Resident Expert: The Untold Story of OPEC

Resident Expert: The Untold Story of OPEC

The UAE is one of 13 member nations of the only major global organization developed specifically to advance the economic interests of countries whose primary export is oil — the Organization of the Petroleum Exporting Countries (OPEC).

NYU Abu Dhabi Institute Senior Research Fellow Giuliano Garavini, and assistant professor of international history at the University of Padua in Italy, is currently writing a book on the history of OPEC from its ambitious beginnings in Baghdad 50 years ago, to the Oil Shock of the 1970s, to its precarious role in today's interconnected, resource-conscious society in which Garavini says there is an "undeclared war between producers and consumers."

Will the world always need oil and is it true that we're running out? Are oil-rich nations like the UAE victims of the so-called oil curse? Garavini answers these and other tough questions as he explores the untold past and uncertain future of OPEC.

What is OPEC?

The main characteristic of OPEC, created in the 1960s, is that its member countries are relevant net exporters of oil. OPEC is not simply an organization of petroleum producers. There are many countries that produce oil but don't export it, like the United States. The US was once the largest exporter in the world, but lost its place to Venezuela in the 1920s and eventually became a net importer of energy in 1948.

Current members of OPEC are: United Arab Emirates, Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Indonesia, Libya, Algeria, Nigeria, Ecuador, Gabon, Angola.

Why are you writing a history of OPEC?

Most historians agree that the Oil Shock of 1973 is a turning point in the history of the 20th century. I wanted to get deeper into what happened during the shock, and discovered that the history of oil has mostly been written from the point of view from the oil consuming countries, of the West, not from the point of view from the producers.

What Oil Shock?

In 1973, the price of oil increased four fold. In the 60s, producers of raw materials — like oil or copper — found themselves at a structural disadvantage compared to the industrialized manufacturing countries. The industrialized countries were getting richer and richer because the price of manufactured goods increased, while the price of raw materials decreased.

And there was no way out of this cycle except by some political action. So, OPEC countries fought for an increase in oil prices in the attempt to redistribute wealth from industrialized countries to what were then known as third world countries. OPEC was helped in doing so by an extremely favorable economic conjuncture. At the time, OPEC said the price increase in oil would spearhead an increase in the prices of all raw materials and help reform international economic institutions such as the International Monetary Fund (IMF) and the World Bank.

There will always be a market for oil because so many things are made from it, from plastics to cameras. Oil will have its role to play in the future, but perhaps for a more noble purpose than to burn it to move a car.

Giuliano Garavini, research fellow, NYUAD Institute

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Do OPEC countries have much in common other than oil?

It's an interesting question. OPEC modified its statute in 1965 to say that member countries had to be relevant exporters of oil and share "fundamentally similar interests," which is a vague concept. There are oil exporters in the world, like Russia and Norway, which are not members of OPEC. It may have something to do with the different place these countries want to have in the world. This is something my book will talk about.

How did nationalization of oil companies change OPEC?

In the 1980s, after oil producing countries throughout the world nationalized or gained majority control over their oil industries, OPEC shifted from being a political organization of oil ministers who spoke politics to one another, to an organization driven by national oil companies with their own self interests.

I'm speaking theoretically, but it you were a politician of an oil producing country, you might want to fight for a higher price of oil because this would eventually be beneficial to the welfare of your own citizens. You would want national oil companies to pay as much as possible in taxes to their governments.

But a national oil company has to do well in a business sense. Even though you're state-owned, you might have other priorities, for example to keep your market share. So, if the oil price decreases, you might want to sell more oil to force competitors out of business in order to maintain your market share or perhaps even increase it.

A state-owned oil company my have different interests than the state itself.

The oil curse is ... the idea that countries who have oil would actually be better off without it because oil takes over every aspect of the economy. But as a historian, it's important to look at how oil exporting countries changed practically, in daily life, in terms of roads, hospitals, education, and their role in the world.

Guilano Garavini

Do you think oil-rich countries suffer from the oil curse?

Well, the oil curse is fundamentally the idea that countries who have oil would actually be better off without it because oil takes over every aspect of the economy. But as a historian, it's important to look at how oil exporting countries changed practically, in daily life, in terms of roads, hospitals, education, and their role in the world.

And look at this region. I've seen images of children in the 1950s with flies in their eyes and who had huge health issues. Money from oil has been used also to make sure kids in the UAE don't have these kinds of problems anymore.

It's also unfair to assume that Western countries like the US can become a superpower because of oil, but there's something wrong when other countries build their economies and even militaries from oil wealth.

Why are oil exporters facing uncertain futures?

1. Shifting markets

Oil used to flow from east to west, from the Gulf to the US. Now it mostly flows from west to east, from the Gulf to China. That's a big change. And what goes on in China is increasingly important for the demands of oil. Last year, China overtook the US as the biggest oil importer in the world, so the whole geography of the world economy of has shifted.

2. Politics

Industries are under increased pressure by governments to be more energy efficient, which leads to lower consumption of fossil fuels, and that's not good news for OPEC countries in general. Industry has to be way more careful than it did 20 or 30 years ago. On top of this, governments in the West are also increasing taxes on fossil fuels: another factor that pushes prices down. There is an undeclared war between producers and consumers.

3. Consumer culture

There are cultural changes in the way people perceive the role of fossil fuels in their lives. Until the 1970s, people didn't know that their car emissions were hurting the planet. Oil producing countries have to adapt in a way that maintains political stability and keeps their citizens in good standards of living.

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Will we always need oil? Is the world really running out?

There is a famous line given by one of the most important ministers in the history of OPEC. Yamani, who was Saudi, said that "The stone age didn't end for lack of stones" (he said it although it may not have come from somewhere else). In any case, this was a way of saying the oil age will not end because we're going to run out of oil. It will end because there will be technological innovations or cultural changes that will make people shift from oil to some other kind of energy.

I think the bottom line is, oil has been one of the crucial natural resources of the 20th century. I don't think that's an object of debate. There will always be a market for oil because so many things are made from it, from plastics to cameras. Oil will have its role to play in the future, but perhaps for a more noble purpose than to burn it to move a car. But whatever energy source we shift to it will come with its own political and economic challenges.