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The Organisation of Petroleum Exporting Countries
OPEC the Organisation of Petroleum Exporting Countries consists of fourteen members. The founding five members being Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, later followed by nine other members. Founded in September 1960 for the purpose of unifying oil prices among its member countries in order to obtain fair and stable prices for its producers, an efficient regular supply for consumers and a fair return on capital for investors in the industry. The members of the OPEC countries meet twice a year in order to set the price of oil per barrel.
During the 1950’s and 1960’s oil was cheap, due to the fact that the supply of oil increased at a faster rate than the demand for oil. Then in the 1970’s we saw a reversal of this trend of cheap oil as the world economy boomed leading to demand outstripping supply. In November 1973 things were to change more significantly. Egypt launched an attack on Israel and OPEC members threatened to cut off oil supplies to any country which supported Israel. At this time OPEC members supplied over 60% of the world’s oil and realised that by limiting the production of oil to the pre 1973 production they could quadruple the price of oil.
OPEC was so successful at raising the price of oil as the short term demand for oil is inelastic. This is due to the consumers of oil having already heavily invested in oil reliant capital equipment such as cars. For instance in the short term it would not be practical for car owners to suddenly change their car due to an increase in the price of petrol. With no cheap alternatives in the short term and a shortage of s ...