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In 1960, a handful of oil producing nations made a decision that would reshape the global economy. They formed a cartel to control the world's most vital resource, challenging powerful corporations and altering the balance of global power. Over the decades, that organization would trigger crises, fuel economic booms and influence energy prices across every corner of the planet. Learn more about the creation, rise and eventual decline of opec, the Organization of Petroleum Exporting Countries on this episode of Everything Everywhere Daily. This episode is sponsored by Quince. I recently moved into a new, larger place and I faced the challenge of decorating it. I of course am turning to Quince to help get the job done. In addition to clothes, Quince offers stylish home furnishings that makes my place look great at affordable prices. And I've also recently picked up a second cashmere sweater that I've talked about before just because I like it so much. 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With Mint Mobile, you can get high speed data and unlimited talk and text delivered on the nation's largest 5G network starting at only $15 a month. Use your own phone and number, activate with ESIM in minutes and start saving immediately. No long term contracts and no hassle. That's why I recommend Mint Mobile. If you like your money, Mint Mobile is for you. Shop plans@mintmobile.com eed that's mintmobile.com eed upfront payment of $45 for 3 month 5GB plan required equivalent to $15 a month new customer offer for first 3 months only, then full price plan options available, taxes and fees. Mint Mobile for details. The origins of OPEC can be traced back to the ends of the Second World War. The world found itself in a situation in which the most important resources had shifted from iron and coal to oil. This wasn't an overnight change, but by the end of the 1940s, planes, trains and automobiles were all increasingly dependent on petroleum. At the time, the oil industry was dominated by seven western companies known as the Seven Sisters. These included Exxon Mobil, Chevron, Gulf, Texaco, Royal Dutch Shell and British Petroleum. They had secured long term concessions across the Middle east and elsewhere in the early 20th century before many countries recognized the value of their oil. These agreements gave them the right to explore, produce and sell oil in exchange for relatively modest payments to the host governments. The companies controlled not only production, but also pricing, refining and distribution, effectively running a vertically integrated global system. Producing countries had little transparency and even less influence over pricing decisions. The first cracks in this system appeared after World War II, when newly independent states and governments with rising nationalist sentiment began demanding a larger share of oil revenues. A key turning point came in 1950 when Saudi Arabia negotiated a 5050 profit sharing agreement with Aramco. This model quickly spread to other producing countries and marked the first major shift in the balance of power. Governments were no longer passive recipients of royalties. They were now partners entitled to a defined share of profits. Even with profit sharing, however, the companies retained control over production levels and the posted price of oil, which determined how revenues were calcul. Throughout the 1950s, the Soviet Union had massively increased its crude oil output and as a result, members of the Seven Sisters had to lower their prices to compete with Soviet oil in several markets. After a second consecutive cut in the posted price of oil by these companies in August 1960, the major producing nations had enough. The Organization of Petroleum Exporting Countries was founded on September 14, 1960 in Baghdad by its first five members, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. At the conclusion of the founding conference, it was announced that the purpose of OPEC would be to provide a forum for unifying member countries oil policies and to determine ways to safeguard members interests both individually and collectively. The members agreed that they could no longer remain indifferent to the attitude of oil companies in modifying prices and demanded that oil companies keep prices stable and restore prices to those prevailing prior to the August 1960 price cuts. The organization, however, was not immediately powerful or even cohesive. At the 1962 members meeting, a battle broke out over export limits. Each country wanted to export as much oil as it could, but flooding the market with cheap oil would decrease the price. The very problem OPEC had been formed to prevent. The new organization was fragile and suffered from the fact that it straddled the divide between the economic and political realm. Through the 1960s, OPEC members steadily increased their leverage. One of the most important tools they used was participation agreements, which gradually transferred ownership stakes in oil operations from the companies to the host governments. Instead of abruptly expropriating assets of oil companies, countries negotiated incremental increases in their share, often moving from minority stakes towards majority control. This approach allowed them to build technical and administrative capabilities while avoiding immediate confrontation and problems that would accompany immediate control. Beyond its initial founding members, OPEC saw significant growth throughout the 1960s. Qatar became a member in 1961, followed by Libya and Indonesia in 1962. The organization continued to broaden its reach later in the decade as Algeria joined in 1969 and the United Arab Emirates, originally represented solely by Abu Dhabi, joined in 1967. By the end of the 1960s, OPEC had transformed from a small founding group into a broader coalition spanning the Middle East, North Africa and parts of Asia. And here I want to digress a bit to explain the economics behind cartels and what OPEC was trying to do. Cartels are nothing new. A cartel is just an agreement among competing producers to join together to act like a monopoly. Instead of competing with each other on price and output, members coordinate to restrict supply, thereby raising prices and increasing the group's profits. In economic terms, they try to move from a competitive equilibrium where prices are driven down to a monopoly like outcome where output is limited and profits are maximized. However, cartels seldom work in the long run because they depend on members sticking to the agreement. Each participant is assigned a production quota or target and the collective output restriction supports higher prices. The problem is that every member has a strong incentive to cheat if everyone else is holding back production. To keep prices high, a single producer can quietly exceed its quota, selling more at the elevated price and earning extra profit without immediately collapsing the market. That's a classic prisoner's dilemma. If too many members cheat, supplies rise, prices fall and the cartel's advantage disappears. By the early 1970s, the balance had tipped decisively in favor of OPEC member countries. Demand for oil was rising rapidly, especially in industrialized economies. And producing countries recognized their strengthened position. Most OPEC members now had majority control over their oil production. Nigeria joined in 1971, becoming OPEC's first sub Saharan African member. Ecuador joined in 1973 and Gabon joined in 1975. The early 1970s marked a decisive turning point. In 1971, the Tripoli Agreement was signed by major oil companies and OPEC members operating in the Mediterranean Sea region. The agreement raised oil prices and increased the share of profits for producing countries. OPEC members were also moving aggressively towards outright nationalization of their oil industries, transferring direct control over their reserves away from Western oil companies. The collapse of the Bretton woods monetary system added further financial complexity. Because oil was priced in dollars, oil producers real income decreased when the dollar began to float free of the old link to gold. OPEC finally showed the world the power of its fully operational Death Star in 1973. The Yom Kippur War of October 1973 transformed OPEC from a regional trade organization into one of the most powerful forces in global geopolitics. At an OPEC summit at the Sheraton Hotel in Kuwait City on October 16, 1973, it was announced that oil prices would rise from $3.01 per barrel to $5.12 per barrel. And this was only the beginning. In December, two months after the Yom Kippur war, prices were raised by an additional 130%. And the organization's Arab members curtailed production and placed an embargo on oil shipments to the United States and the Netherlands, the main supporters of Israel during the war. The result throughout the west was severe oil shortages and spiraling inflation. Between October 1973 and January 1974, the price of reference light Arabian crude oil barrels rose by a factor of four from $2.32 a barrel to $9 a barrel. Although the embargo only lasted for five months, it triggered a two year economic crisis and oil prices never returned to their pre crisis levels. The late 1970s brought a second dramatic disruption. A revolution in Iran, which was the second largest oil exporter after Saudi Arabia, triggered a second oil shock in 1979. It caused a sharp drop in Iranian oil output and panic buying followed. The outbreak of the Iran Iraq war in 1980 further disrupted supplies. By the end of the year, North Sea crude oil stood at a new high of $40 per barrel, a level not to be exceeded for another 10 years. The 1970s and 1980s were the golden years for OPEC. The problem of keeping oil prices high, however, is that you make it possible to explore and produce oil in places where it otherwise wouldn't be economical. High oil prices in the 1970s induced investment in oil production by non OPEC countries, particularly for reserves with a higher cost of production, including Prudhoe Bay in Alaska, the North Shore fields of the United Kingdom in Norway, the Cantarelle fields of Mexico and oil sands in Canada. At the same time, Western economies had become significantly more energy efficient. The 1980s and 90s also marked the first signs of instability in membership. Economic pressures and internal policy disagreements led some countries to leave. Ecuador withdrew in 1992, citing the financial burden of membership fees and production quotas, and Gabon followed in 1995 for similar reasons. From 1982 to 1985, OPEC decreased oil production several times to stabilize prices. But these attempts failed as many OPEC members were producing above their quotas. Saudi Arabia was one of the few OPEC countries that was actually implementing output cuts, and soon non OPEC countries surpassed OPEC in oil production. By 1986, exhausted and losing market share, Saudi Arabia opened the spigot, flooding the market and crashing prices to historic lows. Throughout the 1990s and early 2000s, OPEC continued to serve as a coordinating body, adjusting production targets to stabilize prices. Its influence fluctuated depending on market conditions. During periods of tight supply, such as the early 2000s, OPEC regained some of its leverage. The rise of rapid industrializing economies, especially in Asia, drove up oil demand, contributing to a prolonged period of higher prices that peaked in 2008. The most structurally significant challenge to OPEC's dominance in decades emerged from an unexpected technological innovation in the United States. The US Shale revolution, driven by innovations in hydraulic fracturing and horizontal drilling, enabled American producers to ramp up output, ultimately making the United States the world's top oil producer, a place that it still holds today. This led to the unprecedented declaration of cooperation in December 2016, with OPEC members and 10 non OPEC oil producing countries coming together to help rebalance the market, reduce inventory levels and support oil market stability. This expanded group, dubbed opec, represented an unofficial broadening of the cartel's membership. OPEC currently consists of 11 member countries and accounts for approximately 38% of global oil production. In some ways, OPEC was a victim of their own success. Their ability to keep oil prices high in the 1970s and 80s was an impetus for increased oil production outside of OPEC member states. They were also the victims of the same problem that every cartel faces. Many members, especially the smaller producers with less developed economies, had strong incentives to constantly cheat. This led many countries to leave OPEC over the years so they wouldn't be subject to production limits. OPEC still exists, but its ability to control oil prices has been extremely neutered because it doesn't control the majority of the world's oil supply anymore. However, OPEC does control about 75 to 80% of the world's proven oil reserves, most of that being in Saudi Arabia, Venezuela and Iran. It's entirely possible that in the years or decades ahead, OPEC might become more relevant again if those reserves are tapped and if production in other countries declines. But should that happen, they'll face the same problems that they did before members cheating and high prices encouraging more production. The executive producer of Everything Everywhere Daily is Charles Daniel. The associate producers are Austin Otkin and Cameron Kiefer. My big thanks go to everyone who supports the show over on Patreon. Your support helps make this podcast possible, and I also want to remind everyone about the community groups on Facebook and Discord. That's where everything happens that's outside the podcast, and links to those are available in the show Notes. As always, if you leave a review on any major podcast app or in the above community groups, you too can have it read on the show.