Abstract
The Organization of the Petroleum Exporting Countries (OPEC) was established in September 1960 in Baghdad by Venezuela, Iran, Iraq, Kuwait and Saudi Arabia.1 The establishment of the Organisation was a countervailing action on the part of the oil producing countries against the reductions of posted prices by the international oil companies.2 The price reduction had taken place without prior consultation with the oil producing countries. Previous separate attempts by the governments of these countries to expand their influence on the production and pricing of oil had failed to be effective.3 Since the Bandung Conference, the developing countries had discovered the potency of collective action, and they were pressing for international economic reforms in the United Nations. In 1960, the first development decade was announced and the the first UNCTAD conference was on the drawing board. For the oil producing countries, the price reductions were the straw that broke the camel’s back.
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References
The Treaty to establish OPEC was published on September 24, 1960 after the inaugural meeting of the founding member states on September 10–14, 1960. After ratification by the member states, OPEC was registered as an international organisation at the United Nations on November 6, 1962. OPEC was officially recognized as an international organisation by the United Nations Economic and Social Council on June 30, 1965. J. Evans, op.cit., p.129.
See A. Sampson, op.cit., 1985 and A. Alnasrawi, op.cit., 1985.
Venezuela, Iraq and Iran had their clashes with the oil companies during the 1950s. For further reading see for example: P. Terzian, op.cit., 1985; A. Hussein, Iraq: The eternal fire,Third World Centre, London, 1981.
The OPEC is an intergovernemental organization and has three organs: The Conference, The Board of Governors, and the Secretariat. The Conference, the supreme authority of the Organization, has two ordinary meetings a year and consists of delegations representing a member country.
The statutes of OPEC were approved at the Organzation’s Conference in Caracas in 1961 by the adoption of Resolution II.5. The Statute was amended several times (at the 3rd, 4th, 5th and 6th meeting, fully revised at the 8th meeting in 1965 and amended by the 12th, 20th, 24th, 50th, 51st, and 57th meeting). The current edition of the Statute is dated June 1986. OPEC Statute June 1986 and OPEC Official Resolution and Press releases 1960–1983, Pergamon Press, 1984, Oxford, and the 1984–1987 Supplement, OPEC, Vienna, 1987.
Resolution IV 32 called for the restoration of crude oil prices to the pre-August 1960 level. Resolution IV 33 insisted that royalty payments should not be credited against income tax and should be set at a uniform and equitable rate. Resolution IV 34 attempted to eliminate any contribution of governments to the selling expenses of the companies. OPEC Official Resolutions and Press Releases 1960–1983, Oxford, 1984, p.16–18.
“Of course, in many foreign nations there was no real comprehension of United States antitrust laws. Thus, it is unlikely that most OPEC leaders ever realized that, if the American companies joined together in negotiating production quotas and prices with OPEC, the Justice Department could charge them with violating antitrust laws.” B.H. Wall, Growth in a changing Environment; a history of Standard Oil Company (New Jersey), Exxon Corporation 1950–1975, McGraw-Hill Book Company, New York, 1988, p.605.
Saudi Arabia and Iran negotiated on behalf of the exporting countries because the major companies were either party to ARAMCO or the Iranian Consortium, or both, thus skirting the legal objections of the oil companies.
B.H. Wall, op.cit., p.608.
In 1966 the Middle East average would mean a 10–11% increase of Iranian production. The Shah was pressing for an increase of 17.5%. B.H. Wall, op.cit., p.612.
T.H. Moran, op.cit., in:International Organization, Spring 1981, Volume 35, no. 2, p.244. See section 4, Chapter one, for a discussion of OPEC and the stability of the group.
Real oil prices had also deteriorated between 1970 and 1973, after the Teheran and Tripoli Agreements. The member states had in fact been negotiating with the oil companies to adjust oil prices to the level of inflation in 1973. The oil companies did not want a complete correction of oil prices and negotiations were broken off. When they were about to start again, the October War had broken out and OAPEC had announced its boycott and production cuts.
Solemn Declaration, Conference of the Heads of State, Algiers, March 1975, OPEC O f ficial Resolution and Press Releases 1960-1983.
Between 1972 and 1974, the value of oil exports had increased 411.7%.
A proposal of representatives of the OPEC countries’ national oil companies in London in August 1974, regarding state oil-sales also included a proposal involving the observance of a loose system of market-demand prorationing, and of minimum selling prices equivalent to 93% of the posting for Arabian Light 34° crude fob Ras Tanura after appropriate adjustment for gravity, quality and geographic location was made. This proposal was not accepted by the majority of OPEC member states governments. However, the official pricing formula recommendation received general acceptance on an informal basis. J. Evans, op.cit., p.412.
In the refinery crude oil is basically broken down into three basic groupings of products. The components of these three groups of products vary according to the gravity of the crude. A barrel of light (average API 44°) breaks down into: 30% of residue (with fuel oil as an important product), 40% of middle distillates (with gas oil as an important product and naphtha) and 30% of light products (for instance gas, gasoline, aviation fuels, naphtha). Naphtha is extracted from both the light and middle distillate cuts. A barrel of crude API 31°, still considered a light crude, can be broken down into: 50% of residue, 31% of middle distillates and 19% of light products. OPEC, Basic Oil Industry Information, 1983, p.28–29.
Technically, the differentials equalize the refiners cost for diverse grades, sulphur and wax contents, and transportation charges over the yearly demand cycle. T.H. Moran, op.cit., in: International Organization, Autumn 1987, volume 41, no. 4, p.600.
OPEC Bulletin,March 1982, p.1.
T.H. Moran, ibid., in: International Organization, Autumn 1987, volume 41, no. 4, p.600.
Saudi Arabia, Kuwait, Qatar and the UAE were discontented in 1983 with prevailing price differentials between the value differentials of light African crudes to the Gulf crudes and with the discounts on official selling prices. The acceptance of new quota allotments was made conditional to a change in differentials and to an abolishment of discounts. In 1985, changes in differentials were accepted by the Conference but Algeria, Libya and Iran dissociated from this decision. Seventy-Third (Extraordinary Meeting of the Conference), Geneva, press release 3/85.
In June 1989, OPEC spot-market prices were in the range of $14.71 for Saudi Heavy and $15.40 for Dubai crude to $17.85 for Bonny Light and Saharan Blend. The spot-market prices for NOPEC crudes were in June 1989 (4 week average): Oman Blend $ 15.80; Suez Mix (Egypt) $15.11; Brent $17.55; Ekofisk $17.78; Isthmus (Mexico) $18.30; West Texas Intermediate $ 20.04; Urals (Soviet Union) $16.61. OPEC Bulletin, July/August 1989, p.29–32.
At the 73rd meeting of the Conference, January 30 1985, price differentials were also discussed, and the Conference decided that the maximum differential between heavy crude produced in the Gulf and light crudes produced in Africa should around $2.40 and in accordance with: Arab Heavy $26.50, Arab Medium $27.40, Arab Light $28.00, Murban $28.15, Minas $28.53, Bonny Light 28.65, as of 1 February 1985. Press Release 3/85 Geneva, 30 January 1985 and 8/86, Geneva 20 December 1986, in: OPEC Official Resolutions and Press Releases 1984–1988, p.228 and OPEC Bulletin, December/January 1987, p.3.
In 1974 Abu Dhabi’s membership was transferred to the United Arab Emirates.
In 1965 Algeria produced 558,700 b/d, Ecuador 7,800 b/d, Gabon 24,900 b/d, Indonesia 480,600 b/d, Iran 1,908,300 b/d, Iraq 1,312,600 b/d, Kuwait 2,360,300 b/d, Libya 1,218,800 b/d, Nigeria 274,200 b/d, Qatar 232,600 b/d, Saudi Arabia 2,205,300 b/d, United Arab Emirates 282,200 b/d and Venezuela 3,472,900 b/d. OPEC Annual Statistical Bulletin 1985, p.44–55.
OPECAnnual Statistical Bulletin 1985, p.8.
Libya depended 100% on oil imports in 1965, and this share in total exports decreased slightly after 1965 but remained high in the 90–100% range.
Peak production levels of the member states: Algeria 1,161,200 b/d in 1978, Gabon 223,000 b/d in 1975, Indonesia 1,686,200 b/d in 1977, Iran 6,021,600 b/d in 1974, Iraq 3,476,900 b/d in 1979, Kuwait 3,283,000 b/d in 1972, Libya 3,318,000 b/d in 1970, Nigeria 2,302,000 b/d in 1979, Qatar 570,300 b/d in 1973, Saudi Arabia 9,900,500 b/d in 1980, United Arab Emirates 1,998,700 b/d in 1977 and Venezuela 3,708,000 b/d in 1970. OPEC Annual Statistical Bulletin 1987, p.44–53.
The r/p ratios of the Soviet Union, the United States, the United Kingdom, Norway and Mexico are respectively: 13.6, 10.3, 5.6, 12.2, and 49.9 years. BPSR 1990, p.2.
Already in the OPEC Annual Report of 1978 attention is drawn to the fact that the average energy coefficient of the OECD countries was estimated by the IEA to be around 0.83 for the period 1977–1985, “showing a downward trend from the historical 1.0–1.1 period”. “This, however, reflects only a global picture because there is a wide range of differences among the countries, due to the fact that the energy elasticity for any country will depend on a variety of factors concerned with the structure of the economy, the energy mix employed, the efficiency of energy use, and the population structure. However, over a period of time, through technological progress, conservation and energy efficiency, energy elasticity will be reduced.” OPEC Annual Report 1978, p.57. See for the mentioned developments in the EC, R. Lefeber and J.G. van der Linde, op.cit..
D.J. Teece OPEC Behavior: An Alternative View, in: J.M. Griffin and D.J. Teece (eds.), OPEC Behavior and World Oil Prices 1982, p.67.
World Bank Development Report 1988, p.222–223.
In 1985 GNP per capita was $7,916 and in 1986 $6,413. In 1985 the population of Saudi Arabia was 11,520,000, in 1986 11,650,000 and in 1987 13,610,000. The increase of the population of 2 million (1987 over 1986) may partly explain the reduction. However, the large increase in population (18%) seems unrealistic and the increase must be due to new estimates by the government. OPEC Annual Statistical Bulletin 1985 and 1986.
See Table 3, OPEC Annual Statistical Bulletin 1987.
D.J. Teece, op.cit., in: J.M. Griffin and D. J. Teece (eds.), OPEC Behavior and World Oil Prices, 1982, p.67.
The labour force is also restricted, because women are hardly participating in the labour process. Islamic law does play a role, although in other Islamic countries a larger part of the female population is actively involved in the labour market.
Y.A. Sayigh, Arab Economic Strategy in a Changing World Oil Market, in: Third World Quarterly, January 1982, p.18.
Of course the level of technology in industry could improve the capital/labour ratio. Demand for labour could be qualitative instead of quantitative. However, training of local labour takes a long time. On top of that, the allocation of the national labour force has been directed at ‘white collar’ labour in the private service sector and public sector of the economies. The lack of low and medium trained technicians inhibits industrial developments.
The Economist, March 26, 1988, p.59.
C. van der Linde, International Division of Labor and Economic Integration of the Arab World, University of Amsterdam, March 1984, unpublished.
Ibid., p.35. The member states of the Gulf Co-operation Council (GCC), established in 1981 to co-ordinate among other things their industrialization plans, try to develop their economies through efficient use of scarce production factors. They have established joint-ventures in dock-yards, aluminum smelting and in steelplants.
“Economic pressures arising from the fall in export revenues have underlined the urgency of Saudiisation at all levels of government, industry and commerce. The seriousness with which the authorities are approaching this issue, reflected in a sustained high level of budget allocations for education and training at a time of stringency in most other sectors, suggests the kingdom’s dependence on imported labour will fall steadily over the next five to 10 years. However, the need for rapid qualitative as well as quantitative improvements means that, in the short term at least, there are tremendous opportunities for specialist foreign companies and agenies to become involved in the training effort. The 1987 budget allocation for manpower resource development is SR 23,725 million ($6,325 million), a cut of only 1 per cent on 1985/86, and roughly 22 per cent of the total SR 109,248 million ($29,130 million) allocated to civilian expenditure.” MEED Special Report Saudi Arabia, June 1987, p.53.
Real oil prices had already deteriorated since 1982, See Figure 2.1. On top of the deteriorating purchasing power of a barrel of oil and the subsequent payment difficulties, interest rates on the oustanding loans were high.
Total external debt: Long-term debt (public, publicly guaranteed and private non-guaranteed), short-term debt, use of IMF credit, short-term debt. World Bank Development Report 1988, Table 16.
The GCC countries are reported to have borrowed Iraq $30 billion. Financial Times, 2–9-1987, p.3. 61 World Bank Devlopment Report 1988, Table 19.
Exports include re-exports and exports of petroleum products from gas plants. OPEC Annual Statistical Bulletin 1989, Table 27.
The Economist, March 19, 1988, p.59 and October 15, 1988, p.93.
Friedrich Ebert Stiftung, Internationale Politik, Saudi-Arabien in den 80er Jahren, Expertengespräch 26. und 27. April 1982, p.21–22.
Iraq claims the agreement was reached under pressure and therefore not valid. The peace negotiations are, among other reasons, deadlocked because of it.
Qatar has brought the dispute over the reef Fasht al-Dibl with Bahrain (a non-OPEC member state but a member state of OAPEC and the GCC) to the International Court of Justice in the Hague. The Economist, January 21, 1989.
The countries did, however, share production in the Neutral Zone for a long time. The Economist, January 21, 1989.
Yamani commented on the behaviour of companies and oil consuming countries with regard to stocking: “As we all know, stocks play an important role for any commodity: when there is a surplus, you buy for your stock to replenish it; and when there is a shortage, you draw from your stock. But what has been happening in the oil industry is exactly the opposite. When we had a shortage because of the Iranian Revolution in 1979, companies started to buy heavily to stock up; and when we had a surplus in 1981 and 1982, those same companies started drawing heavily from their inventories. That is of course not a healthy situation, but it is a fact.” Sheikh Ahmed Zaki Yamani, Statement of Saudi Policy (1982), in: R. Mabro (ed.), OPEC and the World Oil Market; The genesis of the 1986 price crisis, Oxford Institute for Energy Studies/Oxford University Press, 1986, p.69.
“ Required stocks represent the minimum operating levels for a certain period of time, imposed for ‘security reasons’ by the governments or international organizations (i.e., the EC, the OECD or the national governments), and they are linked to current consumption or imports. In the OECD and EC, these stocks were increased during the crisis from 60 days of consumption to 90 days of consumption. Discretionary stocks are company stocks and the level is decided upon by the companies.
Z. Mikdashi, Transnational Oil, Issues, policies and perspectives, Frances Pinter Publishers, London, 1986, p.31.
OPEC consultative Meeting on 21 February 1979 in Geneva, Fifty-Third (Extraordinary) Meeting of the Conference in March 1979 in Geneva and in Press Release no. 7–79, Vienna, 18 September 1979, OPEC Official Resolutions and Press Releases 1960–1983, 1984. Yamani commented on the behaviour of the oil companies: “Throughout 1979, continued high demand in the west and the peak prices being paid on the spot markets were creating chaos. Oil companies were rushing in to buy. But this wasn’t oil they needed. It was for storage. I asked myself why and the only possible answer was that they thought there could be a total cut-off in oil exports from Iran.” In November 1979, American Embassy personnel were taken hostage in Teheran, adding to these fears. Another major factor to increased spot market buying was the dependence of Japan on Iranian exports. The revolution was considered a serious threat to the security of supply. J. Robinson, Yamani, The Inside Story, Simon & Schuster, London, 1988, p.214–215.
Y. Stoumaras, Are oil price movements perverse? A critical explanation of oil price levels 1950–1985, Oxford Institute for Energy Studies, WPM 6, 1985, p.44–45.
Press Release no. 3–79, Vienna, 28 february 1979, OPEC Official Resolutions and Press Releases 19601983, 1984, p.163.
Saudi Arabia reached its peak production in 1980 and in 1981 production was only slightly lower-9,555,000 b/d. Late 1979, Yamani repeatedly stated that Saudi Arabia would not give in to pressure to restrict oil production. Saudi Arabia continued throughout the oil crisis to honour their long-term contracts and sold any additional oil at the OPEC market price. J. Robinson, op.cit., 1988, p.215.
The marker crude was established at $36 and the maximum OPEC price at $41. Press Release no. 2–81, Geneva 26 May 1981.
J. Evans, op.cit., p.584/585 and See section 3.3 regarding Nigeria’s debt servicing problems.
Iraq refused to agree to the quota system in 1983 and the subsequent agreements all have a ‘theoretical’ Iraqi quota allotment. Iraq demanded parity to Iran’s share in production. This was eventually acknowledged in the 1989 agreement. Financial Times, 29–11–1989.
Iran is expanding its production capacity as a result of post-war reconstruction, and is aiming at its pre-war production capacity of 6,600 thousand b/d rapidly. Financial Times, September 27, 1988.
Iraq’s production capacity was supposed to expand quickly. In 1989 Iraq was expected to increase the capacity to at least 3,600 thousand b/d or 4,000 thousand b/d. Under the present allocation scheme the share of production to capacity will decrease. Financial Times, September 27, 1988.
The Economist (October 15, 1988) estimated the production capacity at 8,000 thousand b/d. However, Saudi Arabia produced close to 10,000 thousand b/d in 1980.
Production capacity estimates from The Economist, October 15, 1988.
Petroleum Intelligence Weekly, March 12, 1990, p.6.
Ibid, 24 June 1991 and 1 July 1991.
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van der Linde, C. (1991). The Organization of the Petroleum Exporting Countries. In: Dynamic International Oil Markets. Studies in Industrial Organization, vol 15. Springer, Dordrecht. https://doi.org/10.1007/978-94-015-7913-1_6
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