Opec

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OPEC.

ORIGINS AND OBJECTIVES
EUROPEAN PRODUCERS AND OPEC
BIBLIOGRAPHY

The Organization of the Petroleum Exporting Countries (OPEC) is an international producers' cartel whose members' governments coordinate petroleum policies in order to receive the best possible price for the crude oil they export. OPEC nations regard such price coordination as the best means to safeguard their economic and political interests, both individually and collectively. The cartel's operation has had a profound impact on European economies since its founding in Baghdad in September 1960 by the governments of five developing, oil-producing countries: Kuwait, Iraq, Iran, Saudi Arabia, and Venezuela. Eight other developing countries joined later: Qatar (1961), Indonesia (1962), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), and Gabon (1975). (Ecuador and Gabon left the cartel in 1992 and 1994 respectively.) OPEC's connections to Europe have been important to the organization. OPEC's secretariat (headquarters) has always been located in nonaligned European countries, first in Geneva, Switzerland (from September 1960 to September 1965), and then in Vienna, Austria (from September 1965), but OPEC was also founded to serve as a counterweight to the economic dominance of the United States, the United Kingdom, and the Netherlands in the global petroleum industry.

ORIGINS AND OBJECTIVES

In Western Europe, fuel oil replaced coal as the main source of industrial energy between 1945 and 1974, and gasoline usage increased with the spread of automobiles. Western Europe came to rely on petroleum products in ways it had not before World War II and, with few indigenous oil fields (the North Sea fields of Great Britain and Norway are the exceptions), it relied on imported oil to meet its major energy needs. Low crude oil prices, large-capacity supertankers, and the structure of the international oil market encouraged European dependency on imported oil. In 1960 the international oil market was dominated by the purchasing power and oil-field ownership rights of the "Seven Sisters," transnational oil corporations located in the United States (Exxon, Mobil, Texaco, Gulf, and Chevron) and Western Europe (British Petroleum and Royal Dutch Shell), who tried to keep crude oil prices low. OPEC formed in response to this situation and, worried by the fall of the value of the dollar in the early 1970s (all international oil exports were and still are priced in U.S. dollars), which lowered the value of their already low-priced oil exports, OPEC nations fought for more favorable terms of trade for the raw material they exported.

OPEC rose to international prominence in the 1970s and 1980s as some members (e.g., Iraq, Libya, and Saudi Arabia) nationalized their oil industries, and OPEC used its cartel power to raise the price of crude oil on the world market. Most notably, OPEC cut production and refused to sell oil to countries that had supported Israel in its 1973 war with Egypt and Syria, that is, the United States and its allies in Western Europe, especially the Netherlands. This producer embargo caused a fourfold increase in the price of oil from October 1973 to March 1974 and seriously disrupted the developed economies of Europe and North America and the developing economies of non–oil producing countries in South America, Asia, and Africa. Of the nine members of the European Economic Community (EEC), only the Dutch faced a complete embargo because of support for the United States and Israel, while the United Kingdom and France received almost uninterrupted supplies, and the other members experienced only partial cutbacks.

The rise in oil prices had a much greater impact in Europe than the embargo itself. Not only was the traditional flow of capital reversed when massive amounts of "Petrodollars" now moved from the industrial nations of Europe and North America to Saudi Arabia, Kuwait, Iran, and the other oil-producing countries, but OPEC countries began exporting capital back to Europe and the United States. Petrodollars funded much of the United States, French, and British national debt and led to OPEC nations' investment in European firms, urban real estate, and vacation homes. A striking example of this new relationship was the Iranian state's purchase of 25 percent of the stock of the German steel firm Krupp for $75 million in 1974.

The aftershocks of the 1973 oil crisis rocked the world's economy, as high inflation and a series of recessions (dubbed "stagflation") persisted until the early 1980s. High oil prices continued until 1986, when they fell back to pre-1973 levels only to rise again slowly thereafter. The era of cheap energy was over, and the cost of living rose 32 percent to 46 percent for Europeans between 1968 and 1975. Unemployment reemerged as a problem in European economies for the first time since World War II (6.9 percent of the workforce in early 1978). The oil crisis brought an end to thirty years of high economic growth in the EEC and ushered in an era of high unemployment and economic stagnation. By 1980 stagflation was a major factor in the breakdown of the postwar "social contract" between business and labor and the rise of Thatcherism in the United Kingdom, while in Germany the "oil shock" helped catapult the Green Party, with its emphasis on energy conservation, into national prominence. However, as a measure of oil dependency (that is, the ratio between a country's oil imports and its total oil consumption) of the world's top oil consumers, France and Germany rank third and fourth worldwide, well ahead of the world's largest consumer, the United States, in sixth place.

EUROPEAN PRODUCERS AND OPEC

The role of European oil producers vis-à-vis OPEC is varied. The major European oil producing nations (United Kingdom, Norway, Azerbaijan, Russia, and Romania) are not members of OPEC and have occasionally used their production power to undercut OPEC prices and production quotas and maintain some energy independence. The United Kingdom follows the most independent policy and tends to use its high-grade reserves to mitigate OPEC-orchestrated price increases on the British economy. Russia was the world's largest oil producer until production collapsed in 1992, and it is striving to achieve that status again. Since 1997 Russia has attended numerous OPEC meetings and has made a number of commitments to reduce production and/or exports in coordination with OPEC, but these have had little effect. Norway is the world's third-largest oil-exporting country and generally does not participate in OPEC meetings but it has adjusted oil production with OPEC three times since 1998.

Nevertheless, OPEC continues to be a very powerful cartel. OPEC's oil exports represent about 55 percent of the oil traded internationally, and at the end of 2004, OPEC had proven oil reserves of 896,659 million barrels of crude oil, representing 78.4 percent of the world total of proven oil reserves. Most non-OPEC oil-producing countries are net importers of oil (Russia, Norway, and the United Kingdom are major exceptions), so OPEC still has a strong influence on the European oil market, especially if it decides to reduce or increase its level of production.

See alsoInflation; Recession of 1970s.