Origins of OPEC: The lead-up to the creation of the world’s oil producing cartel
OPEC, the club of some of the world’s largest oil exporters, was formed in 1960 by five countries—Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. These countries, despite their many differences, were united on the question of asserting greater control over their countries’ most important resource and preventing further price cuts. This piece analyzes the factors that facilitated its creation.
Scott McKnight - November 2019
The Titanic-hitting-the-iceberg moment that led to the creation of OPEC was the decision by Exxon, then the world’s largest oil company, to cut the price of Arabian light crude by 14 cents per barrel on August 1960. In fact, this was the second time Exxon cut its oil price in the span of a year. It was also the second time it had done so without consulting the producing governments.
But there is more behind OPEC’s creation than these two price cuts, just as there is more to the cause of World War I than the murder of an obscure Austrian archduke. This article argues that a series of events combined in particular order to bring about this break. First, there was far greater competition in the global oil market—between the companies themselves, the ‘supermajors’ and ‘independents’; as well as from Soviet oil exports—which finally put real downward pressure on prices and which oil companies could no longer tolerate. Second, the supermajors struggled to acknowledge that a handful of non-Western producing countries had emerged as dominant oil-producing countries by the late 1950s and that these countries bore serious and legitimate grievances against the companies themselves. And third, two oil men—one Venezuelan and the other Saudi Arabian—together broke through the political malaise in their respective countries (and in some others, too) to unite and assert greater control over their countries’ most valuable resource. These factors, which came into sharper focus as the 1950s progressed, led to the creation of OPEC in September 1960, an oil-producers’ cartel that in due time would fundamentally transform the global oil industry.
The setup: The oil industry becomes global
By the 1950s, the oil industry was massive, global and vital to the functioning of modern economies. In the years following the end of WWII, the world’s oil was coming from fields outside of the United States and Europe, and in rapidly growing volumes from a handful of Middle Eastern countries in particular. Apart from Iran, most of the well-known oil producers—Kuwait, Saudi Arabia and Iraq—ramped up production only from the late 1940s on. This trend was only set to continue, given the shocking abundance of reserves and the extremely low production costs of oil in the region (about one-fourth cheaper than the average cost per barrel of Venezuela, then the world’s largest oil producer outside the United States).
But these bountiful fields were under the control of a handful of private companies—what we now call international oil companies (IOCs) or ‘supermajors’, but then were somewhat derisively referred to as the ‘Seven Sisters’. Five were American—Exxon, Mobil, Chevron (then Standard of California), Gulf and Texaco, to use their current or latest names; one was British (BP, then Anglo-Iranian), and one a British-Dutch mix (Royal Dutch Shell). These vertically integrated giants were the forerunners of today’s global-spanning multinationals, and accounted for practically every barrel of oil produced and sold outside the United States and the Soviet Union at the time.
Under concession agreements that covered obscenely large expanses of territory and wildly prolific oilfields in the Middle East in particular, the supermajors came together to form joint ventures, since each on its own was unable to cope with the sheer capital and marketing needs for such a bounty. Through these interlocking arrangements, these companies produced, refined and marketed much of the world’s oil, which helps explain why global oil prices were remarkably stable for nearly two decades following the end of WWII. Abundant supply in one corner of the world met voracious demand on the other, as gushing volumes of oil from the Middle East and Venezuela were shipped and refined for the vehicles and factories of a rebuilding—and eventually—booming Europe and Japan, as well as increasing oil-hungry Global South. Keeping this global balance of oil supply and demand in alignment was a great testament to the skill and coordination of these companies.
The superpowers: Doing their own thing but influencing the rest
Outside this dichotomous relationship between major oil-producing countries and major oil-consuming ones was the United States and the Soviet Union. Each was an indisputable oil giant in its own right, relatively self-sufficient as it produced but also consumed massive volumes of oil on its own. But each made decisions in 1950s that affected—and ultimately helped upset—this global oil equilibrium.
On questions of oil, the two were going in different directions. The Soviet Union, with surging volumes of production, looked for foreign outlets not so much to increase profits as to expand its sphere of influence—and, if possible, to break the supermajors’ balance. On the other hand, the United States in the 1950s was the world’s largest consumer and producer of crude, an oil universe on its own in many respects. But America’s oil was high-cost, produced by countless companies of all sizes and from oilfields scattered across many states, with Texas the biggest among them. These producers had organized themselves into a potent lobby and held enormous sway in Washington (their most sympathetic backer was Lyndon B. Johnson, or LBJ, then Senate majority leader). As the 1950s progressed, the main concern of America’s oil lobby was the flood of cheaper, higher-quality crude from the Middle East (which the supermajors were producing) and which threatened their very existence. US domestic producers, vocal and numerous, feared cheap Middle East oil wouldn’t just steal their markets; it’d eventually destroy their business too. Their push for protection succeeded when the US imposed mandatory oil import tariffs in 1959 (more below).
The shift from a seller’s market to a buyer’s one—to the producing government’s gain
The global oil market looked quite different at the end of the 1950s than it did at the start of the decade. With new production coming online, from the Soviet Union as well as from investments aggressively made after the Suez crisis of 1956, the oil market by the late 1950s was increasingly competitive.
The US, seeking to protect US oil producers and recognizing its voluntary controls were futile, imposed mandatory oil import restrictions in March 1959. Any shortfalls would be met by oil imports from Canada and Venezuela, but only on a quota basis. The effects were far-reaching. The restrictions effectively pushed many of the world’s largest oil exporters—and the companies that produced their oil—to find markets elsewhere. Second, a certain group of US oil companies, which came to be known as the ‘independents’—themselves massive but not to the extent of the supermajors—frantically competed abroad for new sources of crude and markets, driving down prices for consumers while cutting deals with producing countries that were more favourable than the old ones made with the supermajors.
These factors—the closing of the US market, competition from ‘independents’ and Soviet oil, as well as cutting deals on better terms for producer governments—threatened the equilibrium that the supermajors had built through their hugely profitable interlocking arrangements in Iran, Iraq, Saudi Arabia, Kuwait and Venezuela. Producer governments were finally finding the constellation of forces shifting in their favour.
The producing countries have had enough
All of these changes to the world oil market were happening behind the geopolitical transformation of decolonization; that is, European-based empires withdrawing—either wilfully or by force—from the territories they had colonized. In their wake were newly independent states, determined to take part in the production of and revenue made from the sale of their natural resources. Against these changes, the old system just couldn’t hold up.
The supermajors were largely deaf to this wave of growing nationalism, and in many ways weren’t wired to understand it. Instead, it was the changing market conditions—and especially the downward pressure on oil prices in the late 1950s—that eroded their profits and pushed them to action.
With the market weakening in the late 1950s and oil companies—supermajors as well as independents—desperate to find buyers, the companies first turned to discounts to get rid of their oil. But with still too much oil in the market, the companies then turned to cut the posted price, led by Exxon in 1959 and again in 1960—the assassin’s bullet for the Austrian archduke mentioned above. The companies wouldn’t bear the decline in profit alone; the producing governments, whose revenue was now impacted but whose opinions were never solicited, were furious. But they needed someone to break the malaise and bring these very different countries together.
Someone to bring them together
The idea of an oil-producers’ cartel was inspired by the Texas Railroad Commission, a coordinating body that helped save the US oil industry as they nearly overproduced themselves to death in the 1930s. It was Perez Alfonzo, a Venezuelan who had already made his impact on the global oil industry in the late 1940s by introducing the revolutionary ‘50/50’ split between producing governments and oil companies. Perez Alfonso understood that Venezuela’s position in the global oil industry in the 1950s was a precarious dominance. It was a massive producer but one with high cost oil and its biggest market—the United States—cut off in 1959. Before this Gordian knot was cut, he’d envisioned a cartel of producing countries implementing what he called ‘production programming’—a precursor to what the production quotas that OPEC would many decades later give to its member-states. But Perez Alfonso also recognized that Venezuela, sensing its dominance eroding from cheap and abundant Middle Eastern oil, ironically needed an ally in that faraway world to make such an organization viable.
OPEC ‘will be a thorn in the eyes of those who deviate from the right path’ - Iraqi president Gen. Kassem, September 1960, a day after OPEC was formed
His ally was Abdullah Tariki, a rare nationalist amid the arch-conservative Saudi kingdom who, like Perez Alfonzo, had pioneering ideas for the industry and his company’s oil policy. Saudi Arabia, whose oil began flowing in 1938, was rapidly emerging as a massive oil producer through the 1950s; in 1950, the country produced 500,000 barrels per day; in 1956, it was 1m bpd, and rising fast. Saudi Arabia was a curious partner in this radical scheme. The country’s foreign policy was deeply aligned with the United States—notwithstanding the king’s rage about Israel and his frequent antisemitic rants. Likewise, the country’s oil industry was run by the Aramco consortium made up exclusively of America’s supermajors—Exxon, Mobil, Texaco and Chevron. But amid the royal family’s multi-year succession struggle, Abdullah Tariki seized the opportunity as head of oil policy to push Saudi’s otherwise conservative oil policy in a radical direction. The two men shared a vision that was both nationalist—to assert greater control over their countries’ most valuable resources—and conservationist—to develop it in the most cautious way and under an extremely long-term horizon.
When the supermajors, led by Exxon, cut posted prices in 1959 and again in 1960, the two men seized the momentum of anger on the part of producing countries to meet in Baghdad and form OPEC. Along with the signatures from Venezuela and Saudi Arabia were representatives from Iran, Kuwait, and the host-country Iraq. OPEC was founded in September 1960, going largely unnoticed by the international press; even the supermajors and independents themselves barely considered the organization’s formation to be of significance.
Conclusion
The cutting of posted prices by Exxon in 1959 and 1960, which the other companies repeated, greatly impacted the finances of those major oil producers whose budgets were increasingly dependent on their revenue. Venezuela, which didn’t have its revenues based on this posted-pricing structure, nevertheless had other motives to form an oil producers’ cartel. It saw its market power on an inevitable decline as the more abundant, lower-cost oil from the Middle East began to enter markets. The US government’s decision to impose mandatory oil import tariffs in 1959, which effectively blocked Venezuelan oil exports to its biggest market, only added urgency to the Venezuelan cause.
For their part, the supermajors were blinkered by their multi-decade dominance. They had built up the oil industry, made it global, and converted many of these woefully backward economies into legitimate exporters of the world’s most important commodity. But their dominance was also being steadily eroded—from the ‘independents’ as well as from destabilizing Soviet oil exports. The supermajors couldn’t easily abandon their colonial attitudes, either. When they cut prices to defend profits, they were doing so under increasingly arcane assumptions that only their bottom-lines mattered and they need not consult with the producing governments in which they operated.
In Baghdad in September 1960, country representatives from Iran, Iraq, Kuwait, Saudi Arabia and Venezuela signed into being OPEC, driven by anger over the price cuts and determined to gain greater control over their respective oil industries. Although it would take many years before the organization made its mark, the organization’s creation marked a turning point as the first time a group of oil-producing countries joined together to push for their collective rights against the globe-spanning oligopoly of companies and powerful governments behind them.
Scott McKnight is editor of Oil & Politics
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