OPEC vs US (Part I): The Early Clash of the Titans

OPEC vs US: Where it all began?

The year 1960 is marked with the history of OPEC when in September, five countries – Iran, Kuwait, Iraq, Venezuela and Saudi Arabia – conceptualised the formation of a union in the form of OPEC (Organization of Petroleum Exporting Countries). It was the start of a new age and era in the oil market.

They [the union] declared that the organization be open to “any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of Member Countries, may become a Full Member of the Organization, if accepted by a majority of three-fourths of Full Members, including the concurring votes of all Founder Members” in order to expand its member strength. But not many are aware of what led to OPEC’s formation.

What led to the formation of such a union?

OPEC was initially formed due to enforcement of import quotas by the U.S. on oil. The then American government enforced a program in 1959 that limited the permissible quantity of import of crude oil and refined products to the country. The program called Mandatory Oil Import Program (MOIP) discriminated against the Persian Gulf nations and Venezuela and gave preference to oil from Mexico and Canada. This partiality led to depression in the prices of oil of the disadvantageous nations thereby harming their economies. This disparity resulted in the coming together of four Persian Gulf nations (Iran, Iraq, Kuwait, and Saudi Arabia) and Venezuela to form OPEC for the purpose of obtaining higher prices for crude oil and creating a space for equal participation against the hegemony of US.

In those days, the control of the oil market was in the hands of seven major oil companies (known as the “Seven Sisters”), all belonging to the developed world, with about 85% of global oil production. OPEC’s primary motive was to reclaim the oil resources of the developing nations in order to benefit their economic development in the interest of their citizens.

And began the rivalry

It [the cause of rivalry] began in the early 70s when OPEC started bending its prices. A larger share of profits for the oil extracted from the OPEC nations was demanded from the seven companies. The largest economic hiccup for the United States was heard in 1973 which launched the rivalry between OPEC and US. October 6, 1973, witnessed the Middle Eastern war of Syria and Egypt versus Israel – The Yom Kippur War. The US came into the picture with a helping hand to not let Israel collapse under the oppression of Egypt and Syria. Israel, in the desperate situation it was, fought back with the help of U.S. airlift and some assistance from Netherlands and Denmark. The then Secretary of State, Henry Kissinger worked towards ensuring the airlift of U.S. armament to back-footed Israel, which was a pivotal moment in the war when Soviet Union didn’t get along with the U.S. to negotiate an end to the war until Arab coalition began to lose its ground. By mid-October, the increased tension between the Arab and Israel gave birth to a decision that cost not just Israel but its allies more than they expected. The control of oil prices was then used as a political weapon by OPEC against the foes. Eventually, an oil embargo was placed on the U.S. and the Netherlands as the OPEC nations became highly entangled in the dispute. Not only did that lead to an increase in prices but also was the cause of oil shortages in the United States and throughout Western Europe. The series of events quadrupled the oil prices, resulting in a crucial energy crisis in Europe and the U.S.

At last, the embargo against the U.S. was lifted in March 1974 when Henry Kissinger negotiated military disengagement agreement between Syria and Israel dissolving the disturbing matter as a part of his “shuttle diplomacy” missions. However, that did not stop oil prices from rising. The oil production was cut several times in the 70s by OPEC and by the 80s; prices had shot up by 10 times as compared to 1973. All was going well for OPEC till the early 80s.

Then situations: What shaped the present the way it is?

Be it the disintegration of the Soviet Union in 1991 that disrupted Russia’s production for several years or the Asian economic crisis which led to a fall in demand, there have been several instances that have benefited OPEC and helped it control oil prices in an advantageous manner. The organization has been able to maintain a rate of production that favours it but its exclusive control over the oil prices could easily slip into danger.

Clearly, in this complex equation, the price of oil isn’t just under the control of its demand and supply. Organizations and nations those have strong oil ties and resources; hold a monopoly of controlling its prices and that is the most important element. The 70’s and 80’s may have been the golden time for OPEC but recent events prove that this pricing power is slowly shifting in the hands of the United States.

Click here to visit our next segment, which explores how the tussle between these two bodies has influenced world oil prices and how the market is progressing in the contemporary times due to this rift in the past.