The Organization of Petroleum Exporting Countries (OPEC) is a CARTEL of 12 nations that seek to influence oil prices through control of the supply of oil to world markets. OPEC was created in 1960 with initial members including Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. At the time, oil prices were less than $5 per barrel. (Prices vary slightly, depending on oil’s sulfur content.) Algeria, Gabon, Indonesia, Libya, Nigeria, Qatar, and the United Arab Emirates subsequently joined OPEC. (Ecuador also joined but later left the organization.) Unlike the United States, in most countries oil and other subsurface RESOURCES are considered public ASSETS. Early in the 20th century, U.S. British, and Dutch companies entered into agreements to explore and drill for oil resources in developing countries; at the time, many of these countries were European colonies. Along with the independence movement of the 1950s came the demand by newly formed countries to control their natural resources. Humorist Art Buchwald once argued that the creation of OPEC was Harvard’s fault because the sons of royalty from oil-producing nations attended Harvard, where they learned about the benefits of forming cartels. OPEC was created as a cartel to control oil supplies and thereby raise the price received by oil-producing countries. While OPEC countries control less than 40 percent of the world supply of oil, they control nearly 100 percent of the world’s short-term marginal production. Slight increases or decreases in the supply of oil, ceteris paribus (other things being held constant), result in significant changes in the price of oil. OPEC, like other cartels, allocates production quotas among its members, attempting to achieve a desired SUPPLY and thereby controlling the price of oil. Raising the price of oil significantly increases revenue for OPEC members as well as other oil-exporting countries, particularly Norway and Mexico. One estimate suggested that OPEC would earn nearly $250 billion in 2000, more than double its oil income from 1998, when oil prices declined below $10 per barrel. In March 1999 OPEC agreed to cut oil production by 2.1 million barrels per day, about 8 percent of member output. For most of its history, OPEC has been a fractious organization with constant conflict among members. Economic theory suggests cartels tend to be unstable and fail because once prices rise, members have incentives and capacity to increase output. Cheating on agreed production quotas increases market supplies, driving down prices. OPEC’s longevity is directly attributable to Saudi Arabia, its leading oil-producing country. Saudi Arabia has acted as the “swing producer” in the cartel, often reducing its output to offset over-quota production by other OPEC members. It also controls most of the spare capacity in OPEC, an estimated 3 million barrels per day in 2000. When Saudi Arabia has increased its production, as it did in 1986, world oil prices have fallen. When it has reduced output, oil prices have tended to rise. During the Gulf War (1990), Saudi Arabia stepped in and increased output, offsetting reduced output from Iraq and Kuwait during the conflict. Because of the role Saudi Arabia plays, some economists argue OPEC is not a cartel but instead represents a price-leadership OLIGOPOLY. In July 2000 Saudi Arabia unilaterally announced it would increase output by 500,000 barrels per day in an attempt to lower oil prices. Saudi leaders feared continued high oil prices might push the fragile global economy into a RECESSION. While OPEC reduces market supplies in order to achieve higher prices, market prices are established by the interaction of supply and DEMAND. New supplies of oil from the North Sea, Arctic wilderness area, and other parts of the world also influence world oil prices. Global demand for oil depends primarily on the level of global output. In adopting their production quotas, OPEC attempts to forecast world market conditions. Often changes in OPEC output decisions create huge swings in market prices, which in turn threatens ECONOMIC GROWTH, the source of demand for their product. In recent years European countries have paid even higher prices for OPEC oil. OPEC prices are payable in U.S. dollars, and as European currencies have depreciated against the dollar, the cost of oil has increased. Continued high oil prices can adversely affect OPEC by stimulating additional oil exploration and increasing the benefits of energy conservation. Sheik Zaki Yamani, the former Saudi Oil Minister, recognized the potential danger of high oil prices with the statement, “The stone age didn’t end because the cavemen ran out of stone.”