The founding of OPEC
September 14, 2020 marks the sixtieth anniversary of the Organization of the Petroleum, Exporting Countries or OPEC – almost two thirds of a century of existence characterized by embargo, conflict, and even war.
It is an intergovernmental organization of 13 nations founded in 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia and Venezuela) and headquartered since 1965 in Vienna, Austria. In 2019, OPEC accounted for 42.0 percent of global oil production and 71.8 percent of the world’s proven oil reserves, giving it a major influence over the global oil market and prices that were previously controlled by the so-called “Seven Sisters” cartel of the world’s largest multinational oil companies. 1
The stated mission of the organization is to “coordinate and unify the oil policies of its member countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of oil to consumers, a steady income to producers, and a fair return on capital for those investing in the oil industry. 2 The organization is also a significant provider of information about the international oil market. The current OPEC members are Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of Congo, Saudi Arabia, the UAE and Venezuela.
The formation of OPEC marked a turning point toward national sovereignty over natural resources and OPEC decisions have come to play a prominent role in the global oil market and international relations. The effect can be particularly strong when wars or civil disorders lead to extended disruptions of supply. In the 1970s, restrictions in oil production led to a dramatic rise in oil prices and in the revenue and wealth of OPEC with long-lasting and far-reaching consequences for the global economy. In the 1980s, OPEC began setting production quotas for its member nations; generally, when the quotas are reduced, oil prices increase. This has occurred most recently from the organization’s 2008, 2016 and 2020 decisions to trim oversupply.
The OPEC Reference Basket of Crudes has been an important benchmark for oil prices since 2000.
How influential is OPEC?
The influence of OPEC has closely followed the peaks and valleys of the world’s demand for oil.
However, the greatest challenge OPEC has so far faced in its history was the COVID-19 pandemic, an event which will go into history as the most destructive event that has hit the global economy in almost a century. Indeed its impact is already far bigger than those of both the financial crisis of 2008-9 and the 2014 oil price crash. 3 There are indications that its adverse impact could be even bigger than that of the 1929 Great Depression.
Today, economists and analysts debate about how influential OPEC is. Conventional wisdom holds that OPEC has the world in its grasp. It can manipulate prices by tinkering with supplies. But the conventional wisdom is mostly wrong. For the most part, its actions lagged behind fundamental changes in oil supply and demand rather than leading them. OPEC looks like a masterful cartel when, in fact, it is mainly just riding the waves.
Decision-making inside OPEC is quite complicated most of the time. This is because the policies of its de facto leader Saudi Arabia sometimes differ radically from those of other OPEC members’ in relation to prices and supplies.
Three times since the early 1980s, Saudi Arabia has singlehandedly and unsuccessfully taken decisions which diverged from the interests of OPEC.
Early in the 1980s, Sheikh Ahmad Zaki Yamani, the veteran former oil minister of Saudi Arabia, suddenly awoke to Saudi Arabia’s need for market share. He flooded the market with oil causing the oil price to collapse to $10 per barrel. It later transpired that the Saudi need for a market share was just a cover for a CIA-Saudi conspiracy to expedite the downfall of the former Soviet Union with the Reagan administration starting a costly arms race and Saudi Arabia depressing oil prices by flooding the market. Saudi Arabia ended bankrupting itself in the service of the United States. 4
In the aftermath of the 2014 crude oil price crash, the oil price lost 54 percent of its value and there were no indications that it will stop there in the absence of a major production cut by OPEC. At one point the price fell to $30.
Instead of agreeing to production cuts with OPEC, Saudi Arabia ignored OPEC and flooded the global oil market with oil. Circumstantial evidence suggested some political collusion between Saudi Arabia and the United States behind the steep decline in oil prices aimed against Iran and Russia.
Saudi Arabia was forced to eventually discard its strategy and engineer with Russia an OPEC/non-OPEC production cut agreement whereby OPEC and Russia cut production in support of oil prices effective as of January 1, 2017. As a result, prices have recovered from $40 a barrel to almost $80. The agreement has since been extended to the end of 2018 with talks going on about converting it into a permanent mechanism for cooperation between OPEC and Russia in what has been dubbed as OPEC+.
And with prices falling by more than 50 percent as a result of the COVID-19 pandemic since hitting £60 in January, OPEC+ met on March 6 and 7 to discuss new production cuts or deepening existing ones. Saudi Arabia called for deeper cuts amounting to 1.5 million barrels a day (mbd).
Russia refused to agree to deeper cuts arguing that OPEC’s proposal for cuts of between 600,000 barrels a day (b/d) and 1.5 mbd would have been ‘a drop in the ocean’ in a market where oil demand is plunging fast. Considering that oil demand was already down by 15 mbd and could reach 20 mbd in coming weeks, influencing the market with the cuts proposed by Saudi-led OPEC would have been impossible. 5
Russia’s refusal was the last straw for Saudi Arabia so it decided rashly to wage a price war against Russia and flood the global oil market with oil. This exacerbated the destruction of global oil demand leading to prices sinking below $20 a barrel.
Anti-OPEC bill could be a game-changer for oil markets
In its effort to wrest more control over global oil markets away from foreign producers, the US Congress has been pushing a bill that would let the US sue OPEC for an alleged oil price fixing. The bill called ‘No Oil Producing and Exporting Cartels Act’, or ‘NOPEC’, was first introduced in May 2018. 6
However, the NOPEC idea is nothing new and dates back to 2000. Both former presidents George W. Bush and Barack Obama threatened to use their veto power to halt it from becoming law. This time around, however, there is a good chance that President Trump would sign such a bill into law. 7 Trump has been critical of OPEC for years and during the 2016 presidential election that war of words escalated to the front pages of international newspapers.
While the Congress has every right to prevent concentrations of power that interfere with trade and reduce economic competition within the United States, it has no extraterritorial jurisdiction whatsoever on other countries’ commercial practices. What commercial practices OPEC members agree to follow vis-à-vis their oil trade are their own affair and nobody else’s. If the United States doesn’t like OPEC commercial practices, then it should stop buying oil from OPEC members.
The United States has so far broken the rules of the World Trade Organization (WTO) by imposing sanctions on virtually everybody and walked away from United Nations-recognized Iran nuclear deal and also the UN-supported Climate Treaty without batting an eye lid. Moreover, the United States has been manipulating oil prices through the petrodollar and also through exaggerated claims about rises in US oil production and huge build-up in its oil and refined products inventories in order to depress oil prices and achieve geopolitical and economic aims.
If NOPEC ever becomes a law and the United States tries to sue any OPEC member under the NOPEC Act, OPEC members collectively should retaliate by withdrawing every single penny they keep in the United States and stop investing in the US altogether. They could also nationalize American interests in their oil industries and discard the petrodollar and adopt the petro-yuan instead.
The whole debate might again be academic as it was nearly every year in the early 2000s, except for one thing: Donald Trump is now president. He supported prior Congressional efforts to revamp US law to put OPEC in the antitrust crosshairs. And in recent months he has railed against the oil-exporting group on Twitter for allegedly driving up the price of gasoline.
Is OPEC really a cartel?
A cartel is defined as an association of manufacturers and suppliers whose goal is to increase their collective profits by means of price fixing, limiting supply, preventing competition or other restrictive practices. Antitrust laws attempt to deter or forbid cartels. 8
While OPEC may resemble a cartel in some aspects, it is not a cartel. How could it be a cartel when it was founded as a counterweight against the previous “Seven Sisters” cartel of multinational oil companies which dominated every aspect of global oil through price fixing, limiting supplies and suppressing competition for the sole purpose of maximizing its profits.The main purpose behind the founding of OPEC was to give producers more control over their own oil.
When OPEC was founded in Baghdad in 1960, its constitution stipulated that its raison d’etre is to defend the rights of its members by ensuring a stable global oil market and stable prices. That is exactly what OPEC has been doing for the last 60 years and will continue to do so as long as it remains an organization of petroleum exporting countries.
OPEC with its huge proven reserves and production capacity has every right to ensure oil prices are fair enough to provide its members with a reasonable return on their finite assets thus enabling them to explore for new oil and expand production capacity to meet global oil demand. In so doing, they are rendering a great service to the global economy from which the United States benefits. Furthermore, OPEC has never excluded competition. And the proof is that US shale oil is being exported around the world.
One would expect a cartel to curb production in order to raise the price of its product as well as to share market among its members. However, OPEC has never once tried to fix a specific price, nor has ever been able to achieve this goal. Wishing a certain price is totally different from fixing it. The fundamentals of the global oil market are the ones that have always determined the oil price helped occasionally by geopolitics. OPEC has no control on these fundamentals and, therefore, has no control on the movements of prices. It merely takes advantage of market conditions and follows the dictates of the market. For instance, OPEC was not able to prevent prices from falling in the 1980s even after it adopted the production quota system in 1982. Moreover, OPEC was neither able to temper oil prices in 2008 when prices rocketed to $147 a barrel, nor was it able to stop the 2014 oil price crash.
When it comes to limiting oil supply, a true cartel like the “Seven Sisters” was able to do exactly that because it was virtually in control of global oil resources. OPEC has never been in such a situation. It only accounts for 42.0 percent of the global oil market with the rest of the oil-producing nations of the world accounting for 58.0 percent. The United States and Russia both account for 12 percent each.
Furthermore, it was never ever the intention of OPEC to harm customers or the global economy knowingly. Any adverse impact on the global economy or on customers was merely a collateral damage resulting from international policies aimed at either undermining the economies of the OPEC members as a geopolitical tool or enabling their own economies to benefit from low oil prices at the expense of the OPEC members.
OPEC has not been involved in any disputes related to the competition rules of the WTO, even though the objectives, actions and principles of the two organizations diverge considerably. A key US district court decision held that OPEC consultations are protected as “governmental” acts of state by the Foreign Sovereign Immunities Act, and are, therefore, beyond the legal reach of US competition law governing “commercial” acts. 9
Still, OPEC shouldn’t be unduly worried about the NOPEC Act. It has enough muscle to retaliate against the United States. Were the United States to mount a lawsuit against OPEC or any of its members, the organization could stop all its oil exports to the US and even cut its oil production to force prices up. This will harm the US economy most being the world’s largest consumer of oil.
Another measure OPEC could take against the United States is to replace the petrodollar with the petro-yuan in their oil transactions. That would be the biggest ever retaliation against the US.
Only OPEC+ stood between the destructive power of the COVID-19 pandemic and the collapse of the global oil market and the whole oil industry.
Its huge production cuts put a floor under oil prices and prevented them from sinking below $20 a barrel. OPEC+ efforts to stabilize the global oil market and prices were acknowledged worldwide even grudgingly by the United States.
On its sixtieth anniversary, both the global economy and the global oil market owe OPEC+ an extraordinary debt of gratitude.
* Mamdouh G. Salameh is an international oil economist. He is one of the world’s leading experts on oil. He is also a visiting professor of energy economics at ESCP Europe Business School in London.
1. BP Statistical Review of World Energy, June 2019.
2. ‘OPEC: General Information & Chronology’, 1989, pp. 7-9.
3. Mamdouh G. Salame, ‘Oil Crises, Historical Perspective’, ‘Encyclopedia of
Energy’, Volume 4, 2004, Elsevier Inc.
4. Mamdouh G. Salameh, ‘What Is Behind the Steep Decline in Crude Oil Prices: Geopolitics or Glut’ (A book published by the Arab Center for Research & Policy Studies, June 2015, Qatar).
5. ‘Russia Sees Oil Market Balance in 2021’, posted by oilprice.com on March 27, 2020 and accessed on April 20, 2020.
6. Tim Daiss, ‘Anti-OPEC Bill Could Be a Game-Changer for Oil Markets’, oilprice.com, July 23, 2018, accessed on November 1, 2018.
8. Wikipedia, the free encyclopedia.
9. Keith Johnson, ‘Proposed Law Would Allow US to Sue OPEC for Manipulating Oil Market’, FP, July 18, 2018.