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Organization of Petroleum Exporting Countries (OPEC)

ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES (OPEC)

group formed in 1960 to protect economic interests of oil-exporting countries.

In the early 1950s, international oil companies (IOCs) developed the posted price system to help host governments estimate oil revenues in advance. Posted prices were accounting devices that host governments used to calculate the amount of taxes the companies would pay under industrywide fifty-fifty profit-sharing agreements. Despite normal fluctuations in the real prices at which crude oil was traded, posted prices were not adjusted, and fixed posted prices became an industry norm. When competitive pressures forced the IOCs to reduce posted prices unilaterally in February 1959, an immediate outcry arose from the affected host governments.


OPEC's Founding

The first Arab Oil Congress met later that year. Delegates from oil-exporting countries came to plan concerted action against the oil companies. Structural differences among national oil industries made coordination among these countries difficult technically. Conflicts of interest over investment and production shares made coordination difficult politically. Competition between Venezuela and Middle Eastern exporters was heightened by the 1959 posted price cuts. British Petroleum set lower prices in parts of the Middle East than in Venezuela in hope of breaking the As-Is Agreement, a mediated connection between world oil prices and the U.S. market. Venezuelan oil thereby became even less competitive, requiring further downward price adjustments and convincing oil exporters that their responses to the companies had to be closely coordinated.

Political conflicts ended the Oil Consultation Commission, the first producer attempt to institutionalize coordination. But when the IOCs imposed yet another round of price cuts in August 1960, five oil-exporting countries set aside their political differences to salvage their economic interests. Venezuela, Saudi Arabia, Iran, Iraq, and Kuwait formed the Organization of Petroleum Exporting Countries (OPEC) in September 1960. OPEC's first resolutions included calls to restore posted prices to their pre-February 1959 levels and to stabilize oil prices by regulating production.

The U.S. government refused to recognize OPEC, forbade U.S. oil companies to negotiate with it, and imposed trade sanctions on OPEC members to discourage other countries from joining. This suited the IOCs, which saw an advantage in continuing their accustomed practice of dealing with host governments one at a time. OPEC responded creatively, developing joint negotiating positions with the understanding that any member able to gain an additional advantage on its own should do so. Any gains would constitute a new floor for bargaining in the next round. During its first ten years, this "leapfrogging" earned OPEC members incremental gains in oil revenues, which both increased OPEC's international stature and attracted new members to the organization.

Perhaps OPEC's most significant contribution to the oil revolution was its support and implementation of "participation," the gradual nationalization of foreign-owned oil properties. Most members did not follow the participation strategy to the letter, but years of discussion provided an opportunity to prepare for the responsibilities that would come when they became full owners of their oil industries. This accomplishment was overshadowed, however, by OPEC's successful utilization of leapfrogging to achieve rapid oil price increases, by Libya in 1970 and afterward by alternating pressure exerted first by oil-exporting countries in the Mediterranean and then in the Persian Gulf. This set the stage for OPEC's takeover of crude oil pricing when the 1973 ArabIsrael War, with its well-designed Arab oil embargo, provided the opportunity.

Pricing Strategies

OPEC's success in taking over oil pricing created new problems for the group. Oil-importing countries, led by the United States, demonized OPEC as the primary cause of worldwide economic decline. Inside OPEC, structural differences among member industries led to disagreements over pricing strategies. Low-price-preference members such as Saudi Arabia, with small populations and huge oil reserves, favored moderate oil prices to discourage consumers from seeking alternative fuels. High-price-preference members like Algeria, with large populations, wanted high prices so they could pay for ambitious development programs, while their small reserves offered no incentive to support pricing policies that would sustain the long-term attractiveness of oil as a fuel. Some members with large reserves, like Iran and Libya, also favored high prices. Iran had a large population and an ambitious development program, but Libya's preference was politically motivated by Libya's desire to assert its autonomy among its OPEC peers as well as its independence from western domination.

Price positions could be flexible, however. In 1978, the threat of revolution pushed Mohammad Reza Shah Pahlavi of Iran to seek allies among his neighbors. Iran joined most of the Arab gulf countries in pushing for the adoption of a long-range moderate pricing strategy to replace what had, until then, been an ad hoc method of setting oil prices. The new system became obsolete almost before it was agreed upon, however; it was superseded by pressures that doubled oil prices in one year thanks to panic buying during the Iranian Revolution. Predictably, oil demand fell, but the availability of new, non-OPEC supplies from the North Sea and elsewhere allowed major importers to shift their purchases, making OPEC the marginal supplier of crude oil to the world market.

Market weakness in the early 1980s caused OPEC to focus on oil production sharing as a strategy for controlling oil prices by regulating crude supply. A voluntary production-sharing plan was launched in 1982 but, as had happened to the voluntary oil import quota in the United States during the 1950s, producers ignored it. A mandatory quota system was introduced in March 1983, and crude prices were reduced for the first time since OPEC had assumed its price-setting role in the hope of stimulating consumer demand. An Austrian accounting firm was hired to monitor member production in order to discourage cheating on the quotas.

The quota system had many flaws. Even small producers were required to accept a quota, prompting Ecuador to leave OPEC in 1993 to escape its quota obligations. Saudi Arabia, OPEC's largest producer, refused to accept a formal quota that it said was an unacceptable infringement on its sovereignty. This marginalized Saudi production within OPEC as crude from many sources flooded the market and total demand for OPEC oil declined. Without a quota and its implied entitlement to produce a defined share of OPEC crude, the Saudis had to accept the informal role of swing producer, one which would vary its production to satisfy market demand remaining after other producers had supplied their quota amounts. As OPEC's swing producer, however, Saudi Arabia would have to absorb more than a proportional share of demand reduction. This already unpleasant situation would be complicated in the Saudi case by its heavy dependence on associated natural gas, which led to shortages of fuel for power generation when oil production there fell to below 3 million barrels per day in mid-1985. Shortly afterward, Saudi Arabia decided to produce oil with only its own needs in mind. Global supplies burgeoned and oil prices plummeted, dipping below $10 U.S. per barrel in June 1986. Although oil prices recovered, they have yet to return to pre-1985 highs.


Political Divisions

Political conflicts continued to divide OPEC members during this time. The first Gulf War, between Iran and Iraq (19801988), so split the organization that OPEC could not agree on a new secretary-general when it was Iran's turn to nominate one of its nationals. An assistant secretary-general, Fadhil al-Chalabi of Iraq, served as acting secretary-general from 1983 to 1988. Hostility among members during this period made meetings acrimonious and reduced the usefulness of OPEC as a forum for coordinating policy.

The end of the IranIraq War provided an opportunity to mend intra-OPEC relations, but the second Gulf War, which began when Iraq invaded Kuwait in 1990, brought new turmoil to oil markets and to OPEC itself. Before Iraq invaded Kuwait, world oil prices were depressed and virtually every OPEC member with excess production capacity was producing over its quota. Unfortunately for Kuwait, it was the only country small enough and close enough to suffer Iraq's wrath directly. After Kuwait was liberated in February 1991, U.N. sanctions against Iraq, imposed in retaliation for the invasion, ended legal oil exports from Iraq. Starting in December 1996, Iraqi income from smuggled oil was augmented by earnings from the U.N. Oil-for-Food Program, which supervised the marketing of some 3.4 billion barrels of Iraqi crude between the start of the program and March 2003, when the United States and Britain invaded Iraq. The United Nations also ensured that the Iraqi share of oil-for-food income was spent only to meet humanitarian needs. The rest went for war reparations (25 percent after December 2000, 30 percent before), the cost of U.N. weapons inspections (0.8 percent), and administrative and operational costs for the program (2.2 percent).

Overproduction by OPEC members remains a problem during periods of ample crude supplies, but political turmoil and consequent supply disruptions in member countries, from Venezuela and Nigeria to Iraq and Indonesia, have masked the problem of excess capacity by creating or even merely threatening war-related shortages. Yet members able to do so are expanding production capacity, which will add to conflict over production ceilings and quota allocations as growing supplies from Iraq come to the market.

Overall, OPEC's difficulties in managing and stabilizing the international oil market continue to be beyond member control. Following the collapse of the Soviet Union, the new Central Asian countries offered attractive terms to potential investors in oil and gas exploration and development. Now rising production from this region adds to pressures on the price structure. The need for capital investment is another axis of competition pitting OPEC against Central Asian and non-OPEC African producers, leading many OPEC members to reconsider their positions on nationalization. IOC operations are expanding in virtually every OPEC nation, while the occupation of Iraq could leave a privatized Iraqi oil industry as one of its legacies.

OPEC's gravest failure has been its concentration on oil market conditions rather than on the economy as such. Consequently, it has failed to develop strategies to prepare members for a post-oil world. As long as prices are low and supplies seem secure, oil will remain a competitive fuel in global markets and the deep restructuring necessary to wean member economies from their addiction to oil revenues can be avoided. Yet whether post-Saddam Iraq will be reintegrated into OPEC or not, relying on hydrocarbon revenues as the mainstay of their economies leaves members vulnerable not only to the day-to-day vagaries of the market but also to the impact of long-term structural change. The almost exclusive concentration of governments, press, and public on oil pricing actually prevents OPEC from devoting significant intellectual and financial resources to other aspects of industry development, including research on alternative sources of energy for export and domestic use. Kuwait's early research into solar power, for example, was quickly abandoned as its oil reserves expanded and reliance on oil revenues seemed less risky than devoting substantial resources to bringing a competing energy source to markets where it already had an advantage. Yet with concerns about pollution and global climate change encouraging consumers to shift out of hydrocarbons, OPEC members' acute dependence on oil and gas revenues leaves their economic security as vulnerable to changes in market structure as they are to political conflict.

see also as-is agreement; oil embargo (19731974); petroleum, oil, and natural gas.


Bibliography


Mikdashi, Zuhayr. The Community of Oil Exporting Countries: A Study in Government Cooperation. Ithaca, NY: Cornell University Press, 1972.

Mitchell, John, et al. The New Economy of Oil: Impacts on Business, Geopolitics, and Society. London: Earthscan, 2001.

Skeet, Ian. OPEC: Twenty-Five Years of Prices and Politics. Cambridge, U.K.: Cambridge University Press, 1989.

Tétreault, Mary Ann. Revolution in the World Petroleum Market. Westport, CT: Quorum Books, 1985.

Weisberg, Richard C. The Politics of Crude Oil Pricing in the Middle East, 19701975. Berkeley: University of California, 1977.

mary ann tÉtreault

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Organization of Petroleum Exporting Countries (OPEC)

Organization of Petroleum Exporting Countries (OPEC)

BIBLIOGRAPHY

Throughout its history, the Organization of Petroleum Exporting Countries (OPEC) has indirectly influenced oil prices in response to sharp volume fluctuations resulting from geopolitical tensions. However, as of 2006 OPECs effect on the market, which affords member states political leverage, has changed dramatically relative to the late twentieth century, because member states now have far less excess production capacity (see Figure 1).

OPEC had more excess oil capacity in the 1980s, when crude oil prices reached close to $80 a barrel, than it did by 2006, during which prices reached as high as $75 a barrel (Figure 2). Minimal surplus capacity limits OPECs ability to soften the blow of the high price of oil via increasing supply to meet the immense demand.

The Organization consists of eleven developing nations whose economies rely heavily on oil export revenues. OPEC seeks to maintain stable international oil prices via quotas on oil production and pursue petroleum policies that serve the national and collective interests of its members. In 2002 OPEC agreed that a fair price on crude oil should be set between $22 and $28 a barrel. Three years later, member states agreed to cap their crude oil production at 28 million barrels per day (MBPD). By 2006 Qatari Energy Minister Abdullah Attiyah maintained that a fair market price for crude oil should be in the range of $50 to $55 a barrel. However, during the

same year, crude oil prices reached over $70 a barrel, and some OPEC countries often surpassed their production quotas by 2 MBPD.

Prior to OPEC, the so-called Seven Sister Companies dominated the crude oil market. Those seven companies included Esso (which later became Exxon, and is now known as Exxon Mobil), the Anglo-Iranian (previously Anglo-Persian) Oil Company (later British Petroleum, and currently known as BP), Royal Dutch Shell, Gulf Oil (most of which became a part of what is today known as Chevron), Standard Oil of New York (which became Mobil, and later merged with Exxon), Texaco, and Standard Oil of California (now part of Chevron) (see Table 1). Crude oil prices remained stable, with a range from $2.50 to $3.00 a barrel during the late 1940s through the 1960s, or $21 to $22 a barrel when adjusted to 2006 dollars.

The Seven Sister Companies remained dominant by restricting oil output and minimizing internal conflict. But competition from other world suppliers would eventually break up their control over the international oil market.

OPEC was created at the Baghdad Conference on September 1014, 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Eight more countries later joined the OrganizationQatar (1961), Indonesia (1962), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), and Gabon (1975). OPEC set up a secretariat in Geneva, Switzerland, which moved to Vienna in 1965. The OPEC Statute states that countries that apply for membership must maintain a substantial net export of crude petroleum and have fundamentally similar interests to those of Member Countries (OPEC Statute, p. 3). The formation of OPEC resulted in a shift in influence over the oil market away from the Seven Sister Companies toward OPEC.

OPECs dominance became fully evident during the 1970s as its Arab member states limited oil shipments and cut production at a time when demand was high, which resulted in a spike in oil prices. The Arab countries imposed an embargo on oil shipments to the United States

Table 1
Shares in the international market of major oil companies (1946)
Seven Sister Companies Production (%)
SOURCE: Moran 1987, p. 585.
Esso28
Anglo-Iranian Oil Company22
Royal Dutch Shell21
Gulf Oil9
Standard Oil of New York5
Texaco3
Standard Oil of California2
Total 90

and any other country that condemned Egypt and Syrias attack on Israel in 1973, which was significant considering that OPEC exports accounted for 85 percent of world oil trade at the time (Mikdashi 1974, p. 4). According to data from the Middle East Quarterly and WTRG Economics, the nominal price of oil escalated by more than 300 percent at the end of 1974 compared to prices a decade earlier. OPEC validated its authority and gained political leverage by reducing oil supply to the world market.

During this same period, Libya became a more prominent member of OPEC. Libya had undergone a regime change a few years earlier as the result of a military coup led by Colonel Muammar al Qadhafi, and had officially become known as the Great Socialist Peoples Libyan Arab Jamahiriya. Qadhafi encouraged Arab-nationalist and socialist policies. Many analysts have credited the new Libyan regime with shaping OPECs measures to increase oil prices, enforce embargoes, and gain control of oil production (Anderson 1999, p. 4). For example, according to a 1973 Time Magazine article, Qadhafi took advantage of the high global demand for oil by forcing oil companies to increase Libyas oil royalties over 100 percent from $1.1 billion in 1969 to $2.07 billion in 1971 (The Arab World, p. 2). Libyas influence played a partial role in OPECs enhanced political strength on the world stage.

OPECs reaction to the scarcity of oil supply resulting from the Iranian Revolution in 1979 and the Iraqi invasion of Iran in 1980 further illustrated its strength. The new regime in Iran, which was the second largest OPEC oil exporter following Saudi Arabia, curbed oil exports to the world market driving prices upward. By 1979 Iran produced less than 1 MBPD, which was down from over 6 MBPD a year earlier (Iran and Oil Prices, Washington Times, January 17, 2006; Phillips 1979, pp. 12). Iraqs invasion of Iran in 1980 sparked a reduction in the combined production of both countries to only 1 MBPD and a jump in prices from about $14 per barrel by early 1979 ($43.48 in 2006 dollars), to $35 per barrel by 1981 ($77.97 in 2006 dollars), according to WTRG Economics. Other countries within OPEC were able to offset Iran and Iraqs lower oil production by increasing their output while also maintaining a substantial amount of excess capacity. Saudi Arabia alone utilized three-quarters of its production capacity in order to make up for reduced output. Additional output from the other OPEC members helped crude oil prices to fall.

However, increased OPEC crude oil supply resulted in an oil price collapse by the mid-1980s. A Brookings Institution report entitled Lessons from the 1986 Oil Collapse (1986) notes that Saudi Arabia increased its market share after many of its OPEC partners failed to abide by their production quotas, thus oversupplying the market. Consequently, in 1986 crude oil prices declined from over $20 to as low as $12 a barrel ($22.17 in 2006 dollars). Lack of cohesion among member states presented a challenge to the effectiveness of OPEC during this period.

By the early 1990s, the price of oil began to creep upward with the Iraqi invasion of Kuwait and the resultant threat of a Persian Gulf war. Saudi Arabia possessed the most oil reserves regionally and internationally (see Figure 3).

Saudi Arabia increased production by more than 3 MBPD during the Gulf War of 1991 (Lieber 1992, p. 155). This increased output to offset shortages created by the Gulf War of 1991 resulted in the stabilization of prices shortly after.

As the twenty-first century began, many geopolitical tensions further limited OPECs oil supply and raised prices. The 2002 strike by state-owned Petroleos de Venezuela caused Venezuelan oil production to plunge so low that Venezuela still has not been able to regain its peak output capacity of 3.5 MBPD. In addition, the international military action in Iraq in 2003 caused Iraqi output to plummet to less than 1.5 MBPD. In 2006 Irans threat to slash oil exports during its dispute with the United Nations over its nuclear missile program kept oil prices high at over $70 a barrel.

OPECs ability to offset price increases in the early part of the twenty-first century pales in comparison to its clout during political conflicts thirty years earlier because there is far less additional oil supply in OPEC countries, including Saudi Arabia. The U.S. Energy Information Administration reported Saudi Arabias excess capacity as being around 1.3 to 1.8 MBPD in May of 2006. Other OPEC members have zero surplus capacity in a world that consumes around 80 MBPD (see Figure 4). By the first half of 2006, oil prices jumped from $50 a barrel to a little more than $70 a barrel. Although the price per barrel is a few dollars shy of that in 1981 ($77.97 in 2006 dollars), the peak production capacity of OPEC is far less than that of the early 1980s, thus reducing OPECs ability to manipulate the market.

OPECs impact on the international crude oil market will continue to wane with such a tight supply. High crude oil prices have led to discussions about the possibility of tapping new oil reserves in non-OPEC countries and expanding alternative sources of energy, such as ethanol, in order to meet high demand at a much lower cost.

SEE ALSO Energy; Energy Industry; Energy Sector; Qadhafi, Muammar al

BIBLIOGRAPHY

Alhajji, A. F., and James L. Williams. 2003. The Coming Energy Crisis? WTRG Economics. http://www.wtrg.com/EnergyCrisis/EnergyCrisis.pdf.

Anderson, Frank. 1999. Qadhafis Libya: The Limits of Optimism. Middle East Policy 6 (4): 6879.

Buchbinder, David. 2003. Venezuelas Oil Strike May Be Over, but Industry Faces High Hurdles. Christian Science Monitor, February 19: 7.

Ceasar, Mike. 2002. Venezuelans Hit by Oil Crisis. BBC News. http://news.bbc.co.uk/1/hi/business/1913893.stm.

Energy Information Administration Web site. http://www.eia.doe.gov.

Gately, Dermot, M. A. Adelman, and James M. Griffin. 1986. Lessons from the 1986 Oil Price Collapse. Brookings Papers on Economic Activity 2: 237284.

Kanovsky, Eliyahu. 2003. Oil: Whos Really over a Barrel? Middle East Quarterly 10 (2): 5164.

Kliesen, Kevin L. 2001. Rising Oil Prices and Economic Turmoil: Must They Always Go Hand in Hand? Regional Economist (January): 49.

Kochhar, Kalpana, Sam Ouliaris, and Hossein Samiei. 2005. What Hinders Investment in the Oil Sector? Washington, DC: International Monetary Fund Research Department.

Lieber, Robert J. 1992. Oil and Power after the Gulf War. International Security 17 (1): 155176.

Mikdashi, Zuhayr. 1974. Cooperation among Oil Exporting Countries with Special Reference to Arab Countries: A Political Economy Analysis. International Organization 28 (1): 130.

Moran, Theodore H. 1987. Managing an Oligopoly of Would-Be Sovereigns: The Dynamics of Joint Control and Self-Control in the International Oil Industry Past, Present, and Future. International Organization 41 (4): 575607.

Oil Price History and Analysis. WTRG Economics. http://www.wtrg.com/prices.htm.

OPEC Statute. OPEC Secretariat. http://www.opec.org/library/opec%20statute/pdf/os.pdf.

OPEC Warns of Oil Crisis. 2002. BBC News. http://news.bbc.co.uk/1/hi/business/1917522.stm.

Organization of Petroleum Exporting Countries Web site. http://www.opec.org.

Peak Oil News and Message Boards. 2006. Fair Price for Oil Is 50 to 55 Dollars per Barrel: Qatari Minister. http://www.peakoil.com/article16202.html.

Phillips, James A. 1979. The Iranian Oil Crisis. Heritage Foundation. http://new.heritage.org/Research/MiddleEast/bg76.cfm.

Time Magazine. 1973. The Arab World: Oil, Power, and Violence. April 2.

Washington Times. 2006. Iran and Oil Prices. January 17.

Sarita D. Jackson

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OPEC (Organization of Petroleum Exporting Countries)

OPEC (Organization of Petroleum Exporting Countries)

JOSEPH PATTERSON HYDER

The Organization of Petroleum Exporting Countries (OPEC) is a coalition of eleven nations that controls over fifty percent of the world's oil and natural gas exports. OPEC members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. OPEC strives to protect the economic interests of participating countries while maintaining a stable petroleum market by establishing production quotas for its member states.

Large Western oil companies controlled and profited from oil production in the Middle East and Africa in the first half of the twentieth century. The oil companies angered the leaders of these oil-rich countries by retaining 65 percent of the profits. OPEC was established in 1960 in order for the oil producing countries to maintain a larger percentage of oil-derived profits.

Although OPEC represented its members in negotiations with the large oil companies, the organization exercised little control over the world oil market until 1973. With inflation spiraling around the world and with increasing oil demands in the United States and Europe, OPEC realized that the stage was set for a major power grab.

Inflation led the Richard M. Nixon administration to place price controls on oil products in March 1973, resulting in increased demand. Faced with oil shortages because of increased demand, Nixon tapped U.S. oil reserves. By autumn 1973, the U.S. had nearly drained its reserves. The United States had become more dependent on oil imports than ever before.

The Yom Kippur War began in October 1973, with the United States and Western Europe supporting Israel over Egyptian and Syrian forces. OPEC, comprised primarily of Middle Eastern countries sympathetic to Egypt and Syria, made a move to seize increased control of the world oil market. OPEC imposed an oil embargo against the United States and increased oil prices in Europe. The price of crude oil doubled in a matter of days, from three U.S. dollars per barrel to over five dollars per barrel. In January 1974, prices reached 11.75 dollars per barrel.

The oil embargo of 19731974 inconvenienced frustrated Americans, who had to modify their lifestyles to accommodate the steep increase in oil prices. The White House encouraged Americans to conserve energy by driving less, carpooling, and turning down thermostats. The Nixon administration responded by extending Daylight Savings Time in the United States, encouraging companies to trim work hours, and pushing Congress to approve construction of the Alaskan Pipeline.

The energy crisis that resulted from the OPEC embargo fueled a worldwide recession. The Dow-Jones lost 45 percent over the next two years. Oil shortages led to long lines at gasoline pumps. When OPEC finally lifted the oil embargo against the U.S. in March 1974, it had established itself as one of the most powerful economic forces in the world.

OPEC's strategy backfired, however, when public and political opinion in the United States and Europe was inflamed. The United States increased its oil production with the completion of the Alaskan Pipeline in 1977. Large American and European oil companies also sought to regain some of their lost influence by increasing oil exploration in non-OPEC countries and offshore. As a result, much of the power that OPEC had wielded over world energy markets was eroding.

For the first several years of the 2000s, OPEC sought a stable oil market by maintaining an average price of $22 to $28 per barrel of crude oil; exerting price controls had become more difficult and less profitable for members. An example of OPEC's increasing ineffectiveness occurred in 2001, when crude oil prices fell by one-third. During the same year, OPEC cut its oil production by over twenty percent.

OPEC has experienced periods of waning effectiveness in the past, but these periods were usually the result of internal disagreements. OPEC's more recent problems stem from the rise of large, non-OPEC oil producing states, such as Russia, Norway, Mexico, Oman, and Angola. In order for OPEC to remain a viable power, it needs the cooperation of these states. Russia, Norway, and Mexico have tended to follow OPEC's lead, but continued support from these states is questionable. Russia has already indicated that it will proceed independently for the fore-seeable future.

Many OPEC members have expressed an unwillingness to limit their oil production and profits if non-OPEC countries continue pumping at full capacity and flooding the market with cheap oil. If OPEC cannot hold sway over these emerging oil-producing states, then the primary reason for the existence of OPEC may eventually be in question.

FURTHER READING:

ELECTRONIC:

Organization of Petroleum Exporting Countries (OPEC). <http://www.opec.org> (May 2003).

SEE ALSO

Indonesia, Intelligence and Security
Iran, Intelligence and Security
Iraq, Intelligence and Security Agencies
Kuwait Oil Fires, Persian Gulf War
Libya, Intelligence and Security
Nigeria, Intelligence and Security
Saudi Arabia, Intelligence and Security

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Organization of Petroleum Exporting Countries

Organization of Petroleum Exporting Countries (OPEC), multinational organization (est. 1960, formally constituted 1961) that coordinates petroleum policies and economic aid among oil-producing nations. Its Board of Governors and board chairperson are elected by member nations; OPEC's headquarters are in Vienna, Austria. Members consist of Algeria, Angola, Ecuador (membership suspended 1992–2007), Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. Indonesia was a member but suspended its membership in 2008. Saudi Arabia has traditionally dominated the organization, owing to its enormous oil reserves; the organization's members produce about 40% of the world's crude oil.

In 1973, as a result of the Arab oil embargo against Western nations who supported Israel during the Yom Kippur War (see Arab-Israeli Wars), OPEC was able to raise oil prices tremendously; the price hike caused inflation in oil-importing nations. Increases ensued from 1975 to 1980. However, as importing countries pursued alternate energy resources, OPEC was forced to lower prices by 1982. Oil prices remained low through most of the 1980s and 90s, with only a temporary hike during the Persian Gulf crisis of 1990–91 (see Persian Gulf War). With the cooperation of non-OPEC oil-exporting nations, OPEC was able to raise prices in 1999 by cutting production. As prices rose above $30 a barrel in early 2000, OPEC members agreed to increase production somewhat, cutting back production again a year later in an attempt to maintain prices. A worldwide economic slowdown caused oil prices to fall to near $20 by late 2001, but cutbacks by OPEC and non-OPEC nations, an economic rebound (including very strong economic growth in China), and the U.S. invasion and occupation of Iraq subsequently caused benchmark prices to rise and stay above $40 in mid-2004. Efforts by OPEC to control prices, however, have generally been less influential than market forces, which in 2008 drove the price of oil to nearly $150 in midyear and down to below $40 the year's end.

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Opec Oil Embargo

OPEC OIL EMBARGO


On October 17, 1973, Arab oil producers declared an embargo that drastically limited the shipment of oil to the United States. These producers, members of a cartel known as the Organization of Petroleum Exporting Countries (OPEC), enforced the embargo in response to the Yom Kippur War between Egypt and Israel. In a gesture of support for Egypt OPEC curtailed oil exportation to countries that supported the Israelis. The cartel later extended the embargo to other countries and oil prices soared worldwide. Accustomed to the influx of ample, inexpensive petroleum from OPEC member countries such as Saudi Arabia, Iraq, Iran, and Kuwait, many nations remained at the mercy of these producers of the valuable natural resource.

In the United States the embargo brought on a crisis of unequaled proportions. Daily shipments of oil from the Middle East dropped from 1.2 million barrels to a scant 19,000 barrels. Motor vehicle owners faced long lines at the service stations, and were forced to pay dearly for gasoline when they finally took their turn at the pump. Between May 1973 and June 1974 the average price of gasoline increased by 43 percent. Perhaps the most dangerous effect of the embargo however was the fear and panic it aroused. U.S. citizens were suddenly faced with the shortage of a resource indispensable to every industrialized nation. The shortage was mainly a matter of perception, since OPEC simply withheld oil and had not run out of it. In fact at the time the United States imported only about a third of the oil it used, relying on domestic production for the majority of its supply. But the embargo proved that every drop counted and that a powerful cartel could bring the world to its knees. Daily hardships such as rising oil prices and rates of inflation made the perceived scarcity of the resource seem very real.

Indeed the United States was consuming resources faster and more voraciously than most other countries. Although it represented only six percent of the world's population in 1973, the United States regularly consumed 33 percent of the world's energy supply. Station wagons and other gas-guzzlers were enjoying their heyday. A positive effect of the embargo was that it prompted conservation efforts throughout the country. President Jimmy Carter (19771981) declared a national speed limit of 55 miles per hour in order to cut back on gasoline consumption (meanwhile, the number of traffic-related deaths dropped considerably during that period). Between September 1973 and February 1974 the average daily use of petroleum dropped by more than six percent. The U.S. government adopted an energy conservation policy that remained in effect until President Ronald Reagan's (19811989) administration discarded it two decades later. The embargo served as a reminder that the world's oil supply was finite and encouraged consumers to use it responsibly, at least for the time being.

OPEC exercised an enormous amount of power during the embargo, which lasted well into 1974. But eventually the crisis hurt the cartel as much as the countries outside of it. The skyrocketing prices and the perceived shortage led to a drop in the overall demand for oil. Countries looked to alternative energy sources such as natural gas, nuclear energy, and coal. Oilproducing countries outside of the Middle East stepped up their pace of production and relied more heavily on their domestic supply.

Unfortunately many of the positive effects of the 1973 crisis, the attempts at energy conservation and the move toward relying more heavily on domestic resources, did not last long enough after the embargo was lifted. Conservation efforts dropped off as memories of long waits at the gas station and inflated prices faded. A new breed of larger, less gas-efficient cars took to the roads in the 1990s when sport-utility vehicles and small trucks gained popularity. In the 20 years following the crisis U.S. dependence on imported oil increased rather than decreased, reaching the 50 percent mark in 1993. In 1998 on the twenty-fifth anniversary of the embargo many analysts pointed to such statistics as indications that a crisis like that of 1973 could happen again. They claimed that the low, stable price of oil was misleading people in the United States into believing that the world's supply of the natural resource was unlimited. Meanwhile the nation continues to consume energy at an extraordinary rate. Whether or not it will take another economic crisis to change such ingrained behavior remains to be seen.

Topic overview

OPEC exercised an enormous amount of power during the embargo, which lasted well into 1974. But eventually the crisis hurt the cartel as much as the countries outside of it. The skyrocketing prices and the perceived shortage led to a drop in the overall demand for oil. Countries looked to alternative energy sources such as natural gas, nuclear energy, and coal.

See also: Embargo, Petroleum Industry


FURTHER READING

Bode, Denise. "Twenty Years After OPEC Oil Embargo, United States at More Risk Than Ever." The Oil Daily, October 18, 1993.

Chalabi, Fadhil J. "OPEC: An Obituary." Foreign Policy, Winter 19971998.

Crow, Patrick. "Remembering the 1973 Oil Embargo." The Oil and Gas Journal, October 18, 1993.

"The Energy Embargo of 1973," [cited May 25, 1999] available from the World Wide Web @ www.nettally.com/palmk/nrgopec.html/.

Feldman, David Lewis. "Revisiting the Energy Crisis: How Far Have We Come." Environment, May 1995.

Foner, Eric, and John A. Garraty, eds. The Reader's Companion to American History. Boston: Houghton Mifflin Co., 1991.

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Organization of Petroleum Exporting Countries

Organization of Petroleum Exporting Countries (OPEC) Intergovernmental organization established in 1960 by many of the world's major oil producing states to safeguard their interests. Its primary purpose is to set production quotas and coordinate prices among the 12 members. It was able to control oil prices in the 1970s, but its influence has waned since then, largely because of internal differences and the emergence of major oil-producing countries outside OPEC. Its headquarters are in Vienna, Austria.

http://www.opec.org

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OPEC

OPEC / ˈōpek/ • abbr. Organization of the Petroleum Exporting Countries.

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OPEC

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OPEC

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OPEC

OPEC (ˈəʊˌpɛk) Organization of Petroleum-Exporting Countries

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