The Organization of Petroleum Exporting Countries (OPEC)

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The Organization of Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, in September 1960, to unify and coordinate members' petroleum policies. OPEC members' national oil ministers meet regularly to discuss prices and, since 1982, to set crude oil production quotas. Original OPEC members include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975, the organization expanded to include Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), and Nigeria (1971). Ecuador and Gabon were members of OPEC, but Ecuador withdrew in December 1992, and Gabon followed suit in January 1995. Although Iraq remains a member of OPEC, Iraqi production has not been a part of any OPEC quota agreements since March 1998. EIA estimates that the current eleven OPEC members account for about 40% of world oil production, and about 2/3 of the world's proven oil reserves.

OPEC PRICE BAND

OPEC collects price data on a "basket" of crude oils, and uses average prices for these oil streams to develop an OPEC reference price to monitor world oil market conditions. From January 1, 1987 to June 15, 2005, OPEC calculated an arithmetic average of seven crude oil streams, including: Algeria's Saharan Blend, Indonesia Minas, Nigeria Bonny Light, Saudi Arabia Arab Light, Dubai Fateh, Venezuela Tia Juana and Mexico Isthmus (a non-OPEC oil) to estimate the OPEC basket price. This OPEC basket price averaged $50.71 per barrel in 2005, $36.05 per barrel in 2004, $28.10 per barrel in 2003, $24.36 per barrel in 2002, $23.12 per barrel in 2001, and $27.60 per barrel in 2000.

At its 136th meeting to review oil markets on June 15, 2005, OPEC decided to change both the composition of the basket, and the way that it is calculated. According to OPEC, the changes were made to better reflect the average quality of crude oil in OPEC Member Countries. Effective June 16, OPEC's reference basket now consists of eleven crude streams representing the main export crudes of all member countries, weighted according to production and exports to the main markets. The crude oil streams in the basket are: Saharan Blend (Algeria), Minas (Indonesia), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and BCF 17 (Venezuela). According to OPEC, the API gravity for the new Basket is heavier, at 32.7º compared to 34.6 º for the previous basket of seven crudes. In addition, the sulphur content of the new Reference Basket is more sour at 1.77%, compared to the previous basket of 1.44%. OPEC calculated that on June 15 (the last day that the old reference basket was calcuated), the new basket would have averaged $50.03 barrel, over $2 per barrel less than the old basket price of $52.26 per barrel.

In addition to the OPEC Basket, several other crude oil prices are used to follow world oil market conditions. Because the U.S. benchmark, West Texas Intermediate (WTI) crude oil, is a very light, sweet (low sulfur content) crude, it is generally more expensive than the OPEC basket, which is an average of light sweet crude oils such as Algeria's Saharan Blend and heavier sour crudes (with high sulfur content) such as Dubai's Fateh. Brent is also lighter, sweeter, and more expensive than the OPEC basket, although less so than WTI.

At its March 2000 meeting, OPEC set up a price band mechanism, triggered by the OPEC basket price, to respond to changes in world oil market conditions. According to the price band mechanism, OPEC basket prices above $28 per barrel for 20 consecutive trading days or below $22 per barrel for 10 consecutive trading days would result in production adjustments. This adjustment was originally automatic, but OPEC members changed this so that they could fine-tune production adjustments at their discretion. Since its inception, the informal price band mechanism has been activated only once. On October 31, 2000, OPEC activated the mechanism to increase aggregate OPEC production quotas by 500,000 barrels per day. At its January 30, 2005 meeting, OPEC decided that market changes had rendered the band unrealistic, and decided to temporarily suspend the price band mechanism.

On August 7, 2006, the OPEC basket price rose to $72.12 per barrel, its highest price since the price band mechanism was established. From December 2, 2003, when the basket price last crossed the $28 per barrel threshold, the OPEC basket price has traded above the $28 per barrel level for 693 consecutive trading days through August 7, 2006.