From the 1973 Oil Embargo to the recent oil price crash, from the Gulf War to the 2008 Financial Crisis, from the U.S. shale oil production to OPEC plus alliance, OPEC has always made it to the top headlines. Let’s see the intriguing journey through the 60 years of OPEC.
How OPEC came to be?
The history of OPEC began in September 1960 at the Baghdad Conference, when five founding members, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, signed their names to a document establishing the Organization of the Petroleum Exporting Countries (OPEC) and declared the organization open to “any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of Member Countries.” These members were later joined by eight more countries (earlier eleven). As a result, OPEC today boasts 13 active members.
Curiously, some of the world’s biggest oil producers do not belong to OPEC and never have. Among them: Canada, China, Mexico, Norway, Russia, and the United States itself. And although not a single European nation is an OPEC member, the organization maintains its headquarters in Vienna, Austria.
The founding members formed OPEC in September 1960, at a time when the developing world was rapidly decolonizing post World War II. At that time, seven major oil companies (known as the “Seven Sisters”), all originating in the developed world, controlled about 85% of global oil production. These included Britain’s Anglo-Persian Oil Company, which later evolved into BP plc, Standard Oil of California (modern-day Chevron), Texaco (later absorbed into Chevron), America’s Gulf Oil (likewise), Standard Oil of New Jersey – modern-day ExxonMobil, Standard Oil of New York (later absorbed into Exxon) and Royal Dutch Shell – the only one of the seven to retain its original name today.
The truth about the 1973 Arab Oil Crisis
OPEC didn’t flex its muscle until the 1973 Arab-Israeli War when Arab members of the OPEC imposed an embargo against the United States in retaliation for the U.S. decision to re-supply the Israeli military and to gain leverage in the post-war peace negotiations. Arab OPEC members also extended the embargo to other countries that supported Israel including the Netherlands, Portugal, and South Africa. The embargo both banned petroleum exports to the targeted nations and introduced cuts in oil production.
The 1973 Oil Embargo acutely strained a U.S. economy that had grown increasingly dependent on foreign oil and had dwindling domestic reserves. The United States found itself more reliant on imported oil than ever before. Having to negotiate an end to the embargo under harsh domestic economic circumstances that served to diminish its international leverage, signaled a shift in the global financial balance of power to oil-producing states.
The full impact of the embargo, including recession, high inflation, and stagnation in oil importers, resulted from a complex set of factors beyond the proximate actions taken by the Arab members of OPEC. The declining leverage of the U.S. and European oil corporations (the “Seven Sisters”) that had hitherto stabilized the global oil market, the erosion of the excess capacity of East Texas oil fields, and the President Richard Nixon’s decision to take the United States off of the gold standard and allow the U.S. dollar to float freely in the international exchange all played a role in exacerbating the crisis. Once the broader impact of these factors set in throughout the United States, it triggered new measures that focused on energy conservation and the development of domestic energy sources. Congress created the Strategic Petroleum Reserve to provide a 90-day supply and prevent future shortages.
One year after the oil embargo ended, OPEC countries held their first Summit of Heads of State and Government in Algiers in 1975. Policies established here helped OPEC to maintain high and stable oil prices into the end of the decade, at which point the Iranian Revolution arrived to drive them sharply higher.
1991 Gulf War
Post-Revolution, oil prices remained high until the middle of the next decade, though these prices eroded over time, due to overproduction by various OPEC countries and the ruinous Iran-Iraq War (1980–88) which pitted two OPEC members against each other, undermined the unity of the organization and precipitated a major policy shift by Saudi Arabia, which decided that it no longer would defend the price of oil but would defend its market share instead. Following Saudi Arabia’s lead, other OPEC members soon decided to maintain production quotas.
Saudi Arabia’s influence within OPEC also was evident during the Persian Gulf War (1990–91)—which resulted from the invasion of one OPEC member (Kuwait) by another (Iraq)—when the kingdom agreed to increase production to stabilize prices and minimize any disruption in the international oil market. The new system of “production ceilings”, adopted by OPEC largely succeeded with oil prices first stabilizing in the high-teen to the low-twenty-dollar range, then holding more or less constant throughout the 1990s. By the end of the 1990s, however, oil prices had sunk back to levels approximating those of the 1986 oil bust.
OPEC in the 2000s
In 2000, OPEC instituted a “price band” mechanism that again aimed to stabilize oil prices. Supply constraints and growing demand for energy in China, however, drove prices up in the 2004 to 2008 period, hitting an all-time high of $143 per barrel, before the 2008 Financial Crisis again destroyed demand, and sent prices tumbling. The market remained relatively balanced in this period. Prices were stable between 2011-14 and held at high levels through mid-2014 before a combination of speculation and oversupply caused them to fall in 2014.
US Shale Oil Boom and Bust
In 2014, U.S. shale oil created a boom in domestic crude oil production. The oil prices averaged above $90 a barrel for three years, from 2011 to 2014 which was enough to allow shale exploration and production to be profitable. Thanks to shale oil production, U.S. reliance on foreign oil imports plunged.
However, the sudden jump in oil production created an oversupply that sent prices plummeting. Shale oil producers kept drilling. They became better at cutting costs the more they drilled. To maintain market share, OPEC also kept pumping oil. Normally, it would cut production as oil prices fell. Eventually, low prices caught up with the industry. Many shale oil producers stopped drilling. In October 2015, about half were sitting idle. Dozens filed for bankruptcy, and 55,000 workers were laid off. On January 20, 2016, oil prices fell to a 13-year low of $26.55/b. OPEC waited till November 2016 when it increased prices and cut production. It produced oil more cheaply than its U.S. competition. The cartel toughed it out until many of the shale companies went bankrupt.
OPEC-Russia Oil Alliance
On July 2, 2019, OPEC formed a partnership with a 10-country oil alliance led by Russia. The countries signed a three-year charter of cooperation that would set production levels among all 24 members. However, the “OPEC Plus” supply agreement fell apart in March 2020 after Moscow refused to support deeper oil cuts to cope with the outbreak of coronavirus in order to weaken both the U.S. shale oil industry and the OPEC’s clout in the market. In response, OPEC removed all limits on its own production, flooding global markets with oil at a time when the OPEC demand has already weakened substantially resulting in the biggest single-day crash in oil prices in almost 30 years.