Organization of the Petroleum Exporting Countries (OPEC)
석유수출국기구 (OPEC)
The intergovernmental organization that Iran, Iraq, Kuwait, Saudi Arabia and Venezuela founded in Baghdad on 14 September 1960 so that oil-producing governments could coordinate their production and pricing policies. Begun as a counterweight to the oligopoly of the seven big Anglo-American oil companies, the "Seven Sisters", it reshaped the system of oil production in favour of the producing states in the 1960s and 1970s and set off the oil shocks of the 1970s by raising prices unilaterally in 1973. Economists often cite it as a textbook cartel; its members describe it as a force for market stability.
In depth
After the Second World War the world oil market was dominated by seven large companies known as the "Seven Sisters": the Anglo-Persian Oil Company (a predecessor of BP), Shell and American companies that had come out of the breakup of Standard Oil. The name was coined by Enrico Mattei, head of the Italian state oil company Eni. The companies controlled all oil operations within the producing countries, and the governments' share depended on the "posted price" that the companies set and announced. When one country resisted, the companies slowed its production and raised it elsewhere, and the Mossadegh government in Iran, which had nationalized its oil, was overthrown in 1953 in a coup sponsored by the United States and Britain.
The trigger was a cut in posted prices. In February 1959 the companies unilaterally reduced the posted prices for Venezuelan and Middle Eastern crude by 10 percent. Weeks later, at the first Arab Petroleum Congress in Cairo, Saudi Arabia's Abdullah Tariki met Venezuela's Juan Pablo Pérez Alfonzo, and the two led the delegates to the Maadi Pact, which called for an "Oil Consultation Commission" of exporting countries. When the companies cut Middle Eastern prices again in August 1960, representatives of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela founded the Organization of the Petroleum Exporting Countries at the Baghdad Conference the following month, despite strong American opposition.
The early OPEC was weak. The "50/50" profit-sharing agreements between producers and companies stayed in place until 1970, and if one member demanded too much, the companies could cut production there and raise it elsewhere. When Libya negotiated a 58/42 agreement with Occidental in 1970, other members demanded better terms. The Tehran agreement of 14 February 1971 and the Tripoli agreement of 2 April raised posted prices and the producers' shares, with clauses against the falling value of the dollar. By the early 1970s OPEC members produced more than half the world's oil, and a wave of nationalizations followed in Libya, Algeria, Iraq, Nigeria, Saudi Arabia and Venezuela.
In October 1973, during the Yom Kippur War, the OPEC members raised prices for the first time on their own, without negotiating with the companies, while the Organization of Arab Petroleum Exporting Countries (OAPEC), built around OPEC's Arab members, declared production cuts and an embargo against countries that had supported Israel. The price of crude rose from $3 to $12 a barrel. This was the first oil shock, one strand of the crisis of the 1970s. The embargo and cuts were OAPEC decisions, while the price rise was OPEC's, and the two are distinguished on that point. In April 1974, at the UN's sixth Special Session, the Algerian president Houari Boumédiène called the OPEC action a "source of hope" that showed the vital need for producing countries to operate the levers of price control. That hope fed into the demand for a New International Economic Order.
High prices eroded OPEC's own power. When the Iranian Revolution and the Iran-Iraq War drove prices towards $40 a barrel in 1979 and 1980, consuming countries switched their power stations to coal, gas and nuclear power and developed new fields in Siberia, Alaska, the North Sea and the Gulf of Mexico. OPEC's market share fell from about 50 percent in 1979 to under 30 percent in 1985. Saudi Arabia cut its output from 10 million barrels a day to a third of that to defend the price; when that failed it reversed course and flooded the market, and in 1986 crude fell below $10 a barrel.
Views of OPEC differ. Economists cite it as a textbook example of a cartel, whose members cooperate to reduce market competition and obtain monopoly profits. Its members describe it as a counterweight to the earlier "Seven Sisters" cartel and a modest force for market stabilization. The political scientist Jeff Colgan, pointing to the endemic cheating on commitments, doubted that it is a cartel at all: "OPEC sets easy goals and fails to meet even those." Either way, there is broad agreement that the founding of OPEC marked a turning point towards national sovereignty over natural resources.