As it turns 60 Opec needs to adapt to navigate the transition of energy resources

The oil crises has sowed the seeds of modern renewable energy, efficiency, and energy policy, while halting the post-war paradigm of environmentally unsustainable breakneck growth

Opec has successfully navigated seven major oil market cycles since its inception in 1960. Reuters  

Sixty years ago this Monday, the Al Shaab Hall in Baghdad hosted five of the oil world’s most consequential figures. Abdullah Al Tariki of Saudi Arabia, Juan Pérez Alfonzo of Venezuela, and the representatives of Iraq, Kuwait and Iran established the Organisation of Petroleum Exporting Countries. One of the most important economic groups of modern history, Opec today faces a transformation as profound as that at its birth.

As historian Giuliano Garavini of NYU Abu Dhabi has explored in his recent book, Opec was a standard bearer for cooperation amongst the developing and post-colonial countries. Just seven years earlier, an American- and British-backed coup had ended Iran’s attempt to nationalise its oil, intimidating others who might press for better terms. The immediate inspiration for Opec’s founding was the February 1959 unilateral cut in official “posted” prices by the international oil firms, reducing their tax obligations to their hosts.

But behind it lay years of particularly Venezuelan diplomacy and travel to the Middle East, leading to the Ma’adi Pact of 1959 in the Cairo suburb at the end of the first ever Arab Petroleum Conference. In those days of limited international flights and even international phone lines, Opec was a remarkable assembly of countries with different languages, cultures, geographies, politics, histories, religions, with very little in common beyond their vast petroleum resources. Others joined later, including Abu Dhabi (now representing the UAE) in 1967, taking membership to twelve by 1973.

Opec has been through at least four incarnations. Its first decade was spent demanding a fairer share of taxation in a glutted market from the international oil companies, the “seven sisters” of Shell, Exxon, British Petroleum and others, who in interlocking consortia controlled almost all oil across the Middle East, Venezuela and Nigeria.

After 1970, the market tightened. The 1973 oil embargo by some Arab states (not Opec) imposed over the October War with Israel was the catalyst, not the cause, of an enormous run-up in prices. The Iranian Revolution and outbreak of the Iran-Iraq War in 1978-80 further squeezed supply.

The Opec holdings of international oil firms were progressively nationalised, clinging on with minority stakes only in a few places such. The great national oil companies, still the world leaders in reserves and production, emerged – Saudi Aramco, Adnoc, Petróleos de Venezuela, National Iranian Oil Company.

From 1970 to 1981, the organisation’s concern was setting prices – usually upwards. Shell managing director Frank McFadzean cynically observed “senior Cabinet Ministers flying off with the melodrama normally associated with the relief of a beleaguered fortress” to obtain less than a month’s worth of oil for the UK.

Opec had become the world's most instantly influential economic organisation and gained the reputation of a bogeyman for the industrialised countries that it has never quite shaken off.

The group is famous for its production quotas, the locus of intense bargaining and controversy. Yet these only came into existence in 1982 as demand for Opec crude slumped under the strain of recession, alternative fuels, conservation and competing production – all inspired by the organisation’s excessively high price targets. Saudi Arabia gave up its role as swing producer in 1986 and has always avoided resuming that burden.

The oil crises also sowed the seeds of modern renewable energy, efficiency, and energy policy, while halting the post-war paradigm of environmentally unsustainable breakneck growth.

The long slump to 2003 was followed by a China-fuelled boom, the 2008-9 financial crisis, another boom, then the 2014 shale-inspired bust. These volatile times spawned Opec’s fourth incarnation in 2016, part of the wider Opec+ grouping with Russia and some other non-Opec producers, which has proved crucial in managing coronavirus’s epic demand destruction. The influence of formerly leading members Venezuela, Nigeria, Algeria, Libya, Indonesia and Iran has shrunk almost to nothing. The key decisions are all made between the Arabian Gulf and Moscow.

Yet other warning signs have been flashing for at least a decade. Battery vehicles threaten oil’s near-monopoly in ground transport, approaching economic competitiveness and ever more essential for the climate. Liquefied natural gas and then hydrogen for ships, biofuels and hydrogen for planes, will be next.

As I wrote on Opec’s fiftieth anniversary, “This fading of oil as the world’s premier energy source should have aroused more concern than it has in Caracas, Riyadh or Tehran. At this rate, they will leave billions of barrels in the ground at the end of the oil age.” The five founding members long ago succeeded in gaining control over their resources, but the economic situation of three is challenging, while Saudi Arabia and Kuwait face the dilemma of growth and diversification beyond their petroleum bounty.

So, the fifth version of Opec has to adapt. It needs to regain the market share lost to higher-cost producers in the shale era and then to Covid-19, while managing the return within its ranks of exports from Iran, and perhaps Venezuela and Libya. Will the Opec+ cooperation become a long-term feature of the market, and will Saudi Arabia seek to deter Russia’s higher-cost new fields? How will it manage the new volatility of oil prices and possible underinvestment while oil is unfashionable?

But an adaptable and enduring organisation can also find a new mission. Its members need help to make the tough transition of energy sources. Instead of being seen by some as an obstruction to world climate policy, it could be a constructive force for adapting oil exporters to a low-carbon world.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis