Opec down but not out
A new history of Opec says the organisation is being undermined in part by the ambitions of national oil companies
Never has Opec’s relevance—and future—been questioned more than today. This is hardly surprising. For leaving aside any discussion of price or output strategy, changes are afoot.
Opec’s dominant member, Saudi Arabia, has embarked on a course aimed at ending the country’s reliance on oil. The United Arab Emirates is the region’s leading developer of renewables. And Qatar has dropped out of Opec.
Media headlines suggest that Opec’s obituary is being prepared: “Opec is not dead yet, but it has lost control of the market,” said one in July 2019. “Opec losing control, share in global market,” said another in October. The perfect context, one might say, for a book entitled The Rise and Fall of Opec in the Twentieth Century*. Yet even the author, historian Giuliano Garavini, concedes that the organisation still has life in it. He says Opec was “a key international actor in the twentieth century” and “might also play a role in the future, even if the world progressively turns away from the use of hydrocarbons as a key energy source”.
So, Opec may be less influential today than in the past. But its demise is by no means imminent. The miracle is that it has survived thus far, given the turbulent events in some of the member states and tough challenges faced by the organisation itself.
To tell the story of Opec involves first recounting how oil gradually became a vital source of energy in the past century, against a background of two world wars, not to mention a host of minor conflicts and political crises. The author takes nearly 90 pages to do this, touching on some of the events that still resonate today.
One pertinent example is Britain’s discreet but determined diplomatic efforts in the wake of the First World War and collapse of the Ottoman Empire to make sure that the oil-rich city of Mosul was brought within the boundaries of Iraq, rather than Turkey. In the British parliament, one member swept aside the diplomatic niceties, declaring, “Whether you like it or not we have arrived at the age of oil. We live in a country in which there is plenty of coal and no oil.”
Thereafter, Western companies moved into the Middle East in force to grab concessions wherever they could. At the same time, US firms drilled for oil in Latin America. It was here that the first murmurs of what the author calls “petronationalism” were heard. Mexico nationalised its oil industry as early as 1938. Venezuela’s 1943 Hydrocarbons Law gave the government a 50pc share of earnings, a pattern that was later adopted in other producing states.
Opec’s efforts to influence oil markets face more obstacles than ever
In 1949, Venezuela took a remarkable step that opened the way for dialogue among oil producers from different parts of the world. It sent a delegation to the Middle East with a mandate to establish friendly relations with governments there in order to seek cooperation on prices and production. The team visited Egypt, Iraq, Kuwait—and Iran, where they held four days of talks. The top Iranian official in the meetings later described the encounter as “invigorating and inspiring—the first step in the emancipation of the oil industry and the seed that ten years later would flower into Opec”.
A further step towards encouraging more contact between producers was taken at the Asian-African Conference at Bandung, Indonesia in 1955. The final communique spoke of the possibility of international coordination to stabilise raw material prices, suggesting that “exchange of information on matters relating to oil, such as remittance of profits and taxation, might eventually lead to the formulation of common policies”.
Baghdad inaugural meeting
The 1950s in the Middle East was an era when Arab nationalism flourished and governments in the region sought to wrestle better terms from the international oil companies. Even though mutual Egyptian-Iraqi rivalry complicated attempts by Arab governments to work jointly, an Arab Petroleum Congress was held in Cairo in 1959, albeit with representatives of the majors present as observers. In September the following year, Iran, Kuwait, Saudi Arabia and Venezuela sent delegates to the Iraqi capital, Baghdad, where they founded Opec. Its headquarters were established in Vienna.
The optimism surrounding the creation of the group did not last long. In 1962, it began royalty negotiations with the majors and intra-Opec squabbles began. During a producers’ coordination meeting in Beirut in late 1963, the author writes, “the discussions among the delegates grew heated” with Iraq and Venezuela opposing any compromise. He adds that the year “1964 was probably one of the darkest in Opec’s twentieth-century history” as the member states bickered over the direction of the negotiations to an extent that the organisation “was very nearly disbanded”.
Survival is not a sufficient purpose on its own, in a world that is turning away from fossil fuels
Friction between Opec and consuming states intensified when, after the 1973 Arab-Israeli war, Arab oil producers cut output by 25pc and blocked sales to countries that had supported Israel. The short-lived boycott had two immediate effects: it made oil producers immensely rich overnight; and it harmed the economies of oil importing nationa, causing damage to Opec’s reputation from which it has never completely recovered.
More trouble lay ahead. In 1980, two Opec neighbours, Iran and Iraq, went to war with each other. Ten years later, Iraq invaded Kuwait, leading to another war and sanctions imposed on Baghdad. All the while, the organisation battled to keep coordination sufficiently tight to influence the market. It did not always work. A period of record-high prices in the early 1980s was followed by a 1986 crash. Prices soared again in the first decade of this century, only to fall sharply once more.
NOC muscle flexing
The author’s seventh chapter is entitled ‘The Failed Cartel’. He ascribes part of the reason for this to “the weakening of state control over the petroleum sector” turning into “a subterranean struggle by the national oil companies (NOCs) to free themselves from the shackles imposed by the state”. NOCs sought to “take on a leading role in the global oil market, equalling if not surpassing the achievements of the oil majors”. As a metaphor, he contrasts the “sparkling new headquarters” of the Abu Dhabi National Oil Company with the “modest and relatively unassuming” energy ministry. Another example he could have cited is Saudi Arabia, where Saudi Aramco is dominant at home and expanding its global footprint, while the energy ministry slips further into the background.
With Saudi Arabia and non-Opec Russia today leading oil producers’ coordination efforts, and the US becoming a major exporter, Opec’s efforts to influence oil markets face more obstacles than ever. It must think hard about its next steps. Survival is not a sufficient purpose on its own, in a world that is turning away from fossil fuels.
Garavini’s book is well researched and full of interesting details. The one major flaw is not of his making. The book appears to have been published without a copy edit. There is a typo on the bottom line of the very first page of the introduction, and dozens more follow. Former ruler of Abu Dhabi Shaikh Shakbut is spelt correctly on one line and incorrectly on the next. And so on. Also the English at times is not just clunky, it is incomprehensible. The ship, sadly, has been spoiled for a ha’porth of tar.
*Published by Oxford University Press