What is OPEC and how does it affect the Oil prices across the globe?

OPEC stands for Organisation for Petroleum Production and Exporting Countries.

It has been formed by 13 countries together with the goal to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.

The 13 member countries accounted for an estimated 44% of global oil production and 80% of the worlld's "proven" oil researves giving OPEC a major influence on global oil prices.

Crude oil production by the OPEC is an important factor that affects oil prices. This organization seeks to actively manage oil production in its member countries by setting production targets. Historically, crude oil prices have seen increases in times when OPEC production targets are reduced.

OPEC's oil exports represent about 60% of the total petroleum traded internationally. Because of this market share, OPEC's actions can, and do influence the international oil prices. In particular, indications of changes in crude oil production from Saudi Arabia, OPEC's largest producer, frequently affects oil prices.

The extent to which OPEC member countries utilize their available production capacity is often used as an indicator of the tightness of global oil markets, as well as an indicator of the extent to which OPEC is exerting upward influence on prices.

Industry analysts define spare capacity as the volume of production that can be brought on within 30 days and sustained for at least 90 days. Saudi Arabia, the largest oil producer within OPEC and the world's largest oil exporter, historically has had the greatest spare capacity. Saudi Arabia has usually kept more than 1.5 - 2 million barrels per day of spare capacity on hand for market management.

OPEC’s spare capacity provides an indication of the world oil market's ability to respond to potential crises that reduce oil supplies. As a result, oil prices tend to incorporate a rising risk premium when OPEC spare capacity reaches low levels. From 2003 through 2008, OPEC's total spare capacity remained near or below 2 million barrels per day (or less than 3 percent of global supply), which provided very little cushion for fluctuations in supply in a context of rapidly rising demand. Markets are influenced by geopolitical events within and between OPEC countries because they have, historically, resulted in reductions in oil production. Given OPEC's market significance, events that entail an actual or future potential loss of oil supplies can produce strong reactions in oil prices.

Let’s try to understand a history about the formation of OPEC and how member countries joined them as time passed. The OPEC is a permanent, inter-governmental organization created at the Baghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

The five founding members were later joined by:

1) Qatar (1961) – terminated its membership in January 2019;

2) Indonesia (1962) – suspended its membership in January 2009, reactivated it in January 2016, but decided to suspend it again in November 2016;

3) Libya (1962);

4) United Arab Emirates (1967);

5) Algeria (1969);

6) Nigeria (1971);

7) Ecuador (1973) – suspended its membership in December 1992, reactivated it in October 2007, but decided to withdraw its membership effective 1 January 2020;

8) Angola (2007);

9) Gabon (1975) - terminated its membership in January 1995 but rejoined in July 2016;

10) Equatorial Guinea (2017); and

11) Congo (2018).

OPEC had its headquarters in Geneva, Switzerland, in the first five years of its existence. This was moved to Vienna, Austria, on September 1, 1965.