A short history of US-OPEC relations

By

“The irony sure is thick,” says Mike Sommers, President of the American Petroleum Institute, the foremost big-oil lobbying group. His admonishment came after Jake Sullivan, the White House’s National Security Advisor, called on OPEC, the Organisation for Petroleum Exporting Countries, nations to increase their oil production.

Mr Sommers likely expressed the view of a large swathe of Americans who struggle to understand why the White House is calling on foreign producers to increase oil production after placing further restrictions on embattled domestic producers. Republicans have accused President Biden of shifting the blame for inflation away from his own exuberant economic policies to foreign oil prices.

There is little support to be found for the statement in Mr Biden’s own party either. The progressive wing of the Democratic Party is dismayed that all the talk of green energy and decarbonisation does not amount to anything abroad. By relying on foreign producers in place of domestic ones, America will merely export its greenhouse gases to the Middle East.

At first OPEC was little more than an economic weapon for Arab states

Ultimately however OPEC, which is a cartel (artificially limiting production to increase prices), is unlikely to heed the White House’s request any time soon. Though their reticence to increase oil production may placate climate activists’ concerns, it does not bode well for the relationship between the world’s largest oil guzzler and the world’s largest oil producers.

The Organisation of Petroleum Exporting Countries was founded in 1960 so that oil producing countries in the Middle East and South America might better profit from their vast natural resources. Up until that point, American and British oil majors had been able to control prices. In return, they shared 50% of their profits with the producing nations. (In the petro-capitalist paradise that was post-war America, that 50% was, of course, tax deductible.)

At first OPEC was little more than an economic weapon for Arab states, and hardly a successful one at that. In 1967 OPEC boycotted Israeli allies during the Six Day War, but US reserves combined with an increase in domestic production rendered the boycott ineffectual. The management of OPEC knew little of oil production or oil markets, and thus in its adolescent years OPEC was largely redundant.

OPEC’s power dwindled, especially as the Gulf states became more reliant on the US for security

By the early 70s however, OPEC turned a corner. The 1971 Tehran and Tripoli agreements resulted in higher oil prices and gave more control to OPEC nations. In 1973 the US’s growing demand for oil urged President Nixon to lift the oil import quota that had previously limited America’s foreign supply of oil. This further improved OPECs leverage. It utilised said leverage later that year upon the outbreak of the Yom Kippur War by again boycotting the US and Israeli allies.

Oil prices in the West reached new heights and inflation ran rampant. Though the embargo itself ended in 1974, oil prices remained high prompting Western nations to look for alternative energy sources. Jimmy Carter’s government started investing more heavily in new forms of energy production, even installing new-fangled solar panels on the White House roof.

Their tenancy lasted just over a year. As President Reagan came in the solar panels were on the way out. Nonetheless, the investments that Mr Carter had made his presidency began to yield results. New energy sources, combined with the deregulation of the domestic oil industry under Mr Reagan led to a fall in US imports.

OPEC’s power dwindled, especially as the Gulf states became more reliant on the US for security through the 90s and early 2000s. A stable, albeit wary, quid-pro-quo relationship developed, wherein OPEC would keep oil markets stable, and the US would guarantee the security of the global energy infrastructure.

There is a strong school of thought within the Biden administration that US foreign policy has been weighed down in the Middle East

That relationship is beginning to deteriorate, however. Public rebukes of the Saudi monarchy from the White House podium have hardly helped. There is a strong school of thought within the Biden administration that US foreign policy has been weighed down in the Middle East, and the US military is continually scaling down its presence in the region. Meanwhile, a deal with Iran is back on the table, a prospect that concerns many OPEC nations.

The downfall of oil’s dominance looms large in OPEC nation’s concerns. It has already resulted in an internal spat between Saudi Arabia and the UAE on whether now is the right time to start offloading reserves. Faced with both short – and long-term challenges, OPEC is unlikely to forego profits out of mere benevolence at present.

This leaves both sides in a precarious stalemate. Mr Biden has put his domestic popularity on the line and is unlikely to get much in return. OPEC faces an existential crisis, and its constituent nations can no longer rely on the US to guarantee security. Confidence, much like Brent crude, is in short supply.

Image: CC-BY-NC-SA 2.0 via Creative Commons

Leave a Reply

Your email address will not be published. Required fields are marked *

 

This site uses Akismet to reduce spam. Learn how your comment data is processed.