When the Organisation of Oil Exporting Countries , OPEC , was created in 1960, it was an answer to a competitive move of the main producers of crude oil,  the large international oil companies , who wanted to maintain their control on the industry, and wanted to block  possible potential competitors, developing    new oil producing areas. 

To do that, they reduced the price,  sure as they were  to have he cheaper oil sources in the world. The move was a normal operation of the oil cartel , made up of the “ seven sisters”  which had  until that time controlled  the whole industry. However, reducing the price meant  reducing the money  that the companies were paying to the producing countries , as royalties, the  money “ due to the King”. Those countries, led basically by Venezuela, were not amused, and create OPEC   to defend their own oil income.   How this new Organisation would operate to obtain its objectives   was not really decided, and it started with the obvious move  of negotiating with the oil companies.

At that time , there were  two theories on the possible behaviour   of OPEC . It could try to swipe away  the oil companies, taking  over their oil production, refining and distribution  ,  and slowly to become in due time  the only owner of the oil. That would imply, among other things,  a competitive strategy , with prices low  enough  to convince the oil companies  that the oil business was no more profitable. This was the theory enunciated, but never developed,  by Enrico Mattei, the founder of ENI,  the Italian oil company,  who was driven by his  anti  colonialism , and by the interest of countries like Italy,   who had no access to cheap oil.  The other theory , developed by economists,  was that the Organisation should behave like a cartel, making sure to keep competitors at bay  and pricing its oil  in such a way to make  not profitable to  find new fields, which would in any case not be cheaper  to produce that the  very large fields  in the Arab-Persian Gulf.  

This theory was supported by economists who  had read in Paul Frankel’s “Essential of Petroleum “ that  marginal cost were negligible in oil production,  and the industry had to be run  by a cartel,  that is, the group with control over the cheaper fields.  Both theory were proven , in fact, to be very far  from what the oil producing countries  wanted , that is, to get as much money  out of the oil as was possible.  That meant that the price had to be increased to a maximum in the first phase to increase the “royalty” , and , after nationalisation of the oil companies,   to feed all into the State’s budget.  That meant overriding the fear coming from the economists that high prices would reduce demand for oil, at the same time   creatingcompetitive productions   from areas out of OPEC’s control.  Both those fears happened to be proven correct , but OPEC was driven  basically by countries  with relatively small reserves , that needed money immediately, and were not thinking of the future.

Some Arab   ideologists even answered the economists’ fears by saying that oil had to be kept in the ground to service the  next generations , so that high prices were a double  advantage, providing money  now  from a reduced production, and keeping some in store for the future. The difference between the economists and the oil Ministers  of the majority of the OPEC Countries, has been the whole life of Fadhil Chalaby , an Iraqui intellectual,  with PHD  from French Universities  who did his training in Oil as a Permanent Secretary for Oil in the Iraqui Government  and  was for ten years the  Secretary General of OPEC , although with a slightly different name of the job .  The story of this discussion, and of the relative frustration, is perfectly told by his   book , which tells the story of a long disagreement  , and eventually of a retreat of both Fadhil  Chalaby and his great friend,  Zaki Yamani ,  the long standing Oil Minister of Saudi Arabia .

They were both defeated by the urge to get the maximum income possible at any given moment . That was not a theory elaborated in any way, but a must on which the OPEC member fell every time. OPEC ‘s policy was dictated ,  writes Chalaby quoting a non  identified  member of OPEC, by the fact  “ that  OPEC has become a prisoner of  its member  countries’ budgets”. Still now, the OPEC members , when talking of prices tend to  deduce the price they want  out of the needs of the States’ budget.

Of course , this flow of money is in some cases  “invisible”  as some recipients do not show any sign of  having invested  that huge amount of money for the development of the Country , as the money often runs away in a thousand rivulets. Chalaby  tries , at the end of his book, to write a chapter  to define OPEC. It is not a cartel , that is ,an organisation that takes maximum care  of its market share , and fights with low prices  every possible competitor.  “The main factor that unites OPEC’s  member Countries with their diverse interests  is the common goal of immediate short term  maximisation of revenues .”That explains why OPEC has lost market share  as its high prices  encourage exploration . The share of OPEC in the world’s primary energy declined  from 27 %in 1973 to 11% in 1984, to 16% in 2005. This is due  not only  to more oil being found  in non OPEC areas, , but also to the development of other sources , like natural gas, nuclear energy , and increasingly , renewables.

To day, the situation of the oil industry is even more complex.  Crude oil  is now priced on the basis of  non OPEC crudes, one North American,  “West Texas Intermediate” , and the   “Brent” crude  in the North sea.  Both of them of limited production, or   like Brent,  menaced by field  exhaustion. The actual price is dictated by the futures’ market, and pushed up by the easy flow of cheap capital  fuelling speculation.  The urgent need to reduce CO2 emissions is driving consumers countries’ Governments to phase out oil as much as possible.   The higher the price , the lower the demand  , that’s the basic truth that OPEC always denied , with the result of shrinking its market share.  It may happen that the playing out of oil will be made possible more quickly than expected  , due to the combined action  of high prices , energy conservation , the development of cheaper renewables and more efficient electric cars.