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OPEC – Fifty Years Regulating Oil Market Roller Coaster

Gonzalo Ortiz

QUITO, Sep 14 2010 (IPS) - Half a century after OPEC came into being, the world is very different, thanks partly to the actions of this organisation, the first to be formed in the developing South specifically to protect an export product.

When the Organisation of the Petroleum Exporting Countries (OPEC) was founded in 1960, the price of crude was barely one dollar a barrel, and oil producing states had very little bargaining power.

Decisions on oil production, transport and refining were in the hands of the so-called “seven sisters”, the largest companies controlling Middle East oil, which enjoyed the protection of the U.S. and British governments.

The U.S.-based companies were Standard Oil (Esso) of New Jersey and Standard Oil of New York, later combined as ExxonMobil; and Standard Oil of California, afterwards known as Chevron, Texas Oil Company (Texaco) and Gulf Oil, which after fusions and mergers became the Chevron Corporation.

The Anglo-Dutch company Royal Dutch Shell and the Anglo-Persian Oil Company, later British Petroleum and now BP, completed the list.

This began to change Sept. 14, 1960, when on the initiative of oil ministers Juan Pablo Pérez Alfonzo of Venezuela and Abdullah al-Tariki of Saudi Arabia, government representatives from Iran, Iraq, Kuwait, Saudi Arabia and Venezuela met at the Baghdad Conference and formally created OPEC.


The bloc currently comprises Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. Gabon was a member from 1975 to 1995, as was Indonesia from 1962 to 2009.

A key decision reached by OPEC in the 1980s was to invite other crude exporting countries to participate as observers. Egypt, Kazakhstan, Mexico, Norway, Oman, Russia and Sudan are currently OPEC observers and coordinate their policies with the organisation.

A barrel of oil — equivalent to 159 litres, the same unit used to measure crude since the 19th century when it was transported in these containers — no longer bears a one-dollar price tag. On Monday it was trading at 75.61 dollars when markets opened in New York.

Now there are many more private oil firms and some have become giants, like ExxonMobil and Chevron, but they no longer call the tune.

It’s not just that some, like Gulf, Amoco, Arco and dozens more, have simply disappeared, but that now, largely thanks to OPEC, countries and state oil companies have the most clout in the marketplace.

In fact, 15 of the world’s 20 largest firms are state companies, and together with governments they control 80 percent of global oil.

OPEC’s major role has been to help regulate market prices.

René Ortiz, the only Ecuadorean to have served as OPEC secretary general (1979-1981), told IPS that the founders of the organisation were convinced that unity among exporting countries was the only way to add value to this non-renewable natural resource.

During the 1960s, the foundations of the organisation were discreetly laid. Then in the 1970s, when the market changed, OPEC seized the moment, deciding unilaterally to triple the price of oil, and it suddenly became the centre of world attention.

Economist Norma de los Reyes, the first Ecuadorean to have worked at OPEC, even before the country began to export oil, told IPS that “it was really the two great oil shocks of that decade (the 1970s) that dramatically changed the market.”

She was referring to the 1973 Arab-Israeli War and the 1979 Iranian Revolution that swept Ayatollah Ruhollah Khomeini to power. “The price of Ecuadorean oil leaped from a dollar a barrel, when exports started in 1972, to 14 dollars in 1975 and to 25 dollars a barrel by the end of the decade,” she said.

Ortiz, for his part, said: “When I was secretary general, OPEC had its 20th anniversary. But in that year, 1980, two important and contradictory events took place: OPEC formulated its long-term strategy, and the Iran-Iraq War broke out, lasting 10 years and leaving one million people dead.

“The 1980s were a very difficult decade for OPEC. The organisation’s credibility was wrecked by war between two of its most important members,” he said.

Added to that was failure to abide by the agreed quotas — OPEC countries were producing four million barrels per day (bpd) more than the self-imposed ceiling of 28 million bpd — and the arrival onstream of North Sea oil.

“British production of five million bpd and Norway’s output of three million bpd swamped the market, and the price collapsed to below eight dollars a barrel,” Ortiz said.

Commitment of the member countries to OPEC policies and coordination with other exporting countries only began to yield fruit in the early 1990s.

“Oil diplomacy was consolidated, with a very important result: OPEC and non-OPEC exporters reached agreement on a price range of between 22 and 28 dollars a barrel, which was maintained for several years,” Ortiz said.

However, technological progress led to drilling at greater depths on land and in offshore reserves, and prices fell again. De los Reyes said: “It should not be forgotten that at the end of the 20th century the price of crude was 10 dollars a barrel, and it was thought that consumers would enjoy cheap oil indefinitely.”

But new factors drove crude prices to an all-time high. China, still an exporting country in the early 1990s, became a net importer of increasing amounts of oil. Demand also grew in India and other emerging markets.

Pension funds and institutional investors took on a role in the oil market, creating two kinds of oil: a physical product, and a financial asset, said de los Reyes.

Daily trading of oil futures, the “paper barrels” that are bought and sold on stock exchanges, currently totals more than 30 times the daily consumption of real barrels of oil worldwide, she said.

“Along with the real estate bubble in the United States, an oil bubble was created. Both were based on speculation, and they both burst in a similar way,” Ortiz said.

So on Jul. 11, 2008, U.S. benchmark West Texas Intermediate (WTI) hit 147.27 dollars a barrel, but by December that year it had plunged to 32.40 dollars a barrel. By July 2009 the price had risen to 60 dollars, and at present it fluctuates between 65 and 75 dollars a barrel.

“OPEC controlled 47 percent of oil supplies in 1960, compared to 30 percent today. However, together with the other exporting countries, it still plays a role in regulating prices,” Ortiz said.

“OPEC is interested neither in speculation nor in exploitation,” de los Reyes said. “Even with improvements in efficiency, global energy use will rise by nearly 50 percent by 2030, and at that stage oil will still be supplying 30 percent or more of the world’s energy needs.”

 
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