Wall Street History
Well, as I like to say, I certainly don''t expect these columns to
win any Pulitzer''s. To wit, I really should have explained what
countries are members of OPEC before I did last week''s article.
So please accept my apology as we go back, back, back.to fill in
OPEC was formed at a conference held in Baghdad, September
10-14, 1960. There were five original members: Iran, Iraq,
Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975,
the organization expanded to 13 members with the addition of
Qatar, Indonesia, Libya, United Arab Emirates (UAE.as
opposed to UAB, the Univ. of Alabama-Birmingham), Algeria,
Nigeria, Ecuador and Gabon. Ecuador dropped out in December
1992 and it wasn''t until January 1995 that ministers wised up to
one of their own. At a meeting a minister turned to the
representative from Gabon and said, "By the way, where is this
place you call, Ga-bon?" Gabon''s representative, duly
embarrassed said, "I know nothing. I know not where Gabon is
myself." With that he fled the room, never to be seen again, and
Gabon was removed from the roster.
Despite all of its press, and influence, it may surprise you to learn
that OPEC produces just 40 percent of the world''s oil. It does,
however, hold more than 77 percent of the world''s proven
reserves. OPEC also contains nearly all of the world''s excess oil
Non-OPEC nations thus produce nearly 60 percent of the world''s
crude oil. But non-OPEC countries have smaller reserves which
are being depleted more rapidly than in OPEC. For this reason, it
behooves these nations to continue to aggressively pursue new
Current non-OPEC production is concentrated in seven countries:
Canada, the United Kingdom, Norway, Mexico, China, Russia
and the U.S. Five of these seven are net exporters to the world
oil market, the U.S. and China being the exceptions. Together,
the seven account for about 60 percent of non-OPEC production,
with the U.S. and Russia being the largest. The remaining
sources of non-OPEC oil are from 14 nations, including Syria,
Brazil, Colombia and Oman.
Continuing then where we left off last week.
In March 1974 the Arab oil embargo was lifted but the event had
left its mark. American prosperity had depended in part on what
the Shah of Iran described as "the mystical power of the oil
companies," or, the arrogance with which the industrial world, in
the role of colonial power, claimed dominion over the planet''s
The price of oil continued to rise throughout the ''70s. And oil
wasn''t the only commodity to do so. By 1980, other
commodities such as tin, silver and gold rose to all-time highs
while rubber, cotton and grain also rose to high levels.
In 1974 the Consumer Price Index rose to 11 percent. This was
the highest peacetime price-surge in American history. By 1975,
President Gerald Ford had unveiled his "Whip Inflation Now"
program, with its humiliating WIN buttons.
Meanwhile, between 1973 and ''78, annual revenues from oil in
the main Arab producing countries grew enormously. For
Saudi Arabia''s rose from $4.35 billion to $36 billion, Kuwait''s
went from $1.7B to $9.2B, and Iraq''s increased from $1.8B to
But this increase in wealth led to an increase in dependence on the
very industrialized countries they had sought to teach a lesson.
The producing countries had to sell their oil, and the industrial
countries were their main customers. In the course of the 1970s,
the excess of demand over supply came to an end, because of
economic recession, attempts to economize in fuel consumption
and increased production by countries which were not members
The bargaining position of OPEC grew weaker and a high and
uniform price level was going to be difficult to maintain. And the
huge surpluses that were created in the producing nations had to
be invested somewhere so, for the most part, they were invested
in the industrial countries. They had to go to the same nations for
technical expertise in order to develop their own economies and
they sought outside help in building their armed forces.
The U.S. was also increasingly prepared to threaten force if oil
supplies were interrupted again. We were not just worried about
revolutions in the producing countries but also the extension of
Soviet influence in the region, i.e., the 1979 invasion of
After the 1973 oil embargo, Kissinger and Nixon had looked on
Iran as an important regional ally. Unlike King Faisal in Saudi
Arabia, the Shah of Iran did not use his oil to place political
pressure on the U.S., although he greatly increased its price. [The
U.S. did still supply Saudi Arabia with large amounts of aid]. In
addition, Iran allowed the U.S. to refuel ships at its ports and
continued American antagonism of the Soviet Union.
Nevertheless, the second oil crisis (which really started in 1978
when Iran led a new price increase), accelerated as a result of the
Iranian revolution [see the "Hott Spotts" archives] as well as
political reaction to the Camp David Accords between Egypt and
Israel. Oil was to hit $40 a barrel by 1981.
But eventually the price peaked due, again, to the simple forces
of supply and demand. The industrialized nations began to
develop more efficient uses of energy while OPEC failed to
maintain a united front on prices and volume of production. The
price of crude has generally been in a free fall since ''81. Even
with the recent price rise, in inflation-adjusted terms, we have a
long ways to go to begin to come close to the levels of the late
70s / early 80s.
And one interesting note from just last week. There was an item
in the Wall Street Journal concerning Russia''s Gazprom, the
world''s largest producer and exporter of natural gas. They are
proposing a cartel along the lines of OPEC to raise the price of
gas, a lot of which is used in Europe. Gazprom is looking to
reach agreements with two other major gas producers, Norway
and Algeria. If gas prices remain low, Gazprom warned, Russia
may balk at extending supply contracts in Western Europe.
Finally, what have we learned from the two price shocks of the
''70s? Little. We still import way too much oil. Asia, for
example, is back up to around 70% [from the Middle East] in
some countries. Should the global economic recovery continue,
there is no doubt that the $22 prices of today will look cheap in a
year or so.
[Sources: "Energy Information Association;" "The Great Wave,"
by David Hackett Fischer; "A History of the Arab Peoples," by
Albert Hourani; "A Reassessment of U.S. Strategic Interests in
the Post-Gulf War Middle East," by W. Judd Peak]
*Next week I''ll have some thoughts on the Roaring ''20s.