Thesis: The Organization of the Petroleum Exporting Countries (OPEC) emerged to maximize the profits of selling oil, to respond to the multinational oil companies, and to form a cartel of oil producing countries.
Prior to understanding how did OPEC emerge and how it comes upon to its success, we should start of with “what is OPEC”. OPEC stands for “Organization of the Petroleum Exporting Countries, which was founded in 1960 in Iraq, in which the founding members include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. However, this does not include all of the nations that make up the OPEC because later, eight other countries join the OPEC, which includes, Qatar, Indonesia, Libya, United Arab Emirates, Algeria, and Nigeria. Ecuador and Gabon joined OPEC, however they withdrew.
The objective of OPEC is to keep the oil price high and stabilize it, in order a fair price for petroleum producers, which is done by the unification of petroleum policy, that is the producers come together to decide. The organization eliminates the competitive factor between nations that produce petroleum, which will create an efficient economic that will give the investors a good return. If the Baghdad Conference did not decide to create this organization, the price range for oil would be quite variable and may be too expensive. The OPEC is basically a cartel, which is formed to make the price as high as possible, but at the same time stable. The countries in OPEC come upon an agreement that oil shall be sold at a certain price, which helps these investors in making profit. The organization allows the members to be in control of the oil price, in other words it monopolizes the oil market, especially because the product is oil. However, it does not really control since only 41 percent of the world’s oil comes from them, but their oil export represents about 55 percent of oil traded internationally. Oil is valuable because of the fact that it has a limited amount, which is why it is the perfect merchandise to cartelize.
OPEC was a response to the multinational oil companies, whom tried to cut the price of oil in order to gain back their profit. What really ignited the formation of OPEC was when British Petroleum cut the oil price the second time because the first time had already condemned the oil exporting countries. The history of how the five top oil-exporting countries came together dates back to World War II. Before World War II, there were oil producing countries and the companies, and the reason the oil producing countries were not independent was because of the fact that it had many disadvantages, such as technology, networks, and exploration skills. Being independent was hard for oil producing countries because they did not have fun, which made they struggle to compete with the international market. Venezuela was one of the first country to start negotiating with the companies, in which the “fifty-fifty principle” was their first agreement in 1943, however as they started to demand more, the oil companies moved to cheaper countries. In response, Venezuela advised Arabs to work out the same type of a contract.