The Formation of OPEC

 Posted Price System: In the early 1950s, major oil companies introduced the posted
price system as an accounting device to help host governments estimate anticipated
oil revenues. These prices were used for tax calculations, even though very little oil
was actually sold at these posted prices. The stability of posted prices became an
industry norm, and host countries focused on lobbying for profit sharing and
improved concession terms rather than demanding increases in posted prices.
 Change in Oil Companies' Perspective: As concession costs increased and
competition from independent oil companies impacted profit margins, major oil
companies began to view posted prices as a means to improve their financial
situation. In February 1959, the companies, without consulting host governments,
lowered posted prices, leading to an outcry from affected host countries.
 Formation of OPEC: In response to the price reductions, representatives from Latin
American and Middle Eastern oil-exporting countries met in the first Arab Oil
Congress in 1959. This marked the beginning of coordinated action against the oil
companies. The Organization of Petroleum Exporting Countries (OPEC) was officially
formed in September 1960 by five oil-exporting governments: Venezuela, Saudi
Arabia, Iran, Iraq, and Kuwait.

OPEC's Early Years

 Aims of OPEC: OPEC's primary objectives from the start included assisting host
governments in gaining more autonomy and control over their oil. The organization
aimed to stabilize crude oil prices, restore posted prices to pre-1959 levels, require
consultation with host governments before altering posted prices, and develop a
program for ensuring stable oil prices through production regulation.
 Incremental Gains: OPEC, despite internal competition and diversity among
members, helped its members make incremental gains in oil revenue. The decision-
making within OPEC evolved to a "least common denominator" approach, allowing
members to coordinate policies based on a common ground while leaving room for
individual advantages.
 Challenges and Expansion: OPEC faced challenges such as competition among
members and political divisions. Over time, OPEC's membership expanded to include
countries from Africa, Southeast Asia, Latin America, and the Middle East, leading to
increased political and cultural diversity.

LEAPFROGGING
The Oil Weapon

 Historical Use of the Oil Weapon: The deployment of the oil weapon, used in Arab-
Israeli conflicts since 1948, included actions such as blowing up oil installations
during struggles for control. Attempts to use the oil weapon during the Suez crisis in
1956 and the Six Day War in 1967 were not highly effective.
 Causes of Ineffectiveness: The oil weapon's ineffectiveness was attributed to other
oil-producing countries' willingness to expand production during embargoes, oil
companies' effective supply management, and dissension among Arab governments.
The conservative Arab oil-exporting governments, heavily dependent on oil
revenues, were reluctant to bear the economic costs of using the oil weapon.
 Creation of OAPEC: The establishment of the Organization of Arab Petroleum
Exporting Countries (OAPEC) in 1968 by three conservative Arab states aimed to
address their specific concerns, including potential income loss and political
pressures. The 1967 oil embargo served as a turning point, highlighting the need for
cooperation among OPEC members for collective economic interests.

(The 1967 Oil Embargo and Its Effects)

 Global Impact: The 1967 oil embargo, resulting from production cutbacks by Arab
governments, caused world oil prices to rise. The closure of the Suez Canal during
the Six Day War created a tanker shortage for oil shipments to Europe from the Gulf,
leading to increased transit time and costs.
 Political and Economic Effects: The embargo prompted at least one European nation,
France, to shift its foreign policy in the Middle East to secure energy supplies. Other
European governments also became disenchanted with US foreign policy positions.
The European Community aimed to develop its own energy policy independently of
the United States in 1973.
 Oil Companies' Perception: Despite the structural changes in the international oil
market, oil companies remained complacent and focused on their fears of
 oversupply. They saw opportunities to improve profit margins and were skeptical
about the global oil market being disrupted by political pressure.
 Shift in US Oil Production: A crucial structural change was the decline in US oil
production from its peak in 1970. As demand continued to rise, the US became
increasingly dependent on foreign sources of oil. The decline in US oil production
meant reduced excess capacity under direct US control.
 False Sense of Security: Oil company complacency was based on OPEC's disarray
during the 1967 embargo and their success in countering production cuts. The
companies underestimated indicators of rising global oil demand and failed to plan
for future exploration and development operations.
 Unforeseen Consequences: The false sense of security was misleading, as the 1967
war had closed the Suez Canal, causing effective tanker shortages for oil shipments to
Europe. The lack of preparation for potential supply interruptions from
Mediterranean ports reflected a lack of foresight by oil companies.

Libyan Squeeze

 Revolution in Libya (September 1969): In September 1969, a revolution in Libya led

by Colonel Muammar Qaddafy replaced a pro-western king with a militantly anti-
American leader. Qaddafy sought to maximize Libya's returns on its oil resources,
considering its strategic position on the Mediterranean.
 Structural Factors in Libya: Libya's oil industry was divided into nearly 40
concessions, each with its own operating company. The country possessed high-
quality oil, which was both light in weight and low in sulfur. Qaddafy leveraged these
structural factors to isolate vulnerable companies, particularly Occidental Petroleum,
demanding increased payments to the Libyan government under the threat of
shutdown.
 Occidental Petroleum's Dilemma: Occidental Petroleum, lacking alternative oil
sources in the Eastern hemisphere, faced significant pressure. Attempts by its
president, Armand Hammer, to purchase oil from Exxon at a discount were
unsuccessful. Hammer ultimately agreed to pay the higher price demanded by
Qaddafy, setting a precedent for other companies.
 Ripple Effects: The Libyan squeeze extended beyond Libya's borders. In 1971, Gulf oil
producers, led by the Shah of Iran, also demanded higher oil prices. The oil
companies sought joint negotiations to prevent being individually targeted, but the
Nixon administration refused to include all Middle Eastern oil producers, leading to
separate negotiations.
  Leapfrogging Concerns: Oil companies were wary of leapfrogging, where one
country's successful negotiation could set a precedent for others. The attempt to
limit leapfrogging by inserting a five-year clause in the Teheran agreement proved
ineffective in protecting the companies.
 US Dollar Devaluations: The continued deterioration of the US economy led to dollar
devaluations in 1971 and 1973. These devaluations reduced real oil prices specified
in the Teheran-Tripoli contracts. OPEC members, in response, demanded revisions to
nominal prices in these agreements to compensate for exchange rate losses.
 Failed Negotiations and Larger Questions: Despite the companies' attempts to resist
these demands by citing the five-year clause, negotiations were ongoing in the fall of
1973. Other events unfolded, turning the issue of oil prices into a broader question
of who would control OPEC oil

The 1973 Arab Oil Embargo

 Background and Deteriorating Oil Company Position:

 The oil companies faced challenges before the 1973 oil revolution due to
Teheran-Tripoli agreements reducing their authority.
 Domestic issues in the US, such as falling behind in oil supplies and
congressional hearings, created public criticism.
 Energy Crisis Origins:
 Spot shortages and price increases resulted from restrictions on oil imports,
leading to an energy crisis.
 The oil embargo in October 1973 was often seen as the outcome of the oil
weapon's use in the Yom Kippur War, but the roots of the crisis existed
earlier.
 Warnings and Nixon Administration Inaction:
 Arab governments openly warned, throughout 1972-73, of using the oil
weapon if a Middle East settlement conforming to UN Resolution 242 was not
achieved.
 The Nixon administration, facing political problems and adhering to the Nixon
Doctrine, did not respond or intervene directly in Middle Eastern affairs.
  Arab Oil Embargo (October 17, 1973):
 OAPEC imposed an oil embargo against Israel's allies, intending to be more
extensive and discriminating than previous embargoes.
 Despite some successes, the targeting plan faced violations, and the embargo
inflicted hardships on both supporters of Israel and the friends of the Arabs.
 Consolidation of the Oil Price Revolution:
 The embargo consolidated the oil price revolution, leading to significantly
higher bids for crude oil during the crisis.
 OPEC members, divided between price hawks and moderates, eventually
compromised on a price four times higher than a year earlier.

The Oil Revolution

 Change in Ownership and Industry Restructuring:

 The oil revolution involved a shift in the ownership of oil, with OPEC countries
gaining more control.
 Nationalizations and equity control shifted decision-making power from
multinationals to host governments, leading to industry restructuring.
 Impact on Corporate Ownership and Industry Dynamics:
 Crude oil prices, set by OPEC, eliminated the ability of multinationals to use
oil production to subsidize other industry phases.
 The shift in ownership prompted the selling off of unprofitable refineries and
gasoline stations by large oil companies.
 Windfall Profits and Global Exploration:
 Higher OPEC prices enabled oil companies with equity holdings worldwide to
make windfall profits.
 Despite higher royalties and fees, companies prioritized increasing production
outside OPEC, with some investing in other energy sources.
 Demand and Consumption Dynamics:
 Higher oil prices depressed demand, and while inflation eroded some price
increases by 1978, consumers still perceived increased costs.
  Consumption, after a brief drop in 1974-75, rose again, with consumers using
a similar amount of oil as in 1973 before the oil embargo.

Oil and Politics in the Middle East

 OPEC's Increased Political Appeal:

 OPEC's power in the international industry increased its appeal as an arena
for pursuing political goals.
 Ethnic, religious, and territorial conflicts were expressed within OPEC, with
disagreements over oil prices often reflecting deeper political disputes.
 Complex Motivations in OPEC Price Conflicts:
 Disagreements over oil prices stemmed from complex economic and political
interests, challenging simplistic economic explanations.
 The Iranian revolution intensified conflicts within OPEC, with Iran using oil
prices both as a tool against the US and to boost national income.
 Iran-Iraq Conflict and OPEC Disruptions:
 The Iran-Iraq conflict, fueled by oil and territorial disputes, disrupted OPEC
meetings and impeded efforts to coordinate production.
 Iraq's economic success and the First Gulf War further strained OPEC unity,
hindering attempts to maintain a united front in a deteriorating market.

Oil and Money in the Middle East

 Blessing and Curse of Oil Wealth:

 Oil's blessing lies in its easy conversion into foreign exchange, significantly
increasing earnings for oil-exporting countries.
 The flood of money resulting from higher oil prices, driven by the oil
revolution and events in Iran, brought both positive and negative
consequences.
 Economic and Military Impact:
 Good News: Oil money provided ample resources for economic development,
military defence, and improving citizens' welfare.
 Bad News: Rapid and unpredictable money inflow led to domestic economic
challenges, inflation, and excessive spending on arms purchases.
 Petrodollars and International Banking:
 Economists' concerns about "unusable" petrodollars were dispelled as oil-
exporting countries' cash balances entered the international banking system.
 The term "petrodollars" emerged as these funds were recycled as loans to oil-
importing countries.
 Mixed Impact on Domestic Economies:
 Sudden wealth led to increased imports, exacerbating domestic inflation
rates.
 Some oil-exporting states accumulated foreign debt to fund investments and
arms purchases, diverting resources from rural populations.
 Arms Purchases and Socio-Economic Effects:
 Oil money fueled arms races, with Iraq's Saddam Hussein becoming more
powerful due to extensive weapons acquisitions.
 Efforts to redistribute oil revenues varied; Kuwait and Bahrain subsidized
various sectors, while conspicuous consumption and corruption also thrived.
 Foreign Policy Autonomy:
 Oil money enhanced the autonomy of oil-exporting countries, reducing
dependence on external patrons for economic or military assistance.
 Middle Eastern nations could pursue more egalitarian relationships, shifting
alliances and breaking the tradition of Great Power Primacy.
Conclusions

 Economic Independence and Foreign Policy Shifts:

 Oil provided economic independence for Middle Eastern countries, enabling
unique development strategies and new political alliances.
 It served as a substitute for conventional military power, prompting nations to
reassess foreign policies based on long-term economic interests.
 False Sense of Power and Economic Security:
 The oil windfall created a false sense of power and long-term economic
security for policymakers in oil-exporting states.
 Few prepared for economic downturns, leading to visible repercussions in the
region after the boom years.
 Impact on Regional Politics and Wars:
 Oil revenues financed destructive Gulf wars and the arming of forces
committed to Islamist revolution across regions.
 Second Gulf War casualties included Arab nationalism, allowing for shifts in
regional power dynamics and progress in the Middle East peace process.
 Ambiguous Results and Costs:
 Despite opportunities, oil's exploitation exacted high social, political, and
economic costs.
 Uncertainty prevails about the future regional order and whether oil has been
a blessing or curse for nations and their peoples.
 Ambiguous Effects Beyond the Middle East:
 Similar analyses of energy politics in other regions may reveal equally
ambiguous effects and obscure prognoses for oil exporters and importers
worldwide