Is OPECs oil era over?
Rather than the arbiter of global energy, OPEC is and has always been a dysfunctional, divided and
discouraged organisation
GREGORY BREW
Just a few months ago, some were declaring the old oil order is dead after the Organization of the Petroleum Exporting Countries (OPEC) failed to agree on coordinated action at its April meeting in Doha.
That meeting was meant to bring about a production freeze to arrest the downward spiral of prices that began in July 2014. Instead, the Doha meeting was over before it began. Iran refused to slow the production until it had regained its pre-sanctions position in the market, so Saudi Arabia canceled the freeze and continued to produce at peak levels.
This week, with oil trading at six-month highs, OPEC members once again had high hopes to show that the organisation remains relevant as they gathered in Vienna. Yet, once again, the meeting ended without agreement, resulting in no change to the current policy of essentially unlimited production.
So does the verdict that OPEC is dead still stand, signaling the end of an era in which it supposedly ruthlessly controlled the price of oil? In fact, that era barely existed in the first place. The failed meetings confirm a longstanding truth: the worlds most famous cartel has never really been a cartel.
Rather than the arbiter of global energy, OPEC is and has always been a dysfunctional, divided and discouraged organisation.
My recent research has taken me through the history of oil, particularly the relationship between oil revenues, economic development and the geopolitical balance of power in the 1960s and 1970s. Oils history has been dominated by a struggle for balance, a contest between competing interests, both economic and political, and between the fundamental market forces of supply and demand.
OPEC has never been shielded from or been able to fully thwart these forces.
When it was created in 1960, OPEC was meant to offer members a greater say in how their oil was produced and priced, addressing the disproportionate power wielded by private Western corporations. Its larger goal, to bring order to the chaotic world of global energy, has always been elusive.In the end, OPEC did not possess enough market share to make a meaningful impact.
Nevertheless, significant changes were occurring at the time. Demand for oil shot up, while production in the US stagnated. The ability of the Seven Sisters to control the market was undermined by international competitors drilling new fields in North Africa, where Libyas Muammar Qaddafi threatened to shut off supply if he didnt get
higher prices.
To punish the US for supporting the Jewish state, Arab oil producers (not OPEC, as popularly believed) cut production and declared an embargo. Together with the war, this destabilised energy markets as demand outpaced supply.
Amid the fighting, OPEC met with the Seven Sisters in Geneva and demanded an increase in the posted oil price. After rejecting a small change, OPEC announced it would double the price to $5 and later doubled it again to $11.65.
This triggered a massive shift in economic power, what Stanford University professor Steven Schneider called the greatest non-violent transfer of wealth in human history. With the uptick in oil revenues, OPEC states spent lavishly on economic development, social programs and investments in Western industry and steadily nationalised their domestic industries, pushing out the Seven Sisters.
Despite its victory, OPEC had come no closer to resolving its internal divisions. This became evident when another energy crisis hit.
In January 1979, the shah of Iran fled amid revolution, and global oil markets panicked. Prices soared, from $12.70 to over $30 by 1980. Irans 6 million barrels per day (bpd) disappeared and other OPEC states eagerly seized the opportunity to sell oil at costly premiums, sending the price even higher.
In the ensuing years, Saudi Arabia tried to impose a quota system, with overall production capped at 20 million bpd. Most members ignored their quotas or over-produced to gain greater revenue.
The writer is PhD Student in History, Energy and Foreign Relations at Georgetown University
