OPEC still a big player in global crude oil economy

For many, the mention of the Organization of Petroleum Exporting Countries, widely known as OPEC, carries with it a deep history of oil crises and shocks to the global economy.

This was very apparent during OPEC's height of influence in the 1970s and early '80s, and again a year or so again when Saudi Arabia's decision to keep pumping oil, in the face of a world glut, set oil prices into a global tailspin.

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But with Russia and a band of Saudi-led OPEC countries tentatively offering Tuesday to freeze oil production levels — a move that could potentially help rescue Canada's ailing oil industry — the international organization of 13 petrol-exporting nations is again proving its influence on the global stage.

"OPEC is no longer in its heyday, but it is absolutely still important," says Atif Kubursi, professor emeritus of economics at McMaster University in Hamilton and a former OPEC adviser. "They have survived lots of conflicts and wars, and proven their resillience."

For those who need a refresher or a crash course on OPEC, here's a timeline:

Formative years

OPEC was founded in Baghdad with five original members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

The oil-producing countries banded together in response to the so-called "Seven Sisters" — a group of multinational oil companies, based in Europe and the U.S. — which were trying to reduce the price of foreign, particularly Middle Eastern crude. 

Many of the OPEC countries were former colonies, and had limited influence in decision-making, said Kubursi.

The founding OPEC countries "had no say in price, volume of production or where the oil goes," he adds. "The Seven Sisters were absolutely in complete control."

By bargaining together, Kubursi says the countries had more strength in numbers and a "collective voice" to face these international oil companies head-on.

In the 1960s and early '70s, OPEC countries strived to nationalize oil in order to wrestle the production and refining process away from the foreign conglomerates, so they could independently set prices.

The U.S., says Kubursi, was not opposed to these OPEC countries nationalizing their oil production, seeing the step as a way for them to take back power from the then-surging economies in Europe and Japan, which were taking advantage of the U.S. being mired in the Vietnam War.

Because Europe and Japan were so oil-dependent, the U.S. began to rely on OPEC, most of whose members were U.S. allies at the time, as "vacuum cleaners to drain European and Japanese" influence in the global economy, Kubursi said.

Oil crisis

In 1973, however, because the U.S. backed Israel in the Yom Kippur War with Egypt and Syria — both OPEC member nations — the Arab-majority OPEC turned off its taps, using this oil embargo as leverage to get Western nations to back away from the conflict.

OPEC initially cut production by 25 per cent, with plans to reduce production by a further five-per-cent-a-month until a resolution in the region could be agreed upon.

The price of oil nearly quadrupled overnight from $3 a barrel to $15, and up to almost $40 by the end of the decade (all figures in US dollars).

In response to the oil price shock, the Paris-based International Energy Agency was created in 1974 by consumer nations, and Alberta's oil industry boomed as a result of the sudden shortage and demand.

During the '70s, the province's population grew by a third as some four thousand workers a month flooded in to take advantage of the black gold rush.

The oil boom in Alberta was said to have created more millionaires than any other previous time in Canadian history. And the new oil wealth transformed cities like Calgary and Edmonton, with Calgary at the height of the boom issuing $1 billion worth of construction permits annually, more than New York or Chicago.

"Canada became a sort of microcosm of what was happening in the rest of the world," said Kubursi. "Alberta was, like OPEC, producing oil for the rest of the country." 

The roaring '70s of oil production would not last forever, however. OPEC's embargo ceased in 1974, and by the early '80s too rapid expansion and a world-wide recession crippled the industry, and Alberta led the country in housing foreclosures and bankruptcies.

The Iran shock

Revolution in Iran, then the second biggest oil seller after Saudi Arabia, ushered in a second oil shock in 1979.

Kubursi says Saudi Arabia, in order to punish Iran for the volatility it had  provoked in the oil market and the region, raised its oil production, so lowering prices, with the aim of weakening Iran.

However, Kubursi said this move was "not an unmitigated disaster" for Iran. Because of its reliance on oil, the country was forced to find alternative ways to keep its economy going.

"Iran diversified their economy, more than any other OPEC country, and became a more advanced country," he said. "Manufacturing cars, helicopters, goods and, unfortunately, weapons."  

In 1980, Iraq invaded Iran, marking the first time two OPEC nations became embroiled in a war. The price of oil skyrocketed, reaching as high as $40 US a barrel.

The same effect happened in 1990, when Iraq invaded Kuwait, sending the price up to $41.90 a barrel.

"Life among OPEC countries has never been peaceful, never calm," said Kubursi. "There's always quite a bit of conflict."

"Every war is a notch upward in the price of oil," he added, noting combatants target oil refineries and production operations as a way to cripple the other side. He describes it as "directing an arrow into the Achilles heel of the enemy."

The Russia deal 

In June of 2015, OPEC decided to leave its oil production targets of 30 million barrels a day unchanged, as member nations seemed determined to maintain their share of the world market, which was being eaten into by the surge in U.S. shale oil production and Canada's oil sands.

OPEC's keep-pumping strategy was an attempt to ride out lows in oil prices and force other higher-cost producers, notably the U.S. and Canada, out of the market. In the process, the price of oil plunged more than 70 per cent in about 18 months.

In February 2016, non-OPEC Russia, currently the world's largest oil producer, and a group of Saudi-led OPEC countries offered to freeze production rates, with the major oil producers concerned about the effects a prolonged slump could have on their own economies.

The production freeze could potentially raise the price of oil by $15 to $20 a barrel and rejuvenate industries affected by the slump, like Fort McMurray in Canada.

The proposed freeze is contingent on other producers, notably Iran and Iraq, joining the initiative, which is no sure thing.

And, in any event, Kubursi is not sure the effects will be all that drastic. The recent slump in the price of oil is "not just overproducing," he said. "The world economy is contracting, and with it the demand of oil."