The Birth of OPEC — The Stirring of Resource Nationalism

One nation rose up, and was crushed. The collapse of Mosaddegh’s government in Iran, which we saw last time, left the producing nations a cold lesson: stand against the majors (the international oil capital) and the Western governments with one country alone, and you will be pushed back.

But that defeat was not wasted. The humiliation quietly changed shape into a force of another kind. If one nation isn’t enough, band together. For the first time, the nations that held the resource were moving to sit at the same table.

The fury bred by a one-dollar cut

The spark came not from the producers’ side, but from the Western companies that sold the oil.

In those days it was the majors who set the “posted price” of crude — the figure on the books that served as the basis for calculating taxes and royalties. The producing nations had no say in it. Yet between 1959 and 1960, the majors lowered this posted price without consulting the producers at all. When the price fell, the income flowing to the producers was cut along with it. It was a one-sided blow, and one that struck their own share directly.

It was not only the Middle East that was angered. On the far side of the globe, the South American producer Venezuela carried the same wound. Venezuela’s oil minister and Saudi Arabia’s oil minister had, for some time already, been quietly asking each other whether the producing nations might cooperate. The news of the price cut became the final push that set that idea alight.

The five nations of Baghdad

In September 1960, representatives of five nations gathered in Baghdad, the capital of Iraq: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. On September 14, they proclaimed the founding of a new organization. It was the birth of the Organization of the Petroleum Exporting Countries — OPEC.

The aim was plain: that the producing nations, who had been picked off one by one, should fall into step and make their own voice felt on price and production. One country could be crushed, but if the major producers stood together and said “no further cuts,” even the majors could not ignore them — such was the thinking.

Yet the newborn OPEC was far from all-powerful. Through the 1960s, the most they could manage was to “hold off any further price cuts.” They did not yet have the power to actively “drive prices up.” The world was awash with oil, and the buyers — the majors — held the stronger position. OPEC had been born, but for a long while it entered a quiet period of gathering strength.

Even so, that decade was not wasted. With each conference, the member states gained experience in reconciling one another’s interests. How to adjust production, how to defend the price — bit by bit, they mastered the art of behaving as a single “negotiating party.” Nations that until then had been picked off separately now shared a common language and a secretariat. It was this plain, unglamorous accumulation that became the foundation for a force that would later shake the world. The membership grew over this time as well, and the organization spread beyond the Middle East and South America.

Libya’s young colonel

What turned the tide was Libya, a producer on the Mediterranean.

In 1969, a military coup broke out in Libya, and a young officer, Muammar Gaddafi, seized power. He faced the Western oil companies with a negotiating posture utterly unlike that of producers before him. Libya’s crude was close to Europe and, what is more, a high-quality, low-sulfur oil. Wielding that as a weapon, the Gaddafi government pressed hard for higher prices and higher tax rates.

Geography stacked in his favor. At the time the Suez Canal, which carried Middle Eastern oil to Europe, had been closed since the war of 1967, and the value of Libyan crude — which needed no passage through the canal — had risen all the higher. Every condition was in place to make the companies feel they “could not afford to lose Libya.”

In 1970, Libya at last forced the companies to swallow a rise in the posted price and a surcharge on the tax rate. This was no small single victory. Libya’s increase rippled out to crude loaded across the Mediterranean, and before long it spread to the price of crude on the Persian Gulf as well. It was the moment when one nation’s hard bargaining turned into a confidence, across all the producing nations, that “we can actually do this.”

The Tehran Agreement — the day the balance tipped

Emboldened by Libya’s victory, OPEC, at its Caracas conference in late 1970, resolved at last to embark on full-scale price negotiations with the companies. The stage moved to Tehran, the capital of Iran.

In February 1971, six major Persian Gulf producing nations and thirteen oil companies, chiefly the majors, put their signatures to a single accord. This was the Tehran Agreement. It set a uniform rise in the posted price of Gulf crude, and arranged for further, staged increases over the years that followed. A rise in price had been written into a “timetable” as the will of the producing nations.

Producers who had long been on the back foot had, for the first time, grasped a corner of the initiative at the table where it was decided “what the price would be.” The Tehran Agreement was a milestone, the sign that the balance of power had begun to tip — quietly, but surely. The power to decide still lay in a tug-of-war between the majors and the producers, but the pendulum had clearly begun to swing toward the producers’ side.

It was not only about price. In this period, the producing nations’ ambitions moved on to the stage of “making the oil fields themselves their own.” Until then, the drilling and production of oil had lain almost entirely under the concessions of the Western majors. Now the producers pressed them to “yield a part of the business interest to our country,” and a current began that would in time lead to nationalization. To reclaim not only the price but the very right to control the oil fields — here resource nationalism put down roots a step deeper. The dream of nationalization under Mosaddegh, which we saw in Episode 4, had been dashed; but his legacy, a decade on, was reviving in a steadier form.

The producing nations had gained the weapon of solidarity. They had learned they could move the price, and they had gained confidence. What remained was the trigger that would show that power to the world.

It came, unexpectedly, from the side of politics — in the form of war. Next time, 1973. Oil at last changes shape into a “weapon” pressed against the very heart of the world economy.