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.
Membership
Sources:
- 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