Organization of Petroleum Exporting Countries (OPEC)

The Organization of Petroleum Exporting Countries (OPEC) is a key player in the global trade of oil. In addition to the original five founding countries in 1960—Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela—as of January 2011, OPEC members also included Algeria (which joined in 1969), Angola (2007), Ecuador (1973), Libya (1962), Nigeria (1971), Qatar (1961), and the United Arab Emirates (1967). They collectively hold around three fourths of the world oil reserves and have produced over four times non-OPEC net addition to crude reserves during the period of 2000 to 2007. OPEC produces nearly 40% of the world oil supply.

OPEC was established on September 14, 1960, in Baghdad. In this meeting—and perhaps in the entire OPEC history—two individuals, above all others, are the primary initiators and genuine leaders of this organization: J. P. Pérez Alfonzo (Venezuela) and Abdullah al-Tariki (Saudi Arabia). The founding members’ share of oil royalties were directly tied to posted prices. The posted price was an accounting measure for valuing crude oil produced from a particular region (in this case, the Persian Gulf region) within the vast network of international oil companies; this measure was also in use as a yardstick to pay royalties by the oil companies during the cartelized oil era. The magnitude and variation in posted prices were exclusively determined by the International Petroleum Cartel (IPC). In September 1928, IPC was forged under the auspices of the “Big Three” (Standard Oil, Royal Dutch-Shell, and Anglo-Persian Oil Company) at the Achnacarry Castle in Scotland in order to control the flow of oil from the moment of extraction to the time of delivery of refined products to the various consuming markets across the world. This arrangement is known as the “As Is Agreement” according to which almost all oil across the globe—from exploration, development, and production stages through to international distribution, refining, and retailing—were to be cartelized by a handful of integrated oil companies.

In a broader context, the founding of OPEC was a response to unremitting cuts in the magnitude of posted prices motivated by a combination of [Page 1277]factors, such as the 1958 recession, expansion of Russian oil, and the imposition of the 1959 U.S. oil import quota on the oil from the Persian Gulf, which was trickling rather progressively into the U.S. East Coast markets. The last factor was designed (a) to discourage competition from the independent oil producers by restricting inflow of supply into the U.S. market, and (b) to limit the outflow of oil from the Persian Gulf region, thus complying with tenets of the Achnacarry Agreement. Hence, U.S. government collusion with IPC and its deliberate concealment under “national security,” operated at the expense of both U.S. domestic consumers and the share of oil royalties by oil exporting countries in the region.

Formation of OPEC is symptomatic of the initial fracture within IPC's internal structure, which eventually turned into a widespread breakdown during the oil crisis of 1973–1974. The crisis accomplished three things: (1) It decartelized the production of crude oil across the globe, (2) it globalized crude oil by means of competitive markets, and (3) it led to competitive appropriation of differential oil rent by the owner of oil reserves across the globe, irrespective of OPEC membership.

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