Aside from research and public relations,
the OPEC staff takes care of the more mundane housekeeping
chores of the organization, including hotel and airplane
reservations;. security arrangements; payroll, bookkeeping,
and the hiring and firing of local clerks and secretaries.
None of these tasks involves any control of the oil market.
"OPEC is merely a service organization
for thirteen sovereign oil-producing nations," explained
Bahman Karbassioun, an Iranian who has been associated with
OPEC for nearly ten years. "We provide background data,
such as the amount of OPEC oil that can be sold at a given
price, to the ministers when they meet," he added. "All
decisions are up to them."
The thirteen oil ministers of the member
nations meet at conferences that, according to the OPEC
charter, "are the supreme authority of the Organization."
These conferences are convened semi-annually, and additionally
whenever a majority of members requests an extraordinary
session. It has held an average of about three conferences
a year. At these conferences, it is required that all decisions
be made unanimously. Then decisions must be ratified by
the thirteen governments before taking effect. No member,
not even if it is in a minority of one, can be forced to
abide by a decision to which it did not explicitly agree.
There is, therefore, no need for a mechanism in OPEC for
In verifying, or even monitoring agreements.
Compliance is completely voluntary Most OPEC decisions concern
the base price for crude oil. Members can easily evade such
price decisions through the simple expedient of altering
terms-such as quality or transportation differentials thereby
giving discounts or premiums.
Technically, it would be relatively
easy for OPEC to enforce price decisions, by keeping track
of the crude-oil sales: most oil is loaded onto tankers
from only a dozen or so terminals. But members won't allow
OPEC to measure the actual flow of oil from their terminals,
for good reason: despite the appearance of unity, they are
all competitors for shares of the world market. Current
oil sales are considered by many OPEC states to be the equivalent
of state secrets. Saudi Arabia declared in 1980: "We refuse
on principle to even discuss the subject of production,
which concerns us alone. Our decisions on production derive
from market conditions and Saudi Arabia's international
When the oil ministers meet at OPEC
conferences, they therefore have no choice but to depend
on their own national data. Moreover, some ministers are
more equal than others. Sheikh Ahmed Zaki Yamani, the Harvard-trained
oil minister of Saudi Arabia, often plays the lead role
at these conferences. "Yamani's in charge of long-term strategy,"
one Iranian technocrat explained, and added, "It is no coincidence
that the benchmark price for Saudi crude oil is the official
OPEC price." From his perspective, Saudi Arabia attempts
to use OPEC to force the twelve other producing countries
to support its standard oil price. OPEC, with its minuscule
staff and tiny budget, clearly is not the sort of cartel
that has captured the public's imagination. A cartel, by
definition, has one indispensable characteristic: it must
be able to restrict the supply of the commodity reaching
the marketplace. Yet, although individual OPEC members can
cut back on the amount of oil that they supply , OPEC itself
is powerless to interfere in such decisions. As Sheikh Yamani
said at the last OPEC meeting in Vienna, in December, "Production
decisions are made in Riyadh, not Vienna."OPEC not only
lacks power to impose its will on recalcitrant members,
it lacks the basic information needed to operate a cartel.
At best, it is only a shadow of the former international
cartel of oil companies that previously controlled almost
the entire oil trade. This group, known as "the Seven Sisters,"
was a real cartel, with thousands of employees and unlimited
funds. It is useful to compare the operations of a real
cartel ,with those of OPEC.
The international oil cartel traces
back to a grouse shoot at Achnacarry Castle, in Inverness,
Scotland, in September of 1928, which was attended by the
heads of the three most powerful oil combines in the world:
Sir Henri Deterding, the chairman of Royal Dutch Shell:
Walter Teagle, the head of Standard Oil of New Jersey (now
Exxon); and Sir John Cadman, chairman of Anglo-Persian Oil
(now BP). Under the pretext of engaging in sport, these
three men conspired to eliminate competition in developing
new oil resources for the world. The mechanism was the "as
is" principle, under which all agreed to divide future markets
among themselves according to the shares of the market they
held in 1928. This meant that there would be no advantage
in "destructive competition," as the companies put it, among
themselves for new oil fields: whatever advantage one company
received would be shared proportionally by the others. In
a separate "pooling" accord, the three companies also agreed
to share their oil tankers, refineries, pipelines, and marketing
facilities with each other. As the membership of the cartel
expanded to include the other major companies, it became
known as the Seven Sisters. The cartel controlled oil production,
refining, transportation, and sales in almost all areas
of the world except the United States, which had strict
The cartel's principal instrument of
control was local consortiums set up to manage and develop
oil fields in the Middle East, Venezuela, and wherever else
oil was discovered. Each consortium was owned by members
of the Seven Sisters in a ratio determined by the "as is"
principle; each operated as an essentially nonprofit service
entity, producing only enough oil to meet the requirements
of its owners. To assure that supply never exceeded the
demand for oil, the partners submitted "programs" specifying
the oil they needed for five years, and the consortium set
its exploration and development programs according to these
requisites. If less oil was required by the oil companies,
the consortiums would close down wells; or, if required
by the country's law to drill for oil (as in Iraq), would
drill in areas they knew would not yield any. The system
proved so successful that by 1970 more than 90 percent of
the world's exportable oil was being produced by consortiums
in Iran, Iraq, Saudi Arabia, Kuwait, the United Arab Emirates,
and almost every other oil-rich area.
From its refineries, tankers, and loading
platforms, the Seven Sisters cartel had complete knowledge
of all facets of the oil market. It also had the power to
shut down entire nations that interfered with its concessions:
when Mohammed Mossadegh, the prime minister of Iran, nationalized
the country's oil industry, in 1951, the cartel denied Iran
use of its refineries and tankers for two years, nearly
bankrupting the country. Through its network of consortiums,
the cartel had absolute control over how much oil was produced
The strains that led to the breakup
of the Seven Sisters cartel proceeded from a single issue:
the division of profits between the international oil companies
and the countries from whose territory the oil gushed. Until
1971, the cartel's consortiums gave the countries a set
percentage~ 50 percent in most cases~ of an arbitrary price,
called the "posted price," that the oil companies paid for
each barrel. If an independent oil company attempted to
buy oil, it would have to pay a much higher, "third-party"
price. It was, of course, in the interest of the oil cartel
to keep its posted price as low as possible, and make its
profits selling refined oil. In 1970, for example, the posted
price was $1.80, as it had been, with minor fluctuations,
for twenty years; consumers in Western Europe paid the equivalent
of $11 to $13 a barrel for refined oil.
The delicate balance that the cartel
had maintained in the world export market for a half-century
was irreversibly upset in the late 1960s by the unexpected
decline in oil production in the Western Hemisphere. The
United States, which had been almost self-sufficient in
oil, became a significant importer of Middle Eastern oil.
As the scramble for the available supply intensified, it
became evident that prices would be forced inexorably upward.
With prices for gasoline, heating oil, jet fuel, and other
refined products rising in Europe, the countries that produced
oil-notably Saudi Arabia, Iraq, Iran, and Libya-were not
content with their share of the fixed posted prices; instead,
they demanded at least part of the coming windfall.
The first cracks in the cartel's control
came in 1970 in Libya, the one major exporter that had granted
concessions to independent companies outside the purview
of the consortiums. Under the revolutionary leadership of
Colonel Qaddafi, Libya threatened to nationalize the independent
companies unless they increased Libya's share. Eventually,
the largest independent, Armand Hammer's Occidental Petroleum,
acquiesced to Qaddafi's demands. Then Saudi Arabia, Iraq,
Iran, and other producers in the Persian Gulf demanded that
the consortium, grant them the same terns Libya had obtained.
When the cartel acceded to these demands, Libya put pressure
again oil the oil companies. and the cartel found itself
caught in a ratchet between Libya and the Persian Gulf producers.
both demanding more favorable terms. To solve this problem,
the oil companies devised a strategy to force the oil-producing
comities to negotiate as a single bloc. Because some of
the producers were bitter rivals who refused to bargain
together, the cartel sought a multinational organization
under whose auspices they could negociate with the oil companies.
In January of 1971. the cartel chose a small Vienna-based
group, with a staff of nine, whose existence it had ignored
for the past eleven years--OPEC.
A letter signed by the oil companies
in the cartel began: "We wish to place before OPEC and its
member countries the following proposal. . . "