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Who Is OPEC and Why Do We Care?

OPEC holds over 80% of the world’s crude oil. But here's the problem...

Energy Economist

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Crudefunders is the first crowdfunding portal to offer direct investment in Oil & Gas Projects for both sophisticated and beginner investors. It is an innovative, technology marketplace that provides a unique opportunity for ALL types and levels of investors to directly participate various phases of Oil & Gas Projects for as little as $1,000 per investment including an exclusive “free look downhole” for our Reg CF investors. Crudefunders also helps create jobs and increase American energy independence, while improving the odds of success for SMB operators and service companies.

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Aside from being an energy economist for the last 17 years, I am also the co-host of a radio show that reaches a good portion of West Texas and New Mexico, including the Permian Basin. On our show, we talk from week to week with geologists, state and national officials, independent oil and gas producers and consumers like you and me. When we open our listener line, we often get a question from a listener, asking why we allow OPEC to have such influence on our energy prices. To answer that question, I give a brief explanation of who OPEC is and then we discuss why it matters. So, I’ll take the same tack here and hope to answer a couple of your burning questions as well.

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental organization, created at the Baghdad Conference in September of 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five founding members were later joined by nine other members but that number changes from year to year, and today there are a total of 13 active OPEC members. OPEC has its headquarters in Vienna, Austria today.

Who, or What, is OPEC?

The 13 active members of OPEC currently include the original five and eight additional members: Algeria, Angola, Ecuador, Gabon, Libya, Nigeria, Qatar, and the United Arab Emirates. These 13 countries place their production, from a pricing perspective, in what they term a “Basket of Prices”. Today’s Basket price is posted on the OPEC website and the last posting was $53.93 on February 2, 2017. (Notice it is posted in US dollars, because all crude oil is traded in US dollars).

You might notice that two members–Venezuela, a founding member of OPEC, holding the largest amount of proven crude oil reserves at 300.88 billion barrels within OPEC, and Ecuador–are located in South America. That leaves the balance representing African and the Persian Gulf production. The Saudi’s have the second most proven reserves within OPEC at 266.46 billion barrels but exert the most pressure on its membership because they export more than anyone else!

So how can an oil cartel, based in Vienna, Austria, representing Persian Gulf, Africa and South American crude oil, influence prices here in the US? Well, that’s an easier question to answer than most. Since crude oil is commodity that is produced around the world and exported regularly from all corners of the earth, it is traded in US dollars and we here in the US still only produce about half of what we need on a daily basis. So we have a large appetite for foreign crude oil. That’s how OPEC affects our prices for crude oil and refined products; they manipulate their production and force prices up or down to meet their needs for cash. That’s where we were up until a 2 and a half years ago, and this is why we care.

Why OPEC Matters So Much

The U.S. consumes around 16 million barrels of crude oil per day, on an average basis, to meet the demands for gasoline, diesel, jet fuel and more in the world’s largest economy. Today, the U.S. produces only 8.9 million barrels daily, or 55.9% of our average demand. We are left needing to import the remaining 44.1% from organizations like OPEC and corporations in Canada. According to the Energy Information Agency (E.I.A.), as of 2015, OPEC exported 2.894 million barrels or 30.65% of the total crude oil being imported (9.449 million barrels) into the U.S.

Canada is our largest importer, sending 3.765 million barrels south to the U.S. for refining, but because the economies of Canada and the U.S. are so intertwined their production and prices are tied to ours and they exert no influence on our prices, where OPEC does.

Since we have globalized crude oil as a world-based commodity, supply and demand trends move the market more readily and tends to have the largest and most long-term impact on prices. Geopolitical threats, distribution channel disruption, pipeline problems and production decline curves are all workable, short term, and, most often, metrics to be dealt with locally. While you might be able to fix transportation or pipeline issues, you can’t fix supply; it’s a long-term fixed metric and at the turn of this last century we thought were running out of crude oil supply. Changes in supply affect everything and they don’t happen very often so we began planning for our futures with less fossil fuels.

Remember Peak Oil?

I remember being told by analysts, that we were running out of proven reserves of crude oil and natural gas! In April of 2006, I attended a Department of Energy conference where we were told by D.O.E. officials,” because of the finite nature of crude oil reserves around the world, we would need to quickly move toward alternatives like renewable fuels, if we were going to survive economically.” We were told, “there were enough proven reserves in the world to get us, at current levels to around 2050.” In 2006, the U.S. was importing 13.7 million barrels per day and OPEC was our largest supplier at 5.5 million barrels. This is the time when the ethanol and biodiesel industry began to explode onto the scene and their production facilities were popping up everywhere. It was a panic reaction to concerns over crude oil supply.

The price of the starch-based agriculture products like corn and grain sorghum skyrocketed in response to the demand being shifted in their direction because they are the principal crops used to produce ethanol. The price for corn in 2006 averaged $2.28 per bushel and because of the panic created by the government, demand rose to nearly $7 per bushel in 2012. The price of ethanol rose as well from $1.50 per gallon up to nearly $3.60 per gallon. This also put price pressures on gasoline, which rose during that time as well.

Flash forward 10 years and things have changed. Today, net imports into the US of crude oil are 8.29 million barrels per day down roughly 40% from their highs. Reserves have changed as well, and according to the OPEC website, proven reserves as of the end of 2015 showed OPEC held the “lion’s share” of the world’s crude oil with 1,213.4 billion barrels or 81% of proven reserves versus the rest of the world holding 279.2 billion barrels or 19%. Since 2006, the worlds producers have found significantly more proven reserves like the two huge finds in West Texas last year with Wolfe-Camp of over 20 billion barrels and the Apache Corp. find of over 3 billion barrels more.

Capping OPEC’s Influence on the US Economy

Since OPEC has control of some of the world’s largest proven reserves they have great influence on prices around the world, just by how much crude oil they produce and export. That is how they have such influence on US prices, they manipulate their supply. (See chart below showing OPEC proven reserves)

While we are concerned about OPEC’s influence on our gasoline price, we temper that by including the U.S. demonstrated reserves of coal at 477,078 million short tons and the proven reserves of natural gas of 324.3 trillion cubic feet. Rest assured we have enough proven reserves in crude oil, natural gas and coal to drive our economy for a very long time and enough market share, thanks to the shale production and new production techniques, to limit the influences of OPEC on our gasoline prices for a long time.

In a fine twist of fate, the U.S. now after 40 years and as of December, of 2015, allows the producers of crude oil in the U.S. to export crude “from” the U.S. We officially banned crude oil exports in 1975 and it came two years after an OPEC oil embargo that banned oil sales to the U.S., which sent gas prices skyrocketing. Newspaper photographs of long lines of cars outside of gas stations became a common and worrisome image. I had just gotten my driver’s license when the price of a gallon of gasoline went from $.35 per gallon to $.79 per gallon in 1974. At the time, minimum wage was $1.60 per hour. When OPEC began its oil embargo to the U.S., we imported 2 million barrels of crude oil per day with total US consumption by refiners of about 10 million barrels per day. That means the US imported only 20% of its demand. It was my first lesson in economics.

Today’s figures show a very different picture. Using last week’s E.I.A. figures, the U.S. had net imports of 7.8 million barrels of crude oil per day into a refinery demand of 16.05 million barrels. That means the US now imports 48.7% of its demand for crude oil. That one statistic alone explains why prices move here in the US as much as they do, in an environment when the US is dependent on imports. Even though OPEC is not the biggest importer into the US anymore, they have shifted their focus from price strategies to market share. The only way to grab market share is to undercut somebody’s price. So, when the US was producing crude oil at levels near 9.4 million barrels in 2015 and OPEC went out and undercut everybody’s price, the crude oil price dropped like a rock around the world and here as well.

Can OPEC Lift Oil Prices Again?

The most recent move by OPEC was the agreement to cut their own production in hopes of allowing prices to stabilize back above the $50 per barrel and refill their government treasuries. While this is a great concept for OPEC, there is enough distrust around the world from within OPEC and outside to make traders question the ability of OPEC to follow through with its promised cuts. Only time will tell, but it appears they are holding to their word so far.

Now comes the tricky part, and that’s putting this all together. When an organization like OPEC, which has spent the last 38 years focusing on exerting control on the price of crude oil, suddenly switches direction and begins to work on exerting control on supplies and not price, the markets tend to not trust the motives of a particular player, especially because they have a track record of doing only what is expedient for themselves. Then, in a strange twist of fate, the world’s economies begin to falter, reducing aggregate demand for crude oil. That tends to deflate prices because, all of a sudden the world can’t consume all that is produced and the world’s storage capacity begins to fill-up to dangerously high levels.

That is where we are today, our crude oil stocks on hand are still way too high and the only way to manage prices is to reduce the world’s largest producers like OPEC. I heard Stephen Schork of “The Schork Report” say on a business channel the other day, that for every barrel of crude oil we took off the market from 2015 to today, OPEC put back on 2.5 barrels. This is how OPEC slit the throat of crude oil; they out-produced US production cuts and crippled the world’s delicate supply and demand balance!

By Tim Snyder

If you want more information on the energy markets and what is making prices move every day, go to our website and scroll down to where it says “Subscribe”. There you will find our link to the daily commentary “Energy Wise”, a comprehensive piece that includes both fundamental and technical analysis of the day’s energy markets and provides you with the detail that you need. For more on Energy Economist Tim Snyder and his company, go to

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