What would you be if you had influence over more than 40 percent of the world's oil production, and over three-quarters of its proven oil reserves? You'd be the Organization of the Petroleum Exporting Countries. You'd be OPEC.

But it's tougher than you think being the world's largest oil cartel, which still must measure the market to stay on top. In fact, it wasn't that long ago that the nations of OPEC had little say in how their oil flowed.

OPEC History

In 1960, the world's major oil-producing nations were very annoyed. A worldwide glut in petroleum had led multinational oil companies to cut prices without consulting them, and money that these under-developed (but oil-rich) nations had been counting on disappeared down the well.

Many of the nations had long-standing deals with the big oil companies that allowed the corporations--and not the nations that had the oil--to set production and prices. Not surprisingly, the oil-producing nations wanted more say.

But no one country had enough leverage to confront the companies alone. So they decided to stand together, and name their terms. They formed OPEC. Originally, there were five members: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. The membership now stands at twelve: the original five, plus Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, and Angola.

OPEC Methods

OPEC doesn't directly fix the price of oil. Instead, it limits supply through production quotas and lets the price take care of itself. Its original goal was simply to reduce supply so that prices would return to where they had been prior to the price cuts of 1959 and 1960. Yet ambitious members had bigger plans--including raising the price of oil to higher levels, and using oil as a political weapon.

That weapon was fired in 1973, when Arab members refused to ship oil to nations that supported Israel and OPEC cut production to quadruple oil's price. The effects were devastating. The world economy saw widespread inflation followed by a deep recession, and millions waited in line for gas. The embargo lasted five months, but oil prices continued to rise until they peaked at record highs in 1979.

OPEC Limits

While OPEC's efforts have enriched member nations, the organization's clout has limits. The world still gets more than half its oil someplace else, so OPEC can't really cut anyone off. It can only threaten other nations with the prospect of more limited supply and, thus, pricier crude.

But that's not exactly good for the cartel's own long-term business. As oil becomes more expensive, oil-consuming countries tend to invest more in conservation and alternative energy sources, threatening long-term demand. Though such investments might be good for the world, OPEC would rather keep its customers happily awash in oil.

High prices limit the cartel in other ways, too--they give members more incentive to cheat. In fact, OPEC members often exceed their production quotas to get extra cash, leaving it to the Saudis to offset their shenanigans. Saudi Arabia has enough capacity to compensate for other members' rogue actions (or cheat in a major way itself) by ramping production up or down whenever it wants.