A Brief History of OPEC Ahead of US "Energy Independence"

Michael Teague |

On Wednesday, December 4, the Organization of Petroleum Exporting Countries, better known by the acronym OPEC, will convene in Vienna, Austria for its 164th regular meeting with the purpose of agree on production targets.

The meeting for the group of 12 major non-Western oil exporting nations, comprising Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, the Kingdom of the Saudi royal family, the United Arab Emirates, and Venezuela is an important one, coming as it does at a time when the United States finds itself in the midst of a what has been called a “Shale Boom” that will make it the world’s top producer of oil and gas for what looks to be the foreseeable future. On October 4, the US Energy Information Administration reported that 2013 would see the US surpass both Russia and the Saudi Kingdom in the production of petroleum and natural gas. 

For many, the dramatic rise in US production occasioned by the unlocking of shale reserves throughout the country has been welcomed as a sign that the once improbable notion of energy independence has become a possibility, if not a given. With no  difficult not to have noticed by this point how much speculation has been devoted to the future of the oil-pricing cartel, and particularly how it will deal with an America that in such a short period of time become not only energy independent, but also energy dominant. At times, there even seems to be a sort of relish taken in imagining the possibility of OPEC’s eventual demise.

Before jumping to hasty conclusions, however, a brief overview of OPEC’s history and the reasons for its creation in the wake of the second World War is at least in order.


Post-WWII, Developping Nations Demand Their Fare Share

Since the early 1970’s, OPEC has been known as a “pricing cartel,” and has been consistently portrayed as a more or less unfriendly group of mean-looking non-Westerners seeking to impose their evil whims upon the civilized Western world via the ability to manipulate the price of crude oil. And while this caricature might make intuitive sense to the lay-American who has had to contend with various price hikes at the pump over the decades, the origins of OPEC tell a more nuanced, if not completely different, story.

Though the organization is typically associated, for better or for worse, with the white dishdashas of the royal families who rule the Gulf and the Arabian Peninsula, OPEC’s origins are to be found not in those parts of Western Asia and Northern Africa so commonly known as the “Middle East.” Rather, OPEC was born out of the initiative of the Venezuelan government of the late 1940’s and early 1950’s.

In 1947, the Venezuelan government, seeking to receive a more equitable share of the profits that foreign oil companies were making off of their reserves, demanded that these companies begin splitting those profits 50-50. The government was well aware of the audacity of its move, and was particularly concerned that international concerns might retaliate by taking their business elsewhere. Thus, along with the new profit-sharing model it sought to impose, delegations were sent to the oil producing nations of the Middle East, at the time Iran, Iraq, Kuwait, and the Saudi Kingdom, where the wisdom of this move was quickly embraced.


Institutionalizing the Rights of Exporting Countries

By 1960, oil companies had been unilaterally cutting prices to deal with an ostensible supply glut, thereby cutting in to Venezuelan profits. Venezuelan delegations were again sent to the Gulf, this time with a far more ambitious idea; a sort of global union to protect the world’s oil producing countries and their interests. Shortly thereafter, OPEC was born.

Among the changes that the organization brought to global energy markets, the most significant among them were the establishment of collective bargaining rights, as well as ensuring the right to be directly involved in the drilling and pumping that foreign companies were doing on their soil. Also, the pricing system imposed by OPEC was created as to automatically adjust for inflation.


Oil & Politics - the Yom Kippur War of 1973 and Subsequent Embargo

As onerous as these new rules may have been to oil companies, however, no single event shaped US public opinion towards the organization as did the 1973 war between Israel and the Arab states of Egypt, Syria, and to a much lesser extent, the Kingdom of Jordan.

Though each of these countries had their own respective interests in the conlict, OPEC’s member-states, comprised primarily of Arab countries, closed ranks behind Egypt and Syria, and made the shocking decision to raise oil prices on their own, without first consulting the companies. The move was intended to punish Western governments, whose support for the state of Israel had only become more unconditional in nature over the course of 3 major Arab-Israeli conflicts beginning in 1948.

The Arab oil embargo of 1973 sent the price of crude up nearly 400 percent at one point, profits that directly benefitted the OPEC countries much in the same way that oil companies had profited handsomely only a couple decades before from these same underdeveloped nations. Exorbitant prices at the pump and unprecedented fuel shortages throughout the US, however, led to extremely negative perceptions and portrayals of OPEC and especially its Arab components in the US especially, as citizens were chastened by the sudden demonstration of their near total dependence on foreign energy resources.


The Quest for Energy Independence

Perhaps the most consequential long-term result of the embargo was that it jump-started the quest for US “energy independence,” and gave this endeavor its patriotic subtext. The OPEC embargo of 1973 is more or less responsible for the increased willingness of oil companies to take on more and more difficult projects in far flung and dangerous places, particularly the waters off the coast of northern Alaska, as well as the UK’s North Sea.

Since that time, however, extraction technology has expanded significantly, and oil companies are just getting used to the notion that they might not actually be as reliant on the pricing of OPEC’s basket of crudes. At the same time, however, OPEC is by no means out of cards to play. Recent developments have made for a situation in which the organization will find itself confronted with serious decisions about how much oil its members should produce, and at what discount they will have to sell it to remain competitive in the coming era of US energy independence. This has been compounded by the potential  lifting of sanctions on Iran that could see that country legally allowed to sell oil on the global market sometime in the not-too-far future.

But even if that happens, OPEC can do a number of things to protect its interests. For instance, it could sell crude at such a discount that all the small independent companies riding the shale boom in the US could have the whole market pulled from under their feet.

While such a decision is not likely unless other elements worsen the overall geopolitical situation, it is worth remembering that the notion of US energy independence will not mean the end of competition, and it will likely not mean the end of OPEC either.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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