What is OPEC? | CNBC Explains

Summary

OPEC, formed in 1960, influences global oil prices by controlling 40% of production and over 80% of reserves. Despite challenges from rising non-OPEC supplies and renewable energy, OPEC remains significant. Geopolitical events and market forces like the shale oil boom in the U.S. affect oil prices, but OPEC's decisions still play a crucial role, even as the world gradually shifts towards alternative energy sources.

Takeaways

• 🚗 Oil is a crucial component in many everyday products, not just fuel for vehicles.
• 🌐 The Organization of the Petroleum Exporting Countries (OPEC) influences global oil prices by controlling supply.
• 📈 OPEC was established in 1960 to stabilize petroleum markets previously dominated by U.S. companies.
• 🌍 OPEC members currently supply over 40% of the world's crude oil and hold more than 80% of proven reserves.
• 🏙️ Major oil consumers like the U.S. and China can impact oil prices significantly.
• 📉 Non-OPEC countries have increased production, reducing OPEC's market influence.
• 📉 A drop in oil demand in Europe and Asia, along with increased supply, led to a price crash.
• 💸 Venezuela exemplifies the economic impact of oil price fluctuations, with the world's largest reserves but also high inflation.
• 📈 Since 2016, oil prices have been rising due to OPEC-led production cuts and agreements with non-members like Russia.
• 🇺🇸 The U.S. shale oil boom has increased domestic production, yet still relies on substantial oil imports.
• ♻️ High and steady oil supply supports the renewable energy sector as an attractive alternative to fossil fuels.
• 🌍 Geopolitical events can cause oil prices to fluctuate, but supply and demand are the primary determinants.

Q & A

What is the primary role of OPEC?

OPEC's primary role is to monitor the stability and prices of the petroleum market, which was previously determined by U.S. dominated multinational oil companies.

Which countries founded OPEC in 1960?

OPEC was founded in 1960 by Iraq, Kuwait, Iran, Saudi Arabia, and Venezuela.

What percentage of the world's crude oil production does OPEC currently supply?

OPEC member countries supply over 40% of the world's crude oil production.

How much of the world's proven crude oil reserves does OPEC control?

OPEC controls more than 80% of the world's proven crude oil reserves.

Where do OPEC's oil and energy ministers meet and how often?

OPEC's oil and energy ministers meet twice a year in Vienna, Austria.

What is the main criticism against OPEC's collective decisions on oil output?

Critics argue that OPEC's collective decisions on oil output are a way for them to maintain the price they want.

How did China's rapid development in the early 2000s affect the oil price?

China's rapid development in the early 2000s, coupled with a lack of growth in oil production, sent the price of oil shooting up.

What impact did the rise in oil prices have on non-OPEC countries' oil production?

High oil prices made it profitable for non-OPEC countries like the U.S. and Canada to discover harder to extract oil, leading to an increase in their supply levels.

What caused the oil price to crash?

A rise in supply and a reduced demand for oil in Europe and Asia led to the oil price crashing.

How has the shale oil boom in the U.S. affected OPEC's market influence?

The shale oil boom in the U.S., with production levels hitting a record high, has contributed to a decline in OPEC's market influence as the U.S. has increased its oil supply.

What is the significance of OPEC's agreement to cut production in 2016?

In 2016, OPEC members agreed to the first production cut since 2008, reducing output by around one million barrels a day, which was crucial in stabilizing oil prices.

How does the volatility of oil prices affect geopolitical factors?

Geopolitical factors such as the Iran nuclear deal and political threats can cause oil prices to fluctuate, as these events can influence supply and demand.

What is the long-term outlook for OPEC as new sources of energy emerge?

As new sources of energy gradually replace hydrocarbons, the oil industry, including OPEC, faces a race against time, suggesting a potential decline in their long-term relevance.

Outlines

00:00

🚗 Oil's Role Beyond Fuel

Oil is a crucial ingredient in everyday products like plastic gloves and tires, affecting their costs. Its price is primarily determined by supply and demand, with OPEC playing a significant role in the market. Formed in 1960 by five founding members, OPEC now includes 14 countries controlling over 80% of the world's proven oil reserves. They meet twice a year to decide on oil output to maintain market stability, although critics argue this is to maintain desired prices. The largest oil consumers are the U.S. and China, whose demand growth, especially China's in the early 2000s, contributed to rising oil prices. This profitability led non-OPEC countries like the U.S. and Canada to increase supply, reducing OPEC's market influence. A drop in demand in Europe and Asia caused oil prices to crash, leading to political issues in oil-dependent countries like Venezuela. However, lower oil prices also meant cheaper fuel and energy costs for consumers. Since 2016, oil prices have been rising due to production cuts by OPEC and non-OPEC countries like Russia. The U.S. shale oil boom has increased production, but it still imports significant amounts of oil. High oil supply supports the renewable energy sector, but geopolitical factors can still cause price volatility. Despite this, OPEC remains relevant in the 21st century, but the oil industry faces a future where new energy sources may replace hydrocarbons.

Keywords

💡Oil

Oil, primarily extracted from petroleum, is a fossil fuel that serves as a vital energy source and raw material for numerous products. In the video, it is highlighted that oil is not just used for fueling cars but is also a component in everyday items like plastic gloves and tires, illustrating its broad applications and impact on various product costs.

💡OPEC

OPEC, or the Organization of the Petroleum Exporting Countries, is a group of nations that collaborate to influence the global oil market. Formed in 1960, OPEC's founding members sought to stabilize oil prices, which were previously determined by U.S.-dominated oil companies. The script mentions that OPEC members supply over 40% of the world's crude oil and control more than 80% of the world's proven oil reserves, indicating their significant influence on oil prices.

💡Supply and Demand

Supply and demand are fundamental economic concepts that determine the price of goods and services, including oil. The video explains how fluctuations in oil prices are largely due to changes in supply and demand. For instance, China's rapid development in the early 2000s increased demand for oil, leading to a spike in prices.

💡Crude Oil

Crude oil is a raw form of petroleum that must be processed before it can be used as fuel or for other purposes. The video states that OPEC member countries supply over 40% of the world's crude oil production, emphasizing the importance of this raw material in the global energy market.

💡Market Influence

Market influence refers to the power to affect market conditions, such as prices. The script discusses how OPEC's decisions can influence oil prices, but also notes that non-OPEC countries like the U.S. and Canada have grown their oil supply, leading to a decline in OPEC's market influence.

💡Production Cut

A production cut is a reduction in the amount of oil produced by oil-producing countries to balance supply with demand and maintain stable prices. The video mentions a production cut by OPEC members in 2016, which was a response to a drop in oil prices caused by an oversupply.

💡Shale Oil Boom

The shale oil boom refers to the significant increase in oil production from shale formations, particularly in the U.S. The video notes that the U.S. shale oil production has hit record highs, challenging the dominance of traditional oil-producing countries like Saudi Arabia and Russia.

💡Renewable Energy

Renewable energy sources are those that can be replenished naturally and are considered more sustainable than fossil fuels like oil. The script suggests that high and steady oil supply makes renewable energy an attractive alternative, potentially aiding the growth of the renewable energy sector.

💡Geopolitical Factors

Geopolitical factors are political developments that can influence global markets, including oil prices. The video cites the Iran nuclear deal and political actions by President Trump as examples of geopolitical factors that can cause oil prices to fluctuate.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The video uses Venezuela as an example, where high dependence on oil revenue has led to the world's highest inflation rate, illustrating the economic challenges faced by oil-dependent countries.

💡Energy Transition

Energy transition refers to the shift from non-renewable energy sources like oil to renewable energy sources. The video concludes with the idea that the oil industry is facing a race against time as new energy sources gradually replace hydrocarbons, suggesting an inevitable shift in the global energy landscape.

Highlights

Oil is used in various products, not just as fuel for cars.

The Organization of the Petroleum Exporting Countries (OPEC) influences oil prices by controlling supply.

OPEC was formed in 1960 by five founding members to stabilize petroleum prices.

OPEC currently consists of 14 member countries.

OPEC countries supply over 40% of the world's crude oil production.

OPEC controls more than 80% of the world's proven crude oil reserves.

OPEC meets twice a year in Vienna to decide on oil output adjustments.

Critics argue OPEC's decisions are aimed at maintaining desired oil prices.

China's rapid development in the early 2000s contributed to rising oil prices.

Non-OPEC countries like the U.S. and Canada increased oil production due to high prices.

OPEC's market influence has declined due to increased supply from non-OPEC countries.

A drop in oil demand in Europe and Asia led to a crash in oil prices.

Venezuela faces economic challenges due to its reliance on oil revenue.

Lower oil prices benefit consumers by reducing fuel and energy costs.

OPEC agreed to a production cut in 2016 to stabilize oil prices.

The U.S. shale oil boom has increased domestic production.

The renewable energy industry benefits from a steady oil supply.

Geopolitical factors can cause oil prices to fluctuate.

Supply and demand ultimately determine oil prices.

OPEC remains relevant in the 21st century with significant control over oil reserves.

The oil industry is facing a transition as new energy sources emerge.

Transcripts

Oil isn’t just petrol for your car.

It’s an ingredient in a lot of what we use, from the plastic glove that keeps your hand clean

to the tires that keep you on the road.

Which means the cost of these products can be affected by the fluctuating price of oil.

That price is largely decided by supply and demand

and the collective actions of an organization that provides 40% of the world’s oil - OPEC.

OPEC stands for the Organization of the Petroleum Exporting Countries.

It was formed in 1960 by founding members Iraq, Kuwait, Iran, Saudi Arabia and Venezuela.

The group was created to monitor the stability and prices of the petroleum market,

which was previously determined by U.S. dominated multinational oil companies.

Currently OPEC member countries also include Algeria, Angola, Ecuador, Equatorial Guinea,

Gabon, Libya, Nigeria, Qatar and the United Arab Emirates.

Today these oil producing member countries supply over 40% of the world’s crude oil production.

And together they control more than 80% of the world’s proven crude oil reserves.

OPEC’s oil and energy ministers meet twice a year in Vienna, Austria where they collectively

decide whether to raise or lower oil output in order to maintain a stable market.

Critics argue that it’s a way for them to maintain the price they want.

But does OPEC actually control world oil?

The biggest consumers of oil are the U.S. and China.

It was China’s rapid development in the early 2000s coupled with a lack of growth

in the production of oil which sent the price of oil shooting up.

In turn, those high prices made it profitable for non-OPEC countries like the U.S. and Canada

to go after and discover harder to extract oil.

Because they weren’t bound by the cartel’s decisions, these countries have grown their

levels of supply, which meant OPEC’s market influence began to decline.

A rise in supply and a reduced demand for oil in Europe and Asia led to the price of oil crashing.

This caused political problems in some OPEC countries like Venezuela,

where oil is the chief driver of the economy.

It has the largest proven oil reserves in the world but also the highest inflation rate on the planet.

But for most consumers, the drop in oil price meant cheaper fuel and lower energy costs.

Since 2016 however, oil prices have been steadily rising.

Later that year the Saudi-led OPEC members agreed to the first production cut since 2008,

a reduction of around one million barrels a day.

Crucially, Russia and 10 other non-members also agreed to pump less oil.

OPEC and its allies agreed to extend the cuts through to the end of 2018.

But in the U.S. there’s a shale oil boom.

Production levels recently hit a record high and are predicted to surpass both Saudi Arabia and Russia.

But even with higher output levels, the U.S. still imports roughly 300 million barrels of oil a month.

For the renewable energy industry, however, keeping oil supply high and steady makes it

an attractive alternative and might be one of the most powerful tools to grow the sector.

But the price of oil remains volatile.

Geopolitical factors such as the Iran nuclear deal and President Trump threatening OPEC

could see the prices go up or down, but in the end the forces of supply and demand

will ultimately determine the price.

With more than 80% of the world’s proven oil reserves, OPEC in the 21st century continues

to be relevant and their decisions can still affect the price of oil, if just temporarily.

But as new sources of energy gradually replace hydrocarbons, the oil industry faces a race against time.

In the words of an ex-Saudi oil minister: “The Stone Age did not end for lack of stone,

and the Oil Age will end long before the world runs out of oil.”