OPEC

The Organization of Petroleum Exporting Countries, a central body which, at regular intervals, fixes the price of oil on the international markets. Although a supplier of oil, Britain is not one of the OPEC countries since they are all at odds with the old colonial powers who controlled the oil industry in its early stages. OPEC increased petroleum prices very dramatically in 1973 and 1974 to the great discomfort of most Western nations. See oil crisis.

The founder members are Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Later members include Algeria, Ecuador, Gabon, Indonesia, Libya, Qatar, Nigeria, and the United Arab Emirates.

OPEC, originally the inspiration of Venezuela and Iran, is an intergovernmental organization composed of eleven oil producers: Algeria, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, United Arab Emirates, Iran, Nigeria, Venezuela, and Indonesia (and formerly Ecuador and Gabon). OPEC was founded 1960 in reaction to the pricing and production policies of the major oil companies 1959 and 1960.

Throughout most of the 1960s, the major Western oil producers in the Middle East and elsewhere pursued production strategies that led to a surplus of oil in the international markets, contributing to a downward push in real oil prices. By 1970, market conditions began an upward trend in oil prices. Demand rose dramatically and began to outpace the supply of oil. With the October War of 1973, a revolutionary change in the oil market occurred when Arab oil producers of OPEC—the Organization of Arab Petroleum Exporting Countries (OAPEC)—imposed an oil embargo upon the US and the Netherlands for their support of Israel. This was followed by the quadrupling of the price of oil by OPEC to $10.84 per barrel. These developments continued through to 1978 during which time many of the OPEC governments nationalized the oil companies operating on their territory. OPEC now had the ability to determine production and sales policies and to set oil policies.

This change in the structure of the oil market dramatically altered the balance of power in the energy markets and radically disrupted the financial flow of international reserves. Arab oil monarchies were in receipt of vast petro-dollar reserves which they invested mainly in Europe and the US. This dramatic increase in incomes financed the great economic boom of the 1970s and early 1980s in the Middle East while contributing to a slower more erratic economic growth in the industrialized world. A second oil price rise of 1979/80 to nearly $40 a barrel resulted in falling world prices, in particular in commodity prices. Oil prices, however, soon began to decline until the price collapse 1986 to a low at one point of $8.

OPEC itself had and has no internal unity except on the matter of setting production limits on oil to their advantage—and even here unity is not always evident. Saudi Arabia is the only oil producer that can raise or lower its oil production by millions of barrels per day without seriously affecting its own economy or polity. For a time, it would attempt to discipline members who did not adhere to their agreed production quota by threatening to raise or lower its own production. This policy utterly failed in the 1980s. From 1982, the market was flooded with oil. By 1986, oil prices collapsed. In order to reverse the decline, an OPEC conference met to set a maximum level for output and agree to a production quota system for all members except Iraq to stabilize the price at $18 by 1987. But when the Iran-Iraq War ended 1988 and both Iraq and Iran came back into the oil market, the agreed quotas were undermined. Between 1988 and 1990, the year Iraq invaded Kuwait, the quota system collapsed. During the Gulf War (1991), as part of its war effort and in cooperation with energy policies of its Western allies, Saudi Arabia increased its production by 3 mbd (million barrels per day) to 8.5 mbd. After the war, Saudi Arabia continued its high production levels. As a result of a virtual production free-for-all by the members of OPEC, particularly in the latter part of 1992, a decline in the price of oil set in. As many of the OPEC members were confronted with social and economics problems, there was an increased need for oil revenues. The difficulty emerged as to how they would share the burden of reducing production that would keep oil attractive to an increasingly environmentally conscious industrialized world which was preparing to further trim its use of oil.

In the aftermath of the war, Saudi Arabia and Iran had been competing with each other for market shares pending the return of Iraq to production. Both had considerable need of oil revenues. Kuwait had not felt obliged to reduce its production while it was recovering from the war. Similarly, Indonesia, Algeria, and Nigeria as medium-sized producers depending on oil revenues to develop their economies had not felt that they should be asked to limit their production. Small producers had increasingly felt that it was not equitable for them to be asked to cut their production. In the course of the 1990s, however, instead of market shares, Saudi objectives changed in favour of higher oil prices because of concern for its economic and political stability. Though operating oil fields were being depleted, advances in oil field explorations led to the discovery of substantial oil deposits in geological strata below existing producing levels. Developments in extraction technology and pipeline transport have reduced costs significantly. In addition, substantial oil fields are continuing to be discovered in Central Asia, Russia, Latin America, and elsewhere. Gas and other energy sources increasingly are exploited in competition with oil.

OPEC has come under increasing pressure resulting from its inability to devise production strategies that would appeal to the diverse interests of its members. More recently, it is coming under pressure from technological advances that are being made in the field. OPEC supplies approximately 37 per cent of world demand, but the OPEC share of the market has been declining and continues to decline.

— Barbara Allen Roberson