OPEC’s Rise and Downfall

This work overviews the historical evolution of OPEC from its inception in the wake of decolonization to its emergence as a dominant force in the global oil market during the 1960s and 1970s. It examines how newly independent oil-producing nations sought to assert sovereignty over their resources, leading to the formation of OPEC. The narrative covers key events, including nationalization efforts, pivotal diplomatic maneuvers, and the impact of major conflicts like the Arab oil embargo and the Yom Kippur War. Additionally, it discusses the challenges and internal divisions that led to OPEC’s decline in the 1980s, ultimately shaping its enduring legacy in international energy politics.

INTRODUCTION

After the Second World War, the world underwent significant political and economic transformations. The colonial system began to break down, and as a result, Third World countries began to gain their independence. Moreover, the oil-producing states of the Global South had a desire to secure sovereignty over their energy resources, which later led to the creation of the Organization of Petroleum Exporting Countries (OPEC).

OPEC is an international intergovernmental organization that coordinates and unifies the oil policies of member countries and ensures a regular supply of oil to consumers, a stable income to producers, and a fair return on capital for those who invest in the oil industry. OPEC rose to prominence in the 1960s and 1970s, wielding immense power over the global oil market. In human history, there aren’t many examples of organizations with many years of efficient activity of such magnitude and influence as OPEC. Given the numerous challenges and fluctuations in the global oil market, OPEC has failed to act as a true cartel like the infamous Seven Sisters, yet has managed to maintain its relevance to continue to pour oil on world markets. This essay explores the historical context that fueled OPEC's emergence at the beginning of the 1960s, its period of dominance and golden age in the 1970s, and the factors that led to its decline after the 1980s.

The end of World War 2 marked the decline of colonial empires. Third World countries sought to assert their sovereignty and achieve economic and political independence. These newly independent nations, led by figures like Gamal Abdel Nasser, the second president of Egypt, and Sukarno, the first Prime Minister of Indonesia, were driven by a strong sense of nationalism. Exhausted by wartime resource exploitation they saw oil as the key to financing their ambitious development dreams and escaping the legacy of colonial plunder. One of Nasser's most significant actions related to oil was the nationalization of the Suez Canal in 1956. This move asserted Egypt's sovereignty over a vital waterway and challenged Western dominance in the region. The nationalization of the Suez Canal had reflections beyond Egypt, affecting global oil flows and highlighting the strategic importance of the Middle East to this day. In Indonesia, Sukarno was one of the first leaders who passed legislation to nationalize the Dutch-owned oil company and assert control of crude oil production. Since that, many nations attempted to nationalize their resources, like Iran’s attempt to control their resources which backfired on the government of Mohammad Mossadegh.

The tragedy that unfolded in Iran in 1950-53 showed the extent to which the West uses its influence to dictate rules in third-world countries. The coup in Iran began with the overthrow of democratically elected Iranian Prime Minister Mohammad Mossadegh as a result of Operation

Ajax, organized by the CIA and the MI6. Mossadegh, having popularized the idea of nationalizing Iran's oil industry, faced resistance from Western companies, especially the British Anglo-Iranian Oil Company, which controlled much of Iran's oil industry. Operation Ajax led to the overthrow of Mossadegh and the establishment of Shah Mohammad Reza Pahlavi, who was more convenient to Western interests. It was also a turning point because the overthrow of Mossadegh and the establishment of the Shah's dictatorship caused deep discontent among the Iranian people. This provoked a rapid rise in anti-Western and anti-Shah nationalism and then Islamic radicalism.

Despite that, the U.S.-Iranian relations during this period proved decisive for the future of Iranian politics. The U.S., to prevent the spread of communism in the region, actively supported the Shah of Iran despite his authoritarianism and human rights abuses. This also created a deep anti-American sentiment in Iranian society that laid the groundwork for a future Islamic revolution. Thus, the coup in Iran showed that the Anglo-American players were ready for any action just to preserve their power and influence.

As was said, at the end of the 50s of the last century, there was a confrontation between Western oil companies and third-world exporting countries. Back then the oil industry was controlled by the Anglo-American cartel nicknamed Seven Sisters. The name was given to it by Enrico Mattei, the founder of the Italian national company Eni, who died in a plane crash in 1962. According to one version, his death was not accidental, because by offering a record high rate of profit to oil exporting countries - up to 75% instead of the established 50% and having ties with the Soviet Union, he angered the Anglo-American oil giants, thereby signing his death warrant. The seven sisters included British Petroleum, Exxon, Gulf Oil, Mobil, Royal Dutch Shell, Chevron, and Texaco - the seven most powerful oil producers on the planet. At their peak, they concentrated almost 90% of the world's oil reserves. The income of exporting countries directly depended on these companies. "Sisters" themselves produced oil, bought it from third-world countries, and engaged in refining and marketing of petroleum products. The monopoly position in the sales market allowed sisters to mercilessly pressure the counterparties from developing countries, forcing them time after time to reduce selling prices.

In an attempt to increase profits, governments increased production, but the limited market resulted in an oversupply of oil. In such conditions, exporters fought their competitors with discounts. In some cases, they could help a particular country, but they harmed the overall market situation. Around the same time, the Soviet Union entered the world market as a supplier. This meant that the excess of oil on the market only intensified. In addition, the U.S.S.R. was actively using the practice of lowering prices - and Western companies had to do the same, as they did not want to lose margins due to competition with the Communists.

In 1959, oil companies unilaterally cut the official price by 10%, reducing the income of exporters - Venezuela and the Middle East. This was the key moment after which a rapid change in the rules of the game in the oil market began. These events could not go unnoticed in the Middle East, causing a storm of protests, which led to the first Arab Oil Congress in Egypt, which played a key role in the creation of the organization. One of the key roles in the realization of the plans of the oil-producing states was played by journalist Wanda Jablonski.

Jablonski's emergence was unique in the sense that she was able to succeed as a reporter as well as being well versed in the oil business, and was respected in the Middle East, where women were not allowed to work at the time. Driven by a sense of justice, she dared to speak against the Seven Sisters and give voice to countries such as Iraq, Saudi Arabia, and Venezuela to speak out about the instability of the oil market. Her credibility and influence, combined with her deep understanding of the oil industry, caught the attention of leaders of oil-producing countries.

In 1948, Jablonski was able to interview with the Venezuelan oil minister where he expressed the opinion about the need to nationalize oil reserves and oil companies, and called for similar actions by oil-rich countries. The material published as a result of the interview caused discontent among the "Seven Sisters". Already in the mid 1950's Jablonski during her work in the Middle East countries interviewed the King of Saudi Arabia, who held a similar opinion on the need to nationalize the oil industry. According to the reasoning of the Saudi king, oil reserves are not unlimited. In addition to that, the leaders of the countries were also interested in raising revenues by increasing the market price of oil, rather than increasing the level of oil production. Eventually, Wanda Jablonski organized the first meeting of leaders of countries expressing solidarity to nationalize the oil industry and increase revenues, previously unknown.

The first ministerial meeting between Venezuela and Saudi Arabia took place during the Arab Oil Congress in Cairo. The main topic of conversation was the subordination of the oil market to oil companies. Representatives of Kuwait and Iran quickly joined the conversation. Since the meetings were informal, the public results of the negotiations were not agreed upon. However, the parties managed to conclude the so-called "Gentlemen's Deal" - a first step towards protecting oil prices, controlling the market, and redistributing profits between oil companies and countries. As a result, the secret meetings were considered a prerequisite for the creation of OPEC. In August 1960, oil companies again lowered oil prices without negotiating with exporting countries. Consequently, an emergency meeting was organized in Baghdad in September 1960, attended by representatives from Saudi Arabia, Venezuela, Kuwait, Iraq, and Iran. After four days of negotiations, the participants announced the creation of the Organization of Petroleum Exporting Countries (OPEC) on September 14, 1960.

In the 1960s, global oil demand more than doubled, reaching 45.3 million barrels per day, amid strong growth in the global economy. Moreover, by the end of the decade, control of the global oil market had passed into the hands of Middle Eastern states, pushing back American and European companies. Thus, the West began to gradually lose political and economic control over the major oil producers. In 1967, the Middle East Alliance tried to take advantage of this for the first time. At that time, during the Six-Day War with Israel, a coalition of Arab countries decided to cut off oil exports to the Jewish state's main allies - the United States, Great Britain, and Germany, but the initiative was not successful because the West was not yet sufficiently dependent on Middle Eastern oil. However, over the next five or six years, the situation changed dramatically. In Europe, for example, the share of Arab crude in total imports more than doubled during these years - from 13 to 30%, so in 1973, OPEC succeeded.

On October 6, 1973, a large-scale Arab-Israeli conflict, also known as the Yom Kippur War, began. The confrontation was caused by the discontent of the Arab leadership with the results of the Six-Day War of 1967. Egyptian and Syrian troops attacked Israeli positions on the fast day of Yom Kippur and initially made serious gains. However, soon, thanks to Western support and the unification of Jewish society, Israel began to win victories. Against this backdrop, Arab countries imposed an embargo against Western nations, causing a global economic collapse.

Since OPEC was already a significant player in the world oil market, the restriction of supplies to the West and the concomitant reduction in Arab production led to a physical shortage of crude oil, which there was no one to fill. As a result of the embargo, oil prices jumped fourfold, from $3 to $12 per barrel, leading to a complete collapse of the price system, while the shortage of resources dealt an economic blow to industrial countries. The oil embargo was lifted only in March 1974 after a series of negotiations. However, the lifting of restrictions did not lead to the return of oil prices to pre-crisis levels, and Washington and its allies would feel the economic consequences of Arab sanctions for a long time. At the same time, economies in the Middle East were growing rapidly, especially in Saudi Arabia, which led to increased export revenues and accelerated economic growth. Thus, the West, heavily dependent on oil imports, was vulnerable, and unlike the failed oil nationalization attempt in Iran, the Arab countries, through OPEC, had a much stronger trump card - they controlled the oil resources. The embargo emphasized OPEC's ability to influence world energy markets and the strategic importance of oil as a vital resource in international politics. It also served as a wake-up call for Western countries to reconsider their dependence on Middle Eastern oil and spurred efforts to diversify energy sources and implement energy conservation measures.

The U.S. response to this war was even more limited due to Cold War dynamics and fear of Soviet influence in the Middle East. They avoided direct military intervention and had to focus on diplomatic negotiations and economic strategies to mitigate the effects of the embargo. During the Yom Kippur War, the U.S. Secretary of State Henry Kissinger played a huge role in mitigating tensions and preserving U.S. dominance and influence on global oil markets. He participated in secret negotiations aimed at separating the opposing armies and promoting a truce between the warring parties. Kissinger has employed shuttle diplomacy, traveling back and forth between the capitals of countries involved in war which allowed him to maintain open channels, convey messages, and facilitate peace talks without parties having to sit down at the same table. His efforts helped to restore diplomatic relations between Egypt and the United States and culminated in the Camp David Accords in 1978, which led to a peace treaty between Egypt and Israel. In the aftermath of the 1973 crisis, his diplomacy aimed at stabilizing the oil market and preserving the price of oil being traded in U.S. dollars. The U.S. dollar has been the dominant currency since the end of World War 2. Oil trade being priced in U.S. dollars made it more convenient for international transactions and offered stability to the global oil market. Thus, to maintain the oil market using a unified currency globally, Kissinger secured a deal with OPEC countries and created the start of the petrodollar system. In return, OPEC countries were provided with military support and protection. The petrodollar system solidified the dollar's status as the global reserve currency.

As it was mentioned earlier, after the embargo, the U.S. was searching for an energy partner in the Middle East in the face of Iran which didn’t introduce an embargo against the US. However, the second oil crisis in 1978 and Iran’s revolution in 1979 changed those plans. As a result, by 1981, oil prices had risen to $40 per barrel. The catastrophic Iranian Revolution of 1979 which overthrew the Pahlavi dynasty under Shah Mohammad Reza Pahlavi and the subsequent Iran-Iraq war disrupted the oil industry, causing a significant price surge. The Iranian Revolution marked the ending of monarchy and the establishment of an Islamic government led by clerks. Newly came principles of Shia Islam sought to disrupt domestic and international relations with the West which supported Shah’s regime. The Iranian Revolution caused instability in the region, especially during the Iran-Iraq war (1980-1988). The Iraqi Government under the leadership of Saddam Hussein invaded the western territory of Iran in an attempt to exploit chaos and weakness from the revolution. OPEC experienced the worst crisis ever because of Iraq's invasion. Sovereignty and national survival became top priorities of member countries, as well as increased oil production to compensate for caused abruptions. Fear and market speculation, strikes, and disruptions in Iranian and Iraqi oil production led to a quintupling of oil prices(5x).

After the oil shocks, countries began looking for alternative sources of oil to reduce their dependence on OPEC. Alaska and the North Sea stood out as promising new areas. The presence of oil there had been known even before the 1973 price spike, but for various political and economic reasons, environmental protests, and technical difficulties, oil production was virtually nonexistent. However, after the embargo was imposed, the Alaskan pipeline project was started and completed by 1977, which significantly increased oil production in the region. Initially, no one believed in the potential of the North Sea, but the discovery of gas in Groningen(Netherlands) led to a reconsideration of the North Sea's oil success. In 1962, Phillips Petroleum applied for exploration in the North Sea, offering $160,000 per month. Oil fields were discovered in the North Sea in 1969, and their commercial development began in 1975.

The models of natural resource revenue management in Norway and Alaska are based on the fact that money from oil funds is used for social development, providing various benefits to the population. Thus, unlike Nigeria (one of the largest oil-producing countries) where corruption is rampant, in countries where the rights of the citizens to natural resource revenues are respected, there is a poverty reduction, local economies are developing, and there is a general improvement in living standards.

At the same time that the oil demand was skyrocketing and people were trying to find as many oil fields as possible, an environmental movement also began to develop. People started worrying about the future of the planet. Industrial countries, mainly the U.S., sought to find new energy sources that would meet electricity demand yet at least cost to the environment. Environmental agenda quickly became one of the new challenges to the World and emerged as the Hydrocarbon Society. Among the most effective environmental solutions particularly those that'd cover electricity demand was a switch to natural gas. Several major natural gas fields were built in the North Sea like the Ormen Lange field discovered in 1997, the Troll gas field in 1979, and the Britannia field discovered in 1975.

In 1982 more countries started to introduce oil from newly found off-shore fields in the North Sea or Soviet oil that was rising its export. In late 1977 OPEC accounted for ⅔ of total oil production, in 1982 they were outpaced for the first time by a million barrels/day. Increased share of other contributors to the global market led OPEC to decide between cutting prices or cutting production. Fear of reducing prices, undermining their pricing structure and fear that industrial countries would buy back OPEC’s oil and control excise and taxes ultimately controlling market price was the main reason why OPEC subsequently increased their production from 18 million barrels/day in 1976 to 31 million barrels/day in 1979. In 1983 OPEC countries tried to oppose Britain which was producing more than Algeria, Libya, and Nigeria combined with its new North Sea oil with unofficial discounts and cut prices. After Britain's massive oil price cut by 3$ for a barrel OPEC officially cut prices from 34$ to 29$ for a barrel. This led to a massive drop in oil prices in 1985.

1985 is known as the Third Oil Shock - the market went out of control, and the typical price-setting structure no longer existed. By 1985 OPEC faced a tough choice between continuing to cut prices for too highly-priced oil or pop it up and face potential shrinkage of market share. OPEC countries started to battle against themselves for customers to preserve their relevance and secure their interests. The organization was bitterly divided, Iran, Algeria, and Libya were open to adopting lower quotas to restore the price to 29$ a barrel, while huge volume producers like Saudi Arabia and Kuwait committed to restoring their market share. In addition to Iran and Iraq, two of the key OPEC members were still locked in a death struggle. 1986 started with the oil price collapse when the price dropped by more than 50%. The consequences of such a drop affected the global economy and caused revenue shortfalls and budget deficits for oil-dependent countries while oil exporters faced a decline in government revenues which forced them to seek external financing to cover budget deficits.

OPEC’s story is one of triumph and tribulation. Born from a desire to oppose the treatment of the West, OPEC rose to wield immense power in the 1970s. However internal disagreements, new oil sources, and military instability in the Middle East followed by several Oil Shocks ultimately weakened OPEC’s grip in the collapse of the 1980s. OPEC’s ability to influence the price of oil hasn't been restored after the Third Oil Shock. Despite that, OPEC remains a significant player in the oil market, influencing prices and production decisions. OPEC’s future will likely depend on its ability to navigate geopolitical tensions, address environmental concerns, and embrace technological innovations.