Conversely, when oil prices began to decline in 1975, because of the world recession, OPEC found itself powerless to stop its members from undercutting each other and competing for sales. Despite OPEC's price declarations, the real price of oil declined by more than 25 percent between 1975 and 1978. The decline was reversed, not by any actions of OPEC but by another series of events in the Persian Gulf: the revolt against the Shah in Iran; a brief rebellion in Saudi Arabia; Iraq's invasion of Iran. In a matter of months, some 5 or 6 million barrels a day of Persian Gulf oil vanished from the export market. In 1979, importers feverishly bid up the remaining supply for their strategic reserves until prices reached $35 a barrel.
Throughout this roller coaster of falling and soaring prices, OPEC demonstrated little ability to affect or even moderate The actions of its members. Price agreements were totally ignored, and the idea of regulating oil production was preemptively rejected. In a comprehensive study of OPEC prices, Walter J. Mead, an economist at the University of California, found that "price and output policies [of members] appear to be determined independently of OPEC policy." He concluded that OPEC could not be considered a cartel in the light of this data, because "the essential ingredient to an effective cartel, coordinated control over output, is totally lacking." OPEC merely took credit for the results of current events.
Whereas OPEC may have proved to be no more than a paper cartel, one nation—Saudi Arabia—succeeded in altering the market by dramatically varying the output from its fields. After all, it was Saudi Arabia, not OPEC, that shut off oil during the Yom Kippur War. It was also Saudi Arabia that, without even consulting OPEC, arbitrarily reduced production in the midst of the Iranian revolt. And it was Saudi Arabia that later flooded the market for the stated purpose of forcing other OPEC members to conform to its pricing policies. Yet, even though Saudi Arabia was the real manager of the world oil supply, statesmen around the world preferred to blame an almost nonexistent organization—OPEC.
In July of 1979, President Jimmy Carter received a memorandum from his chief domestic adviser, Stuart Eizenstat, suggesting that public attention be focused on OPEC. Specifically, it counseled that "with strong steps we can mobilize the nation around a real crisis and with a clear enemy—OPEC." Whether Carter and his advisers were cynical in their search for a scapegoat or ill-informed about the determining role Saudi Arabia played in manipulating the supply of oil, they adopted the general strategy of blaming OPEC for the world's ills. Carter said, "I don't see how the rest of the world can sit back in a quiescent state and accept unrestrained and unwarranted increases in OPEC oil prices." Then, after castigating OPEC in a nationwide address, he read from his notebook a chilling assessment: "Our neck is stretched over the fence and OPEC has the knife." Carter gave this enemy a quality of omnipotence several months later, when he said that OPEC "has now become such an institutionalized structure that it would be very doubtful that anyone could break it down." OPEC was turned into an undefeatable foe.
OPEC made an especially convenient "clear enemy" pre-cisely because it hardly existed. If a real country were chosen for this role, there would be real consequences. Consider, for example, what would have happened if Carter had substituted "Saudi Arabia" for "OPEC" in his denunciations. He would have to have depicted Saudi Arabia holding a knife to America's outstretched neck—an image hardly consistent with continued military and technical aid to that country. OPEC, on the other hand, with which the United States had neither trade nor foreign relations, provided an ideal diversion from reality. It also yielded a four-letter word for the press to use in headlines. Oil companies could put the blame for gas lines and soaring prices on OPEC, with which they had no commercial relations, without offending the countries on which they depended for supplies.
OPEC served an even more important purpose for the oil-exporting nations. It gave powerless nations, which had the means neither to operate their oil fields nor to defend themselves, a dazzling mask. Specifically, for Saudi Arabia, which produces almost half of OPEC's oil, it provided international camouflage for its oil policy. Just as the United States used the OAS as a mask for the embargo on goods shipped to Cuba in the 1960s, and the Soviet Union used the Warsaw Pact as a mask for intervention in Czechoslovakia in 1968, Saudi Arabia used OPEC to obscure its manipulation of the oil market. Such diversionary tactics were especially important to Saudi Arabia, since in 1973 its oil fields were almost entirely in the hands of American technicians and engineers, and its army, fewer than 3,000 men located at bases 1,000 miles away from the oil fields, was hardly in a position to defend the fields.
Finally, OPEC, with its 300-seat press auditorium and television studio, provided a theater in which member countries could play the roles they preferred—hawk, dove, or moderate—for public consumption without constraining their actions in the marketplace. Libya and Iran, for example, chose to play the role of price hawk in the 1982 season; in fact, both countries relentlessly cut prices and gave secret discounts. Saudi Arabia, on the other hand, chose to play the role of a moderate and friend of the West. In 1977, for example, it approved an average production increase of 2 million barrels a day over a six-month period. The promised oil, however, never materialized; Saudi Arabia perfunctorily explained that a seven-week storm in the Persian Gulf had prevented oil loadings. The U.S. Weather Bureau was unable, with all its electronic wizardry, to find any meteorological evidence of this putative act of God.
Until 1982, OPEC set prices for oil very much the way the king in Le Petit Prince, to impress his subjects, commanded the sun to set each day—after consulting a timetable. As long as the wars and chaos in the Middle East drove prices up, OPEC could continue with due pomp to make its announcements of price rises. This game could not be played, however, in the face of falling prices. By March of 1982, world demand for oil had so diminished that refineries were closing throughout Europe and stocks were being dumped onto the market at an alarming rate.
The competition within OPEC for shares of the oil market has been greatly exacerbated in recent years by the loss of nearly one third of the world market to interlopers such as Mexico, Great Britain, Norway, Malaysia, Russia, and Egypt. In 1973, when OPEC began its thundering rise to eminence, its members produced almost all the exportable oil in the world. In 1983, according to a recent Exxon projection, non-OPEC nations (not including the United States) will produce about 13 million barrels a day, equivalent to nearly two thirds of OPEC's total. Mexico, which will produce 2.9 million barrels a day, will export more oil than any OPEC country except Saudi Arabia; and Great Britain and Norway will produce 2.7 million barrels a day from North Sea fields. As the available portion of the market shrinks, OPEC nations, many of whom are desperate for revenues, can compete only by lowering prices. As prices last year continued to slip day by day, it became clear to all concerned that OPEC could no longer even pretend to command prices to rise with any effect.
On March 6, Saudi Arabia called a strategy meeting in advance of the scheduled Vienna meeting in the tiny city of Doha, on the Persian Gulf. It was attended by only nine OPEC members, who confronted the vexing problem of how OPEC could lower its official price to a competitive level without undermining its image of exerting control over the market. Saudi Arabia proposed shrouding the necessary price reduction in a semantic fog in which the "official OPEC price" would remain at $34 a barrel but the premiums charged for "differentials" in quality and transportation would be "adjusted." This would effectively reduce the price. The plan was ultimately rejected, because, as Petroleum Intelligence Weekly, a trade paper, observed, "The 'differential umbrella' is not large enough ... to mask the market's perception of the price reductions required." The only answer, it was decided in Doha, was for Saudi Arabia to cut its production substantially.