The Cartel That Never Was

Saudi Arabia finds in the perceived unity and power of OPEC a convenient illusion

"OPEC is merely a service organization for thirteen sovereign oil-producing nations," explained Bahman Karbassioun, an Iranian who has been associated with OPEC for nearly ten years. "We provide background data, such as the amount of OPEC oil that can be sold at a given price, to the ministers when they meet," he added. "All decisions are up to them."

The thirteen oil ministers of the member nations meet at conferences that, according to the OPEC charter, "are the supreme authority of the Organization." These conferences are convened semi-annually, and additionally whenever a majority of members requests an extraordinary session. (In OPEC's twenty-two-year history, it has held an average of about three conferences a year.) At these conferences, it is required that all decisions be made unanimously. Then decisions must be ratified by the thirteen governments before taking effect. No member, not even if it is in a minority of one, can be forced to abide by a decision to which it did not explicitly agree. There is, therefore, no need for a mechanism in OPEC for implementing, verifying, or even monitoring agreements. Compliance is completely voluntary. Most OPEC decisions concern the base price for crude oil. Members can easily evade such price decisions through the simple expedient of altering terms—such as quality or transportation differentials—thereby giving discounts or premiums.

Technically, it would be relatively easy for OPEC to enforce price decisions, by keeping track of the crude-oil sales: most oil is loaded onto tankers from only a dozen or so terminals. But members won't allow OPEC to measure the actual flow of oil from their terminals, for good reason: despite the appearance of unity, they are all competitors for shares of the world market. (Some members, such as Iran and Iraq, are not just rivals for power but actually at war.) Current oil sales are considered by many OPEC states to be the equivalent of state secrets. Saudi Arabia declared in 1980: "We refuse on principle to even discuss the subject of production, which concerns us alone. Our decisions on production derive from market conditions and Saudi Arabia's international commitments."

When the oil ministers meet at OPEC conferences, they therefore have no choice but to depend on their own national data. Moreover, some ministers are more equal than others. Sheikh Ahmed Zaki Yamani, the Harvard-trained oil-and-resource minister of Saudi Arabia, often plays the lead role at these conferences. "Yamani's in charge of long-term strategy," one Iranian technocrat explained, and added, "It is no coincidence that the benchmark price for Saudi crude oil is the official OPEC price." From his perspective, Saudi Arabia attempts to use OPEC to force the twelve other producing countries to support its standard oil price.

OPEC, with its minuscule staff and tiny budget, clearly is not the sort of cartel that has captured the public's imagination. A cartel, by definition, has one indispensable characteristic: it must be able to restrict the supply of the commodity reaching the marketplace. Yet, although individual OPEC members can cut back on the amount of oil that they supply, OPEC itself is powerless to interfere in such decisions. As Sheikh Yamani said at the last OPEC meeting in Vienna, in December, "Production decisions are made in Riyadh, not Vienna." OPEC not only lacks power to impose its will on recalcitrant members, it lacks the basic information needed to operate a cartel. At best, it is only a shadow of the former international cartel of oil companies that previously controlled almost the entire oil trade. This group, known as "the Seven Sisters," was a real cartel, with thousands of employees and unlimited funds. It is useful to compare the operations of a real cartel with those of OPEC.

The international oil cartel traces back to a grouse shoot at Achnacarry Castle, in Inverness, Scotland, in September of 1928, which was attended by the heads of the three most powerful oil combines in the world—Sir Henri Deterding, the chairman of Royal Dutch Shell; Walter Teagle, of Standard Oil of New Jersey (now Exxon); and Sir John Cadman, chairman of Anglo-Persian Oil (now BP). Under the pretext of engaging in sport, these three men conspired to eliminate competition in developing new oil resources for the world. The mechanism was the "as is" principle, under which all agreed to divide future markets among themselves according to the shares of the market they held in 1928. This meant that there would be no advantage in "destructive competition," as the companies put it, among themselves for new oil fields: whatever advantage one company received would be shared proportionally by the others. In a separate "pooling" accord, the three companies also agreed to share their oil tankers, refineries, pipelines, and marketing facilities with each other. As the membership of the cartel expanded to include the other major companies, it became known as the Seven Sisters. The cartel controlled oil production, refining, transportation, and sales in almost all areas of the world except the United States, which had strict antitrust laws.

The cartel's principal instrument of control was local consortiums set up to manage and develop oil fields in the Middle East, Venezuela, and wherever else oil was discovered. Each consortium was owned by members of the Seven Sisters in a ratio determined by the "as is" principle; each operated as an essentially nonprofit service entity, producing only enough oil to meet the requirements of its owners. To assure that supply never exceeded the demand for oil, the partners submitted "programs" specifying the oil they needed for five years, and the consortium set its exploration and development programs according to these requisites. If less oil was required by the oil companies, the consortiums would close down wells; or, if required by the country's law to drill for oil (as in Iraq), would drill in areas they knew would not yield any. The system proved so successful that by 1970 more than 90 percent of the world's exportable oil was being produced by consortiums in Iran, Iraq, Saudi Arabia, Kuwait, the United Arab Emirates, and almost every other oil-rich area.

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