OPEC
OPEC is a cartel of 13 oil-producing nations that attempts to coordinate petroleum production to influence global oil prices. Founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, OPEC now also coordinates with non-OPEC producers (Russia, Mexico) through OPEC+.
As an attempted cartel, OPEC faces the classic collective action problem: members benefit if the group restricts production, but each individual member benefits from cheating. Saudi Arabia's role as swing producer - able to increase or cut production significantly - gives it unique leverage.
OPEC members routinely cheat on their quotas. Studies show systematic overproduction by Iraq, Nigeria, and others. The cartel only works because Saudi Arabia acts as 'swing producer' - cutting its own production to offset others' cheating. When Saudi Arabia refuses this role (as in 2014-2016 price war), prices crash.
Key Facts
Power Dynamics
All members vote, decisions by consensus
Saudi Arabia dominates through spare capacity; Russia (via OPEC+) now co-leads; Iran/Venezuela lack leverage due to sanctions
- Saudi Arabia's willingness to cut production
- Russia's OPEC+ participation
- US shale production as external constraint
- Saudi-Russia axis
- Saudi-US security relationship
- Iran-Saudi rivalry
Revenue Structure
OPEC Revenue Sources
- Member contributions 100%
Based on oil production capacity
No enforcement power over production; members only pay dues while benefiting from cartel
Classic cartel with classic cartel problems - each member incentivized to cheat
Decision Dynamics at OPEC
COVID production cuts agreed within weeks (April 2020)
OPEC+ formation took years of Saudi-Russia negotiation (2014-2016)
Saudi Arabia must be willing to cut first; others will only follow if credible
Failure Modes of OPEC
- 2014-2016 price war when Saudi refused to cut
- 2020 Saudi-Russia price war
- Member cheating throughout history
- No enforcement mechanism
- Prisoner's dilemma incentives
- Energy transition threatens long-term relevance
If energy transition accelerates, members may 'pump and dump' - racing to monetize reserves before stranded
Biological Parallel
Like cleaner fish relationships that break down under stress. In good times, the symbiosis works - Saudi Arabia 'cleans' the market by cutting production. But each member is tempted to parasitize the system by secretly overproducing while others cut. The relationship only holds when the dominant partner (Saudi) enforces discipline, but they sometimes refuse, causing system collapse.
Key Agencies
Research and coordination
Market analysis