From OPEC to the Emerging Powers: the History of the Oil Markets
Oil is the most important source of energy, the market capable of determining the economic and political structures of entire macro-areas. The race for black gold began as early as the end of the 19th century in the aftermath of the first industrial revolution. The world started to need more and more crude oil and in a short length of time it became an essential commodity capable of replacing coal. But above all it has been since the end of the Second World War that oil production has meant, for the exporting countries, the possibility to forcefully assert their presence on the international political stage.
For several decades now oil production has, in the collective imagination, been linked to the countries of the Middle East. And in particular to those of the Persian Gulf region. It is precisely here that most of the world’s reserves are concentrated, but it is also here that the term “oil monarchies” was coined, referring to the many states of this area of the planet whose royal families have transformed the lives of their countries thanks to huge oil revenues. Starting with the House of Saud which rules Saudi Arabia which has been the largest oil exporter for years. The country alone has about 18% of the total world reserves and its 10,460,710 barrels a day put it in third place after the US and Russia in terms of oil production but, in view of the territory covered by these two powers, the quantity produced by Saudi Arabia takes on great proportions. The other neighbouring monarchies are also known for their development being linked to the export of oil.
The same applies to the United Arab Emirates which, thanks to oil, has become an economic point of reference in the region. Qatar, Bahrain, Kuwait and Oman also started to exploit intensively their large oil reserves in the 1970s. A little further north, Iraq is the other country in the region to have some of the most important oil deposits, on a par with neighbouring Iran. OPEC was established in Baghdad in 1960 during a meeting promoted by one of the most important South American producers, Venezuela. This is the cartel which right from the outset included the most important oil producing nations. In addition to Venezuela, the founders were Iraq, Iran, Saudi Arabia and Kuwait. The cartel’s main objective was to counter the dominance of the so-called “seven sisters”, i.e. the seven most important oil multinationals, mostly American and British, which determined price and production trends.
In addition to the Gulf countries and Venezuela, other governments have joined OPEC over the years and the cartel eventually embraced other areas of the Gulf as well. Today its members include African countries such as Libya, Algeria, Angola, Nigeria, Gabon, the Democratic Republic of the Congo and Equatorial Guinea. The United Arab Emirates has also been in OPEC since 1967 whilst, as regards Asia, Indonesia and Qatar joined later even if they subsequently decided to leave. As regards South America, Ecuador was the other major producer to join OPEC
The political centre of gravity of OPEC has historically always been orientated towards the Gulf countries. This could be seen, for example, in 1973 when, shortly after the Arab-Israeli Yom Kippur War, the cartel decided to ban the export of crude oil to western countries that supported the Jewish state. A decision that triggered, among other things, a price increase of over 70%. The economic and political influence within OPEC has historically been in the hands of Saudi Arabia, being the main oil producing country of the cartel and the only one able to make use of large quantities of reserves. Indeed, Riyadh has been able to tolerate unilateral actions by other OPEC countries and cut its production in the event of overproduction by other states.
The “new producers” and the new international equilibriumIn recent years, the management of the oil market has not been a prerogative of the OPEC countries. There have been two types of reason for this. First, numerous changes have occurred within OPEC itself that have slightly shifted the decision-making axis of the cartel. Several countries outside the Gulf area have started to carve out greater market shares and as a result have gained significant positions within OPEC. From Angola to Nigeria and from Libya due to the quality of its oil to Iraq because of the political changes that have affected the country since the fall of Saddam Hussein in 2003, several countries have increased their pull in the cartel. Secondly, there have been profound changes outside OPEC in recent years. Starting with the increase in the production of countries that are not members of the cartel such as, amongst others, the United States and Russia. By their side, countries such as China, Canada, Brazil, Mexico, Azerbaijan and Kazakhstan have increased their share of the oil market whilst in Europe Norway enjoys primacy, with Oslo in fifteenth place overall in the ranking of oil producing countries.
But the really significant changes mainly have their origins in Washington and Moscow. In the case of the former, the use of fracking technology that began in 1998 but really took off from 2009 onwards has meant that the United States has been able to consolidate its position at the top of the list of oil producing countries. Today the United States leads this ranking with more than 15 million barrels produced per day. This has meant that, among other things, Washington has been able to decrease its dependence on imports from the Gulf countries and OPEC has been less and less able to affect the price of crude. For its part, Russia has increased investment in the sector and Moscow’s strategy in recent years has been to seek direct dialogue with the Saudis in order to influence the oil market. In this way the so-called “OPEC Plus” was born, in other words a fully-fledged cartel including the OPEC countries and Russia, with Moscow and Riyadh in the role of coordinators.
An important turning point for the oil market came with the outbreak of the coronavirus pandemic at the beginning of 2020. The spread of the virus and the consequent lockdowns in many countries led to a sharp drop in demand which, in turn, led to a dramatic collapse in prices. For the first time, on the occasion of the G20 in April 2020, an agreement was reached to cut production by Saudi Arabia, Russia and the United States. The pact was respected and implemented in the following weeks.