OPEC Victories in 1971

Oil exporting countries who are members of the Organization of Petroleum Exporting Countries (OPEC) scored a major success in 1971. In negotiations with the major international oil producing companies operating within their lands, the member states of OPEC succeeded in increasing both the nominal (or posted price) of oil from North Africa and the Persian Gulf and the rate at which company profits on that oil are taxed.

OPEC, whose membership now includes all of the world's important oil exporting countries, was organized in 1960. Although not itself a body that bargains collectively for the exporting countries, it has succeeded in promoting the interests of the separate countries through achieving parallel lines of national policy.

Earlier, OPEC had been instrumental in halting the decline in posted prices that occurred during the 1950s, and in protecting member countries' return per barrel of oil. OPEC did this during the 1960s by tying the return per barrel to the posted price, which at its insistence was maintained at a fixed rate, despite the continued downward trend in the actual market price of crude oil.

In view of the continued decline in market price, the earlier OPEC success was thought by many to be somewhat shaky. Exporting countries claimed as their share of the revenues from oil sales a 50 per-cent tax on profits imputed to the companies at the fixed post price. Their take, although called a tax on income, became in effect a fixed charge per barrel (80-90 cents at the Persian Gulf in the late 1960s). In the face of declining market price and a fixed per-barrel charge, the companies were earning progressively less per barrel. This led to speculation that eventually the producer countries would have to bear a portion of the decline in actual revenue per barrel.

Instead, the negotiations of the past year resulted in an increase in the producer countries' per-barrel take by about 40 cents or more at Persian Gulf ports (as of June 1971), with an escalation clause that will bring about annual increases totaling more than 20 cents over the next five years—the period of the agreement signed at Teheran in early 1971. North African increases are larger; over the same period Libya will gain about 80 cents per barrel. This is in part accounted for by a transportation premium (due to proximity to Europe) which will decline as tanker rates from the Middle East to Europe ease. Oil exporting countries in other parts of the world also increased their take by one device or another (in the Venezuelan case, by unilateral action).

Why this unexpected turn in what appeared to be an evolutionary decline in world oil prices? A contributing cause was a unique set of circumstances restricting the supply of oil at the time of the Libyan negotiations. The disruption of the Trans-Arabian Pipeline (Tapline) in the spring of 1970 by the Syrians, followed by production cutbacks (in the name of conservation) imposed upon most of the companies operating in Libya by that country's government were major factors. The accompanying threat of an embargo on shipments of Libya's low-sulfur oil at a time when Europe was increasingly concerned about air pollution added to Libya's bargaining power. While these events apparently were not carefully structured by OPEC, they were not acts of God either. The exporters turned them to account. It appears that Western observers of the oil trade may have underestimated the cohesiveness and boldness of the exporting countries.

In late 1970 the oil companies agreed to a rise in the posted price of Libyan oil and to a higher tax rate on imputed profits—a double bite. The Libyan success was followed by a demand for improved posted price and tax treatment by a united front of Persian Gulf producers, again accompanied by the threat of a concerted embargo on oil shipments. Following the Persian Gulf settlement in February 1971 came another round with the Libyans, completed in the early spring of 1971, which gave them a still more favorable agreement.

What the events of 1971 portend for the future is not altogether clear. Has the buyers' market in world oil been replaced by a sellers' market? It would be difficult to reach such a conclusion on the basis of the vast amounts of low-cost oil reserves in the Middle East, North Africa, and other parts of the world, with more continuing to be found. Nevertheless, the oil companies, unable to resist the whipsaw tactics of producer countries and unwilling to see their earnings further eroded, have begun to pass the increased charges through to their customers. Is it realistic to expect the exporting countries, orchestrated by OPEC, to succeed as a producers' cartel in exacting ever higher prices from the importing countries through the use of the international oil companies as their vehicle? It is equally difficult to reach this conclusion in view of the persistent failures of the producing countries to reach agreement in the past on production controls that would be necessary to support an enduring cartel.

The events of 1971 are probably best viewed as an episode made possible through shrewd producer country bargaining under a unique set of circumstances. Those who were victimized through higher prices—the importing countries—will want to give serious attention to methods of preventing similar episodes in the future. As long as they are heavily dependent on imported oil from OPEC countries, neutralization of the embargo threat as a bargaining weapon through substantial stockpiling of crude oil and plans for rationing oil products in possible emergencies will need to receive serious attention. For the longer run, plans to lessen dependence on OPEC oil, through various measures, will receive impetus. The OPEC countries, triumphant in 1971, are now setting their sights on another target. Higher per-barrel earnings is but one of two major objectives that have received serious attention in OPEC councils in recent years. The other is eventual majority ownership in the major concessions—not through acquiring equity shares in the existing concession-holding companies, but through the setting up of new companies in which the foreign concessionaires and national firms of the producing countries would both hold an interest. In the autumn of 1971, the rough outlines of an OPEC blueprint for what is euphemistically referred to as "participation" in the major concessions began to emerge.

All past conflicts involving the international oil companies, the producer government, and the importing countries are likely to pale in comparison with the difficulties that lie ahead. The international oil trade may now be entering the most unpredictable period in its history.