Organization of Petroleum Exporting Countries (OPEC) - History of Business in the U.S.
Identification: International cartel of oil-exporting countries dedicated to controlling the price of oil in the international market
Date: Founded September 10-14, 1960
Significance: OPEC’s founding challenged the power of the “Seven Sisters,” the seven giant international petroleum companies—five of which were incorporated in the United States—that at the time dominated the production, shipping, and refining of oil outside the United States and Russia. Thirteen years later, control over the international price of oil slipped into OPEC’s hands.
The early growth of the international petroleum industry was significantly driven by two developments: the turn-of-the-century switch to oil as the fuel of preference of navies in a world where security was widely measured in sea power and the 1911 courtordered breakup of John D. Rockefeller’s Standard Oil monopoly, which forced many of its parts to look overseas for the oil on which their refining and marketing operations depended. Demand for oil rose with the development of a private automobile industry—made affordable via Henry Ford’s assemblyline production techniques—and a recognition of oil’s competitive advantages over coal as an energy source. The industry grew in size and evolved in structure to meet this increased demand.
The Seven Sisters
By the time that the governments of the major petroleum-exporting states began to discuss a cooperative effort to capitalize on the growing demand for oil after World War II to gain greater revenue, the industry had gone through several stages. From its origins in a concession system in which individual oil companies acquired the right to a country’s petroleum reserves for a one-time fee, it had evolved into a 50-50 profit-sharing system, under which the producing companies paid the governments of oilproducing states 50 percent of the price of oil on the global market.
The Seven Sisters’ economic model was geared toward deriving profits from selling oil cheaply in extremely high volumes. The companies were thus reluctant to increase the price of oil precipitiously, lest demand and the volume of their trade decrease. Meanwhile, the oil-producing states were growing dissatisfied with their revenue under the 50-50 profit-sharing system. In September, 1960, representatives of Iran, Iraq, Saudi Arabia, Kuwait, and Venezuela met in Baghdad to found the Organization of Petroleum Exporting Countries (OPEC) with the expressed short-term goal of lobbying the Seven Sisters to increase the price of oil, and the long-termgoal of regaining control over their petroleum reserves from Western oil companies.
Oil and the U.S. Economy
Much of OPEC’s subsequent history can be written in terms of its successful and unsuccessful responses to events that it only occasionally set in motion. The major developments occurred during the 1970’s and early 1980’s, when three political events—the Arab-Israeli Yom Kippur War in October, 1973, the fall of the shah of Iran in early 1979, and the Iraq-Iran war later that year—transformed the international oil market and challenged the ability of Western economies to absorb the cost of imported oil, whose price increased twelvefold between 1973 and 1979. The YomKippurWar resulted in the members of the Organization of Arab Oil Exporting Countries (OAPEC) declaring an embargo on oil shipments to any country aiding Israel during that war. The threat of that embargo produced such panic in the oil-importing world that OPEC’s members were able to regain control over the ownership of their petroleum assets by buying out theWestern oil companies and then hiring them to continue to produce their oil for sale on the world market.
Six years later, the fall of the shah and the advent of the Iraq-Iran War produced more panic buying by oil-importing countries. Imported petroleum’s price quickly soared from $16 per barrel to over $36 per barrel, and record profits accrued to both the oil industry and OPEC’s member states. Over the long term, however, the higher price of oil proved to be too costly to all concerned. A prolonged “stagflationary” period ensued during the 1980’s, as inflation caused by the price increase and unemployment resulting from the counter-inflationary policies adopted to curtail that inflation produced a deep, long global recession. OPEC’s member states resorted to underselling one another when the demand for their oil plummeted with the global economy. The price of oil eventually fell below $7 per barrel before Saudi Arabia’s efforts to reestablish discipline inside Organization of Petroleum Exporting Countries succeeded and the price of oil restabilized around $24 to $26 per barrel on the eve of Iraq’s 1990 invasion of Kuwait.
The Iraqi invasion produced a new jump in the price of oil before the U.S.-led war against Iraq culminated in Iraq’s defeat, the restoration of Kuwait’s oil industry, and the restabilization of oil prices around $20 per barrel throughout most of the 1990’s—aprice structure that allowed the American economy and other Western economies to grow again.
The first decade of the twenty-first century once more found OPEC benefiting from outside events, and the soaring cost of oil again threatened to disrupt the economy of oil-importing states, including that of OPEC’s largest consumer, the United States. By the early years of the new millennium, the growing demand for oil in theWestern world, along with India and China’s increasing demand for oil, was producing a tight oil market even before the March, 2003, U.S. occupation of Iraq and the subsequent fighting there that crippled Iraq’s oil industry. On the fifth anniversary of that invasion, Organization of Petroleum Exporting Countries oil was selling for over $100 per barrel—a fourfold increase over the cost when that war began—with negative effects on Western economies.
Amuzegar, Jahangir. Managing the Oil Wealth: OPEC’s Windfalls and Pitfalls. Rev. ed. New York: I. P. Tauris, 2001. Excellent study of OPEC’s ability to exploit political events for its member states’ financial benefit.
Kalicki, Jan H., and David L. Goldwyn, eds. Energy and Security: Toward a New Foreign Policy Strategy. Baltimore: Johns Hopkins University Press, 2005. Regionally organized study of energy dependency throughout the world that attests well to how important OPEC’s decisions are to security—and life—in the contemporary world.
Sampson, Anthony. The Seven Sisters: The Great Oil Companies and theWorld They Created. Rev. ed. London: Coronet, 1998. Masterful portrait of the rise and fall of the private petroleum cartel that controlled the international oil industry for half a century.
Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1991. Epic history of the world of oil, from the industry’s origins through its growth into a global industry based on oil production in Latin America, Africa, and the Middle East.
See also: Arab oil embargo of 1973; Asian trade with the United States; commodity markets; Energy crisis of 1979; “Gas wars”.