Once upon a time in Baghdad, fifty years ago and exactly on September 14, 1960, the five developing countries of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela met and announced the formation of the Organisation of Petroleum Exporting Countries (Opec), which is rightly celebrating its golden jubilee this year.

At that time, the announcement went unnoticed by the world except for a few International Oil Companies (IOCs) who probably thought that the organisation would soon crumble and disappear and their domination of the oil market would continue.

Those same IOCs twice reduced the price of oil, shortly before the formation of Opec unilaterally and without any concern to the interests of the producing countries thereby expediting the response and the birth of Opec.

The aims of the organisation as clearly stated in its statute were "to coordinate and unify the petroleum policies of its member countries and ensure the stabilisation of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry".

Fifty years on, the aims are still the same and landmarks of success and failure along the road are evident, but on balance there is no doubt that Opec have withered the test of time, the ups and downs of the oil market and the belligerences of the industrial world of the rich.

Inalienable right

During the whole of the 1960s, Opec consolidated its membership and discussed ways and means to achieve its aims without any noticeable improvement in oil prices or producers' per barrel returns.

But the IOCs never dared to reduce oil prices again and Opec emphasised the inalienable right to exercise permanent sovereignty over its natural resources. In the 1970s, Opec assumed the pricing of its oil and helped by positive fundamentals of supply and demand achieved a substantial increase in prices and member countries revenues.

But this success was met by an equally strong reaction from industrial countries by the formation in 1974 of the International Energy Agency (IEA) to counter the influence of Opec and to encourage policies away from oil and particularly Opec oil.

Opec, was unable to control runaway prices in the 1970s but was later able to hold on to them for too long thereby allowing the huge production increase from high cost areas outside Opec and the equally huge fuel switching away from oil leading to almost 50 per cent reduction in Opec's production, the price crash of 1986 and the abandoning of price setting by Opec since then.

Opec sought the help from non-Opec producers to stabilise the market but they offered too little at shorter than expected duration.

From there on, Opec simply relied on setting production targets in order to achieve a desired level of prices in a market dominated largely by general price weakness and by volatility driven by the impact of daily happenings here and there and the increase in speculative trading.

But even this simple mechanism was not strictly adhered to by member countries and another price crash in 1998 was inevitable.

Opec's production in 1979 was close to 31 million barrels a day (mbd) and today is probably 35 mbd, including natural gas liquids.

Prices soured between 2003 and 2008 to close to $150 per barrel driven by rising demand especially in Asia. But the world financial and economic crises of the second half of 2008 caused prices to fall precipitously to between $70 to 80 per barrel, which seems to be a comfort zone for producers and consumers though it is largely caused by declining demand.

Helping hand

In the last ten years, Opec has managed to foster cooperative relationships not only with non-Opec producers but with consumers such as the European Union and China and even with its adversary the IEA. It has finally donned on all that the oil market demands an understanding and a helping hand by all participants if some form of stability is desired.

Given the experience of the past, Opec with its vast reserves will survive these uncertainties and people younger than me will probably celebrate a century of Opec.

 

The author is former head of Energy Studies Department at Opec Secretariat in Vienna.