Organization of Petroleum Exporting Countries (OPEC)

BIBLIOGRAPHY

Throughout its history, the Organization of Petroleum Exporting Countries (OPEC) has indirectly influenced oil prices in response to sharp volume fluctuations resulting from geopolitical tensions. However, as of 2006 OPEC’s effect on the market, which affords member states political leverage, has changed dramatically relative to the late twentieth century, because member states now have far less excess production capacity (see Figure 1).

OPEC had more excess oil capacity in the 1980s, when crude oil prices reached close to $80 a barrel, than it did by 2006, during which prices reached as high as $75 a barrel (Figure 2). Minimal surplus capacity limits OPEC’s ability to soften the blow of the high price of oil via increasing supply to meet the immense demand.

The Organization consists of eleven developing nations whose economies rely heavily on oil export revenues. OPEC seeks to maintain stable international oil prices via quotas on oil production and pursue petroleum policies that serve the national and collective interests of its members. In 2002 OPEC agreed that a fair price on crude oil should be set between $22 and $28 a barrel. Three years later, member states agreed to cap their crude oil production at 28 million barrels per day (MBPD). By 2006 Qatari Energy Minister Abdullah Attiyah maintained that a fair market price for crude oil should be in the range of $50 to $55 a barrel. However, during the

same year, crude oil prices reached over $70 a barrel, and some OPEC countries often surpassed their production quotas by 2 MBPD.

Prior to OPEC, the so-called Seven Sister Companies dominated the crude oil market. Those seven companies included Esso (which later became Exxon, and is now known as Exxon Mobil), the Anglo-Iranian (previously Anglo-Persian) Oil Company (later British Petroleum, and currently known as BP), Royal Dutch Shell, Gulf Oil (most of which became a part of what is today known as Chevron), Standard Oil of New York (which became Mobil, and later merged with Exxon), Texaco, and Standard Oil of California (now part of Chevron) (see Table 1). Crude oil prices remained stable, with a range from $2.50 to $3.00 a barrel during the late 1940s through the 1960s, or $21 to $22 a barrel when adjusted to 2006 dollars.

The Seven Sister Companies remained dominant by restricting oil output and minimizing internal conflict. But competition from other world suppliers would eventually break up their control over the international oil market.

OPEC was created at the Baghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Eight more countries later joined the Organization—Qatar (1961), Indonesia (1962), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), and Gabon (1975). OPEC set up a secretariat in Geneva, Switzerland, which moved to Vienna in 1965. The OPEC Statute states that countries that apply for membership must maintain “a substantial net export of crude petroleum” and “have fundamentally similar interests to those of Member Countries” (OPEC Statute, p. 3). The formation of OPEC resulted in a shift in influence over the oil market away from the Seven Sister Companies toward OPEC.

OPEC’s dominance became fully evident during the 1970s as its Arab member states limited oil shipments and cut production at a time when demand was high, which resulted in a spike in oil prices. The Arab countries imposed an embargo on oil shipments to the United States

and any other country that condemned Egypt and Syria’s attack on Israel in 1973, which was significant considering that OPEC exports accounted for 85 percent of world oil trade at the time (Mikdashi 1974, p. 4). According to data from the Middle East Quarterly and WTRG Economics, the nominal price of oil escalated by more than 300 percent at the end of 1974 compared to prices a decade earlier. OPEC validated its authority and gained political leverage by reducing oil supply to the world market.

During this same period, Libya became a more prominent member of OPEC. Libya had undergone a regime change a few years earlier as the result of a military coup led by Colonel Muammar al Qadhafi, and had officially become known as the Great Socialist People’s Libyan Arab Jamahiriya. Qadhafi encouraged Arab-nationalist and socialist policies. Many analysts have credited the new Libyan regime with shaping OPEC’s measures to increase oil prices, enforce embargoes, and gain control of oil production (Anderson 1999, p. 4). For example, according to a 1973 Time Magazine article, Qadhafi took advantage of the high global demand for oil by forcing oil companies to increase Libya’s oil royalties over 100 percent from $1.1 billion in 1969 to $2.07 billion in 1971 (“The Arab World,” p. 2). Libya’s influence played a partial role in OPEC’s enhanced political strength on the world stage.

OPEC’s reaction to the scarcity of oil supply resulting from the Iranian Revolution in 1979 and the Iraqi invasion of Iran in 1980 further illustrated its strength. The new regime in Iran, which was the second largest OPEC oil exporter following Saudi Arabia, curbed oil exports to the world market driving prices upward. By 1979 Iran produced less than 1 MBPD, which was down from over 6 MBPD a year earlier (“Iran and Oil Prices,” Washington Times, January 17, 2006; Phillips 1979, pp. 1–2). Iraq’s invasion of Iran in 1980 sparked a reduction in the combined production of both countries to only 1 MBPD and a jump in prices from about $14 per barrel by early 1979 ($43.48 in 2006 dollars), to $35 per barrel by 1981 ($77.97 in 2006 dollars), according to WTRG Economics. Other countries within OPEC were able to offset Iran and Iraq’s lower oil production by increasing their output while also maintaining a substantial amount of excess capacity. Saudi Arabia alone utilized three-quarters of its production capacity in order to make up for reduced output. Additional output from the other OPEC members helped crude oil prices to fall.

However, increased OPEC crude oil supply resulted in an oil price collapse by the mid-1980s. A Brookings Institution report entitled “Lessons from the 1986 Oil Collapse” (1986) notes that Saudi Arabia increased its market share after many of its OPEC partners failed to abide by their production quotas, thus oversupplying the market. Consequently, in 1986 crude oil prices declined from over $20 to as low as $12 a barrel ($22.17 in 2006 dollars). Lack of cohesion among member states presented a challenge to the effectiveness of OPEC during this period.

By the early 1990s, the price of oil began to creep upward with the Iraqi invasion of Kuwait and the resultant threat of a Persian Gulf war. Saudi Arabia possessed the most oil reserves regionally and internationally (see Figure 3).

Saudi Arabia increased production by more than 3 MBPD during the Gulf War of 1991 (Lieber 1992, p. 155). This increased output to offset shortages created by the Gulf War of 1991 resulted in the stabilization of prices shortly after.

As the twenty-first century began, many geopolitical tensions further limited OPEC’s oil supply and raised prices. The 2002 strike by state-owned Petroleos de Venezuela caused Venezuelan oil production to plunge so low that Venezuela still has not been able to regain its peak output capacity of 3.5 MBPD. In addition, the international military action in Iraq in 2003 caused Iraqi output to plummet to less than 1.5 MBPD. In 2006 Iran’s threat to slash oil exports during its dispute with the United Nations over its nuclear missile program kept oil prices high at over $70 a barrel.

OPEC’s ability to offset price increases in the early part of the twenty-first century pales in comparison to its clout during political conflicts thirty years earlier because there is far less additional oil supply in OPEC countries, including Saudi Arabia. The U.S. Energy Information Administration reported Saudi Arabia’s excess capacity as being around 1.3 to 1.8 MBPD in May of 2006. Other OPEC members have zero surplus capacity in a world that consumes around 80 MBPD (see Figure 4). By the first half of 2006, oil prices jumped from $50 a barrel to a little more than $70 a barrel. Although the price per barrel is a few dollars shy of that in 1981 ($77.97 in 2006 dollars), the peak production capacity of OPEC is far less than that of the early 1980s, thus reducing OPEC’s ability to manipulate the market.

OPEC’s impact on the international crude oil market will continue to wane with such a tight supply. High crude oil prices have led to discussions about the possibility of tapping new oil reserves in non-OPEC countries and expanding alternative sources of energy, such as ethanol, in order to meet high demand at a much lower cost.

SEE ALSO Energy; Energy Industry; Energy Sector; Qadhafi, Muammar al

BIBLIOGRAPHY

Alhajji, A. F., and James L. Williams. 2003. The Coming Energy Crisis? WTRG Economics. http://www.wtrg.com/EnergyCrisis/EnergyCrisis.pdf.

Anderson, Frank. 1999. Qadhafi’s Libya: The Limits of Optimism. Middle East Policy 6 (4): 68–79.

Buchbinder, David. 2003. Venezuela’s Oil Strike May Be Over, but Industry Faces High Hurdles. Christian Science Monitor, February 19: 7.

Ceasar, Mike. 2002. Venezuelans Hit by Oil Crisis. BBC News. http://news.bbc.co.uk/1/hi/business/1913893.stm.

Energy Information Administration Web site. http://www.eia.doe.gov.

Gately, Dermot, M. A. Adelman, and James M. Griffin. 1986. Lessons from the 1986 Oil Price Collapse. Brookings Papers on Economic Activity 2: 237–284.

Kanovsky, Eliyahu. 2003. Oil: Who’s Really over a Barrel? Middle East Quarterly 10 (2): 51–64.

Kliesen, Kevin L. 2001. Rising Oil Prices and Economic Turmoil: Must They Always Go Hand in Hand? Regional Economist (January): 4–9.

Kochhar, Kalpana, Sam Ouliaris, and Hossein Samiei. 2005. What Hinders Investment in the Oil Sector? Washington, DC: International Monetary Fund Research Department.

Lieber, Robert J. 1992. Oil and Power after the Gulf War. International Security 17 (1): 155–176.

Mikdashi, Zuhayr. 1974. Cooperation among Oil Exporting Countries with Special Reference to Arab Countries: A Political Economy Analysis. International Organization 28 (1): 1–30.

Moran, Theodore H. 1987. Managing an Oligopoly of Would-Be Sovereigns: The Dynamics of Joint Control and Self-Control in the International Oil Industry Past, Present, and Future. International Organization 41 (4): 575–607.

Oil Price History and Analysis. WTRG Economics. http://www.wtrg.com/prices.htm.

OPEC Statute. OPEC Secretariat. http://www.opec.org/library/opec%20statute/pdf/os.pdf.

OPEC Warns of Oil Crisis. 2002. BBC News. http://news.bbc.co.uk/1/hi/business/1917522.stm.

Organization of Petroleum Exporting Countries Web site. http://www.opec.org.

Peak Oil News and Message Boards. 2006. Fair Price for Oil Is 50 to 55 Dollars per Barrel: Qatari Minister. http://www.peakoil.com/article16202.html.

Phillips, James A. 1979. The Iranian Oil Crisis. Heritage Foundation. http://new.heritage.org/Research/MiddleEast/bg76.cfm.

Time Magazine. 1973. The Arab World: Oil, Power, and Violence. April 2.

Washington Times. 2006. Iran and Oil Prices. January 17.

Sarita D. Jackson

ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES (OPEC)

group formed in 1960 to protect economic interests of oil-exporting countries.

In the early 1950s, international oil companies (IOCs) developed the posted price system to help host governments estimate oil revenues in advance. Posted prices were accounting devices that host governments used to calculate the amount of taxes the companies would pay under industrywide fifty-fifty profit-sharing agreements. Despite normal fluctuations in the real prices at which crude oil was traded, posted prices were not adjusted, and fixed posted prices became an industry norm. When competitive pressures forced the IOCs to reduce posted prices unilaterally in February 1959, an immediate outcry arose from the affected host governments.

OPEC's Founding

The first Arab Oil Congress met later that year. Delegates from oil-exporting countries came to plan concerted action against the oil companies. Structural differences among national oil industries made coordination among these countries difficult technically. Conflicts of interest over investment and production shares made coordination difficult politically. Competition between Venezuela and Middle Eastern exporters was heightened by the 1959 posted price cuts. British Petroleum set lower prices in parts of the Middle East than in Venezuela in hope of breaking the As-Is Agreement, a mediated connection between world oil prices and the U.S. market. Venezuelan oil thereby became even less competitive, requiring further downward price adjustments and convincing oil exporters that their responses to the companies had to be closely coordinated.

Political conflicts ended the Oil Consultation Commission, the first producer attempt to institutionalize coordination. But when the IOCs imposed yet another round of price cuts in August 1960, five oil-exporting countries set aside their political differences to salvage their economic interests. Venezuela, Saudi Arabia, Iran, Iraq, and Kuwait formed the Organization of Petroleum Exporting Countries (OPEC) in September 1960. OPEC's first resolutions included calls to restore posted prices to their pre-February 1959 levels and to stabilize oil prices by regulating production.

The U.S. government refused to recognize OPEC, forbade U.S. oil companies to negotiate with it, and imposed trade sanctions on OPEC members to discourage other countries from joining. This suited the IOCs, which saw an advantage in continuing their accustomed practice of dealing with host governments one at a time. OPEC responded creatively, developing joint negotiating positions with the understanding that any member able to gain an additional advantage on its own should do so. Any gains would constitute a new floor for bargaining in the next round. During its first ten years, this "leapfrogging" earned OPEC members incremental gains in oil revenues, which both increased OPEC's international stature and attracted new members to the organization.

Perhaps OPEC's most significant contribution to the oil revolution was its support and implementation of "participation," the gradual nationalization of foreign-owned oil properties. Most members did not follow the participation strategy to the letter, but years of discussion provided an opportunity to prepare for the responsibilities that would come when they became full owners of their oil industries. This accomplishment was overshadowed, however, by OPEC's successful utilization of leapfrogging to achieve rapid oil price increases, by Libya in 1970 and afterward by alternating pressure exerted first by oil-exporting countries in the Mediterranean and then in the Persian Gulf. This set the stage for OPEC's takeover of crude oil pricing when the 1973 Arab–Israel War, with its well-designed Arab oil embargo, provided the opportunity.

Pricing Strategies

OPEC's success in taking over oil pricing created new problems for the group. Oil-importing countries, led by the United States, demonized OPEC as the primary cause of worldwide economic decline. Inside OPEC, structural differences among member industries led to disagreements over pricing strategies. Low-price-preference members such as Saudi Arabia, with small populations and huge oil reserves, favored moderate oil prices to discourage consumers from seeking alternative fuels. High-price-preference members like Algeria, with large populations, wanted high prices so they could pay for ambitious development programs, while their small reserves offered no incentive to support pricing policies that would sustain the long-term attractiveness of oil as a fuel. Some members with large reserves, like Iran and Libya, also favored high prices. Iran had a large population and an ambitious development program, but Libya's preference was politically motivated by Libya's desire to assert its autonomy among its OPEC peers as well as its independence from western domination.

Price positions could be flexible, however. In 1978, the threat of revolution pushed Mohammad Reza Shah Pahlavi of Iran to seek allies among his neighbors. Iran joined most of the Arab gulf countries in pushing for the adoption of a long-range moderate pricing strategy to replace what had, until then, been an ad hoc method of setting oil prices. The new system became obsolete almost before it was agreed upon, however; it was superseded by pressures that doubled oil prices in one year thanks to panic buying during the Iranian Revolution. Predictably, oil demand fell, but the availability of new, non-OPEC supplies from the North Sea and elsewhere allowed major importers to shift their purchases, making OPEC the marginal supplier of crude oil to the world market.

Market weakness in the early 1980s caused OPEC to focus on oil production sharing as a strategy for controlling oil prices by regulating crude supply. A voluntary production-sharing plan was launched in 1982 but, as had happened to the voluntary oil import quota in the United States during the 1950s, producers ignored it. A mandatory quota system was introduced in March 1983, and crude prices were reduced for the first time since OPEC had assumed its price-setting role in the hope of stimulating consumer demand. An Austrian accounting firm was hired to monitor member production in order to discourage cheating on the quotas.

The quota system had many flaws. Even small producers were required to accept a quota, prompting Ecuador to leave OPEC in 1993 to escape its quota obligations. Saudi Arabia, OPEC's largest producer, refused to accept a formal quota that it said was an unacceptable infringement on its sovereignty. This marginalized Saudi production within OPEC as crude from many sources flooded the market and total demand for OPEC oil declined. Without a quota and its implied entitlement to produce a defined share of OPEC crude, the Saudis had to accept the informal role of swing producer, one which would vary its production to satisfy market demand remaining after other producers had supplied their quota amounts. As OPEC's swing producer, however, Saudi Arabia would have to absorb more than a proportional share of demand reduction. This already unpleasant situation would be complicated in the Saudi case by its heavy dependence on associated natural gas, which led to shortages of fuel for power generation when oil production there fell to below 3 million barrels per day in mid-1985. Shortly afterward, Saudi Arabia decided to produce oil with only its own needs in mind. Global supplies burgeoned and oil prices plummeted, dipping below $10 U.S. per barrel in June 1986. Although oil prices recovered, they have yet to return to pre-1985 highs.

Political Divisions

Political conflicts continued to divide OPEC members during this time. The first Gulf War, between Iran and Iraq (1980–1988), so split the organization that OPEC could not agree on a new secretary-general when it was Iran's turn to nominate one of its nationals. An assistant secretary-general, Fadhil al-Chalabi of Iraq, served as acting secretary-general from 1983 to 1988. Hostility among members during this period made meetings acrimonious and reduced the usefulness of OPEC as a forum for coordinating policy.

The end of the Iran–Iraq War provided an opportunity to mend intra-OPEC relations, but the second Gulf War, which began when Iraq invaded Kuwait in 1990, brought new turmoil to oil markets and to OPEC itself. Before Iraq invaded Kuwait, world oil prices were depressed and virtually every OPEC member with excess production capacity was producing over its quota. Unfortunately for Kuwait, it was the only country small enough and close enough to suffer Iraq's wrath directly. After Kuwait was liberated in February 1991, U.N. sanctions against Iraq, imposed in retaliation for the invasion, ended legal oil exports from Iraq. Starting in December 1996, Iraqi income from smuggled oil was augmented by earnings from the U.N. Oil-for-Food Program, which supervised the marketing of some 3.4 billion barrels of Iraqi crude between the start of the program and March 2003, when the United States and Britain invaded Iraq. The United Nations also ensured that the Iraqi share of oil-for-food income was spent only to meet humanitarian needs. The rest went for war reparations (25 percent after December 2000, 30 percent before), the cost of U.N. weapons inspections (0.8 percent), and administrative and operational costs for the program (2.2 percent).

Overproduction by OPEC members remains a problem during periods of ample crude supplies, but political turmoil and consequent supply disruptions in member countries, from Venezuela and Nigeria to Iraq and Indonesia, have masked the problem of excess capacity by creating or even merely threatening war-related shortages. Yet members able to do so are expanding production capacity, which will add to conflict over production ceilings and quota allocations as growing supplies from Iraq come to the market.

Overall, OPEC's difficulties in managing and stabilizing the international oil market continue to be beyond member control. Following the collapse of the Soviet Union, the new Central Asian countries offered attractive terms to potential investors in oil and gas exploration and development. Now rising production from this region adds to pressures on the price structure. The need for capital investment is another axis of competition pitting OPEC against Central Asian and non-OPEC African producers, leading many OPEC members to reconsider their positions on nationalization. IOC operations are expanding in virtually every OPEC nation, while the occupation of Iraq could leave a privatized Iraqi oil industry as one of its legacies.

OPEC's gravest failure has been its concentration on oil market conditions rather than on the economy as such. Consequently, it has failed to develop strategies to prepare members for a post-oil world. As long as prices are low and supplies seem secure, oil will remain a competitive fuel in global markets and the deep restructuring necessary to wean member economies from their addiction to oil revenues can be avoided. Yet whether post-Saddam Iraq will be reintegrated into OPEC or not, relying on hydrocarbon revenues as the mainstay of their economies leaves members vulnerable not only to the day-to-day vagaries of the market but also to the impact of long-term structural change. The almost exclusive concentration of governments, press, and public on oil pricing actually prevents OPEC from devoting significant intellectual and financial resources to other aspects of industry development, including research on alternative sources of energy for export and domestic use. Kuwait's early research into solar power, for example, was quickly abandoned as its oil reserves expanded and reliance on oil revenues seemed less risky than devoting substantial resources to bringing a competing energy source to markets where it already had an advantage. Yet with concerns about pollution and global climate change encouraging consumers to shift out of hydrocarbons, OPEC members' acute dependence on oil and gas revenues leaves their economic security as vulnerable to changes in market structure as they are to political conflict.

see also as-is agreement; oil embargo (1973–1974); petroleum, oil, and natural gas.

Bibliography

Mikdashi, Zuhayr. The Community of Oil Exporting Countries: A Study in Government Cooperation. Ithaca, NY: Cornell University Press, 1972.

Mitchell, John, et al. The New Economy of Oil: Impacts on Business, Geopolitics, and Society. London: Earthscan, 2001.

Skeet, Ian. OPEC: Twenty-Five Years of Prices and Politics. Cambridge, U.K.: Cambridge University Press, 1989.

Tétreault, Mary Ann. Revolution in the World Petroleum Market. Westport, CT: Quorum Books, 1985.

Weisberg, Richard C. The Politics of Crude Oil Pricing in the Middle East, 1970–1975. Berkeley: University of California, 1977.

mary ann tÉtreault

OPEC

The Organization of Petroleum Exporting Countries (OPEC) is an intergovernmental organization established at Baghdad, Iraq in September 1960 that coordinates the petroleum policies of eleven oil-producing member nations. Its founding members are Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975 the organization expanded to include Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), and Nigeria (1971). Iraq remains a member of OPEC but Iraqi production has not been part of OPEC quota agreements since March 1998. The organization is headquartered in Vienna, Austria, and decides matters related to oil production, quotas, and pricing among its members.

Oil is at the heart of the international economy, with daily demand in 2004 exceeding 80 million barrels. Oil is today the world's most actively traded commodity, and it changes hands in dollars ("petrodollars") exclusively. Although OPEC's influence has fallen somewhat from its peak in 1973 to 1983, the combined OPEC nations still supplied roughly 40 percent of the oil traded around the world at the end of 2004, and accounted for almost 70 percent of proven reserves.

1960 TO 1972

OPEC was created as a reaction prompted by the unorganized condition of the oil market after World War II and from political pressures in the Middle East involving Israel. OPEC was not taken seriously as an organization during the 1960s because oil reserves, except Iran's, belonged to Western oil companies. Additionally, there was a worldwide oil surplus, particularly with the reentry of the Soviet Union into the oil market in the late 1950s.

Between 1949 and 1972 surpluses persisted despite a tripling of energy consumption throughout the industrialized world. New oil discoveries more than kept pace with oil demand, and cheap oil became even cheaper because supply outpaced demand as oil-producing countries—particularly as those in the Middle East—competed with each other to increase exports. With increased volumes, the number of foreign oil companies and refineries increased as well, with the number operating in the Middle East alone growing from nine in 1946 to eighty-one in 1970.

The Arab-Israeli War of 1967 prompted calls from Arab states for OPEC to wield the "oil weapon" in the form of an embargo, and it did in the summer of 1967, against countries friendly to Israel. The embargo itself threatened to derail economic growth worldwide. Western Europe, after all, imported 75 percent of its oil from OPEC nations. Not only volumes of oil, but also trade patterns of normal oil flow were affected, because embargo meant the closure of the Suez Canal and Mediterranean pipelines. Within a month, however, cooperation between oil companies, embargoed nations, and non-Arab oil producers—including Indonesia and Venezuela—blunted the embargo, which ended in September 1968 with large revenue and market-share losses for OPEC.

1973 TO 1982

In the years after 1967 energy demand continued to increase and, by the early 1970s, had soaked up the two-decades-old oil-supply glut. In the fall of 1973 OPEC capitalized on the tightening market by calling for a restructuring of its relationship with oil companies such as Exxon, Shell, and British Petroleum, which held the concessions (rights to operate) in OPEC countries. Between 1970 and 1974 crude oil had tripled in real terms to over $10 per barrel. The exporting countries' revenues were going up, but the companies' part of revenues was also increasing in the buoyant market.

On the eve of the Vienna OPEC meeting with oil companies in October 1973, war broke out again between several Arab states and Israel. OPEC implemented another embargo and cut deals with the oil companies, stopping just short of nationalizing the oil industry. Until this time, the companies had set oil prices and production rates, but in 1973 this became the prerogative of OPEC, which immediately raised the price of crude by 70 percent a barrel in November, while reducing the companies' revenue percentages and production authority.

The embargo amounted to an average loss of 4.4 million barrels per day, or a 14 percent reduction in internationally traded oil. With supply constraints and demand surging, there were abrupt price increases by the end of 1973. This embargo was much more disruptive than that of 1967. Besides introducing a redistribution problem for the oil companies, the embargo and price hikes threatened the international monetary system, stifled demand, slowed growth in industrialized nations, and strangled growth in poorer countries. Increases in the oil price reduced the purchasing power of the entire oil-importing world, with concomitant GDP growth declines, unemployment, and inflation. For its ability to effect such change, OPEC became the center of worldwide attention, and even after it lifted the embargo on March 18, 1974, the threat of another embargo lingered.

OPEC's 1973 embargo had long-term effects. Seizure of the oil company concessions, abrupt withholding of oil, and sharp price increases were new and bold actions that signaled OPEC's seeming dominance in the oil marketplace. After all, OPEC still accounted for more that 60 percent of total "free-world" production (excluding the Soviet Union). For all its disruptive results, however, the embargo actually loosened OPEC's grip by providing incentive for oil importers to become less dependent on Middle East oil. It also raised the oil price to a level that would support exploration for new energy sources.

Revolution in Iran, and the outbreak of war in September 1980 between two OPEC members, Iraq and Iran, again placed Persian Gulf oil in jeopardy, and threatened a third oil shock. The market price of oil ("spot prices") spiked to a record $42 per barrel. But supply worldwide was as plentiful as demand was weak in the early 1980s, and prices slowly declined despite the loss of roughly 15 percent of OPEC production. Non-OPEC producers filled the gap. Indeed, by 1982 they exceeded OPEC production by a million barrels a day. A free-for-all in the oil market emerged as OPEC and non-OPEC exporters competed, and as the largest oil market, the United States, deregulated its oil industry, freeing companies to compete and merge with reduced restriction.

Confronted with a competitive market, OPEC faced a choice: cut the price of oil or cut production. It officially chose to cut production, but OPEC members remained bitterly divided over price and output levels. Cheating by exceeding assigned output quotas became common among member nations, and there were barter arrangements such as oil for weapons, oil for technology, or oil or food.

1983 ONWARD

In 1983 the New York Mercantile Exchange began trading oil futures contracts, and soon London and Singapore followed suit. In the 1980s oil became an officially traded commodity like wheat, coffee, and equities, with OPEC just another—albeit significant—player in the daily setting of the oil price.

Reflecting a watershed in the decentralization of the oil market away from the Persian Gulf, the British sector of the North Sea produced more oil in 1983 than the three African members of OPEC—Algeria, Libya, and Nigeria—combined, and OPEC was cutting prices to keep market share and relevance in the world oil market. Producers large and small were coming on line—from Australia to Canada, Angola to Mexico—and diluting OPEC's share. In addition to non-OPEC oil production, conservation was gaining traction worldwide, as was the use of coal, natural gas, and nuclear power in the most oil-dependent countries, such as India and Japan. Indeed, the oil share of the total energy market in industrial countries dropped from 53 percent in 1978 to 34 percent in 1985.

Oil prices collapsed in the mid 1980s after a buildup in production facilities left OPEC with 18 percent excess capacity, and with the United States and Europe in recession. Member nations violated their share of OPEC's output quotas, leaving markets oversupplied. In July 1986 crude had fallen to $11.58 a barrel – its lowest level since January 1976 – before recovering to its mean price for the decade of roughly $25 a barrel.

When the Iran-Iraq War ended in 1988, Arab states invited companies back for exploration, reflecting a new flexibility in light of new competition in the oil market. By this time, however, the industrial world had settled into an economic equilibrium not fueled by oil demand. Except for a spike in 1990 after Iraq's invasion of Kuwait, oil prices declined throughout the 1990s to a low of $10 a barrel in 1998.

In the early 2000s the OPEC cartel remained the single most important player in the oil market, although its position had changed since its dominance in the 1970s. With per-barrel oil prices touching $55 in October 2004, OPEC must balance between reaping windfall profits and triggering recession in oil-importing nations. It found that its ability to sway markets was reduced by its unusually thin margin of spare capacity. In late 2004 that buffer was estimated at just 1 percent of total world demand—much less than the 4 percent cushion OPEC officials conceded the cartel needed to regulate prices.

With other areas of the world on stream, OPEC vowed to act not as the central player it once was in the energy market, but as the "swing producer" of oil, beefing up or trimming supply to balance markets that could be rocked by seasonal changes in oil use and supply disruptions in the global production and transport chain. But with little spare capacity, the cartel has limited ability to tame markets. Moreover, as of October 2004 the world's refining system, which converts crude oil into usable products such as gasoline, diesel fuel, and heating oil, is operating at close to capacity. The International Energy Agency expects non-OPEC nations to add 1.2 million barrels a day in production capacity by the end of 2004—including over 600,000 barrels a day from Russia, Azerbaijan, Kazakhstan, and Canada; and another 400,000 barrels from African nations such as Angola and Chad. The complexion of the oil market has changed radically since OPEC's founding in 1960. Some believe the Middle East will regain its pre-1983 influence as other areas of production and supply run dry, and as global economic expansion drives demand.

SEE ALSO Iran; Monopoly and Oligopoly, Persian Gulf;Petroleum.

BIBLIOGRAPHY

Sampson, Anthony. The Seven Sisters: The Great Oil Companies and the World They Made. New York: Bantam Books, 1981.

Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon and Schuster, 1991.

Peter E. Austin

OPEC.

The Organization of the Petroleum Exporting Countries (OPEC) is an international producers' cartel whose members' governments coordinate petroleum policies in order to receive the best possible price for the crude oil they export. OPEC nations regard such price coordination as the best means to safeguard their economic and political interests, both individually and collectively. The cartel's operation has had a profound impact on European economies since its founding in Baghdad in September 1960 by the governments of five developing, oil-producing countries: Kuwait, Iraq, Iran, Saudi Arabia, and Venezuela. Eight other developing countries joined later: Qatar (1961), Indonesia (1962), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), and Gabon (1975). (Ecuador and Gabon left the cartel in 1992 and 1994 respectively.) OPEC's connections to Europe have been important to the organization. OPEC's secretariat (headquarters) has always been located in nonaligned European countries, first in Geneva, Switzerland (from September 1960 to September 1965), and then in Vienna, Austria (from September 1965), but OPEC was also founded to serve as a counterweight to the economic dominance of the United States, the United Kingdom, and the Netherlands in the global petroleum industry.

ORIGINS AND OBJECTIVES

In Western Europe, fuel oil replaced coal as the main source of industrial energy between 1945 and 1974, and gasoline usage increased with the spread of automobiles. Western Europe came to rely on petroleum products in ways it had not before World War II and, with few indigenous oil fields (the North Sea fields of Great Britain and Norway are the exceptions), it relied on imported oil to meet its major energy needs. Low crude oil prices, large-capacity supertankers, and the structure of the international oil market encouraged European dependency on imported oil. In 1960 the international oil market was dominated by the purchasing power and oil-field ownership rights of the "Seven Sisters," transnational oil corporations located in the United States (Exxon, Mobil, Texaco, Gulf, and Chevron) and Western Europe (British Petroleum and Royal Dutch Shell), who tried to keep crude oil prices low. OPEC formed in response to this situation and, worried by the fall of the value of the dollar in the early 1970s (all international oil exports were and still are priced in U.S. dollars), which lowered the value of their already low-priced oil exports, OPEC nations fought for more favorable terms of trade for the raw material they exported.

OPEC rose to international prominence in the 1970s and 1980s as some members (e.g., Iraq, Libya, and Saudi Arabia) nationalized their oil industries, and OPEC used its cartel power to raise the price of crude oil on the world market. Most notably, OPEC cut production and refused to sell oil to countries that had supported Israel in its 1973 war with Egypt and Syria, that is, the United States and its allies in Western Europe, especially the Netherlands. This producer embargo caused a fourfold increase in the price of oil from October 1973 to March 1974 and seriously disrupted the developed economies of Europe and North America and the developing economies of non–oil producing countries in South America, Asia, and Africa. Of the nine members of the European Economic Community (EEC), only the Dutch faced a complete embargo because of support for the United States and Israel, while the United Kingdom and France received almost uninterrupted supplies, and the other members experienced only partial cutbacks.

The rise in oil prices had a much greater impact in Europe than the embargo itself. Not only was the traditional flow of capital reversed when massive amounts of "Petrodollars" now moved from the industrial nations of Europe and North America to Saudi Arabia, Kuwait, Iran, and the other oil-producing countries, but OPEC countries began exporting capital back to Europe and the United States. Petrodollars funded much of the United States, French, and British national debt and led to OPEC nations' investment in European firms, urban real estate, and vacation homes. A striking example of this new relationship was the Iranian state's purchase of 25 percent of the stock of the German steel firm Krupp for $75 million in 1974.

The aftershocks of the 1973 oil crisis rocked the world's economy, as high inflation and a series of recessions (dubbed "stagflation") persisted until the early 1980s. High oil prices continued until 1986, when they fell back to pre-1973 levels only to rise again slowly thereafter. The era of cheap energy was over, and the cost of living rose 32 percent to 46 percent for Europeans between 1968 and 1975. Unemployment reemerged as a problem in European economies for the first time since World War II (6.9 percent of the workforce in early 1978). The oil crisis brought an end to thirty years of high economic growth in the EEC and ushered in an era of high unemployment and economic stagnation. By 1980 stagflation was a major factor in the breakdown of the postwar "social contract" between business and labor and the rise of Thatcherism in the United Kingdom, while in Germany the "oil shock" helped catapult the Green Party, with its emphasis on energy conservation, into national prominence. However, as a measure of oil dependency (that is, the ratio between a country's oil imports and its total oil consumption) of the world's top oil consumers, France and Germany rank third and fourth worldwide, well ahead of the world's largest consumer, the United States, in sixth place.

EUROPEAN PRODUCERS AND OPEC

The role of European oil producers vis-à-vis OPEC is varied. The major European oil producing nations (United Kingdom, Norway, Azerbaijan, Russia, and Romania) are not members of OPEC and have occasionally used their production power to undercut OPEC prices and production quotas and maintain some energy independence. The United Kingdom follows the most independent policy and tends to use its high-grade reserves to mitigate OPEC-orchestrated price increases on the British economy. Russia was the world's largest oil producer until production collapsed in 1992, and it is striving to achieve that status again. Since 1997 Russia has attended numerous OPEC meetings and has made a number of commitments to reduce production and/or exports in coordination with OPEC, but these have had little effect. Norway is the world's third-largest oil-exporting country and generally does not participate in OPEC meetings but it has adjusted oil production with OPEC three times since 1998.

Nevertheless, OPEC continues to be a very powerful cartel. OPEC's oil exports represent about 55 percent of the oil traded internationally, and at the end of 2004, OPEC had proven oil reserves of 896,659 million barrels of crude oil, representing 78.4 percent of the world total of proven oil reserves. Most non-OPEC oil-producing countries are net importers of oil (Russia, Norway, and the United Kingdom are major exceptions), so OPEC still has a strong influence on the European oil market, especially if it decides to reduce or increase its level of production.

See alsoInflation; Recession of 1970s.

BIBLIOGRAPHY

Blinder, Alan S. Economic Policy and the Great Stagflation. New York, 1979.

Yeomans, Matthew. Oil: Anatomy of an Industry. New York, 2004.

Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York, 1991.

Alexander M. Zukas

OPEC OIL EMBARGO

On October 17, 1973, Arab oil producers declared an embargo that drastically limited the shipment of oil to the United States. These producers, members of a cartel known as the Organization of Petroleum Exporting Countries (OPEC), enforced the embargo in response to the Yom Kippur War between Egypt and Israel. In a gesture of support for Egypt OPEC curtailed oil exportation to countries that supported the Israelis. The cartel later extended the embargo to other countries and oil prices soared worldwide. Accustomed to the influx of ample, inexpensive petroleum from OPEC member countries such as Saudi Arabia, Iraq, Iran, and Kuwait, many nations remained at the mercy of these producers of the valuable natural resource.

In the United States the embargo brought on a crisis of unequaled proportions. Daily shipments of oil from the Middle East dropped from 1.2 million barrels to a scant 19,000 barrels. Motor vehicle owners faced long lines at the service stations, and were forced to pay dearly for gasoline when they finally took their turn at the pump. Between May 1973 and June 1974 the average price of gasoline increased by 43 percent. Perhaps the most dangerous effect of the embargo however was the fear and panic it aroused. U.S. citizens were suddenly faced with the shortage of a resource indispensable to every industrialized nation. The shortage was mainly a matter of perception, since OPEC simply withheld oil and had not run out of it. In fact at the time the United States imported only about a third of the oil it used, relying on domestic production for the majority of its supply. But the embargo proved that every drop counted and that a powerful cartel could bring the world to its knees. Daily hardships such as rising oil prices and rates of inflation made the perceived scarcity of the resource seem very real.

Indeed the United States was consuming resources faster and more voraciously than most other countries. Although it represented only six percent of the world's population in 1973, the United States regularly consumed 33 percent of the world's energy supply. Station wagons and other gas-guzzlers were enjoying their heyday. A positive effect of the embargo was that it prompted conservation efforts throughout the country. President Jimmy Carter (1977–1981) declared a national speed limit of 55 miles per hour in order to cut back on gasoline consumption (meanwhile, the number of traffic-related deaths dropped considerably during that period). Between September 1973 and February 1974 the average daily use of petroleum dropped by more than six percent. The U.S. government adopted an energy conservation policy that remained in effect until President Ronald Reagan's (1981–1989) administration discarded it two decades later. The embargo served as a reminder that the world's oil supply was finite and encouraged consumers to use it responsibly, at least for the time being.

OPEC exercised an enormous amount of power during the embargo, which lasted well into 1974. But eventually the crisis hurt the cartel as much as the countries outside of it. The skyrocketing prices and the perceived shortage led to a drop in the overall demand for oil. Countries looked to alternative energy sources such as natural gas, nuclear energy, and coal. Oilproducing countries outside of the Middle East stepped up their pace of production and relied more heavily on their domestic supply.

Unfortunately many of the positive effects of the 1973 crisis, the attempts at energy conservation and the move toward relying more heavily on domestic resources, did not last long enough after the embargo was lifted. Conservation efforts dropped off as memories of long waits at the gas station and inflated prices faded. A new breed of larger, less gas-efficient cars took to the roads in the 1990s when sport-utility vehicles and small trucks gained popularity. In the 20 years following the crisis U.S. dependence on imported oil increased rather than decreased, reaching the 50 percent mark in 1993. In 1998 on the twenty-fifth anniversary of the embargo many analysts pointed to such statistics as indications that a crisis like that of 1973 could happen again. They claimed that the low, stable price of oil was misleading people in the United States into believing that the world's supply of the natural resource was unlimited. Meanwhile the nation continues to consume energy at an extraordinary rate. Whether or not it will take another economic crisis to change such ingrained behavior remains to be seen.

Topic overview

OPEC exercised an enormous amount of power during the embargo, which lasted well into 1974. But eventually the crisis hurt the cartel as much as the countries outside of it. The skyrocketing prices and the perceived shortage led to a drop in the overall demand for oil. Countries looked to alternative energy sources such as natural gas, nuclear energy, and coal.

See also: Embargo, Petroleum Industry

FURTHER READING

Bode, Denise. "Twenty Years After OPEC Oil Embargo, United States at More Risk Than Ever." The Oil Daily, October 18, 1993.

Chalabi, Fadhil J. "OPEC: An Obituary." Foreign Policy, Winter 1997–1998.

Crow, Patrick. "Remembering the 1973 Oil Embargo." The Oil and Gas Journal, October 18, 1993.

"The Energy Embargo of 1973," [cited May 25, 1999] available from the World Wide Web @ www.nettally.com/palmk/nrgopec.html/.

Feldman, David Lewis. "Revisiting the Energy Crisis: How Far Have We Come." Environment, May 1995.

Foner, Eric, and John A. Garraty, eds. The Reader's Companion to American History. Boston: Houghton Mifflin Co., 1991.