Case Study: Organization of Petroleum Exporting Countries (OPEC) (AQA A-Level Geography): Revision Notes
Case Study: Organization of Petroleum Exporting Countries (OPEC)
What is OPEC?
OPEC is an international organisation that demonstrates geopolitical cooperation between oil-producing nations. Founded to coordinate petroleum policies, it brings together 13 member countries from diverse regions across the globe.
Member countries:
- Middle East: Iran, Iraq, Kuwait, Saudi Arabia, United Arab Emirates
- Africa: Algeria, Angola, Congo, Equatorial Guinea, Gabon, Libya, Nigeria
- South America: Venezuela
All member nations are classified as developing countries, united by their dependence on oil revenues for economic development.
What is a Cartel?
A cartel is a group of producers who work together to control the supply of a product to the world market, with the aim of influencing its price. OPEC operates as an oil cartel.
How OPEC influences global oil markets
OPEC attempts to manage global oil supplies by setting production quotas for its members. By restricting the amount of oil available on the world market, the organisation can push prices higher. This strategy has been used successfully in the past to generate substantial revenues for member states.
The 1970s Oil Crisis
During the 1970s, OPEC demonstrated its market power by restricting oil supplies twice, causing dramatic price increases for oil and its derivatives. This strategy achieved several outcomes:
- Rapidly depleted OPEC's oil reserves due to intense extraction
- Generated enormous wealth for member countries
- Prompted importing nations (particularly in North America and Europe) to develop their own oil reserves as alternatives
- Led to the development of significant non-OPEC oil fields in Alaska and the North Sea
- Made these alternative sources economically viable due to higher oil prices
OPEC's declining influence
OPEC's control over global oil markets has weakened considerably over recent decades. Several factors have contributed to this decline:
Increased non-OPEC production:
The development of oil resources in countries outside the cartel means OPEC no longer dominates global supply. The organisation now controls less of the world market than it used to, reducing its ability to manipulate prices effectively.
The 2014-15 Price Collapse
Between 2014 and 2015, oil prices fell dramatically. This decline resulted from:
- Increased production of US shale oil
- Slowing demand as China's economic growth decelerated
- OPEC's strategic response of flooding the market with additional supplies
By releasing more oil onto the market, OPEC deliberately pushed prices even lower. This tactic aimed to undercut US unconventional oil production, which is more expensive to extract, making it economically unviable for American producers to continue operating.
Internal divisions and political tensions
OPEC has never functioned as a completely unified organisation. External geopolitical factors create divisions among members, who maintain different political allegiances outside the cartel.
Examples of Political Divisions
- Saudi Arabia and Kuwait maintain strong diplomatic and trade relationships with Western nations, particularly the USA and Western Europe
- Venezuela, Algeria, and Iran have historically aligned more closely with former communist states in Eastern Europe, supporting trade and political cooperation with these nations
These competing allegiances can undermine the cartel's unity and effectiveness in coordinating oil policy.
Membership changes:
Countries periodically join or leave OPEC based on their economic interests. For example, Ecuador withdrew from the organisation in 2020, concerned that OPEC-related constraints on production were preventing the country from developing its oil reserves and deterring potential investors.
OPEC+ and cooperation with non-OPEC producers
In recent years, OPEC has increasingly worked with major oil producers outside the organisation to influence global prices. Russia and Mexico, in particular, have coordinated strategies with OPEC members. This expanded group is sometimes referred to as OPEC+.
The 2020 Oil Price War
In early 2020, cooperation between OPEC and Russia collapsed, triggering a damaging price conflict:
- Saudi Arabia and Russia flooded the market with excess supplies
- This occurred simultaneously with the COVID-19 pandemic
- Global demand for oil collapsed as lockdowns halted economic activity
- Prices plummeted dramatically
The Production Cut Agreement:
Eventually, the USA brokered a deal between OPEC and Russia to stabilise the market:
- Production was reduced by a massive 9.7 million barrels per day
- This cut helped support the struggling US oil industry
- However, oil prices still temporarily became negative
- Producers were actually paying customers to take oil due to overproduction and lack of storage capacity
OPEC's share of global oil reserves
Despite challenges to its market influence, OPEC members still control a substantial proportion of the world's proven crude oil reserves.
| OPEC Member | Reserves (billion barrels) | % of OPEC total |
|---|---|---|
| Venezuela | 302.81 | 25.5% |
| Saudi Arabia | 267.03 | 22.4% |
| Iran | 155.60 | 13.1% |
| Iraq | 145.02 | 12.2% |
| Kuwait | 101.50 | 8.5% |
| UAE | 97.80 | 8.2% |
| Libya | 48.36 | 4.1% |
| Nigeria | 36.87 | 3.1% |
| Algeria | 12.0 | 1.0% |
| Angola | 8.16 | 0.7% |
| Ecuador* | 8.27 | 0.7% |
| Congo | 2.98 | 0.3% |
| Gabon | 2.00 | 0.2% |
| Equatorial Guinea | 1.10 | 0.1% |
*Ecuador withdrew from OPEC in 2020
Total OPEC reserves: Approximately 1,189.80 billion barrels, representing 79.4% of global proven crude oil reserves at the end of 2018.
Long-term Resource Dominance
This concentration of reserves means that despite declining market control, OPEC members will remain critical players in global energy security for decades to come. Non-OPEC producers controlled only 20.6% of global reserves during this period, highlighting OPEC's continued resource dominance even as its market influence has diminished.
Key Points to Remember:
- OPEC is a cartel of 13 oil-producing developing countries that attempts to control oil prices by managing supply to the global market
- The organisation's power peaked in the 1970s when it successfully caused major price hikes, but its influence has declined as non-OPEC production has increased
- Internal political divisions weaken OPEC's unity, with members holding different allegiances to Western nations or Eastern states
- Recent events (2020 price war, COVID-19, production cuts) demonstrate both OPEC's continued relevance and its limitations in controlling volatile global oil markets
- OPEC members still control approximately 79.4% of the world's proven crude oil reserves, ensuring their long-term importance in global energy security