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OPEC hd originally been established
in Baghdad on September 10, 1960, as an intergovernmental
group to study posted oil prices. Its five founding members
were Saudi Arabia, Venezuela, Iran, Kuwait, and Iraq. During
its first six years, which went virtually unnoticed in the
press, OPEC housed itself in Geneva and opened an "information
office," which commissioned occasional studies on prices.
It also admitted three new rnembers-Qatar, Indonesia and
Libya. In 1966, it moved its office to Vienna because tho
organization was offered diplomatic status there for its
staff. Its main activity involved issuing proclamations
declaring "solidarity" with the escalating demands
of' the more rebellious oil producers, notably Libya and
Algeria, which joined in 1969. The proposal to serve as
a negotiating umbrella for the oil-producing countries was
accepted by OPEC, as Henry Kissinger notes "with a vengeance."
In OPEC, the oil companies, found not
only a convenient device to bring together feuding states
but also a highly visible foe they could blame for the impending
rise in oil prices. To negotiate as a single force with
this new monolith, the oil companies obtained ail antitrust
exemption for themselves from the Justice Department. OPEC
was, ironically, finally by the real cartel.
Initially, the oil companies' OPEC strategy
was successful. It produced the Teheran Agreement, in which
the producing states, in return for a modest rise in the
posted price to $2.18 a barrel and some favorable revisions
in the concession term, accepted a five-year accord that
would freeze oil prices. This OPEC agreement lasted, however,
only months. Each country, ignoring the agreement, insisted
that it had sovereignty over its oil prices. The "five-year"
Tehran pact disintegrated into a free--for-all, and, one
by one, the consortiums were nationalized.
Whatever hope the old cartel had of
reasserting control over the oil producing nations ended
on Yom Kippur of 1973, with the Egyptian invasion of the
Sinai. The renewed war in the Middle East caused an oil-buying
frenzy in Europe and Japan, as nations fought to build up
their reserves of crude oil. Saudi Arabia and other oil
producers adopted a policy of charging whatever the freight
would bear. Within weeks, the posted price for crude had
more than doubled, to,$5.60 a barrel. No OPEC control was
involved: it was a war that permitted individual nations
to raise their prices.
Another price explosion followed the
announcement by Saudi Arabia and other Arab states, in October
of 1973, that they were cutting back oil their oil production
and embargoing shipments of oil to the United States. This
cutback did not result from any OPEC decision, either. Indeed,
many OPEC states, including Iran. Indonesia, Venezuela,
Ecuador, and Gabon, actually increased production (and even
a few Arab states in OPEC, notably Iraq and Algeria, did
not reduce their production). It was almost exclusively
an initiative of Saudi Arabia. Moreover, the Saudi decision
to shut down 10 percent of the country~s oil production
was not based entirely,on considerations of the plight of
the Arabs. The Senate Subcommittee oil Multinational Corporations
ascertained from testimony of American engineers who were
responsible for operating the Saudi fields in 1971) that
a 40 percent cutback in the giant Ghawar field was required
for the installation of water injection equipment. If it
had not made these cutbacks, the entire reservoir of oil
would have been jeopardized. Jerome Levinson, the general
counsel of the committee, writing under the name Peter Achnacarry,
stated: ". . . the embargo saved Saudi Arabia from the embarrassment
of having to explain supply shortages resulting from technical
problems." By cloaking the cutback in a political purpose,
the Saudis were able to induce other Arab producers, both
inside and outside of OPEC, to join them.
In the wild price spiral that followed
the Saudi shutdown, the official OPEC price was completely
disregarded by other members. Iran and Qatar held auctions
to determine how high they could raise prices. At its subsequent
meetings, OPEC could do no more than ratify the prices that
had already been established by a panicked market.
Conversely, when oil prices began to
decline in 1975, because of the world recession, OPEC found
itself powerless to stop its members from undercutting each
other and competing for sales. Despite OPECs price declarations,
the real price of oil declined by more than 25 percent between
1975 and 1978. The decline was reversed, not by any actions
of OPEC but by another series of events in the Persian Gulf:
the revolt against the Shah in Iran; a brief rebellion in
Saudi Arabia; Iraq's invasion of Iran. In a matter of months,
some 5 or 6 million barrels a day of Persian Gulf oil vanished
from the export market. In 1979, importers feverishly bid
up the remaining supply for their strategic reserves until
prices reached $35 a barrel.
Throughout this roller coaster of falling
and soaring prices, OPEC demonstrated little ability to
affect or even moderate the actions of its members. Price
agreements were totally ignored, and the idea of regulating
oil production was pre-emptively rejected. In a comprehensive
study of OPEC prices, Walter J. Mead, an economist at the
University of California, found that "price and output policies
[of members] appear to be determined independently of OPEC
policy" He concluded that OPEC could not be considered a
cartel in the light of this data, because "the essential
ingredient to an effective cartel, coordinated control over
output, is totally lacking." OPEC merely took credit for
the results of current events.
Whereas OPEC may have proved to be no
more than a paper cartel, one nation,Saudi Arabia, succeeded
in altering the market by dramatically changing the output
from its fields. After all, it was Saudi Arabia, not OPEC,
that shut off oil during the Yom Kippur War. It was also
Saudi Arabia that, without even consulting OPEC, arbitrarily
reduced production in the midst of the Iranian revolt. And
it was Saudi Arabia that later flooded the market to force
other OPEC members to conform to its pricing policies. Yet,
even though Saudi Arabia was the real manager of the world
oil supply, statesmen preferred to blame an almost nonexistent
organization-OPEC.
In July of 1979, President Jimmy Carter
received a memorandum from his chief domestic adviser, Stuart
Eizenstat, suggesting that public attention be focused on
OPEC. Specifically, it counseled that "with strong steps
we can mobilize the nation around a real crisis with a clear
enemy-OPEC." Ignoring the determining role Saudi Arabia
played in manipulating the supply of oil, Carter adopted
the general strategy of blaming OPEC for the world's ills.
Carter said, "I don't see how the rest of the world can
sit back in a quiescent state and accept unrestrained and
unwarranted increases in OPEC oil prices." Then, after castigating
OPEC in a nationwide address, he read from his notebook
a chilling assessment: "Our neck is stretched over the fence
and OPEC has the knife." Carter gave this enemy a quality
of omnipotence several months later, when he said that OPEC
"has now become such an institutionalized structure that
it would be very doubtful that anyone could break it down."
OPEC was turned into an undefeatable foe.
OPEC made an especially convenient "clear
enemy" precisely because it hardily existed. If a real country
were chosen for this role, there would be real consequences.
Consider, for example, what would have happened if Carter
had substituted "Saudi Arabia" for "OPEC" in his denunciations.
He would have to have depicted Saudi Arabia holding a knife
to America's outstretched neck, an image inconsistent with
continued military aid to that country. OPEC, on the other
hand, with which the United States had neither trade nor
foreign relations, provided an ideal diversion from reality.
It also yielded a four-letter word for the press to use
in headlines. Oil companies could put the blame for gas
lines and soaring prices on OPEC, with which they had no
commercial relations, without offending the countries on
which they depended for supplies. OPEC served an even more
important purpose for the oil-exporting nations. It gave
powerless nations, which had the means neither to operate
their oil fields nor to defend themselves, a dazzling mask.
Specifically, for Saudi Arabia, which produces almost half
of OPECs oil, it provided international camouflage for its
oil policy. Just as the United States used the OAS as a
mask for the embargo on goods shipped to Cuba in the 1960s,
and the Soviet Union used the Warsaw Pact as a mask for
intervention in Czechoslovakia in 1968, Saudi Arabia used
OPEC to obscure its manipulation of the oil market. Such
diversionary tactics were especially important to Saudi
Arabia, since in 1973 its oil fields were almost entirely
in the hands of American technicians and engineers, and
its army, fewer than 3,000 men located at bases 1,000 miles
away from the oil fields, was hardly in a position to defend
the fields.
The competition within OPEC for shares
of the oil market has been greatly exacerbated in recent
years by the loss of nearly one third of the world market
to interlopers such as Mexico, Great Britain, Norway, Malaysia,
Russia, and Egypt. In 1973, when OPEC began its thundering
rise to eminence, its members produced almost all the exportable
oil in the world. In 1983, non-OPEC nations produce about
13 million barrels a Day, equivalent to nearly two thirds
of OPEC's total. Mexico, which produces 2.9 million barrels
a day, will export more oil than any OPEC country except
Saudi Arabia; and Great Britain and Norway produce 2.7 million
barrels a day from North Sea fields. As the available portion
of the market shrinks, OPEC nations, many of whom are desperate
for revenues, can compete only by lowering prices. As prices
continued to slip day by day, it became clear to all concerned
that OPEC could no longer even pretend to command prices
to rise with any effect.
For nearly a decade, the OPEC mask has
permitted Saudi Arabia to set prices for the world without
having to take direct responsibility for its actions. As
prices continue to fall, however, the facade no longer hides
the bitter rivalries among members.. The paradoxical question
"What are we fighting about, since we want the same thing?"
applies to their dilemma. The answer is that they are fighting
precisely because each wants a larger share of the world
oil market. If, how ever, any one member succeeds in enlarging
its share, it will be at the expense of another member.
The OPEC members are, and will always be, competitors, not
allies. While they may try to hide their fighting from outsiders
by means of unenforceable paper agreements, it will persist
until it is resolved by a price war.
Oil prices have risen twenty fold over
the past decade. Part of this dramatic increase has been
the result of the free market's attempt to reconcile dwindling
production in America with expanding demand. Another part
was. the result of the fears generated by wars in the Persian
Gulf, which in turn led to frantic efforts to hoard oil
in anticipation of an uncertain future. And partly the result
of the manipulations of Saudi Arabia to cut back production
at moments of world crisis. OPEC, though important as a
mask, was no more than a convenient diversion that distracted
public attention from the real causes of the oil crisis.
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