ORGANIZATION OF PETROLEUM
EXPORTING COUNTRIES (OPEC)



The Organization of Petroleum Exporting Countries (OPEC) was established on September 14, 1960, at a conference in Baghdad, Iraq. The aims of the new organization were to prevent fluctuations in the price of oil, to raise the price of oil to its pre-1960 level, to make the multinational oil companies more accountable when determining the price they pay for oil, to ensure a steady income from oil for OPEC members and a steady supply of oil for their customers, and to remain steadfast and united should oil companies seek to sanction individual OPEC countries for any role they might play in implementing OPEC policies. OPEC thus became a cartel that maintained to its members' advantage the production, supply, and price of crude oil. In order to accomplish these objectives, OPEC was responsible for coordinating the petroleum policies of its members. The founding members of OPEC were Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Other countries joining OPEC were Algeria (1969), Indonesia (1962), Libya (1962), Nigeria (1971), Qatar (1961), and the United Arab Emirates (1967). Ecuador and Gabon both joined OPEC in 1973, but withdrew in 1992 and 1995, respectively.

After years of agitation by Juan Pablo Perez Alfonso, Venezuela's minister of mines and hydrocarbons, an Arab Petroleum Congress was organized by the Arab League and held in Cairo in 1959. The congress called for oil companies to adopt the policy of notifying and discussing with the governments of the oil-producing countries changes in their posted bids for oil. This request was largely ignored, further embittering the oil producing countries. Perez Alfonso argued that prorationing the production of crude oil would allow the oil producers, not the oil companies, to control the price of oil. Prorationing would assign production quotas to the various members of the cartel. Opponents argued that prorationing circumvents market forces of supply and demand (it must be remembered that not all oil-exporting countries joined OPEC) and was ultimately doomed to failure. Perez Alfonso's arguments, however, found a ready audience in the angry Arab states and OPEC was founded the following year. The immediate impetus for the oil cartel was a soft buyer's market in the early 1960s. The supply of crude oil was greater than the demand, prices were depressed, and prospects of price increases were unrealistic. In spite of OPEC, however, prices remained depressed until the early 1970s when the growing strength and unity of OPEC coupled with the increased demand for oil by the Western industrialized nations brought about a seller's market. This state of economic affairs together with growing Israeli/Arab tensions set the stage for the infamous 1973-74 oil embargo.

The embargo was not fashioned by OPEC but rather OAPEC (the Organization of Arab Petroleum Exporting Countries). Membership in the two organizations overlapped somewhat, but in the public's mind long lines at the gas pumps were caused by OPEC and all OPEC members profited from the embargo. Oil embargoes had been attempted by the Arab oil-producing countries in 1956 in reaction to the Suez Canal crisis and again in 1967 following the outbreak of war between Israel and Egypt. Both efforts were futile primarily because of U.S. resolve to break the embargo by making its own oil more available on the world market and the maneuvering of oil supplies by the multinational oil companies. By 1973, however, rapidly changing political and economic trends (the rise of Arab nationalism, growing enmity towards Israel, growing global demand for oil, lessening of the ability to manipulate prices by oil companies) made the embargo much more workable. The 1973 embargo had overtly political goals: the withdrawal of Israel from Arab territory it had occupied since the 1967 war and recognition that a Palestinian homeland needed to be restored. The embargo was applied to oil-importing countries on a sliding scale depending on each country's relationship with Israel. The United States, the Netherlands, and South Africa were Israel's strongest supporters and thus bore the brunt of the embargo—a total ban on the shipment of Arab oil. OPEC acted concurrently with OAPEC by raising the price of oil to $5.11 a barrel in October 1973, and on January 1, 1974, raising it again to $11.65 a barrel. Announced oil-production cutbacks were to be at the rate of 5 percent per month but were held in December at 15 percent.

The strategy of OPEC and OAPEC had a depressing but not devastating effect on the economies of the Western industrialized nations and Japan. In the United States, for instance, the gross national product fell $10 billion from the same 1973 quarter and accounted for a .5 percent drop in employment (approximately 500,000 jobs) and a 30 percent rise in the consumer price index. This caused the U.S. economy to enter into a period of "stagflation"—economic stagnation coupled with inflation. By March 1974, however, most but not all of OAPEC members felt that the United States and its allies were moving in a positive direction towards easing Arab/Israeli tension and the embargo was lifted. OPEC, however, did not lower prices.

When OPEC was established the price of a barrel of crude oil (42 gallons) was selling for less than $5. By the 1980s, in the aftermath of the embargo, the price of that same barrel of crude had risen to around $40. Much of this increase was due to a rising global demand for oil, as well as OPEC's initial controls over production and price. By the mid-1980s, however, the price of oil began dropping due to overproduction and a worldwide recession. There was also a concerted effort among non-OPEC oil-producing countries and other industrialized nations to increase oil exploration, develop new and more efficient oil-drilling technology, and implement long-term energy-conservation projects. By 1985 the price of a barrel of crude had dropped to $25. Many OPEC members continued to exceed their production quotas because of demands of a growing population in their countries, foreign debt, and foreign exchange shortages. In 1987, for instance, the OPEC quota for all members was set at 16.5 million barrels a day, but in fact total OPEC production often exceeded 20 million barrels. Problems with production quotas continued to plague OPEC well into the 1990s.

The price of oil continued to drop throughout the 1990s in spite of area disruptions such as the Persian Gulf War and United Nations's sanctions on Iraq. By 1998 OPEC countries accounted for only 55 percent of crude oil exports and 40 percent of world oil production. There are numerous reasons for this downturn in OPEC's fortunes: oil exploration has opened new areas such as the Caspian Sea and offshore West Africa for resource exploitation, new technology has made it feasible to profitably exploit areas that were once considered to be marginally profitable, the use of natural gas in the total energy scheme is on the rise, the Asian monetary crisis has stifled demand, and relatively mild winters have lessened the demand for heating oil. In mid-1998 oil was selling for a little more than $13 a barrel, a 12-year low. OPEC plans for what remains of the 1990s call for production cutbacks to stabilize if not increase the price of oil. Analysts feel, however, that planned production cutbacks will do little more than end the production of oil that was going into storage for lack of buyers. There are many other reasons OPEC will not soon regain the market control it enjoyed during the embargo. Many Arab oil-producing countries have become notorious for surreptitiously increasing oil production beyond their quotas. Norway, a non-OPEC member and the world's second largest oilexporting country, refuses to go along with cutbacks, while Venezuela, an OPEC member opposed to quotas, has long-term plans to boost production to the level of some Arab states. Perhaps most important cartels such as OPEC dismiss, to their ultimate dismay, the influence that supply and demand has on market prices. According to an oil-industry analyst, quoted in a 1998 issue of World Press Review, "To free-market economists, the fall of OPEC is a textbook case of the futility of price fixing cartels."

[ Michael Knes ]

FURTHER READING:

Ahrari, Mohammed. OPEC: The Failing Giant. Lexington, KY: University of Kentucky Press, 1986.

Karl, Terry Lynn. The Paradox of Plenty: Oil-Booms and Petro States. Berkeley: University of California Press, 1997.

Knott, David. "OPEC at the Crossroads with Non-OPEC Nations." Oil and Gas Journal, 15 June 1998, 19-25.

——. "Venezuela Looks to New OPEC Role." Oil and Gas Journal, 25 May 1998, 20.

Magnus, Ralph H. "Middle East Oil." Current History, February 1975, 49-53, 86-88.

"Once and Future OPEC." World Press Review, June 1998, 31-32.

Organization of Petroleum Exporting Countries. "OPEC Online." Vienna: Organization of Petroleum Exporting Countries, 1998. Available from www.opec.org/welcome.htm .

Salpukas, Agis. "Challenges Inside and Out Confront OPEC." New York Times, 23 June 1998, 50.

U.S. Department of Energy. "OPEC Fact Sheet." Washington: U.S. Department of Energy, 1998. Available from www.eia.doe.gov/ .

Yergin, Daniel. "How OPEC Lost Control of Oil." Time, 6 April 1998, 58.



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