OPEC’s Rise on the Global Stage” is part two of a multi-part series that examines the shifting role of the Organization of Petroleum Exporting Countries in the global oil market throughout its pre-COVID-19 history. To read part one, “OPEC Faces Pressure,” click here
While decolonization movements and the rise of a new socio-political order throughout the 1960s and 1970s gave rise to OPEC and allowed the Organization to establish a certain influence over global oil supplies, its actual contribution to prices fluctuations remained limited.
OPEC was founded by five developing and oil producing countries, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela during the Baghdad Conference in 1960. Back then, decolonization movements were giving birth to new independent states across the world, with each starting to ascertain sovereignty over their territory and natural resources. Until then, oilfields and oil production had been dominated by multinational companies coming from the US and Europe, called the Seven Sisters. They included the Anglo-Iranian Oil Company (now BP), Gulf Oil (now Chevron), Royal Dutch Shell, Standard Oil Company of California (now Chevron), Standard Oil Company of New Jersey or Esso (now ExxonMobil), Standard Oil Company of New York (now ExxonMobil) and Texaco (now Chevron). With decolonization, the Seven Sisters gradually lost control over both oil reserves and oil production. While Iran’s oil industry had already been nationalized in 1951, Iraq nationalized the Iraq Petroleum Company in 1972; Saudi Arabia gradually acquired stake into Saudi Aramco from 1973 until it took full control of the company in 1980; Kuwait took full control over the Kuwait Oil Company, previously owned by the Anglo-Persian Oil company and the Gulf Oil Corporation, in 1975; and Venezuela finally nationalized its own oil industry in 1976. Such nationalizations gradually stripped out foreign companies and Western powers of their dominance over oil and its trade.
Along with nationalization of the oil industry within founding member countries of OPEC, the Organization also welcomed several new producers throughout the 1960s and 1970s. In effect, what this all meant for the global energy industry was a breaking down of what had been a vertically integrated supply chain. Instead of having a selected group of foreign companies owning and controlling the entire value chain from exploration to distribution, new independent countries were now in control of their upstream activities and production, while foreign companies retained only control over the lower end of the value chain (midstream and downstream). To be clear, OPEC as an organization could not then claim control over the entire oil sector but had been given some leverage on the pump and could decide to open or close it as it wished. The 1970s would then prove that owning the oil pump was a very powerful tool in global economic affairs.
In October 1973 and following the United States’ military aid to Israel, which had just been attacked by Egypt and Syria, Arab oil producers of OPEC took the decision of cutting their production by 5 percent and to institute a six-month embargo against the US, the Netherlands, South Africa and Portugal, all allies of Israel. Production cuts were gradually increased until the end of the year, by when overall cuts amounted to 25 percent of September 1973 levels. As a result, oil prices were multiplied by four from $3 to almost $12 a barrel within a few months. For the US and Western economies, whose dependence on foreign oil imports had increased in the late 1960s and early 1970s, the effect was almost immediate. The stock market crashed, inflation rose, and the US entered into recession as early as November 1973. OPEC countries showed the world that by controlling supplies, they could directly influence prices. They had stripped the West out of its control over the most vital commodity for growing world economies and could easily stir social unrest across the US and Western Europe. Concretely, the first oil shock put an end to Western powers’ dominance on global oil supply and signaled the entry of OPEC as the key mover of global oil markets.
The second oil shock only further confirmed the importance of OPEC member countries in the management of the global oil market. Historic protests in Iran at the end of the 1970s forced the Shah to flee the country in 1979 and be replaced by the Ayatollah Khomeini. Protests were accompanied by heavy strikes who particularly hit oil companies in Iran and eventually led to the suspension of Iranian oil exports, taking 7 percent of the world’s oil production at the time off the market. OPEC then played a key role by agreeing to boost production and offset most of the decline, which allowed it to maintain a certain supply stability. However, rising global oil demand and concerns over the future of global supplies weighed heavily to create a speculative panic, and resulting in oil prices more than doubling between 1979 and 1980, despite a net loss of supply of no more than 5 percent.
The importance lies here in the actual contribution that OPEC played in the fluctuations of oil prices during both oil shocks in 1973 and 1979. The former was a politically motivated embargo accompanied by substantial production cuts, and the consequential rise in oil prices and economic crises in the West can directly be attributed to OPEC members, although the measure seems too extreme in itself to ever be replicated. Equally important is the fact that the early 1970s is the only time in history when OPEC oil supply was larger than non-OPEC oil supply. The latter shock, however, showed that despite OPEC’s actions to restore market stability and offset the decline of Iranian oil production and exports, prices still soared because the driving factors were speculations and rising global demand. The role of the Organization in the second oil shock was then limited. As 2016’s Declaration of Cooperation would later show, OPEC’s success in balancing the market would become more and more dependent on outside cooperation, including from key states like Russia and attracting new members.