OPEC

Based on Wikipedia: OPEC

The Cartel That Can't Stop Cheating

Here's a paradox that would make any economist smile: the most famous cartel in the world fails to meet its own targets ninety-six percent of the time. The Organization of the Petroleum Exporting Countries—OPEC—is routinely described in textbooks as the textbook example of how cartels work. The only problem? It barely works at all.

This isn't a story about a shadowy cabal successfully controlling global oil prices from a Vienna headquarters. It's something far more interesting: a tale of nations that desperately need each other but can't stop undercutting one another, of a counterweight that became powerful but not disciplined, and of an organization that accidentally stumbled into reshaping the entire global economy in the 1970s before losing most of that power in the decades since.

Five Countries in a Baghdad Hotel Room

The story begins not with oil barons but with a journalist.

In February 1959, Wanda Jablonski—one of the few women covering the petroleum industry—attended the first Arab Petroleum Congress in Cairo. There, she introduced two men who would change the world: Abdullah Tariki of Saudi Arabia and Juan Pablo Pérez Alfonzo of Venezuela. Both were furious. The major oil companies had just unilaterally slashed the prices they paid for crude oil by ten percent, and neither man's government had been consulted.

To understand their anger, you need to understand how the oil business worked in 1959. Seven enormous companies—five American, one British, one Anglo-Dutch—controlled virtually everything. They were called the "Seven Sisters," a name that sounds almost quaint now but represented one of the most concentrated accumulations of economic power in history. These companies decided where to drill, how much to produce, and what price to charge. The countries sitting on top of the oil had almost no say.

Think of it like renting out your house to a tenant who then decides how much rent to pay you.

Tariki and Pérez Alfonzo hatched a plan in Cairo. They called it the Maadi Pact, or sometimes the Gentlemen's Agreement. The idea was simple: oil-exporting countries should coordinate with each other so they couldn't be picked off one by one. If Saudi Arabia demanded better terms and the oil companies threatened to shift production to Venezuela, well, Venezuela would back Saudi Arabia's play.

The oil companies ignored the warning.

In August 1960, they cut prices again. One month later, representatives from Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela gathered in Baghdad. On September 14, 1960, they founded OPEC.

Why Countries That Own Oil Didn't Control It

This raises an obvious question: if these countries owned the oil, why didn't they already control it?

The answer involves both economics and guns.

Economically, the Seven Sisters had something the producing countries lacked: a vertically integrated system. They didn't just pump oil—they refined it, shipped it, and sold it at gas stations from New Jersey to Jakarta. An oil-producing country could nationalize its wells, but then what? It had no tankers, no refineries, no distribution networks. The crude oil sitting in the ground was worthless without access to the system that turned it into gasoline.

And when economics didn't work, there was always coercion.

In 1951, Iran's democratically elected prime minister, Mohammad Mosaddegh, nationalized his country's oil industry. Two years later, the American Central Intelligence Agency and British intelligence services orchestrated a coup that removed him from power. The message to other oil-producing countries was unmistakable: try to control your own resources, and we will end your government.

This is what made OPEC different. A single country acting alone was vulnerable. A bloc of countries representing a huge share of global oil production was something else entirely. You couldn't coup all of them. You couldn't easily shift production away from all of them at once.

Coordination changed the game.

The Prisoner's Dilemma in the Desert

But coordination is hard. Really hard.

OPEC's fundamental challenge is what economists call the prisoner's dilemma. The basic setup goes like this: if all OPEC members restrict their oil production, global supply falls, prices rise, and everyone makes more money. But if one country secretly cheats—pumping more oil while everyone else holds back—that country captures extra revenue while free-riding on everyone else's discipline.

The problem is that every country faces this same temptation. And when everyone cheats, supply floods the market, prices crash, and the cartel accomplishes nothing.

This isn't theoretical. Political scientist Jeff Colgan studied OPEC commitments from 1982 to 2009 and found that members cheated on their production quotas ninety-six percent of the time. Ninety-six percent.

Part of the problem is that OPEC has no real enforcement mechanism. When a member exceeds its quota, what happens? Nothing. There's no fine, no penalty, no consequences. The organization operates by consensus, which sounds diplomatic but really means that nobody can force anybody to do anything.

Colgan put it memorably: "A cartel needs to set tough goals and meet them; OPEC sets easy goals and fails to meet even those."

The Decade That Changed Everything

So how did a dysfunctional cartel manage to reshape the global economy?

The answer lies in a perfect storm that gathered through the 1970s.

First, the market tightened. Global oil demand was surging while new supply wasn't keeping pace. When markets are tight, producers have leverage they lack when oil is plentiful.

Second, countries started nationalizing. Libya led the way in 1970, negotiating a deal that gave it fifty-eight percent of oil profits instead of the standard fifty-fifty split. Once one country got better terms, others demanded the same. Saudi Arabia, Iraq, Nigeria, Venezuela—one by one, they took control of their own oil.

Third, war came to the Middle East. In October 1973, Egypt and Syria attacked Israel on Yom Kippur, the holiest day in the Jewish calendar. The United States airlifted weapons to Israel. Arab members of OPEC responded with an oil embargo against the United States and its allies.

The embargo was the earthquake. Oil prices quadrupled in months.

Americans who lived through that winter remember it viscerally: the lines at gas stations stretching for blocks, the odd-even rationing based on license plate numbers, the fifty-five mile per hour speed limit imposed to save fuel. The era of cheap energy that had powered postwar prosperity suddenly ended.

But here's the thing: the embargo itself didn't actually cut off that much oil. What it did was signal to the market that supply was uncertain, that the countries controlling the spigot were willing to use it as a weapon. Prices are set at the margin, and fear is a powerful multiplier.

How OPEC Actually Works (And Doesn't)

OPEC's headquarters sits in a modernist building in Vienna, Austria. Twice a year, oil ministers from member countries gather there for what are called "OPEC Conferences." These meetings are the supreme authority of the organization, and they operate on a principle of unanimity—everyone has to agree.

In theory, the conferences set production quotas for each member country. In practice, Saudi Arabia runs the show.

This isn't some secret power grab. It's simple math. Saudi Arabia produces more oil than any other OPEC member, has more reserves, and—crucially—has more spare capacity. That last part matters enormously. Spare capacity means the Saudis can quickly increase or decrease their production to stabilize prices. They're what's called a "swing producer," the entity that balances the market.

When Saudi Arabia decides to flood the market with oil, prices crash. When they cut production, prices rise. Other OPEC members can cheat on their quotas, but they can't change this fundamental reality. The Saudis have the oil, and the ability to use it, that makes them indispensable.

This creates a strange dynamic. Saudi Arabia often ends up cutting its own production to make up for cheating by other members. It's like being the only person in a group project who actually does the work—frustrating, but if you want the project to succeed, what choice do you have?

The Members: A Fractious Family

Imagine trying to get twelve countries to agree on anything. Now imagine those countries include sworn enemies.

The current OPEC membership roster includes Algeria, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia, the United Arab Emirates, and Venezuela. Former members include Angola, Ecuador, Indonesia, and Qatar—countries that left for various reasons ranging from political disputes to simple mathematics about whether membership was worth it.

These nations have almost nothing in common except oil.

Iran and Iraq fought a brutal eight-year war from 1980 to 1988 that killed perhaps a million people. They're both OPEC members. Saudi Arabia and Iran are engaged in a cold war for regional dominance that plays out in proxy conflicts from Yemen to Syria. They sit across the table from each other at OPEC meetings.

Venezuela is a socialist state whose government has been at odds with the United States for decades. The United Arab Emirates is a monarchy closely allied with Washington. Nigeria has struggled with decades of civil conflict and insurgency. Kuwait is one of the wealthiest countries per capita on Earth.

Their populations range from roughly a million (Equatorial Guinea) to over two hundred million (Nigeria). Their governments span the spectrum from absolute monarchies to nominal democracies to whatever you'd call Venezuela's current system. Their economies range from almost entirely dependent on oil revenue to somewhat diversified.

Getting these countries to agree on production levels is like herding cats. Cats that hate each other. Cats with fundamentally different interests.

Is It Even a Cartel?

This brings us back to that textbook question. Economists love pointing to OPEC as the classic example of a cartel. But is it really?

A cartel, properly defined, is a group of producers who coordinate to restrict output and raise prices above competitive levels. The key word is "coordinate." If members can't actually coordinate—if they cheat constantly, if they have no enforcement mechanism, if their commitments reflect what they'd do anyway—then calling it a cartel starts to seem misleading.

OPEC's own preferred self-description is much more modest: an organization that "coordinates and unifies the petroleum policies of member countries." That's bureaucratic language, but it might be more accurate than "cartel."

The organization also points out, correctly, that it was founded as a defensive response to the Seven Sisters' actual cartel. The oil companies really did coordinate production and pricing. They really did control the market. OPEC emerged to counterbalance concentrated private power with concentrated sovereign power.

There's also the legal question. In the United States, cartels are illegal under antitrust law. So why hasn't anyone sued OPEC? The answer is something called the Foreign Sovereign Immunities Act. When governments act as governments—rather than as commercial entities—they're protected from lawsuits in American courts. A key court decision held that OPEC's consultations about oil production are governmental acts, not commercial ones, and therefore immune.

Various American politicians have tried to change this through something called the NOPEC Act, which would strip OPEC of its sovereign immunity. So far, every attempt has failed. The geopolitics are just too complicated. The United States may grumble about OPEC, but it's also allied with Saudi Arabia and other Gulf producers. Nobody wants to blow up those relationships over a lawsuit.

Enter OPEC Plus

By the 2010s, OPEC faced a new problem: it was shrinking as a share of global production.

The American shale revolution had transformed the United States into the world's largest oil producer. Russia was pumping enormous quantities. Canada's oil sands were coming online. OPEC's twelve members now accounted for only about thirty-eight percent of global production—still significant, but not dominant.

If OPEC cut production to raise prices, American and Russian producers would simply pump more to fill the gap. The cartel's market power was eroding.

The solution, reached in late 2016, was to expand. OPEC Plus—the plus referring to ten additional countries including Russia, Mexico, and Kazakhstan—created a larger coalition that could control a larger share of global supply. Russia's inclusion was particularly important. Adding the world's second-largest producer to the coordination framework made the whole enterprise more credible.

OPEC Plus introduced something OPEC had always lacked: a compensation mechanism for members who exceed their quotas. Under this system, countries that overproduce in one period are supposed to make deeper cuts in subsequent periods to make up for it. Whether this actually works better than OPEC's honor system remains to be seen.

The Resource Curse

There's a darker side to this story.

Economists have a term called the "resource curse" or the "paradox of plenty." Countries blessed with abundant natural resources often end up worse off than countries without them. The money flows in, but it distorts the economy, corrupts the government, and funds conflict.

Look at the list of OPEC members. How many are stable, prosperous democracies? Venezuela has experienced economic collapse and political chaos despite sitting on the world's largest proven oil reserves. Libya descended into civil war after Muammar Gaddafi's overthrow and remains fractured. Nigeria's Niger Delta has been plagued by insurgency, pollution, and poverty even as oil wealth flows to elites. Iraq has known little but war and instability for decades.

Oil wealth tends to concentrate power. Governments that can fund themselves through resource extraction don't need to tax their citizens, which means they don't need to be accountable to them. The social contract breaks down. Whoever controls the oil controls the country, which makes control worth fighting over.

OPEC itself can become a vector for these problems. The organization's meetings bring together governments that might otherwise have nothing to do with each other, creating opportunities for deals that have nothing to do with oil production. The geopolitical entanglements run deep.

What OPEC Means for the Climate

And then there's the elephant in the room: climate change.

The world has agreed, at least in principle, to reduce carbon emissions and transition away from fossil fuels. This poses an existential threat to OPEC. If humanity actually follows through on climate commitments, demand for oil will fall precipitously over the coming decades. The oil in the ground will become a stranded asset—valuable today, worthless tomorrow.

This creates a perverse incentive. OPEC members might rationally decide to pump as much oil as possible now, while there's still a market for it, rather than leaving it in the ground to be worthless later. Economists call this the "green paradox"—policies aimed at reducing future fossil fuel use might actually accelerate current production.

Some OPEC members have begun preparing for a post-oil world. The United Arab Emirates has invested heavily in renewable energy and positioned itself as a hub for clean technology. Saudi Arabia's Vision 2030 plan aims to diversify the economy away from oil dependence. But these are exceptions. Most OPEC members remain heavily dependent on oil revenue and have limited capacity to transition.

The relationship between OPEC and climate policy is deeply fraught. The organization has generally opposed aggressive emissions reduction targets, arguing that developing countries have a right to economic growth and that oil demand will remain robust for decades. Environmental advocates see OPEC as an obstacle to progress, a lobby for the fossil fuel status quo.

The Future of a Troubled Organization

So where does OPEC go from here?

The organization celebrated its sixtieth anniversary in 2020, but the celebration was muted. Oil prices had crashed amid the COVID-19 pandemic, briefly going negative for the first time in history. Demand collapsed as planes stopped flying and cars stopped driving. OPEC Plus scrambled to cut production, but the cuts couldn't keep up with the falling demand.

The pandemic was a preview of what the energy transition might look like—a world where oil demand falls faster than producers can adjust. OPEC's tools are designed for managing scarcity, not abundance. The organization knows how to prop up prices by cutting production. It has no playbook for a world that simply wants less oil.

The coming decades will test whether OPEC can remain relevant. Some analysts predict the organization will become more important as high-cost producers exit the market and the remaining low-cost OPEC members capture a larger share. Others see terminal decline, a slow fade into irrelevance as the world moves on.

What seems certain is that OPEC will remain what it has always been: a messy, fractious, frequently ineffective organization that nonetheless shapes the global economy in ways both obvious and subtle. Not quite a cartel, not quite a debating society, not quite anything that fits neatly into a textbook.

Just a group of countries that happen to have oil, trying to make the most of it while they still can.