In response to Standard Oil of New Jersey’s decision to lower the price paid for oil, representatives of the major petroleum-exporting states met to find means of securing greater control over the international oil market.
The Organization of Petroleum Exporting Countries (OPEC) opened its unpretentious offices in Vienna, Austria, in 1960. That city was not OPEC’s first choice. The OPEC states would have preferred offices in Geneva, Switzerland, home of the United Nations and a variety of prestigious international organizations. Switzerland, however, allegedly rejected OPEC’s application to open offices in Geneva. OPEC was not important enough, the story goes, to rate residency in Geneva.
That assessment was soon proved wrong. Thirty years later, OPEC headquarters sprawled over a large block of prime real estate in downtown Vienna, under the shadows of large banking facilities and luxury hotels drawn to Vienna by OPEC’s presence. On the other hand, viewed from the vantage point of 1960, Switzerland’s decision hardly appears exceptional. The affluent and politically powerful days of OPEC were more than a decade away, and the organization already showed the potential for a high level of internal rivalry.
By the late 1950’s, the international oil market was an increasingly saturated and unruly one. Fears of an oil shortage that had dominated the previous decade had vanished with the discovery of the rich oil fields of Kuwait. Exploration and development of additional sources of supply continued, increasingly undertaken by independent oil companies lured into overseas ventures by dreams of imitating Getty Oil’s success in Kuwait. Further complicating the picture was the growing presence of Soviet oil in the market, often sold below the established price for a barrel of an equivalent grade of crude oil by a Soviet government hungry for hard currency. As a consequence, the international cartel of the seven great multinational oil firms that had controlled the international petroleum market for more than a quarter of a century was finding it increasingly difficult to manage the market. Excess supply often forced the major companies, commonly referred to as the Seven Sisters, to cut the price of their oil, to the displeasure of both the major companies and their host governments, which shared in oil profits.
The prevailing arrangement between the major oil companies and the host governments of the oil-producing states split profits from the production of oil equally between the company and host government. Price reductions meant less income for the host governments and hence less support for the sharing arrangement. Still, price reductions continued, as they were the cartel’s most effective mechanism for coping with competition, particularly competition from outside the Persian Gulf area, where production costs were the lowest in the world.
The impetus behind OPEC lies in one of those price cuts. British Petroleum’s
That meeting was OPEC’s moment of conception. Out of it emerged a gentlemen’s agreement among those present to build more independent oil companies in their countries and to work to persuade their home governments to move toward a plan that would give host countries 60 percent of oil profits rather than half. Later, the countries planned to develop a common negotiating position against the oil companies.
The gentlemen’s agreement was a major step in the direction of producer-state cooperation, but it stopped short of representing official government policy in the petroleum-producing world and it did not create any formal structure for coordinating policy against the Seven Sisters cartel of oil companies. Less than a year later, Standard Oil of New Jersey’s
Producer states were outraged both at their loss of revenues and at the unilateral nature of Rathbone’s action, which had lacked even the pretense of consultation with the governments in the oil-producing world. Tariki quickly contacted Pérez Alfonzo to arrange a meeting. Also invited were representatives of Iraq and Iran, the other two parties to the gentlemen’s agreement. In a futile effort to placate these major sources of exportable oil, Shell Oil
On September 10, the representatives of Saudi Arabia, Venezuela, Iran, and Iraq met in Baghdad, along with an official spokesman for Kuwait and an observer from Qatar. It took the group only four days to turn Pérez Alfonzo’s idea of an association of petroleum-producing countries into reality. On September 14, 1960, a new entity emerged, the Organization of Petroleum Exporting Countries. The Iranian delegate to the founding conference, Fuad Rouhani, became its first secretary-general. Venezuela, Saudi Arabia, Iran, Iraq, and Kuwait formed the group. At the time, these states accounted for more than three-fourths of the world’s exported oil.
More than a dozen years were required before OPEC became a significant influence in the international oil market. Despite the revolutionary nature of the organization’s goals and despite some initial policy success (the major oil companies moved quickly to increase the posted price of petroleum within the 50/50 arrangement), until 1973 OPEC was basically a bureaucratic fact-finding and information-sharing organization. Moreover, like most bureaucracies, it was an essentially conservative organization composed of technocrats as fearful of radical developments beyond their control as were their counterparts inside the major oil companies. Thus, it was at least as much a result of outside factors as organizational personnel that OPEC eventually achieved its goal of obtaining control over the oil industry.
Three factors, in particular, facilitated OPEC’s success: the increased appetite of Western countries for oil; the persistent activity of American independent oil companies in developing the fields of new producer states; and the activity of the Organization of Arab Petroleum Exporting Countries
Between 1960 and 1973, Western demand for imported oil increased dramatically, especially during the 1968-1973 period of economic expansion in the United States, Western Europe, and Japan. By the 1960’s, oil was replacing coal as Japan and Western Europe’s principal energy source in virtually all sectors. In the United States, by the 1960’s new sources of production could no longer keep pace with the growing appetite for oil, and the country began to import a growing proportion of its petroleum needs, approximately 30 percent at the time of the 1973 oil embargo. The OPEC bureaucrats in Vienna carefully monitored these trends, as they could increase the bargaining power of member states seeking enhanced revenues. The trends were not, however, in any way the result of OPEC action.
Meanwhile, the gradual transformation of the oil market from a buyer’s market in 1960 to a seller’s market by 1973 not only led to steady price increases (as opposed to the price cuts that led to OPEC’s birth) but also lured independent oil companies into exploration and development ventures and stymied the Seven Sisters’ efforts to reestablish order in the international petroleum market. The most important of these developments occurred in newer oil-producing states with militant nationalistic governments, Libya in particular. There, the development of oil was often left to smaller independent oil companies such as Occidental, companies engaged in comparatively little international activity and hence less able to resist the demands of the host government than were members of the Seven Sisters. The tightening oil market made it easier for host governments to resist the offers tendered by these independents, since other buyers for oil could almost always be found on the spot market.
As a result, from 1970 on, the Libyan government was usually able to charge a higher price per barrel of oil in its negotiations with Occidental than the majors were offering their suppliers under the 50/50 agreement. Libya’s remuneration then became the benchmark demand of the other states, and the Seven Sisters inevitably had to raise their posted price in order to extend, within the 50/50 formula, the same revenue per barrel to their host governments as Occidental was offering Libya in negotiations not bound by the 50 percent rule.
The process maintained the illusion that the Seven Sisters were still in control and that the 50/50 agreement still governed financial relations between the producing companies and host governments. The dynamics of the situation, however, were gradually taking the pricing of oil out of the hands of the multinational oil companies. Control was not falling, however, into the hands of OPEC, but into the hands of the more radical leaders of the newer oil-exporting states. Frightened by this trend, OPEC bureaucrats actually cautioned the governments of OPEC’s members to moderate their own demands on occasion in order to restore order to the market.
The Arab oil embargo of 1973 revealed just how little leverage the Seven Sisters cartel retained. OPEC, on the other hand, had continued to grow and by 1973 contained twelve countries, accounting for all major underdeveloped oil producers except Mexico and several minor producers as well. Member nationals included the charter countries of Iraq, Iran, Venezuela, Saudi Arabia, and Kuwait, along with the United Arab Emirates, Algeria, Libya, Nigeria, Indonesia, Gabon, and Ecuador. OPEC was well positioned to exploit events in October, 1973, when the Arab oil exporters declared an embargo on states aiding Israel in the Yom Kippur War.
At the time, there was insufficient production capacity outside the OAPEC producers to offset the loss of oil the OAPEC states were refusing to sell. Moreover, OAPEC members had built up substantial monetary reserves to withstand a counter-boycott, having learned that lessen from an earlier failed embargo after the 1967 Middle East conflict. Panic seized the market. The spot price for oil leaped to several times the posted price established by the majors. OPEC seized this moment and, led not by its bureaucrats in Vienna but by the politically appointed oil ministers of its member states, at last achieved its 1960 goal of gaining control over the price of oil in an OPEC-dominated marketplace, a position that in subsequent decades alternatively strengthened or weakened owing to changes in the world marketplace, the expansion of OPEC membership which complicated its efforts to coordinate national oil policies, and the discoveries of new sources of oil beyond OPEC nations, among other factors.
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Al-Chalabi, Fadhil J. OPEC at the Crossroads. New York: Pergamon Press, 1989. An examination of OPEC at the moment of its mid-1980’s crisis. Particularly good in detailing the effects of falling oil prices on the cohesiveness of the organization. -
Danielson, Albert L. The Evolution of OPEC. New York: Harcourt Brace Jovanovich, 1982. A good account of OPEC’s changing character between 1960 and 1973, from a minor bureaucratic entity to a politically significant international cartel. -
Griffin, James M., David J. Teece, et al. OPEC Behavior and World Oil Prices. Boston: Allen & Unwin, 1982. As much a study of the political economy of OPEC as of its presence in the world. Primarily concerned with OPEC as a would-be cartel and with the nature and limits of its pricing policy. -
Jones, Peter Ellis. Oil: A Practical Guide to the Economics of World Petroleum. New York: Nichols, 1988. A well-written, comprehensive interdisciplinary examination of the global petroleum market, the petroleum industry in the OPEC era, and the politics and economics of petroleum. -
Kayal, Alawi D. The Control of Oil: East-West Rivalry in the Persian Gulf. New York: Kegan Paul, 2002. Study of all the major players seeking control over oil in the Middle East; analyzes the role of OPEC in the struggles to achieve and benefit from that control. Bibliographic references and index. -
Klapp, Merrie Gilbert. The Sovereign Entrepreneur: Oil Policies in Advanced and Less Developed Countries. Ithaca, N.Y.: Cornell University Press, 1987. A scholarly treatment of the conflicts among host countries, multinational corporations, and domestic oil companies, and of the options available for responding to these conflicts. -
Kohl, Wilfrid L., ed. After the Oil Price Collapse: OPEC, the United States, and the World Oil Market. Baltimore: Johns Hopkins University Press, 1991. The best single source on the collapse of oil prices in 1986 and the implications of this development for the world oil market, American petroleum firms, and the international system. -
Koopmann, Georg, Klaus Matthies, and Beate Reszat. Oil and the International Economy: Lessons from Two Price Shocks. New Brunswick, N.J.: Transaction, 1989. A sweeping examination of the impact of rapidly increasing oil prices on the international financial system. -
Lax, Howard L. States and Companies: Political Risks in the International Oil Industry. New York: Praeger, 1988. Lax focuses on the relationship between host countries and multinational corporations examining the tension resulting from the different goals of the two. Especially good in discussing the decreasing bargaining power of companies. -
Sampson, Anthony. The Seven Sisters: The Great Oil Companies and the World They Shaped. New York: Bantam Books, 1978. Written for popular audiences, this book tells the story of the major oil companies in an excellent mix of information and drama. -
Skeet, Ian. OPEC: Twenty-Five Years of Prices and Politics. New York: Cambridge University Press, 1988. A valuable study of the development of OPEC and its stages of evolution as an actor in international relations.
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