The Organisation of Petroleum Exporting Countries (OPEC), once the all powerful and influential organisation controlling oil and gas supply to the world and thereby dictating the world economy, is now a mere shadow of itself. It may have retained its previous gloss, but it does not control the world market conditions, let alone dictate the market. On top of that as its economic power declines so does its political influence. Altogether, it can be said unequivocally that the OPEC is no longer a robust organisation it once was even a decade or two ago.
It started its life in Sept 1960 when some of the petroleum exporting countries met in Baghdad and formed this organisation with five founding members – Iraq, Iran, Saudi Arabia, Kuwait and Venezuela. Other countries such as Qatar, UAE, Libya, Algeria, Nigeria and so forth joined the organisation at later dates. Altogether there are now twelve members in the group; but it is dominated by the Middle East petroleum exporting countries. Having its headquarters in Vienna, the organisation meets normally a few times a year, either in Vienna or in any other chosen location. The next meeting started in Vienna on November 27, 2014.
The OPEC exerted its supreme influence in the aftermath of the Arab-Israeli war (also known as the Yom Kippur war) in 1973. Despite the fact that the combined Arab forces led by Egypt attacking Israel on the Yom Kippur day was totally annihilated by Israel in just six days, the Arabs came back with the triumph card of petroleum resources. The OPEC (or more precisely, the Arab members of the OPEC) imposed a ban on oil export to USA and other western countries which supported Israel during and after the Yom Kippur war. This very fact of oil embargo sent a shock wave throughout the industrialised countries, as oil from the Middle East was the engine that runs the industrialised economies.
Before the embargo, over 85 per cent of all oil imports to America were from the Middle East. Although America must have felt that she is over-exposed to the vagaries of the Middle East, hardly did she imagine that embargo can actually take place in reality. Within a year, the Brent crude price had quadrupled giving a tail spin to the world economy. All heavy industries such as iron and steel, ship building, car manufacturing, transport industry all went belly up. Throughout the whole of western world, recession was set in and Japan went into what came to be known as ‘stagflation’.
But it is not only in the western world that this oil price hike caused major problems, its effects came hard on the heels of economic recession in to the developing world. The famine in Bangladesh in 1974/75 had its root on this extortionate price rise – the price of raw materials as well as food products went up so much that Bangladesh could not afford to import them leading to a severe scarcity to food supply. Coupled with it, the ubiquitous corruption, mismanagement and practice of hording of food supplies by corrupt businessmen caused a severe famine in Bangladesh.
The industrialised countries learned a very bitter lesson at that time and resolved to allow never again such a situation (some even called it a black mail) to develop and fall prey to such extortion. They decided not to rely solely on Arab petroleum products. Three major strategic decisions had been taken at that time, so that never again they would be at the mercy of one energy source. Those decisions were: (i) there must be diverse and economically viable energy mix for the country; (ii) the indigenous energy sources must be developed and (iii) the oil cartel of the OPEC must be decimated. Each one of these issues takes a long time to develop and materialise, but when it comes to maturity it would offer a secure and affordable energy source to the country. The first two issues were related to energy production, distribution and utilisation, whereas the third one is economic and geo-political. They are all interrelated, but the third element is pivotal to the strategy.
It may be noted that before the quadrupling of oil price, OPEC used to supply nearly 45 per cent of all oil consumption in Europe and over 80 per cent in America. The crude oil price was sufficiently low to allow home grown oil industry covering oil exploration, oil field development, extraction and refinery to develop. So the industrialised economies had to bite the bullet and absorb the bitter pill meted out by the OPEC. Although north-sea oil gave Britain and Norway some cushion effect, but rest of the world did suffer a lot. Alternative energy sources such as coal, geothermal, hydro-electric etc. as well as nuclear did help a bit, but replacing 40 per cent supply was not that easy overnight.
From the mid-1980s through the rest of the last century and into the first decade of this century, a twin-track approach of developing energy – oil, nuclear, renewable etc. – at home and keeping the supply line from the Middle East open did work quite well. The western economic strength and military power were brought to bear on the Middle Eastern producers and they were made compliant to Western need.
Admittedly there were oil price increases, occasionally in excess of the inflation rates, but those were in response to supply and demand situation. When world economy was roaring ahead, there were large increase in energy demand in excess of supply and consequent increase in price. The reverse happened at times of recession.
Almost all the Arab oil producing countries were under dictatorial governments and those dictators under the umbrella of the OPEC organisation could collectively demand a uniform price. If these dictators, particularly the belligerent Saddam Hussein, could be removed (on some excuses) and let the country fall into pieces, then Iraq’s oil supply could be reasonably swallowed. That was the thinking of the neo-cons under George W. Bush. What happened following American invasion of Iraq is now history, but the oil supply from the Middle East became more secure than it would have been otherwise.
The golden opportunity for the West came following, what is now called the ‘Arab Spring’. What started on the street of Sidi Bou Zid, a small town in southern Tunisia, by the self-immolation of a street vendor by the name Mohammad Bouazizi the Arab Spring sparked the fire that engulfed most of the Arab countries one by one. But, as happens most of the times, a spontaneous civil uprising is hijacked by political groups to achieve their goals, it happened in Tunisia too. The uprising happened in Yemen, Egypt, Libya, Syria and so forth. Sometimes a country managed to pull itself back from the precipice, and in others the country simply descended into civil war, anarchy and tore the country apart.
While all these things were happening in those countries, western strategists and intelligence agencies found a golden opportunity. They asked themselves: what happens if these countries were made to fight among themselves, or even better, among the various factions internally? Then the government of the country would be grievously weak and would depend on the support of the western powers. The oil fields might nominally be under their governments but the western powers would effectively control and dictate oil price. At the same time as these oil producing countries would require weapons to fight their internal battles, the western powers would benefit from increased sale of weapons. This would be the win-win situation for the western countries.
On this hypothesis, one may ask why then western powers do not press the oil price to be very low, much lower than the present price of less than $100 per barrel? There are a couple of reasons for that. Some of the western countries are oil producers too. For example, America produces nearly 10.8 million bpd, higher than the largest OPEC producer Saudi Arabia which produces 10.0 million bpd. (Russia produces nearly 9.5 million bpd). The production of the western countries is going up and so the contribution from the OPEC is coming down in relative terms. To keep up the momentum of higher production, there must be further exploration in difficult and inaccessible conditions and that requires huge amount of investment. That investment can only be recovered if the price of the commodity is sufficiently high. Under the present conditions, production of oil is only viable in the west if the price is at least $80 per barrel or slightly more (except in Saudi Arabia where oil production cost is very low). Thus there is a balance to be struck between oil production and wholesale cost.
The OPEC countries are now being squeezed out, or in the process of being squeezed out, on economic grounds by the western countries as extraction of gas and oil by fracking is taking a firm hold in America and Europe. Besides the revival of nuclear power, the renewable sources such as solar energy, wind power, bio-technology and so forth are making big inroads to the energy market. The end result is that OPEC oil is no longer the ‘liquid gold’ it once was. Gone are the days when Saudi Arabian oil minister like Sheikh Yamani could command rapt world attention; his every move, his every word would have endlessly analysed by journalists and oil traders to decipher his mode of thinking! The OPEC is still influential, but its reign in oil industry is well and truly in terminal decline.