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Copyright by Darya Rudych 2018 The Thesis Committee for Darya Rudych Certifies that this is the approved version of the following thesis: OPEC’s Successful Failure: The Analysis of OPEC’s Political Decline in the late 1970s APPROVED BY SUPERVISING COMMITTEE: Supervisor: Jeremi Suri Kamran Aghaie OPEC’s Successful Failure: The Analysis of OPEC’s Political Decline in the late 1970s by Darya Rudych Thesis Presented to the Faculty of the Graduate School of The University of Texas at Austin in Partial Fulfillment of the Requirements for the Degree of Master of Arts The University of Texas at Austin May 2018 Abstract OPEC’s Successful Failure: The Analysis of OPEC’s Political Decline in the late 1970s Darya Rudych, M.A. The University of Texas at Austin, 2018 Supervisor: Jeremi Suri This thesis addresses the political decline of the Organization of the Petroleum Exporting Countries associated with the Iranian Revolution and the ensuing economic crisis. As the oil crisis in 1973-1974 elevated OPEC to the status of the dominant oil administrator, the crisis of 1979 undermined it. OPEC’s political influence, rooted in its position on the oil market, was, therefore, on a downhill. The effects of the Iranian events were two-fold. Firstly, the consumer panic led to a precipitous increase in oil prices which OPEC failed to handle letting its member-states take full advantage of it. Ceding the control over prices to the market forces, OPEC inadvertently undermined the purpose it was created for earning itself a bad fame on the international arena. Secondly, the Iranian Revolution intensified intra-group tensions and led to the significant erosion of the collective solidarity crucial for its cooperative behavior. Together, these factors rendered it impossible for them to pursue its foreign policy of the New International Economic Order and continue to be a champion iv of the Third World in the struggle against economic colonialism and unequitable development. v Table of Contents List of Figures......................................................................................................................... vii INTRODUCTION ........................................................................................................................ 1 OPEC in academic discourse ......................................................................................... 4 A note on the narrative structure.................................................................................... 9 CHAPTER I: INTEGRATING POLITICS, ECONOMICS, AND ENERGY: AN ANALYTICAL APPROACH ........................................................................................................................ 11 Understanding the basics of IPE .................................................................................. 11 IPE and cooperation in the oil market ......................................................................... 14 OPEC Cooperation: Integrating structural and institutional approach ...................... 16 CHAPTER II. OPEC ERA OF ASCENDANCE: 1960 – 1974 .................................................. 24 Genesis of OPEC: Start of Cooperation ...................................................................... 24 Institutional foundations of OPEC .............................................................................. 26 OPEC between 1960-1975: transforming market-power relations ........................... 35 CHAPTER III: OPEC’S MISSED OPPORTUNITY ................................................................... 49 Politicization of oil after 1974 ..................................................................................... 50 OPEC and New International Economic Order .......................................................... 54 The Last Blow ............................................................................................................... 65 OPEC’s patterns of cooperation and dissent: concluding remarks ............................ 77 BIBLIOGRAPHY ...................................................................................................................... 81 vi List of Figures Figure 1. World crude consumption and spare capacity excluding non-communist countries. ........................................................................................................... 37 Figure 2. Uneven distribution of proven crude oil reserves by OPEC ............................... 39 Figure 3. Population sizes by OPEC country ....................................................................... 40 Figure 4. Dollar depreciation and associated worldwide inflation ..................................... 45 Figure 5. International oil companies' equity interest in the Middle East crude oil production ......................................................................................................... 47 Figure 6. OPEC vs. non-OPEC oil production in 1968-1976 ............................................. 57 Figure 7. Crude oil production 1971-1981: Iran vs. OPEC ................................................. 67 Figure 8. Comparison of Spot and Official Prices, 1978-1981 ........................................... 70 vii INTRODUCTION The year of 1980 heralded major changes in the oil market. The rapid increase in oil price from $12.70 to over $39 per barrel was a shock greater in its effects for the international system than that of 1973. For the Organization of the Petroleum Exporting Countries (OPEC) the year of 1980 marked the beginning of organization’s third decade which was characterized by a state of confusion and disarray. The celebration of its 20th Anniversary was overshadowed by the speculations about its precarious future and scenarios of its fast-approaching collapse. At the opening meeting of the Oxford Energy Club in November 1979, René G. Ortiz, OPEC Secretary General at the time, addressed the escalating fears of the international community by assuring to exert discipline and control over the oil prices and bring order to the sellers’ market1. Unfortunately, the preceding gloomy forecasts proved to be well warranted. The chronic failure of OPEC to agree on a unified price and follow price schedules2 revealed Organization’s weakness as a price administrator and contributed to the growing uncertainty of the world oil market. The outcome of the Caracas conference3, termed as “agreement to disagree”4 also revealed internal tensions within the organization and its declining political clout. This 1 OPEC Bulletin 10, no. 45/46 (Nov 12/19, 1979): 1-5. 2 Although OPEC could not agree on a unified price for oil, they agreed to a split price of $24 to $30 a barrel which was to be achieved gradually according to the determined price schedule which was meant to minimize the shockwaves in the oil-dependent economies. However, the price schedule soon proved to be useless as OPEC member-states leapfrogged the fixed prices and followed the spot market. 3 OPEC ministerial conference at Caracas held in December 1979 was convened with the aim of the reunification of the crude marker price at the level of $24/barrel and prevent further upward changes in price. 4 Mohammed E. Ahrari, OPEC: The Failing Giant (Lexington, KY.: The University Press of Kentucky, 1986), 15. 1 signaled a drastic change for OPEC which from the single most influential actor exercising monopoly power in the oil market turned into a battleground of competing interests of its member-states. This, in turn, has shown the limitations of the oil power and the price of political disunity. The oil shock of 1979 proved that OPEC's control (and ownership) of the oil reserves does not directly translate into international economic and political influence over prices, and, in fact, heavily depends on outside political forces and, more importantly, on solidarity among the member-states. Although OPEC tried to restore their internal unity in the second half of the 1980s, it was never able to regain the political influence it enjoyed in 1973-74. Without rallying leadership and concerted action, OPEC could not keep the crude prices consistent and thus keep non-OPEC oil producers out of business. In addition, after years of bemoaning OPEC for its inability to provide a predictable supply of oil at a specified and stable price, oil-dependent consumers learned to rely on their private stockpiles, spot, and futures markets as new trading places. As a result, the year of 1980 marked the decline of the organization after which it was no longer an organization capable of utilizing monopoly influence over an oil weapon. Although it has not disbanded, it no longer acts as a political and economic organization as was envisioned by its founding fathers. Certainly, the changed status of OPEC on the international oil market was brought about by multiple forces. Undeniably, the changing structure of the world oil market undermined OPEC as the single most important actor in the energy politics. However, a preponderance of economic reasoning neglects other non-economic factors that have contributed to OPEC's decrease in influence and overlooks the relation between political 2 (in)action and economic consequence. For instance, OPEC's perpetual disagreement regarding output quotas and fixed prices in the early 1980s resulted in its decreasing market share, a decline in OPEC oil demand, and yet another oil price collapse in 1986. Precipitously falling oil prices, in its turn, instigated Iraqi military aggression against Kuwait what ultimately led to the war in the Gulf.