Page last updated at 10:39 GMT, Thursday, 29 May 2008 11:39 UK

Opec: The oil cartel in profile

Opec headquarters in Vienna

The Organisation of Petroleum Exporting Countries (Opec) is an association of oil-producing nations set up in 1960 with the express purpose of influencing oil prices by controlling supply.

Things have changed a great deal for the cartel in recent years.

In 2000, it adopted a price band of between $22 and $28 a barrel, levels a world away from current prices.

If the price went below $22 a barrel, production quotas would be cut. If it went above $28 a barrel, production would be raised.

Opec abandoned the price band in 2005 and now has no official price target.

When its members meet, they try to co-ordinate future production with their predictions for demand.

Financial sector

While there have been increases in production recently, the price of oil has continued to soar.

Opec's official position is that there is plenty of supply in the market. It says rising prices are the fault of investors in the financial sector, who are buying oil contracts in order to sell them on without ever planning to take delivery.

Clearly there are limits to the amount production can be raised, and Opec also sees dangers in increasing supply further.

Saudi Arabia
United Arab Emirates

"Producers fear that the financial sector will decide that there is over-supply in the market and move into other investments," says Manouchehr Takin from the Centre for Global Energy Studies.

"If there is a sudden change in sentiment like that, then the price could collapse."

That problem is exacerbated by the time delays in the system.

If producers in the Gulf, for example, decide to increase production, it will be about three months before any extra oil reaches the market.

If the announcement of extra production caused a big fall in prices, then the extra oil actually hitting the market three months later would exacerbate the problem.

And the members of Opec have a great deal at stake.

Uniquely vulnerable

Many of the oil-rich states are rich in very little else.

Crude oil is their only export, making them uniquely vulnerable to world oil prices.

When prices fell to $10 a barrel in 1998, their economies were hit hard.

"In the US, Opec is viewed as a cartel and therefore something to be smashed, which is not a helpful way of thinking about it," says Tony Scanlan of the British Institute of Energy Economics.

"The one thing the Opec countries all have in common is their absolute reliance on one product - oil."

1960 - founded by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela
1965 - Moves from Switzerland to new headquarters in Vienna, Austria
1973 - Opec embargo causes oil price shock
1990 - Iraq's anger at Kuwaiti over-production sparks Gulf War
1998 - World oil price drops to $10 a barrel
2000 - Opec introduces $22-$28 a barrel price band
2005- Price band abandoned
2008- Indonesia decides to leave Opec

According to Mr Scanlan, the Opec countries cannot afford to treat oil "as just another commodity".

"When the price falls, it creates real pain. They have to feed and give welfare to their people, the same as Western countries," he says.

On the other hand, of course, when Opec members decided to stop supplying oil to countries they said were supporting Israel in the Yom Kippur War of 1973, a great deal of damage was done to the economies of the targeted countries.

Differing strategies

More recently, Opec has improved its reputation, with attempts made to provide some stability to the oil market.

But since the 1970s, Opec's power has waned, with its control over oil prices being questioned.

There have been continuing disputes about whether member countries are actually sticking to their agreed quotas.

Also, strategies favoured by countries such as Kuwait and Saudi Arabia, which have enormous oil reserves and relatively small populations, are often at odds with those of countries such as Iran and Nigeria, that have bigger populations and few other exports.

Indonesia has announced that it will leave Opec when its membership expires later this year.

The official reason is that it is no longer a net exporter of oil. But the cartel's only South East Asian member is also understood to have been upset that there have not been greater increases of production to try to bring prices down from their record levels.

Another factor weakening the cartel is that as oil prices have risen, reserves that were not previously worth tapping in non-Opec countries have now become viable and Russia has become a particularly significant supplier.

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