Opec, or the Organisation of Petroleum Exporting Countries, was formed by joint agreement at the Baghdad Conference by Iran, Iraq, Kuwait and Saudi Arabia. The cartel is intended to counterweight the influence of the big seven western oil companies (the so-called "Seven Sisters") which dominated the global petroleum business at that time.

Opec becomes a household word in western nations as oil prices surge to unprecedented levels in the wake of the Arab oil embargo of industrialised countries, following the October war between Israel and its Arab neighbours.

The second oil shock of the decade hits the world as a result of widespread disruption of the Iranian oil industry after the Islamic revolution.

After rising steadily in the early years of the decade, oil prices suddenly collapse after widespread Opec cheating on oil quotas forces Saudi Arabia to slash exports from some 7m barrels a day to 2.6m barrels / day. Saudis efforts to reclaim market share causes a deep slump in the price of oil globally.

Panic buying sends oil prices soaring after Iraq's invasion of Kuwait, but a surge in Saudi output a the brief use of Western Strategic Oil stocks prevents a fourth oil price crisis.

Oil prices collapse to under $10 a barrel as a result of chronic Opec quota cheating and the economic collapse in Asia.

Opec responds with a series of deep production cuts which reverse bearish sentiment and trigger a slow, steady rise in oil prices.

Fears that the world will be starved of sufficient oil supplies to maintain the economic expansion and emerging bottlenecks throughout the worlds oil industry drives prices to a series of fresh 10-year peaks. Three Opec production increases fail to quell fears, prompting the US to order the release of strategic petroleum stocks for only the second time.

Through 1970

From September 10 through September 14, 1960 representatives from the governments of Iraq, Iran, Kuwait, Saudi Arabia, and Venezuela met in Baghdad, Iraq and formed the Organization of the Petroleum Exporting Countries, creating one of the world's most misunderstood organizations. At its creation OPEC was intended primarily to be a research institution for the oil states, but history was to intervene.

It is impossible to understand OPEC without some understanding of the history of the energy industry. From the start of the modern oil age at Drake's well in rural Pennsylvania the industry had been subject to a vicious boom and bust cycle. High prices led to high investment in exploration and construction, the resulting capacity increases induced fearsome price wars among the large oil companies. Eventually the large oil companies managed to shift the costs of exploration and development to the governments of the oil producing nations. These states assumed that by taking control of production they would become the dominant players in the oil market. They were sadly mistaken.

As the 20th century progressed the world's identified oil reserves steadily increased. Indeed, for the first 50 years the supply increased faster than demand for new oil. As we know from economics 101, this is a surefire recipe for sustained downward price pressure. The governments of oil producing states were forced to accept terribly low prices from oil companies with plenty of options in a saturated market. Even worse for the oil states, the oil companies won agreements from each to accept a constant posted price for oil rather than letting the price float on the market.

Accepted because it was perceived to reduce the risk of market fluctuations in the oil states the posted price policy became an albatross around the necks of the petroleum world in the late 1950s. Amidst a continually growing imbalance between supply and demand in the oil market and American government policy that subsidized the domestic oil industry for strategic reasons global oil prices fell steadily. The major non-American firms, in a desperate bid to remain profitable, unilaterally began cutting the posted price of oil. British Petroleum cut the rate 10% in 1959, the rest of the industry rapidly followed. A second rate cut imposed by the industry in 1960 led to the creation of OPEC in the fall, ostensibly to coordinate the gathering and dissemination of market information amongst the member states. By sharing contractual terms and production information OPEC managed through the 1960s to stem the fall in oil prices--a process strengthened by the addition of 5 more member states to the cartel.

A giant flexes, OPEC in the 1970s

By the early 1970s the historic imbalance between supply and demand in the oil industry was rapidly reversing itself. Skyrocketing use of petroleum, both in the western world as well as developing nations, surpassed the pace of discovery of new reserves during the 1960s and early 1970s. OPEC was set to take a place on the global stage.

On October 5, 1973 OPEC finally got its chance to flex the muscles that steadily shifting market conditions had given it. Egypt and Syria attacked Israel, oil prices doubled almost immediately. At serious risk of recession, the United States began pressuring Saudi Arabia to increase production to help hold the price of oil down. Not only did the Saudis refuse to increase production, OPEC itself took a public position that any increases in oil production would be tied to Western nations' acceptance of pro-Arab policies regarding the war in Israel. Within days this position hardened to an OPEC threat to cut production by 5% monthly until the US agreed to lend support to Syria and Egypt.

On October 12th and 13th the United States conducted massive airlifts of troops, arms, and supplies on Israel's behalf spawning outrage across the Arab world. On October 17 King Faisal of Saudi Arabia authorized the OPEC oil embargo against the United States. Prices almost instantly quadrupled, going to $25 a barrel through most of 1974. The Western world was plunged into a deep recession as the first oil shock wracked economies from America to Europe and Japan.

The recession did not touch the OPEC nations. Through coordinated production quotas OPEC managed to hold the price of oil at $15-$20 a barrel all through the 1970s, 6-8 times higher than the historical average. Member states were flush with cash, governments spent lavishly on infrastructure and public works. Entire cities were constructed, sprawling in the desert to service the vast oil fields. Life was good in the Arab world, and it was to get better.

In 1979 fundamentalist Muslims overthrew the American backed Shah in Iran. The oil markets panicked, sending the price of oil well above $40/barrel almost instantly and past $50 within weeks. OPEC nations again refused to immediately ramp up production in order to control price increases. They opted instead, in the spring of 1980, to set a $36/barrel price target--more than double the level that had prevailed through the past decade. They successfully defended this price through the first half of the 1980s. OPEC was still on top of the world, the cash fount continued to flow freely.

For as you sow, ye are likely to reap

OPEC's stunning success in the 1970s and 1980s led member states to believe that the good times would last forever. But the seeds of their own downfall had been sown by the very success that they had reveled in. Once again, simple economics conspired to lay the mighty low.

The primary competitive advantage enjoyed by OPEC nations was the extreme low cost of oil extraction from their fields. In Saudi Arabia it cost less than a dollar a barrel to produce crude, compared to $10 or more from fields in Europe and America. While prices sat below $15 nowhere else could compete with the OPEC nations, but with prices at the levels of the early 1980s huge amounts of oil became economically workable.

From the North Sea to the Gulf of Mexico, off the coast of Brazil and in remote Soviet mountains, vast production capabilities came online during the second half of the 1980s and through the 1990s. OPEC's share of the global oil market fell steadily from its peak of 70% in 1980, plunging to 40% in 1998. The price of oil fell from more than $50 back to range between $10 and $15 by the late nineties.

Internal cohesion crumbled as well. In 1992 Ecuador left, followed by Gabon in 1994. Faced with crumbling market share and declining prices member nations began to cheat on quotas, increasing production in spite of continued OPEC resolutions for production cuts. Many states had entered severe recessions as debts ran up during the go-go seventies turned into high-interest burdens in the 1990s. They had no choice but to circumvent production quotas, some income was better than none at all when faced with a populace growing steadily more discontent.

By the end of the 1990s OPEC's ability to set oil prices had evaporated almost completely. Fundamental changes in consumer behavior such as the increased adoption of more efficient automobiles and an increasing deployment of natural gas and nuclear power generators slowed the growth of demand even as the growth in supply picked back up. The historical condition of the oil industry had been restored.


  • http://www.eia.doe.gov/emeu/cabs/opec.html
  • http://www.opec.org/
  • http://www.cnn.com/2000/WORLD/americas/09/26/energy.opec.chronology.reut/
  • http://www.ssc.upenn.edu/polisci/psci260/OPECweb/OPECHIST.HTM

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