OPEC, a Texas-Size Idea
OPEC is an organization of 11 oil producing and exporting countries, from Africa (Algeria, the Socialist People's Libyan Arab Jamahiriya and Nigeria); Asia (Indonesia); the Middle East (the Islamic Republic of Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates); and Latin America (Venezuela).
The story of the Texas Railroad Commission was fascinating to a Venezuelan in exile in the early 1950s in Washington, D.C.
Juan Pablo Perez Alfonzo had a fervent belief that oil belonged to the people where it originated rather than to the extracting interests. He also saw the effect that supply could have on price – and looked for ways to assure Venezuela 50 percent of the profits as well as control over the industry.
Returning to his country in 1958, he accepted the role of Minister of Mines and Hydrocarbons. At first he was unsuccessful in his attempts to break down the oil quota system, so he went to work looking for others on the supply side who might share his feelings.
He found his soul brother in Abdullah Tariki, Saudi Arabia's director of the Office of Petroleum Affairs.
In the 1950s, the Soviet Union was beginning to rejoin the international oil trade as it began to recover from World War II. There was a fear of lost markets to the U.S.S.R. in an "economic offensive" and possible regulatory reactions by Western governments. So, the major oil companies slashed prices to undercut the Soviets.
Of course, the cheaper oil was coming from the Middle East -- and Venezuela. The price cuts also meant lower revenues for the countries producing the oil.
The price cuts were the catalyst for the Baghdad Conference September 15, 1960. At that meeting, the major exporting countries Saudi Arabia, Venezuela, Kuwait, Iraq and Iran created the Organization of Petroleum Exporting Countries.
Those five founders produced 80 percent of the world's oil supplies, and their expressed intention was to defend the price of oil – against the international oil companies.
From the beginning OPEC maintained that oil was a depleting asset and had to be replaced by other assets (cash).
The five were later joined by eight other members: Qater (1961), Indonesia (1962), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973-1992) and Gabon (1975-94).
The influence of OPEC slowly grew.
In 1971, while the Texas price of oil was $3.45 a barrel, OPEC priced their Middle Eastern oil at $2.20. Venezuela also passed a "law of reversion," which stated that all concessions and assets would become Venezuela's at the end of the contract. But, hey. Why wait?
A wave of nationalization of oil assets began – with the forming of national oil companies over the world, sometimes built on the assets of the major oil companies being nationalized. This was not a new idea. Mexico nationalized in 1938.
In 1973, due to rising demand, the international market price overtook the official posted price of the companies. OPEC saw the writing on the wall.
OPEC was now united and able to conserve supply. When the countries threatened to cut back production in the grand tradition of the Texas Railroad Commission, they were able to name their terms of payment. The increased world demand for oil ensured that the price would be met (Texas was pumping around the clock and still coming up short).
In October 1971 OPEC raised the price to $5.12 while curbing production. By December, the Shah of Iran called a press conference to announce the official price would now be $11.65.
It was a new world order, to be sure.