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The Effects of Decreasing Oil Prices on OPEC Creator States - Essay Example

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The Effects of Decreasing Oil Prices on OPEC Creator States

OPEC was founded in Baghdad, triggered by a 1960 law instituted by American President Dwight Eisenhower that forced quotas on Venezuelan and Persian Gulf oil imports in favor of the Canadian and Mexican oil industries. Eisenhower cited national security, land access to energy supplies, at times of war. When this led to falling prices for oil in these regions, Venezuela's president Romulo Betancourt reacted seeking an alliance with oil producing Arab nations as a preemptive strategy to protect the continuous autonomy and profitability of Venezuela's natural resource: oil (Perkins, 2005).
As a result, OPEC was founded to unify and coordinate members' petroleum policies. Original OPEC members include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975, the organization expanded to include Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), and Nigeria (1971). Ecuador and Gabon were members of OPEC, but Ecuador withdrew on December 31, 1992 because they were unwilling or unable to pay a $2 million membership fee and felt that they needed to produce more oil than they were allowed to under the OPEC quota. Similar concerns prompted Gabon to follow suit in January 1995. Angola joined on the first day of 2007. Indonesia reconsidered its membership having become a net importer and being unable to meet its production quota. The United States was a member during its formal occupation of Iraq via the Coalition Provisional Authority (Yergin; Perkins, 2005). Indicating that OPEC is not averse to further expansion, Mohammed Barkindo, OPEC's Secretary General, recently asked Sudan to join. Iraq remains a member of OPEC, though Iraqi production has not been a part of any OPEC quota agreements since March 1998. In May 2008, Indonesia left the OPEC group because of the soaring prices and the rising oil demand in East Asia. Economists think that the withdrawal of Indonesia will have little effect on OPEC and on the oil prices even though it has a high percentage in world oil production (Kohl, 2002; Perkins, 2005).

The persistence of the Arab-Israeli conflict finally triggered a response that transformed OPEC into a formidable political force. After the Six Day War of 1967, the Arab members of OPEC formed a separate, overlapping group, the Organization of Arab Petroleum Exporting Countries, for the purpose of centering policy and exerting pressure on the West over its support of Israel. Egypt and Syria, though not major oil-exporting countries, joined the latter grouping to help articulate its objectives. Later, the Yom Kippur War of 1973 galvanized Arab opinion. Furious at the emergency re-supply effort that had enabled Israel to withstand Egyptian and Syrian forces, the Arab world imposed the 1973 oil embargo against the United States and Western Europe. In the 1970s, the great Western oil conglomerates suddenly faced a unified block of producers. This Arab-Israeli conflict triggered a crisis already in the making. The West could not continue to increase its energy use 5% annually, pay low oil prices, yet sell inflation-priced goods to the petroleum producers in the Third World. This was stressed by the Shah of Iran, whose nation was the world's second-largest exporter of oil, and one of the closest allies of the United States in the Middle East at the time. "Of ...Show more
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Summary

Venezuela was the first country to move towards the establishment of OPEC by approaching Iran, Iraq, Kuwait and Saudi Arabia in 1949, suggesting that they exchange views and explore avenues for regular and closer communications between them (Yergin; Figueredo, 2007; Perkins, 2005)…
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