OPEC has been the only organisation outside the sphere of power and influence of the West, which was able to influence deeply the world economy and also its politics.
Fifty years, half a century, it’s quite a long time . Then , there was no CO2 scare, no global warming, and no...OPEC. The Organisation of Petroleum Exporting Countries was created in 1960 to fight the reduction of the oil price decided by the oil companies. Not many people thought a lot of it. It was quite new , and it needed to establish a structure and a doctrine that would keep together a number of very different countries . Some of them were just getting out of their colonial past, an experience that OPEC’s main promoter , Venezuela, did not have ; some -the Gulf Countries- had much more oil than the rest, and , for example, Kuwait, considered the former colonial power a guarantee against the expansionism of another OPEC’ member, Iraq.
They had , however, a very strong bond : their common dependency on the oil revenue. OPEC started by negotiating with the oil companies a point of the royalties agreements , not a dramatic start. A doctrine was needed , and there a strategic choice had to be made between two broad ideas. Price of oil could be increased , in order to increase the money paid to the countries per each barrel of oil produced. To the contrary, it could be kept low , in order to give OPEC ,in due time, an effective monopoly of crude oil, and , if needed, to wipe the oil companies out .
This vision had been tentatively nourished and not very openly expressed by Enrico Mattei the Chairman of ENI (who died in 1962) who thought that OPEC should become an ally of the oil importers, with the double advantage of increasing demand and gradually reducing the market share of the oil companies. The oil business would fall completely in the hands of the producing countries. ENI produced under OPEC request a study to prove the existence of a monopoly of the major oil companies, which did not discuss the strategic issue, not included in the terms of reference. The low price strategy was , of course , counter intuitive , and also fraught with political problems. The high price one was almost obvious : the oil companies were not against negotiating a price increase; the USA were supporting the proposals of Iran; and Europe and Japan, , the other big importers, were following.
Moreover, the nationalisation of the oil reserves , although never part of the OPEC doctrine, was implemented by a number of members , as an instrument to increase immediately the oil income to the country. After all, OPEC had been created to respond to a price reduction decided by the oil companies ! So , confrontation with oil importers was inevitable, and in the hectic political atmosphere of those years , it was pushed up to an embargo against some western countries in order to help Egypt in the war with Israel. The embargo was not decided by OPEC , but by a similarly named institution that gathered the Arab oil producers, called OAPEC. The embargo failed , the tension was reduced, but not cancelled. That came to be known as “the first oil shock of the ‘70s” which was soon followed by the Iranian revolution and a cut of Iran’s production -not decided by OPEC. The second shock of the seventies was administered when the first was being swallowed by the world economy.
Prices were kept high , and oil was somewhat scarce . The reaction did not take long. The new oil , especially that found in the North Sea, an area not controlled by OPEC, was competing on the market , the oil companies , strong in the downstream, being quite happy to operate as “ free riders” on high prices set by the producers. The importing countries created an anti-OPEC institution , the International Energy Agency. Oil demand was being contained by energy conservation and increased energy efficiency . OPEC had therefore to reduce production , and that job fell to the country with the largest reserves, Saudi Arabia, which after years of diminishing output , was eventually reduced to a very low rate of exploitation of its large reserves, and decided to break out . It declared that it would sell its oil at the same price of the North Sea , and to let the price move according to demand.
The sudden increase of supply crashed the price, producing what was called the “ countershock” . OPEC experimented the working of an economic principle , that high prices reduce demand and increase supply , a “law” that the producers originally thought not applicable to oil, a commodity both indispensable , and subsidiary to another commodity , e.g. the car. Shock and countershock had created an oil market , with OPEC supplying oil and attempting , with diminishing success to fix the price , and coming to understand better the working of the market ; and the oil companies playing the “free rider” and developing any non OPEC area that they could find. OPEC and the International Energy Agency kept at loggerheads for a long time , but this position came to be due not to a real difference in strategy , but rather in the legacy from the past , while the market situation had changed . A secret meeting organised with the two top people on the two association opened up the road to a much better comprehension of each other. There is no rivalry now.
What can we conclude from this attempt of bottled history? First of all, we must say that , apart from the United Nations, OPEC has been the only organisation outside the sphere of power and influence of the West, which was able to influence deeply the world economy and also its politics . The existence of OPEC made an important contribution to the political and economic development of its member countries , who were led to take a political stance and to take responsible , although collective , decisions. The establishment of the national oil companies often created an embryo of technocracy , which has developed, although with large difference in the various countries. Many of its members did in fact have a relevant political development , and talk to day to the great powers without too much of an inferiority complex. To day, the importance of OPEC has taken a new relevance, due to the fact that the volatility of the price of oil create serious problem to their own economic forecasting, and makes it very difficult to project in the future the level of oil money entering in the country. The same problem exist for the consuming countries, which are vulnerable by sudden changes of the cost of their energy imports, strengthened the financial fluctuations.
Today . the flow of speculative money entering the “futures” oil market can be so high as to create instant changes in the cost of supply , which makes almost impossible to forecast some of the most relevant elements of the economic government , including , crucially, the cost of imports. Some discussion on this matter at the last meeting of the International Energy Forum , have shown a remarkable similarity of interest between OPEC and oil importers. Possibly, some practical decisions may follow from these worlds. What can we say about the future of OPEC?
Probably , it won’t change much in the next future. OPEC has not been able to attract the oil countries of the North Sea, and the independent producers like Mexico. The largest oil producer of to day, Russia, is definitely following a policy of his own , which may coincide for some time with OPEC’s , but will be independently decided and operated. Russia has not accepted any limitation to its crude oil strategy, which can be , today , simply called as maximum export. Nor is , apparently , OPEC trying to extend its power to natural gas , one of the main competitor to oil, whose productive and trading structure has been created and consolidated outside OPEC. Some kind of association was create sometime ago to coordinate the production policies of some producers of natural gas , but up to now , no great decision have been taken. Probably, OPEC won’t change a lot in the next decade.