The Organization of the Petroleum Exporting Countries (OPEC) is celebrating the 50th anniversary since its establishment today. OPEC states account for 40% of global oil output and control 80% of the world's proven oil reserves, which constitutes the secret of the cartel's might.
Until the 1970s, the oil market was dominated by a seven company cartel comprising British Petroleum, Chevron, Exxon, Gulf, Mobil, Royal Dutch/Shell and Texaco. It was often referred to as the Seven Sisters.
These companies produced oil, purchased it from Third World countries, maintained refineries and sold oil and petroleum products. Their monopolist status enabled the Seven Sisters to pressure rivals from developing countries and to force them to reduce selling prices on a regular basis.
Oil states became increasingly inclined to pool their efforts and repel the hated Seven Sisters but were unable to come up with any feasible scenario in conditions of excessive supply.
Until the late 1960s, the United States was able to meet domestic demand at the expense of its hydrocarbon reserves. Consequently, oil-producing countries could think of nothing better than a price collusion.
In the fall of 1960, representatives of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela met in Baghdad and signed an agreement on establishing the Organization of the Petroleum Exporting Countries (OPEC).
The creation of this new organization went virtually unnoticed, but OPEC received a chance to make its point 13 years later.
The October 1973 Yom Kippur War between Israel and a coalition of Arab states backing Egypt and Syria heralded the beginning of the expensive oil era. While hostilities were in full swing, OPEC states made an unprecedented decision to impose an oil embargo against the United States and Western Europe.
Furious at the emergency re-supply effort that had enabled Israel to withstand Egyptian and Syrian forces, OPEC states imposed an embargo on Washington and raised oil prices by 70% (from $3 to $5.1 per barrel) for its Western European allies. In January 1974, OPEC once again raised prices to $11.65 per barrel. Corporate stocks, except those of raw materials producers, plunged. A worldwide economic depression set in, and inflation became a headache for U.S. and European politicians and ordinary people.
In fact, long-term pre-requisites for hydrocarbon price hikes were created on other continents. Although the oil embargo was lifted in April 1974, petroleum prices continued to skyrocket until the early 1980s.
The responsibility for the onset of the expensive oil era lies squarely with the United States and Western Europe. They expanded production too rapidly, and their domestic demand followed suit. By the early 1970s, 75% of Americans had opted for private cars instead of public transport. Consequently, the United States which did not face any petroleum shortages in the past, was forced to import 35% of fuel from the early 1970s. The West realized that cheap resources were history, and that long-term excessive raw materials supply was giving way to even more long-term surplus demand.
The 1970s became OPEC's finest hour, when the cartel's revenues increased exponentially. Cities thrived in the Arabian Desert, showcasing Western technological achievements. The poor and backward Persian Gulf monarchies became global economic heavyweights overnight. Unlike raw materials economies relying solely on the market situation, technocracies can effectively cope with various challenges and set the trends for global development.
Although the oil price hike severely tested the West, the U.S. and European economies found an adequate response. The first "digital revolution" took place in the late 1970s and early 1980s, boosting production efficiency several times over, which made it possible to radically cut energy consumption. This, plus U.S. political activity and the development of Western Siberian oil fields in the Soviet Union, made it possible to stabilize petroleum prices. The extremely heterogeneous OPEC states had a rather limited potential for coordinating their actions. Most Arabian Peninsula residents benefited from the raw materials economy due to the region's low population density and tremendous hydrocarbon reserves. On the contrary, the relative overpopulation of Venezuela and Nigeria enabled a small share of their corrupt elites to gain access to raw materials rent, while the oil boom of the 1970s brought nothing but wars and poverty to ordinary people.
OPEC remains an influential player on the raw materials market and will retain this status for the next 30 years, that is, until the end of the "oil era." However, the cartel's influence hardly compares with that of the rapidly expanding Chinese industry. Ever since oil futures have become the object of speculative investment, petroleum prices are determined by the moods of stock market traders, rather than by production demand and output volumes.
RIA Novosti economic commentator Vlad Grinkevich
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
