OPEC, the Organization of Petroleum Exporting Countries, was formed in 1960, when a buyer's market existed for oil, and before member governments came to own and control their respective production.1 Indeed, in the 1960s, the price of oil had steadily declined despite the oligopoly of the dominant international companies, called the "seven sisters." A number of factors were behind this drop in price, the first being the beginning of Soviet petroleum exports to the non-Communist world, whose price generally undercut that of the major oil firms. Secondly, the 1960s saw the emergence of state-owned companies in the producing countries, which often entered into joint ventures with the international firms in order to lessen dependence on them. But an additional effect was also to glut the market, again pushing down prices in the process. And finally, a third factor was simple competition among the "seven sisters" as they fought among themselves for market share. These international firms employed such measures as special freight allowances, the chartering of tankers at subsidized rates, quality (of crude) concessions, "spiking" (that is, improving) quality at no charge, long-term, low-cost financing, and acceptance of partial payment in "soft" currencies (that is, in weaker, unstable ones like from the Third World) as discounts in a market that typified that of most raw commodities (for example, grain, produce, minerals). Thus, the countries that would eventually found OPEC did so after a decade of deteriorating economics--from their perspective, that is.
In 1960, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela became the founding partners of OPEC. Joining later were the United Arab Emirates, Indonesia, Libya, Algeria, Nigeria, Ecuador, and Gabon. The immediate problem that they were to tackle was that of royalties.2 At that time, the oil companies paid most of the host governments a royalty for the right to explore for, prod...