Historical Perspective on the OPEC vs. US Struggle for Oil Price Control
Crude oil, a vital and highly traded commodity, holds a central role in the global economy. In the contemporary landscape, the idea of any single country or organization controlling oil prices in the highly liquid global market seems improbable. However, the historical journey of oil price dynamics has witnessed a constant tug-of-war between two key players – the Organization of the Petroleum Exporting Countries (OPEC) and the United States. This narrative explores the intricate dynamics, historical shifts, and the future outlook of this struggle for control over oil prices.
In 1960, OPEC emerged with a clear mission – to safeguard the interests of Middle Eastern crude exporters in a market that was primarily dominated and controlled by the United States, the world's largest consumer and producer of oil at the time. The formation of OPEC marked a significant shift in the balance of power in the global oil industry.
OPEC's Oil Embargo in 1973
OPEC's assertion of its growing power came to a head in 1973 when Arab members of the organization initiated a crippling oil embargo. This embargo targeted the United States and other nations supporting Israel in the West, highlighting OPEC's influence over the oil markets. The oil embargo in 1973 marked a zenith in OPEC's ability to manipulate oil prices, especially as the U.S. witnessed a steep decline in its domestic production.
The U.S. Dominance
In 1960, the United States was the world's leading producer and consumer of crude oil. Although it already imported around a million barrels of crude oil daily, these imports were conducted at prices set by the dominant U.S. oil companies, supported by import quotas.
The U.S. had imposed quotas in 1959, limiting imports to just 9% of domestic consumption. Earlier, a consortium of U.S. oil companies had gained control of Iran's crude production following a Western-backed coup.
However, the 1970s saw a substantial surge in U.S. consumption, coupled with a decline in domestic crude production, which amplified the influence of oil-exporting nations, notably OPEC. The images of long queues at U.S. gas stations during the 1973-1974 oil embargo firmly established OPEC as a formidable adversary in the eyes of the American public.
The Energy Crisis of the 1970s
The surge in oil prices during the 1970s led to energy conservation measures and increased exploration efforts. While this was aimed at reducing reliance on foreign oil, it inadvertently set the stage for the energy slump of the 1980s.
OPEC and U.S. Shale
The U.S. energy landscape witnessed a significant transformation starting in 2011 with the rapid development of shale resources. This resurgence of domestic oil production led to renewed rivalry between the U.S. and OPEC, which now unfolded as a competition between producers.
When Saudi Arabia decided to increase its oil output in 2014, effectively depressing crude oil prices, it did so with the explicit goal of countering the substantial gains made by U.S. shale production.
In the early 2000s, a series of legislative proposals emerged in the U.S. Congress aimed at subjecting OPEC to U.S. antitrust laws as a cartel. However, none of these proposals were enacted into law.
OPEC’s Formation and Membership
OPEC, the Organization of the Petroleum Exporting Countries, was established in 1960 by developing countries seeking control over their domestic oil production and global supply. The five founding members were Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Since its inception, there have been additions and departures, and as of the present, OPEC boasts 13 member countries:
- Equatorial Guinea
- Saudi Arabia
- United Arab Emirates
Each OPEC member has one vote, and unanimous consent among all member countries is required for any decision related to oil production. New members can be admitted with approval from three-quarters of the membership, including all founding nations.
Saudi Arabia's Dominance
In practice, Saudi Arabia has historically wielded significant influence in OPEC's decision-making. This is primarily because Saudi Arabia stands as the top producer and exporter within the organization, with a substantial share of the aggregate spare production capacity. In 2021, Saudi Arabia accounted for a staggering 34% of OPEC's crude oil output, more than twice the output of Iraq, the second-largest producer in the organization. OPEC's crude oil output constituted 28% of global petroleum liquids production in January 2022.
While all OPEC members benefit from higher prices due to supply quotas imposed by the organization, each member also has an incentive to exceed its quota to maximize its oil revenue. The magnitude of Saudi Arabia's production in comparison to that of other OPEC members creates an additional incentive for these countries to supply as much crude as the dominant producer will tolerate. This dynamic has frequently led to accusations of cheating on quotas, undermining the perception that OPEC operates effectively as a cartel.
How OPEC Operates
By the organization's charter, each member nation has one vote, and all oil supply agreements among members necessitate unanimous consent. In practice, Saudi Arabia's dominant position is reinforced by being OPEC's largest producer and the country with the most unused production capacity. Member states often supply more oil than their allocated quotas dictate.
In late 2016, OPEC extended its influence by coordinating oil supply with 10 non-OPEC countries, collectively forming OPEC+. The non-OPEC members who joined OPEC+ included Russia, Kazakhstan, Azerbaijan, Malaysia, Mexico, Bahrain, Brunei, Oman, Sudan, and South Sudan. Similar to OPEC, OPEC+ supply agreements require consensus among its members.
While Russia's crude oil production rivals that of Saudi Arabia, it maintains significantly less spare production capacity. Even in the wake of Russia's invasion of Ukraine in February 2022, Saudi Crown Prince Mohammed bin Salman reaffirmed Saudi Arabia's commitment to OPEC+.
The historical narrative of the battle for control over oil prices between OPEC and the United States is a story of shifting dynamics, economic and political influence, and market evolution. Both entities have experienced periods of growth and decline, as the energy landscape constantly changes. In the short term, OPEC and U.S. shale producers continue to compete for global market share, despite their differing operating models. Looking ahead, it is evident that the oil industry's dynamics will be influenced not only by production capacity but also by emerging geopolitical risks and the evolving relationship between the United States and Saudi Arabia. In a world characterized by increasing energy demands in developing countries and the ongoing impact of climate change, the historic rivalry between OPEC and the United States remains a crucial aspect of the global energy landscape. In this ever-changing journey, the battle for control over oil prices continues to shape the destinies of nations and the global economy.