Sixty years ago this month, on Sept. 14, 1960, representatives from five oil producing countries – Iran, Iraq, Kuwait, Saudi Arabia and Venezuela – gathered at the Al-Shaab Hall in Baghdad to form the Organization of Petroleum Exporting Countries. OPEC was formally dedicated to “the coordination and unification of the petroleum policies of the member countries and the determination of the best means of safeguarding their interests, individually and collectively.”
Public perceptions in the West about OPEC are usually negative. OPEC is viewed as an oil cartel, or even a monopoly, whose sole purpose is to control the oil market. The 60th anniversary of OPEC is an appropriate opportunity to review its formation.
OPEC formed against the backdrop of the 1950s when major international oil companies, through joint consortia, controlled the production, distribution and sale of world oil, largely produced in the Middle East, Southeast Asia and Latin America. The Italian oil diplomat Enrico Mattei called these companies “Sette Sorrelle” (Seven Sisters), which included Standard Oil Company of New Jersey (Esso, later Exxon), Standard Oil Company of New York (Socony, later Mobil), Standard Oil of California (Socal, later Chevron), Gulf Oil, Texaco, Royal Dutch Shell, and British Petroleum (formerly the Anglo-Iranian Oil Company, AIOC). To these, Mattei might well have added Compagnie Française de Petroles, but he wanted to portray the Seven Sisters as an Anglo-American international oligopoly. In his 1975 bestseller “The Seven Sisters,” Anthony Sampson chronicled this story.
Two men are regarded as OPEC’s pioneering figures: Juan Pablo Pérez Alfonzo (1903-1979) of Venezuela, and Shaikh Abdullah ibn Hamoud al-Tariki (1919-1997) of Saudi Arabia.
Pérez Alfonzo came from a wealthy family in Caracas where he studied law. In 1945 he joined the Ministry of Development, which then managed Venezuela’s oil sector, in the government of Romulo Gallegos, the first democratic government in Venezuela. He renegotiated his country’s 50/50 agreements with foreign oil companies. In 1948, a military coup overthrew Gallegos’ government and sent Pérez Alfonzo into exile for the following ten years, first in the United States and then in Mexico. While living in the United States, Pérez Alfonzo was impressed by the performance of the Texas Railroad Commission, a government agency based in America’s richest oil state. It allocated production quotas to American oil companies in order to stabilize oil prices, and thus the wellbeing of the oil industry. This inspired Pérez Alfonzo to envision a similar but global organization that would protect the oil revenues and interests of Third World oil producing countries. In 1958, a popular movement toppled Venezuela’s military dictator Perez Jimenez, and elected Romulo Betancourt as the new president. A year later, Pérez Alfonzo returned to Caracas and was appointed the minister of mines and hydrocarbons.
Tariki was an outsider to Saudi Arabia’s royal clan. He came from a Bedouin family who administered camel caravans to Kuwait. After an early education in Kuwait, at age 10, Tariki followed his older brother to India where an influential Saudi merchant gave him a job and an English education. He then went to Egypt and graduated in geology and chemistry from the University of Cairo in 1944. Impressed by Tariki’s performance, the Saudi government provided him with a scholarship to study in the United States. Tariki obtained a master’s in geology from the University of Texas in Austin in 1947, did an internship at the Texas Railroad Commission, then worked for Texaco. Marrying an American girl, Tariki returned home in 1948 and took a position at the Ministry of Finance supervising the petroleum affairs of Aramco in Dammam. In 1954, Tariki became director of the new Office of Petroleum and Mineral Affairs within the same ministry. In 1960, Tariki was appointed the first Saudi minister of petroleum and mineral resources by King Saud.
Back to the 1950s
After World War II, the strategic role of oil was heightened. To prevent revolutions, riots, nationalizations and other disruptions (all of which helped the Soviet empire), the Seven Sisters agreed to renegotiate their concessions with most of the oil producing countries and signed 50/50 profit sharing deals. The companies also set a scheme of “posted” or official oil prices for their payments so that oil producing countries could plan their budgets in a predictable manner. This system worked well for some time as there was little difference between the “posted” and the market (“realized”) oil prices. The companies also followed a clear strategy: They produced as much oil as possible to keep the prices low and also exported oil to Europe and elsewhere for the grand post-war reconstructions. In the 1950s, oil overtook coal as the supreme fuel.
There were, however, some undercurrent problems in the Third World. First, nationalistic and anti-colonial sentiments – at times overlapped with leftist and socialist positions – were gaining strength. There were bloody coups in Egypt (1951) and Iraq (1958). In 1951, Iran’s popular Prime Minister Mossadeq nationalized the country’s oil industry, which was dominated then by the British. Two years later, he was overthrown in a U.S./UK-engineered coup. Egyptian President Gamal Abdul Nasser successfully nationalized the Suez Canal in 1956 against the British and French interests. Some oil companies like Italy’s Eni or American Getty Oil, well aware of the regional feelings against the Seven Sisters, made new agreements (as much as 75/25) with oil-producing countries, thus weakening the Seven Sisters.
Then came 1955. Russia began exporting its oil at a cheaper price, competing directly with the international oil companies in their own markets. All this led to oversupply of oil and lower oil prices. The companies had to do something. In February 1959, the IOCs, led by BP, unilaterally cut the posted oil prices by 10 percent. The price of Saudi Arabian light crude was reduced by 18 cents per barrel, leaving it at $1.90 per barrel. Venezuelan oil’s price was reduced by 5 cents a barrel, and a month later by 24 cents a barrel, leaving it at $2.80 per barrel.
Venezuela and Middle Eastern governments were furious.
Back in the United States, there was the dilemma of imported cheap oil, which, although it helped the consumers, disrupted the domestic oil production. In March 1959, President Eisenhower’s administration placed quotas on imported foreign oil in order to protect the independent oil companies. The imported oil could not exceed 9 percent of total U.S. consumption. (This mandatory oil import program was in place until the early 1970s when the United States consumed more oil than it could domestically produce.) The 1959 oil import restrictions particularly hit Venezuela, as 40 percent of its exports went to the United States. Pérez Alfonzo seized on the opportunity to reach out to the Middle Eastern oil countries to form a joint front. In this way, the heavier Venezuelan oil could also be protected internationally from competition with the Middle East’s light crude.
As it happened, an Arab Petroleum Congress was to be held in Cairo in April 1959. This Congress (planned in a meeting of the Arab League three years earlier) symbolized the ascending popularity of Nasser in the Arab world (although the rival Iraqi leadership boycotted it). Tariki, who knew Pérez Alfonzo from his trips to Venezuela in 1951 and 1956, invited him to the Cairo Congress. Pérez Alfonzo thus led a delegation from Venezuela as an “observer” to Cairo, carrying with them Arabic translations of Venezuela’s oil documents.
Tariki had also hired an American legal counsel, Frank Hendryx, who spoke in the meeting on the legal possibility that oil concessions could be modified by sovereign governments in the interest of their citizens. Wanda Jablonski, a renowned American oil journalist who wrote for Petroleum Week and knew both Pérez Alfonzo and Tariki, was also at the Cairo Congress and sensed its tense atmosphere. She even invited both Pérez Alfonzo and Tariki for a chat. The Cairo Congress issued a resolution calling on the oil companies to consult with oil producing countries and not to make unilateral decisions on oil price cuts.
A more important development, however, took place when Pérez Alfonzo, his assistant Bernardo Flores and Shaikh Tariki together with participants from Iran, Kuwait, Qatar and Iraq (who represented the Arab League, not Iraq, in Cairo) held a secret dinner gathering in the Maadi Yacht Club in a suburb of Cairo. Pérez Alfonzo suggested that the participants sign a “gentlemen’s agreement” and propose it to their respective governments. This agreement called for creation of an oil consultative committee among these countries in order to safeguard their oil interests.
The seed of OPEC was thus planted.
The Birth of OPEC
In August 1960, the executives of Esso (Exxon) met in New York to discuss the pressing issue of oil prices. Monroe “Jack” Rathbone was the company’s new chairman, but with little overseas experience. He was determined to make more profits for his company and resented the Russians’ takeover of the world market by their cheap oil. Ignoring what had happened the previous year, Rathbone decided to cut the posted prices once again and unilaterally. There was opposition to his decision even from Esso, especially from Howard Page, the company’s veteran Middle Eastern expert. But it was futile. Rathbone initially planned to cut the oil prices both in Venezuela and the Middle East, but considering its already bitter relation with Venezuela, the company’s officer in Caracas threatened to resign. Therefore, Rathbone decided to leave Venezuela out of its price reduction.
On Aug. 9, 1960, Esso announced reduction of 10-14 cents a barrel (up to 8 percent) in the posted prices of Middle Eastern crudes, leaving the Saudi Arabian light at $1.80 per barrel (the same price as it was in 1949). The other companies, some reluctantly and with a sense of alarm, followed Esso’s suit. Within hours of the news, Pérez Alfonzo and Tariki telegraphed each other to form a meeting. As Howard Page predicted, all hell broke loose. Even the pro-West Shah of Iran, who wanted to distance his country from the Arabs, was furious. Five founding members of OPEC held an emergency meeting in Baghdad Sept. 10-14, 1960, and officially announced the birth of their organization. An editorial in the Middle Eastern Economic Survey commented: “It was quite clear from the start that the price cuts might precipitate the establishment of what some delegate chose to call a cartel to confront a cartel.”
OPEC through Time
OPEC began with a budget of £150,000 contributed by the member countries. In 1961, at its second meeting in Caracas, OPEC appointed Fuad Rouhani, from Iran, as its first secretary-general for a period of four years, since Iran’s name was the first in alphabetical order of OPEC members.
Throughout the 1960s, OPEC was not taken seriously by the IOCs. Nevertheless, OPEC prevented further cuts in oil prices and created a unified voice for the oil producing countries. OPEC rose to power during the First Oil Shock and the Arab Embargo in 1973 and pushed oil prices from $1.80 in 1970 to $11.65 a barrel in 1973. The second oil shock came in 1979-80 during the Iranian revolution and the outbreak of Iraq-Iran war. The oil prices rose to $35 a barrel in 1980. By then, the entire oil industry in OPEC was state owned, either through nationalization (as in the case of Iran and Iraq) or through phased purchase and participation (for example, Saudi Arabia and Kuwait).
All through the years of rising oil prices during the 1970s and early 1980s, non-OPEC oil production kept growing, especially in the North Sea, Alaska, the Gulf of Mexico, Latin America and Southeast Asia. The second oil shock motivated OPEC to overproduce oil while high oil prices were already slashing oil consumption. This oil glut led to the major oil market crash of 1985-86, when oil prices fell below $10 a barrel. After 1986, OPEC never gained its former power both because of sharp political conflicts and economic competition among its members, and the growth of non-OPEC oil production worldwide.
When OPEC formed in 1960, its five members accounted for 67 percent of the world’s oil reserves, 38 percent of oil production and 90 percent of international oil exports. In 2018, OPEC with 12 members accounted for 72 percent of the world’s conventional oil reserves, 42 percent of oil production and 60 percent of total oil traded internationally.
In 2016, OPEC formed an informal alliance (the so-called OPEC Plus) with ten other oil producing countries – Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan and South Sudan, which attend as observers. OPEC Plus, like OPEC itself, is not a coherent club. Conflict and price war between Saudi Arabia and Russia early in 2020 in the midst of the COVID-19 pandemic was an important factor in the oil market crash that adversely impacted other producers, too. However, in April OPEC Plus agreed to cut back its production significantly until the end of this year. The role of OPEC Plus in the future strongly depends on the future of oil itself. How OPEC Plus and non-OPEC oil producers, especially the U.S. shale oil industry, will learn to coexist remains to be seen. If the recent decade is a clue, cycles of ups and downs in the oil market will continue in the coming decades.