Economics and Trade • Oil and Geopolitics
Events that Led to the Formation of OPEC
Large oil companies of Europe and the United States discovered and extracted the petroleum resources of many developing countries during the first half of the 20th century. Initially, the greatest wealth was controlled by the companies, while the nations from which the oil was drawn received a fixed percentage of company profits. The need for united action to change this situation was first articulated by Dr. Juan Pablo Perez Alfonso of Venezuela during the late 1940s.
Only in 1959, however, did Perez Alfonso attend the first Arab Petroleum Conference to press for a union between the Arab countries, Venezuela, and Iran. OPEC was formally inaugurated at a conference in Baghdad, Iraq the following year among Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Since then, the organization has expanded to include Algeria, Indonesia, Libya, Nigeria, Qatar, and the United Arab Emirates.
During the 1960s, the organization concentrated on negotiations with the oil companies (which organized among themselves) over the issues of production, tax revenues, and prices. It evolved that national governments came to control production and therefore pricing, while the companies controlled transport and marketing. Later, OPEC would concern itself less with direct pricing and more with production quotas for each member nation in order to stabilize world prices for oil.
Role as a Political Player
In 1973, OPEC used its control of oil production most effectively to influence world politics. It was able to do this in part because the demand for oil in the industrial nations greatly exceeded supply. In support of the Arab invasion of Israel that occurred in October 1973, the Arab oil producing countries decided to cut their oil production so long as Israel continued to occupy Arab lands. Though individual nations took more drastic action (Saudi Arabia imposed a total embargo on the United States because of its support of Israel), OPEC as a whole raised oil prices by some 300% by the end of the year.
Although rising oil prices resulted in a huge infusion of income into the already comparatively wealthy oil producing countries, in the long term, this policy undermined OPEC's position. In the Arab world, oil existed beneath countries that had relatively small populations and very little development infrastructure. The immense oil revenues could not be invested all at once locally, with the result that much of this money was invested in Western countries. (The investment of "petrodollars" in Western commercial banks would lead to the easy lending policies that fueled the debt crisis of the 1980s.) In addition, the national development that took place in many oil producing countries required the purchase of equipment and technological expertise from the industrialized countries, thus limiting the independence that oil wealth provided.
Oil prices peaked in 1981 and then declined rapidly due to excess production, the more careful use of energy in the Western countries, and the increasing failure of OPEC to enforce a united front among the member states. Because an excess of oil on the market causes the price of oil to go down, the cooperation of all oil producers is required to maintain a stable price. The most productive oil states can sometimes affect the outcome of disagreements between governments. For example, in 1985, Saudi Arabia increased its output by 2 million barrels per day in order to keep prices down and force non-OPEC producers to cooperate with the cartel. Yet OPEC and non-OPEC countries did not meet together officially until 1988, when the price of oil dropped sharply to $14 per barrel.
At times, individual OPEC members choose not participate in accords to limit production or disagree about the quota they are assigned by the organization. Conflicts of this type played a part in Iraq's invasion of Kuwait in 1990. (Iraq has been under United Nations embargo since the invasion but was allowed to export a limited amount of petroleum, amounting to $2 billion every six months, in order to purchase essential supplies for the population, according to a May 1996 agreement.) Disagreements over quotas have also led one-time members to withdraw from the organization, including Ecuador in November 1992 and Gabon in June 1996.
Administration and Work
At the same time, OPEC has accomplished much progress toward the organization's goals. It carries out research programs emphasizing energy and related subjects, reviews developments in the energy and petrochemical industries, studies economic and financial issues, and maintains data services. OPEC assists developing nations by providing training, technology transfer, and development assistance. This work is financed in part through the OPEC Fund for International Development and the work of various multilateral finance institutions. OPEC also is involved in the development and management of tanker fleets.
The supreme organ of OPEC is the Conference, which reviews the recommendations of the Board of Governors and determines the organization's general policy. The Conference approves appointments to the Board of Governors and elects the board's chairman. It consists of representatives of the member nations and meets at least twice a year. The Board of Governors is responsible for the management of OPEC. The Board meets at least twice a year to determine the annual budget and implement the decisions of the conference. There is one governor from each country.
The Secretariat conducts the day-to-day administration of OPEC. It consists of the Office of the Secretary General, the Personnel and Administration Department, the Department of the OPEC News Agency and Information, the Legal Office, and three departments in the Research Division—the Energy Studies Department, the Economics and Finance Department, and the Data Services Department. The Economic Commission also operates within the framework of the Secretariat to help promote the stability of oil prices. It meets at least twice a year and consists of a board, representatives from the member nations, and a staff.
The Ministerial Monitoring Committee keeps track of international oil prices to ensure the stability of the market. It determines long-term strategies and suggests quotas to the Conference. It consists of representatives from each member nation and meets four times a year.
Banks, Arthur S., and Thomas C. Muller, eds. Political Handbook of the World 1998. Basingstoke, UK: Macmillan, 1998; Hourani, Albert Habib. A History of the Arab Peoples. Cambridge, MA: Belknap Press of Harvard University Press, 2002; Lauterpacht, E., et al., eds. The Kuwait Crisis: Basic Documents. Cambridge, UK: Grotius Publications, 1991; Mostyn, Trevor, ed. The Cambridge Encyclopedia of the Middle East and North Africa. New York: Cambridge University Press, 1988.
"Organization of Petroleum Exporting Countries." World History: The Modern Era, ABC-CLIO, 2019, worldhistory.abc-clio.com/Search/Display/312060. Accessed 19 Mar. 2019.
Entry ID: 2181011