The Organization of Petroleum Exporting Countries
The Organization of Petroleum Exporting Countries
In 1972 the director of the U.S. State Department's Office of Fuels & Energy boldly predicted that the average price of Middle East crude oil, then $2.25 per barrel, might rise to $5.00 or even higher by 1980. As an aside, the director mentioned that these figures would translate into higher gasoline prices, heating bills, and industrial cost.57 This was a monumental understatement.
The Organization of Petroleum Exporting Countries (OPEC), as
illustrated in the map on page M-10, comprises the Middle East Arab countries of Saudi Arabia, Kuwait, Qatar, the United Arab Emirates, Iraq, Libya, and Algeria; the Islamic Republic of Iran; Indonesia; Nigeria; Gabon; Venezuela; and Ecuador. OPEC's effectiveness in controlling prices and production was first illustrated by the political and economic events of 1973 and 1974, when the price of crude oil increased from $3.64 per barrel to $11.65 per barrel within one year. OPEC was able to accomplish this for four reasons:
1. It produced 55.5 percent of the world's oil in 1973.
2. Demand for oil was high.
3. Consuming countries were not able to supply their own needs.
4. Substitutes were not readily available.
World oil prices dropped slightly in the 1975-1978 period, but they rebounded in 1979-1980, when they peaked at about $35 per barrel.
In the early 1980s, however, OPEC's resolve began to weaken. Although oil consumption increased steadily over most of the 1970s, the oil-price rise in 1979-1980 resulted in a drop in demand for oil in the industrial countries. The major reasons for the decline in consumption were the world recession, the increase in crude-oil prices, the substitution of other fuels for oil, the effectiveness of national energy policies aimed at conservation, and the changing structure of industry and the lesser importance of energy-intensive industries.38
Some interesting trends developed in the oil industry. First, consumption of oil as a percentage of total energy consumption in the world declined from 48 percent to 40 percent by 1983: Natural gas, coal, hydroelectric power, and nuclear energy increased at the expense of oil. Second, the percentage of world oil consumption decreased for North America and Western Europe, whereas it increased for the centrally planned economies and the rest of the world. Finally, the output of OPEC actually decreased by 50 percent over the past decade. Part of the decrease was due to the fall in demand for oil in general, but part of it was traced to the increase in oil supplied by non-OPEC members. The major non-OPEC increases came from the USSR, Mexico, and the United Kingdom.39 OPEC's share of production fell to 45 percent in 1980 and 30.9 percent in 1987, although it rose to 36.5 percent in 1989. In 1989 world oil production was 63.5 percent from non-OPEC countries. The USSR share of production was 19.7 percent and the U.S. share was 14 percent.40
Because of these trends, OPEC has been losing its grip. After successive price increases over the period 1973-1980, OPEC was forced to cut prices several times after 1983. These price cuts, along with the drop in demand, have devastated the economies of the more populous OPEC countries such as Nigeria, Indonesia, Venezuela, and Iran that need oil revenues to finance economic development. It was estimated that OPEC countries as a group suffered balance-of-payments deficits during the 1982-1985 period. Consequently, foreign-exchange reserves began to slip: Saudi Arabia's reserves, which were at $150 billion in 1982-1983, fell to less than $100 billion by early 198 5.41
Clearly, OPEC, which had been considered the model producer cartel, was facing some serious difficulties. During the first half of 1986, prices fell below $10 per barrel. In late 1986, OPEC was able to fashion an agreement on production quotas. The key country was Iran, which agreed to hold to a quota even if the agreement were violated by Iraq, its warring neighbor. Prices stayed at low but firmer levels during 1987, in the range of $18 per barrel. Despite OPEC's difficulties, about three quarters of the industrial world's oil reserves are held by OPEC countries. Saudi Arabia and the Persian Gulf nations hold 65 percent of the world's surplus oil production capacity, whereas OPEC as a whole holds 95 percent.42
By late 1987 and early 1988, OPEC began to loosen its grip even more. Prices fell to $15 per barrel in 1988, and producer countries could not agree to slow down production in order to stabilize prices. Low prices continued to devastate the U.S. oil industry, and oil exploration ceased.
However, a major problem began to develop between Iraq and Kuwait and Saudi Arabia. Prices had fallen so far in 1988 that the non-OPEC countries agreed to cut production if the OPEC countries would. However, Saudi Arabia would not go along with the plan. The Saudis felt that existing quotas should be enforced and did not want to lower production any more. In late 1988 Iran and Iraq finally agreed to the same quota, and in 1989 prices returned to about $18 per barrel. OPEC ministers agreed to increase production levels a little, but Kuwait did not want to be bound by those limits. Although oil prices had risen to slightly over $20 per barrel by mid-1990, Iraq's President Saddam Hussein attributed low world oil prices to Kuwait's quota-busting production. This was part of his motivation for invading Kuwait in August 1990 and launching war in the Middle East. Prices quickly rose to over $41 per barrel, but oil-producing countries quickly increased output to take up the slack for the embargo on Iraqi and Kuwaiti production, so prices fell to the mid-$20s by the end of 1990. Forecasts for oil prices had a peace-price of $13 per barrel and a war-price of anywhere from $70 to $100 per barrel, although post-war prices settled on around $20 per barrel. The one thing that everyone could agree on was that OPEC production would have to be cut drastically after the settlement of the Iraq-Kuwait war or prices would drop significantly. However, no one really believes that OPEC members would have either the discipline or the good will to lower production and lose revenues.43
In 1972 the director of the U.S. State Department's Office of Fuels & Energy boldly predicted that the average price of Middle East crude oil, then $2.25 per barrel, might rise to $5.00 or even higher by 1980. As an aside, the director mentioned that these figures would translate into higher gasoline prices, heating bills, and industrial cost.57 This was a monumental understatement.
The Organization of Petroleum Exporting Countries (OPEC), as
illustrated in the map on page M-10, comprises the Middle East Arab countries of Saudi Arabia, Kuwait, Qatar, the United Arab Emirates, Iraq, Libya, and Algeria; the Islamic Republic of Iran; Indonesia; Nigeria; Gabon; Venezuela; and Ecuador. OPEC's effectiveness in controlling prices and production was first illustrated by the political and economic events of 1973 and 1974, when the price of crude oil increased from $3.64 per barrel to $11.65 per barrel within one year. OPEC was able to accomplish this for four reasons:
1. It produced 55.5 percent of the world's oil in 1973.
2. Demand for oil was high.
3. Consuming countries were not able to supply their own needs.
4. Substitutes were not readily available.
World oil prices dropped slightly in the 1975-1978 period, but they rebounded in 1979-1980, when they peaked at about $35 per barrel.
In the early 1980s, however, OPEC's resolve began to weaken. Although oil consumption increased steadily over most of the 1970s, the oil-price rise in 1979-1980 resulted in a drop in demand for oil in the industrial countries. The major reasons for the decline in consumption were the world recession, the increase in crude-oil prices, the substitution of other fuels for oil, the effectiveness of national energy policies aimed at conservation, and the changing structure of industry and the lesser importance of energy-intensive industries.38
Some interesting trends developed in the oil industry. First, consumption of oil as a percentage of total energy consumption in the world declined from 48 percent to 40 percent by 1983: Natural gas, coal, hydroelectric power, and nuclear energy increased at the expense of oil. Second, the percentage of world oil consumption decreased for North America and Western Europe, whereas it increased for the centrally planned economies and the rest of the world. Finally, the output of OPEC actually decreased by 50 percent over the past decade. Part of the decrease was due to the fall in demand for oil in general, but part of it was traced to the increase in oil supplied by non-OPEC members. The major non-OPEC increases came from the USSR, Mexico, and the United Kingdom.39 OPEC's share of production fell to 45 percent in 1980 and 30.9 percent in 1987, although it rose to 36.5 percent in 1989. In 1989 world oil production was 63.5 percent from non-OPEC countries. The USSR share of production was 19.7 percent and the U.S. share was 14 percent.40
Because of these trends, OPEC has been losing its grip. After successive price increases over the period 1973-1980, OPEC was forced to cut prices several times after 1983. These price cuts, along with the drop in demand, have devastated the economies of the more populous OPEC countries such as Nigeria, Indonesia, Venezuela, and Iran that need oil revenues to finance economic development. It was estimated that OPEC countries as a group suffered balance-of-payments deficits during the 1982-1985 period. Consequently, foreign-exchange reserves began to slip: Saudi Arabia's reserves, which were at $150 billion in 1982-1983, fell to less than $100 billion by early 198 5.41
Clearly, OPEC, which had been considered the model producer cartel, was facing some serious difficulties. During the first half of 1986, prices fell below $10 per barrel. In late 1986, OPEC was able to fashion an agreement on production quotas. The key country was Iran, which agreed to hold to a quota even if the agreement were violated by Iraq, its warring neighbor. Prices stayed at low but firmer levels during 1987, in the range of $18 per barrel. Despite OPEC's difficulties, about three quarters of the industrial world's oil reserves are held by OPEC countries. Saudi Arabia and the Persian Gulf nations hold 65 percent of the world's surplus oil production capacity, whereas OPEC as a whole holds 95 percent.42
By late 1987 and early 1988, OPEC began to loosen its grip even more. Prices fell to $15 per barrel in 1988, and producer countries could not agree to slow down production in order to stabilize prices. Low prices continued to devastate the U.S. oil industry, and oil exploration ceased.
However, a major problem began to develop between Iraq and Kuwait and Saudi Arabia. Prices had fallen so far in 1988 that the non-OPEC countries agreed to cut production if the OPEC countries would. However, Saudi Arabia would not go along with the plan. The Saudis felt that existing quotas should be enforced and did not want to lower production any more. In late 1988 Iran and Iraq finally agreed to the same quota, and in 1989 prices returned to about $18 per barrel. OPEC ministers agreed to increase production levels a little, but Kuwait did not want to be bound by those limits. Although oil prices had risen to slightly over $20 per barrel by mid-1990, Iraq's President Saddam Hussein attributed low world oil prices to Kuwait's quota-busting production. This was part of his motivation for invading Kuwait in August 1990 and launching war in the Middle East. Prices quickly rose to over $41 per barrel, but oil-producing countries quickly increased output to take up the slack for the embargo on Iraqi and Kuwaiti production, so prices fell to the mid-$20s by the end of 1990. Forecasts for oil prices had a peace-price of $13 per barrel and a war-price of anywhere from $70 to $100 per barrel, although post-war prices settled on around $20 per barrel. The one thing that everyone could agree on was that OPEC production would have to be cut drastically after the settlement of the Iraq-Kuwait war or prices would drop significantly. However, no one really believes that OPEC members would have either the discipline or the good will to lower production and lose revenues.43
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