Daniel Yergin, Chapter 26: OPEC and the Surge Pot
Julie Rentz, Jonild Pashaj, Izaak Martin
Oil Surplus/Low Prices
Late 1950s: Surplus of oil characterized by discounted prices mainly as aresult of the aggressive marketing tactics of the Soviet Union, which stepped up its drive to sell oil in the West by slashing prices and making barter deals.
July 1960: Board of Standard Oil of New Jersey meets to decide what to do about the price of oil in order to stay competitive. They learn of the hostility towards the West in the Middle East over the absentee landlordism of the big oil companies.
August 1960: With no direct warning to oil exporters and with apparent disregard for their national revenues, Jersey announces cuts of up to $0.14/barrel in the posted prices of Middle Eastern crudes - about a 7% reduction. Other oil companies shortly follow suit.
Creation of OPEC
September 14, 1960: The formation of the Organization of Petroleum Exporting Countries (OPEC) is completed. Its original members include the major exporting countries - Saudi Arabia, Venezuela, Kuwait, Iraq, and Iran (control 80% of world’s crude oil exports). Qatar participates as an observer. Its intention is to defend the price of oil by restoring it to its precut level. It insists that the oil companies consult the members on pricing matters. They further call for a system of “regulation of production,” and commit themselves to solidarity in case the oil companies impose “sanctions” on one of them. This is seen as “the first collective act of sovereignty on the part of the oil exporters,” as well as “the first turning point in the international economic relations towards the states’ control over natural resources” (523).
November 1960: Oil companies and Western governments show little acknowledgement of the potential threat of OPEC. CIA devotes a mere four lines to the organization in a secret 43 page report on “Middle East Oil.”
OPEC in the 1960s
Two main achievements: 1) It ensured that the oil companies would be cautious about taking any major step unilaterally 2) The oil companies would not dare cut the posted price again.
Cooperation was strained by the fact that its members were competitors and political rivalries.
It continued to be a sideshow: “The reality of the oil world was U.S. import quotas, Russian oil exports, and competition” (525). People were concerned with the huge growth in demand and the even larger growth in available supply, not OPEC.
I. The New Frontier and more Elephants
OPEC was established; new oil provinces were found and opened up in 1960s. Most of these countries would become OPEC members, entered the world market first as competitors. Africa was considered the New Frontier for world oil, and France took to the lead in exploring it for being the main colonizer. For France to remain a great power, it had to have its own petroleum resources. Charles de Gaulle order maximum drive to develop oil supplies within the French empire. In 1956 the French discovered oil in Algeria, in the Sahara desert. This would free France from foreign dependence and from foreign exchange crisis. But getting oil out of the Sahara was difficult. The fields were deep in the desert and Algeria was caught up n a bloody war for independence, and the Algerians regarded the Sahara as part of Algeria. By 1961 the French state were producing oil around the world equivalent to 94% of French demand. Even though a year later Algeria won its independence, the Evian Agreement that de Gaulle negotiated with the Algerians guaranteed maintenance of France’s position in Saharan oil.
II. The Libyan Jack-Pot
After World War II,Libya was considered a desolate place, nothing more than a significant military strategic point. By mid-1950s, there was growing suspicion among geologists that the country might produce oil. The Libyan Petroleum Law of 1955 provided for much smaller concessions, and would give many of the concessions to independent companies. The early exploration results were disappointing. But by 1959, at a spot called Zelten, the Standard Oil of New Jersey made a big strike. “Libya has hit the jack-pot” State Department summed. Libya was to try oil that would compete with the Middle East, the companies tended to believe that the political risk in Libya was much lower than the risk in the Persian Gulf. By 1961 ten good fields had been discovered and Libya was exporting oil. The Libyan oil was a very high-quality “sweet” low-sulfur, crude. In contrast to the heavier Persian Gulf crude. By 1965, Libya was the world’s sixth-largest exporter of oil. And by the end of 1960s was producing over 3 mb/d, and in 1969 its output actually exceeded that of Saudi Arabia. However, with such quick and unexpected prosperity, the Libyan business environment became fragrant with corruption. Everyone seemed to have his hand out for every little thing. Bribes became common. The vast flow of Libyan oil dramatically affected world oil prices. The Libyan oil picked up where Soviet oil left off. Since most of the production was in the hands of independent oil companies, many unlike the majors, did not have their own outlets and no other supply sources to protect. Throughout the world there was more petroleum looking for markets than there was demand.
III. Mattei’s Last Flight
Enrico Mattei, the Italian oil tycoon the man who had set in motion the challenge to the power of the majors and the very structure of the industry, went from battle to battle taking not only the established oil companies, but also the United States government and eth North Atlantic Treaty Organization, both of which were alarmed by his bid to become a massive buyer of cheap Soviet oil. He intended to link his Mediterranean-based pipeline system to the westward-marching Soviet system, in the process to trade Italian Pipe for Russian oil. But he was also working toward a compromise in his bitter fights with the Standard oil of New Jersey and other major companies. In 1962, Mattei died in a plane crash as he was flying to Milan.
IV. The New Competitors
Though Mattei is gone, he had instigated a revolution that would eventually overthrow the majors’ global dominance. The industry structure was changing. Newcomers were entering the international oil market and production in which constantly they constantly broke the new established order. There many participants in the international oil game, with different interests. The explosion was higher, the advanced and diffusion of technology reduced the geological risk and made exploration and production expertise ready available. Governments in producing and would-be producing countries adopted concessionary policies that favored the entry of independents and new players. Petroleum demands among the industrialized nations were climbing to new highs. American influence was pervasive, succeeding the old colonial empires. The proliferation of players in the oil game was remarkable, especially in the Middle East. In 1946, 9; 1956, 19; and by 1970, 81 oil companies operated in the region. Between 1953 and 1972 more that 350 companies either entered the foreign oil industry or expanded their participation. One of the most obvious results of such crowded arena was a decline in profitability.
1957-1970:Iran and Saudi “surge pot,” oil companies walk the tightrope.
- Iran and Saudi Arabia battle for petroleum production dominance—Sunni vs. Shia, Arab vs. non-Arab, wealth equals power in the region.
- The major oil companies must tread delicately in their dealings with the two nations, convincing them that they do not favor the other.
- Independent oil companies were unconcerned about this relationship, sought to get as much oil out of Iran as possible.
- Iraq revokes the concession held by IPC, has little growth over this period.
- In the end, Saudi Arabia and Iran are fairly even…the tightrope has been traversed.
1940s-50s: Domestic independent producers start pressuring their local representatives.
- Influx of cheap oil drives prices down in the U.S. and elsewhere.
- Domestic independent producers see their prices and profits undercut and solicit their representatives to raise tariffs on imported oil by up to 10x.
- Eisenhower does not want to use tariffs or quotas, offers idea of voluntary restrictions that is not effective.
- National security becomes big issue because of Suez crisis. Domestic oilmen still clamoring for restrictions. In 1959, Eisenhower finally relents.
1959-1973: Oil import quotas are a fact of life.
- Various presidents tighten and relax quotas depending on situation at the time.
- “Brownsville U-Turn” loophole example of the “administrative nightmare” of quotas.
- Prices did remain steady during this time, rising from $2.90 in 1959 to $2.94 in 1968. U.S. prices are higher than in foreign lands. Domestic crude production rises 29% over the same period.
- Ultimately, it protects the profitability of oil, so both domestic and, grudgingly, major oil companies see merit in the quotas.