1973 Oil Crisis - Decline of OPEC

Decline of OPEC

Since 1973, OPEC failed to hold on to its preeminent position, and by 1981, its production was surpassed by that of other countries. Additionally, its own member nations were divided among themselves. Saudi Arabia, trying to gain back market share, increased production and caused downward pressure on prices, making high-cost oil production facilities less profitable or even unprofitable. The world price of oil, which had reached a peak in 1979 during the 1979 energy crisis, at more than $80 per barrel, decreased during the early 1980s to $38 per barrel (239 US$/m3). In real prices, oil briefly fell back to pre-1973 levels. Overall, the reduction in price was a windfall for the oil-consuming nations: United States, Japan, Europe, and especially the Third World.

Part of the decline in prices and economic and geopolitical power of OPEC comes from the move away from oil consumption to alternate energy sources. OPEC had relied on the famously limited price inelasticity of oil demand to maintain high consumption but had underestimated the extent to which other sources of supply would become profitable as the price increased. Electricity generation from nuclear power and natural gas, home heating from natural gas and ethanol blended gasoline all reduced the demand for oil.

At the same time, the drop in prices represented a serious problem for oil-producing countries in northern Europe and the Persian Gulf region. For a handful of heavily populated, impoverished countries, whose economies were largely dependent on oil—including Mexico, Nigeria, Algeria, and Libya—governments and business leaders failed to prepare for a market reversal, the price drop placed them in wrenching, sometimes desperate situations.

When reduced demand and over-production produced a glut on the world market in the mid-1980s, oil prices plummeted and the cartel lost its unity. Oil exporters such as Mexico, Nigeria, and Venezuela, whose economies had expanded in the 1970s, were plunged into near-bankruptcy, and even Saudi Arabian economic power was significantly weakened. The divisions within OPEC made subsequent concerted action more difficult.

Nevertheless, the 1973 oil shock provided dramatic evidence of the potential power of Third World resource suppliers in dealing with the developed world. The vast reserves of the leading Middle East producers guaranteed the region its strategic importance, but the politics of oil still proves dangerous for all concerned to this day.