On August 9, 1960, Standard Oil of New Jersey (Esso) reduced the posted crude prices in West Asia by 8 percent as Soviet oil exports to Europe and Asia rose. Burmah-Shell and Caltex followed with a 14 percent reduction for Indian imports, triggered by Russia’s cheaper oil sale. The interlocking system of oil company ownership and pressure from other consumer countries for lower prices led to the reduction of West Asian crude prices.
Infuriated by these unilateral cuts, Venezuela’s mines and hydrocarbons minister Juan Pérez Alfonso and Saudi Arabia’s first oil minister Sheikh Abdullah Tariki sought a mechanism to regulate oil output and ensure price stability. To weaken international oil majors’ control over production, pricing and global sales, five major producers—Iran, Iraq, Kuwait, Saudi Arabia and Venezuela—convened the historic Baghdad Conference a month later. Thus, on September 14, 1960, the Organization of the Petroleum Exporting Countries or Opec was founded to “coordinate and unify petroleum policies among member countries to stabilise international oil markets and secure fair returns”.
The 1973 oil crisis imparted a boom-bust volatility to the energy market for decades. Opec often leveraged its capacity to stabilise markets and maximise profits during the early 1980s, but global exploration provoked Saudi Arabia to flood the market, crashing prices in 1986 for years. Whether managing 1990 Gulf War supply fears or speculative trade amid growing emerging markets' demand in 2008, as oil hit $147 a barrel, Riyadh’s production hikes doused inflationary fires. Just months later, the global financial crisis triggered a major slump in demand and price.
Brent peaked at $115.06 in June 2014. Then, surging US shale flows and lifting of its export ban in December 2015 affected Opec’s dominance. The glut crashed prices to a multi-year low of $30 by January 2016. Opting to secure its market share, Opec refrained from production cuts. More than 100 US oil and gas companies filed for bankruptcy by mid-year. The 2016 Algiers Accord by Opec members to arrest the plunge in prices, followed by the Vienna Agreement in November, cut 1.2 million barrels of production per day. Ten non-Opec producers joined the coalition that December to form Opec+.
Saudi Arabia, considered the de facto Opec leader due to its massive reserves and production capacity, firmly influenced the cartel’s policy and pricing framework allocating member’s production quotas. A cautiously calibrated politico-economic stance balanced its relations with the West and within bloc members. However, emerging non-Opec and US supplies have shrunk Riyadh’s authority in a dynamically altered organisational structure.
As new oil is discovered in South America and the Caribbean, Opec members were reluctant to let much of their wealth lie buried for longer and lose their historical share in the soaring global demand. Many petro-States used oil revenues to cover high fiscal deficits missing out on long term oil infrastructure investments. China emerged as an important economic catalyst with its financial participation in oil facilities across continents. Its loan-for-oil partnership was difficult to ignore.
With strong bilateral ties in energy and technology, focusing on long-term LPG supplies and to increase its energy exports to Asian markets, Qatar exited Opec in 2019. Ecuador’s parleys with China, centred on debt and stronger bilateral ties, locked $1 billion in loans for Quito and its walk-out of Opec in 2020. Angola President João Lourenço's visit to Beijing and Shandong, a hub of ‘tea-pot refineries’, in March 2024 after the nation broke away from Opec, secured China’s commitment of over $21 billion in investment across solar power and oil exploration.
The Crown Prince of Abu Dhabi met the Chinese President in Beijing last April as they decided on a “more robust, resilient and dynamic” partnership. The UAE exited Opec within a fortnight to break away from Saudi dominance for a larger share in Asian oil demand. Despite America’s vast investments in the Emirati oil industry, the latter is keen to pursue clean energy ambitions with China, a powerful actor in the sphere.
In the absence of a quota hike, Iraq could consider quitting the cartel as it plans to raise production capacity to 6 million bpd by 2029 with Chinese investment.
Russia’s overland pipelines elude EU and US sanctions. The Druzbha, built around the time of Opec’s formation, is one of the longest to provide oil to Europe. The ESPO pipeline transports Siberian crude to Russia’s Pacific coast for Asian markets, with a branch providing direct supplies to Chinese refineries. Moscow could explore a similar pipeline for Indian buyers and draw curtains on its quota centric relationship with Opec.
Nigeria’s Dangote refinery has bolstered national energy security while becoming Europe's leading jet fuel supplier. An ongoing $1.6 billion IPO—Africa's largest—aims to scale its capacity to 1.4 million bpd. To feed this expansion and maximise exports, the nation could resist Opec's strict production quotas.
Robert McNally, energy advisor to President George W Bush, once commented, “While the days of monopolists, soldiers, cartels and regulators stabilising the oil market may be over, the only thing worse than someone controlling the global oil market is no one doing so.”
America’s evolving foothold in Venezuela, Opec’s founding member holding the largest proven reserves, could dent Opec’s collective leverage over oil markets.
Though Opec was considered a negative for the markets because it managed pricing and volume, the tacit order within a cartel occasionally lends the market, rife with speculators, an element of stability and sustains broader economic growth. Each time it failed to regulate supply or cushion a price surge, the ensuing volatility led to universal chaos.
When members push for high prices to pursue their own economic agenda, they risk driving inflation. Conversely, a supply glut causes price collapse. While low-cost West Asian producers can weather a crash, cheap oil would crush expensive competitors like US shale and new oil frontiers, impacting global economic growth. Only calibrated cooperation and consensus can avert a fragile cohesion warped in political friction. A unified Opec could fine-tune the balance.
Ranjan Tandon | Senior markets specialist and author
(Views are personal)