Summary
- OPEC was formed in 1960 by five oil-producing nations to gain more control over their oil reserves and profits, which were largely controlled by the “Seven Sisters” oil companies.
- In 1973, OPEC flexed its geopolitical muscle by instituting an oil embargo against nations supporting Israel, causing oil prices to quadruple.
- Following the embargo, OPEC focused on development and stability, establishing production quotas and the OPEC Fund for International Development (OFID).
- Today, OPEC has 13 main member nations and collaborates with key non-member nations as “OPEC+” to coordinate production levels and pricing.
The Organization of the Petroleum Exporting Countries (OPEC) is a multinational cartel formed in 1960 to promote greater control over production and price-setting in the global oil sector. From modest beginnings, OPEC member nations now account for 81.5 percent of the world’s known oil reserves and around 45 percent of global production.
Origins of OPEC
By the 1950s, 85% of the world’s proven oil reserves were controlled by a group of companies known as the “Seven Sisters:” the Anglo Iranian Oil Company, Standard Oil of New Jersey, Standard Oil of California, Standard Oil of New York, Texaco, Gulf Oil, and Royal Dutch Shell. This consortium could raise or lower global oil prices at will, a system that allowed them to maximize their profits, but rarely benefitted the nations in which they operated.
For the Middle Eastern states, most of them still struggling to emerge from the shadow of colonialism, this foreign control of local oil reserves was increasingly intolerable. Shortly after one steep price cut in early 1959, oil ministers from the region, along with a representative from Venezuela, met at the Arab Petroleum Congress in Cairo. At the end of the congress, they had signed on to the Maadi Pact, a gentleman’s agreement to form a commission to cajole the oil companies to consult oil ministers before major price shifts.
In September 1960, government representatives from Kuwait, Iran, Iraq, Saudi Arabia, and Venezuela met in Baghdad, Iraq for a conference. This meeting ended with the formation of OPEC. The five nations set their objective to take more control of their oil reserves to use them for the profit of their own citizens. In their “Declaratory Statement of Petroleum Policies in Member Nations,” the organization cited the United Nations charter to declare the control of their natural resources “an inalienable right,” and asserted “permanent sovereignty over hydrocarbon resources.”
Membership grew steadily over the next 15 years. Qatar joined in 1961, Indonesia and Libya in 1962, the United Arab Emirates in 1967, Algeria in 1969, Nigeria in 1971, Ecuador in 1973, and Gabon in 1975. These 13 nations accounted for 50% of the global oil supply. In a nod towards its multinational membership, the organization was headquartered in Europe, first in Geneva, Switzerland, and later in Vienna, Austria.
Arab-Israeli War and Embargo
By the early 1970s, OPEC had made considerable headway in prying a higher percentage of profits from the Seven Sisters and several member nations were moving towards the nationalization of their oil fields. It was also ready to flex it’s geopolitical muscle, as the world learned in the fall of 1973.
On October 6, 1973, a coalition of Arab states attacked Israel. On October 17, OPEC announced an oil embargo against those nations supporting Israel. The Arab-Israeli War ended on October 25, but the embargo dragged on for another five months. OPEC nations instituted production cuts and forced producers to raise their prices. During the period of the embargo, the cost of a barrel of oil climbed from $3 to $12.
In the United States, the cost of a gallon of oil rose from $0.38 to $0.55. As long lines formed for expensive and increasingly scarce gasoline supplies, the Nixon Administration asked US gas station owners to voluntarily close from Saturday night to Monday morning, and asked the American people to cut gas usage and power consumption. The speed limit on interstates was reduced to 55 miles per hour to conserve gas. But in the end, the embargo didn’t change US policy, or the policies of any other nation targeted by OPEC, and it ended up accelerating the search for alternative energy sources and conservation efforts.
OPEC in the Post-Embargo Era
Following the 1973 embargo, OPEC shifted some of its efforts towards development. Member nations were urged to direct some of their oil profits to build up poorer countries under the OPEC Special Fund. This was later renamed the OPEC Fund for International Development (OFID).
Despite regional instability, occasional price shocks, and complex geopolitical shifts, OPEC nations flourished in the late 1970s and the early 1980s. But by 1986, many consumer nations were cutting their consumption, and new oil fields in non-OPEC countries were coming on line. This created a glut of cheap oil on the world market, leading to a crash in oil prices. Over time OPEC came up with production quotas for member nations that reduced the supply of oil on the market and began to bring prices back up to a more profitable level.
OPEC’s focus since 1990 has been on stability, both in production and pricing, in the face of wars, revolutions, and geopolitical shifts, and despite a few dramatic increases and decreases in prices, has largely succeeded in balancing supply and demand in ways that keep profits flowing to member nations.
Today, OPEC has 13 main member nations, including the original five members of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, and seven African nations. In recent years, they have expanded to “OPEC+,” giving key non-member nations a set at the table in coordinating production levels and pricing. In 2016, OPEC+ members included Russia, Mexico, Azerbaijan, Sudan, South Sudan, and Bahrain. Member delegations meet at least twice a year in Vienna, and more often in times of crisis.
Further Reading:
Black, Brian C.. Crude Reality: Petroleum in World History. Rowman & Littlefield Publishers, 2020.
McNally, Robert. Crude Volatility: The History and the Future of Boom-Bust Oil Prices. Columbia University Press, 2017.
Shwadran, Benjamin. Middle East Oil Crises Since 1973. Taylor & Francis, 2019.