The secret meeting that launched OPEC

This is Planet Money from NPR. We here at Planet Money are firm believers in the saying there's no such thing as a dumb question, because even the most simple questions can lead to incredibly intricate answers that reveal how the economy works. So we get especially excited when y'all come to us with questions that you feel like you should already know the answers to. Like the other day we got a question from a listener named Valerie Brecky who at first didn't even want us mentioning her name. Ah, I have a lot of friends that listen to NPR specifically Planet Money and I think it's embarrassing when you don't know the answer to what should be a basic question every American that should do in my opinion that is not true at all. Luckily Valerie got over it. She told us she thought of her question while prepping for a camping trip. She has a diesel guzzling camper van and had a question related to how much it cost to fill up at the pump. So she whipped out her phone and started talking into it, voice to text, pressed send. And when her email landed in our inbox it read, "I planet honey, I got a kick outta that." That's not what I said, that's what voice to text said. What did you say? Hi Planet Money, it would be so awesome if you guys could do an episode explaining OPEC to us like we're five years old. I have an almost five year old who definitely has never heard of the organization of the petroleum exporting countries. Not sure, she knows what gas is either. And Valerie's question gets more advanced real fast. She asked what OPEC does to make oil prices go up or down. In general, I understand they exist to keep supply low in order to keep prices higher, but I don't understand why, what went, how, why keep prices high. Love it. Alright, I am going to try to answer as many of those questions as possible, I will do my best. Awesome. Hello and welcome to Planet Money's, maybe regularly occurring series. Everything you wanted to know about, what is OPEC? But we're too afraid to ask, I'm Nick Fountain, today on the show we're going to track down the answers to Valerie's questions. What is OPEC, why does it exist, how and why does it control oil prices, and why does it, United Arab Emirates just leave OPEC? You know what else I thought would be interesting to know? What? Can you actually expect to see gas prices fall at some point in time, given the UAE departure? Alright, good luck on the camping trip, thank you so much. Thank you. Bye. Bye. Alright, let's do this. Our first two questions, courtesy of listener Valerie, what is OPEC, and why does it exist? The simplest answer, it's a group of oil states that have huge sway over oil markets, because they decide, together, how much to pump. But there is so much more, starting with a great story about why OPEC exists, which involves a secret meeting under a tree on the banks of the Nile. This meeting happened in 1959, and the reason it happened had to do with who controlled the oil market at the time, which was not the countries that had the most oil, the Saudi Arabia and Venezuela of the world, who controlled the oil markets was the American and European companies that were drilling in those countries. And those companies, which included the likes of Gulf and Shell and Texco, you might remember from our recent show about Venezuela and oil, had a pretty cool nickname, the Seven Sisters. So the Seven Sisters were the huge companies that were extracting oil from the oil states. And as the name implies, the Seven Sisters were awfully close. They were separate businesses, but they coordinated how they dealt with the oil states. They divvied up who got to drill and where, they even decided the price they would pay countries for their oil. And that is why OPEC was hatched. Essentially, as a response to this kind of a cartel, because the countries whose oil was being pumped were like, why don't we have more control over the price of our oil? This is where the secret meeting comes in. To set the stage, picture if you will, Cairo 1959, the Hilton, which is this gleaming hotel covered in turquoise tiles. And at that hotel, our guest of what was called the Air Petroleum Congress. Basically, who's who of international oil executives and a bunch of oil ministers? Was it mostly men? Oh, almost all men. This is Ana Rubino, who's a biographer. Okay. So into this. Into this sea of men. Walks whom? Walks Juan de Gibonsky, who is this petite blonde woman with big eyes, very elegant, very put together. And she knew basically everybody in the room. Juan de Gibonsky was the most powerful woman in the international oil world for decades. Wanda died in 1992. Luckily for us, Ana, who worked for Wanda, ended up writing the book on her. And that's why we have this story. I'm delighted that you're interested in Wanda. Wanda was, among other things, an investigative journalist, a power broker. The publisher of a newsletter called Petroleum Intelligence Weekly. And when we say newsletter, we're not talking about one of those new fangled substacks. It was considered the Bible of the oil industry. The Bible of the oil industry. It was printed on this very thin, at the time called Bible paper, so that it could be mailed, airmail, for the lowest cost. And so that it could be folded and fit into a man's suit jacket pocket. And she would go around to any meeting she had with oil folks. And she would slip this into their jacket pocket. To hear Ana's telling of it, Wanda's reporting revealed the secretive ways the seven sisters were extracting wealth from the oil states, like little accounting tricks. This was where Wanda actually was so useful and helpful to many of these young shakes and leaders in learning about the economics of oil, learning about the secrets, the mysteries, actually, of how these seven sisters were running the show. Which brings us back to the conference, the one where Wanda walked into the sea of men. But before the conference, the seven sisters decided, we're going to start paying less for oil. And the oil ministers of the countries that produce that oil are just furious because they've not been notified of this cut in the price of oil, which means their royalties are going to go down and frustrated with that. And the fact they know, thanks to reading Wanda to Blonsky's articles, that they're really losing out on a lot of the profits that the oil companies are pocketing. They want to do something about it. So that's the context going into this meeting. And Wanda, she knows all the players, including the two men, maybe most amp to do something about this seven sisters sort of cartel, the oil minister of Venezuela, and the oil minister of Saudi Arabia. And she introduces the two of them. And she said they would have met anyway, but she introduces the two of them. And in the stories that she would tell, it would be either over, she'd say that it would be either over Coke or over whiskey, depending on her audience. Coke you, soda, not that other thing. The men arranged a secret meeting at an empty yacht club outside of town. They invited other officials from Kuwait, Iraq, Egypt, Iran to avoid the prying eyes and ears of the seven sisters. They all drove in separate cars and met under a tree on the banks of the Nile. It was a James Bond atmosphere. Such a guy's in black suits meeting outside under a tree because they were so suspicious. They were so worried about being, you know, spied on. It was right then and there that they came to an agreement. They were going to try to ban together and rest control back from the sort of cartel that was the seven sisters with an organization of their own. So that as an association of oil states, they could have more of a say over how much they sold their oil for. This organization would eventually come to be known as OPEC, the organization of the petroleum exporting countries. And Wanda, she came to be known as the midwife of OPEC. The midwife of OPEC? Yeah. A little data. It will take it or, yes, another phrase that she was also called was OPEC's matchmaker. So that is the what and why of OPEC? An organization of the biggest oil countries that got together in order to fight back against the seven sisters, the sort of cartel of oil companies. And at first, the OPEC countries thought they would wield their power by negotiating kind of like collective bargaining for better contracts. It was in effect more of a consultative body than it was an organization that had any Thank you. impact on the price of oil. - It was a grievance organization? - Yeah, that's actually a good way of putting it. They did have grievances. They were trying to figure out a way to negotiate with the major oil companies, but the major oil companies wouldn't meet with them. - Or at least wouldn't give them what they wanted. The power was still with the oil companies. And OPEC was kind of just an industry group. It would be more than a decade before OPEC countries would realize their power. Together, they could control oil prices, which gets us to our next question from listener Valerie. Why and how did OPEC start to control oil prices? - Why, what, when, how? - Why, what, when, how did OPEC start to control oil prices? Well, it turns out there was kind of a breakout moment. - It is an all-out war. - October, 1973, when Egypt and Syria attacked Israeli forces. - Surprise attacks came early this morning in the air and on the ground. - The Egyptians-- - Shortly after the war started, the U.S. sent plane loads of arms and supplies to support Israel. And a group of the Arab oil producing countries did not like this. To show their disapproval, they did two things. One, they said, none of our oil is gonna go to the supporters of Israel, especially the U.S. This became known as the Arab oil embargo. And this was not OPEC, by the way. It was a smaller group. But the second thing they did and the more important was to limit the amount of oil they even pumped out of the ground. And that is because the U.S. wasn't only buying oil from this group of countries. So even with the embargo, they could get the global market rate for oil elsewhere. If these countries really wanted to put pressure on the U.S. and these other countries, they needed to reduce the total amount of oil in circulation. So they said they were gonna cut production 5% every month as long as the war continued. - It was the biggest, the biggest economic shock the world has ever seen. Because the price of oil went from $3 a barrel to $12 a barrel, almost overnight. And in the United States, we ended up with long gas lines. - How long have you been waiting in line? - About five minutes. I'll just cut in front of a whole bunch of people. - Did that guy behind you tell you that he cut into the line? Twice, I got out and talked to him. And he's just so obnoxious. He's so blatant about it, you know? - Now, as we mentioned, the embargo and production cuts wasn't an OPEC policy. It was just some countries. But OPEC members learned a lesson from it. Their power was not in expressing their grievances or trying to negotiate. They could control the market by banding together and limiting supply. At this point, OPEC countries were producing more than half of the world's oil. So the answer to listener Valerie's question about why and how OPEC controls prices comes from that insight, that their power lies in collectively controlling supply. But, and this is more evidence of how intricate the answer is to simple questions can be, it turns out doing anything collectively is very, very hard, especially when it has to do with money. - OPEC's power lies in acting together and actually sticking to what they're saying that they're gonna do. The thing that's very hard is doing that over a long period of time. - To hear about that about how hard it is to keep the gang together and control how much money they get for their oil, we called up the ultimate OPEC insider. Ibrahim Al-Mahana. How many OPEC meetings have you been to? - Oh, so many, so many. - Hundreds? - More than that. - Thousands? - No, I don't, I don't. - Ibrahim's job for nearly four decades was advising Saudi Arabia's oil ministers. He's been called the Saudi oil whisperer. And part of his work was to try to move the oil market kind of on vibes by convincing oil traders and journalists to see the market the way he saw it or the way he wanted them to see it. So if you want the price to go up, what do you do? How do you message that? - I am not going to tell you. (laughing) - If you want the price to go down, how do you say it? - No, no, no, no. No. - Ibrahim keeps his tricks close to the chest. But talking to him, I got a better understanding of why OPEC would want to control the price of oil, which listener of Valerie had asked. Why keep prices high? - Now OPEC doesn't necessarily want to keep prices high, too high, people might switch to more efficient cars or electric cars. What they want to do is maximize their profits. Of course, though they never really say this out loud, what they do say is that they want to manage supplies, smooth the market. Ibrahim told me that oil, like many commodities, has these huge boom bus cycles. Where the price of oil rises, companies drill more, explore more and pump more. And then there's too much oil and the price plummets. And OPEC, according to Ibrahim, just wants to smooth this cycle out, make it less painful for producers and consumers. But of course, they want to control the price, too. That's the whole point of OPEC. And the tactic OPEC eventually figures out comes from the lesson of the Arab oil embargo. You can control prices by controlling supply. So that is what the OPEC countries started doing, all together as a block, production quotas. - The quota introduced in 1982. And for all countries, they were quota. - And if this sounds like a cartel to you, colluding to set production quotas in order to control prices, I agree. Is it a cartel? - No, no. - Come on. - No, no, no, no, it's a management. You need it. - Ibrahim says they were trying to manage supply, not set the price. Each member country was selling their oil on the open market. But regardless, starting in the early 80s, every OPEC member agreed to a quota, a limit to the amount of oil they pumped out of the ground. Except Saudi Arabia. - Saudi Arabia decided I don't need a quota. - And they said it will be the swinging producer. - Swinging producer, aka the swing producer. And this is really important. Having a swing producer, one member who's not strictly following quotas is a way to finesse the smoothing OPEC was trying to do. Basically, if oil prices rise or drop, a swing producer can quickly ramp up or ramp down production to keep the oil price and market steady. And Saudi Arabia was the obvious candidate to be the swing producer because they have an ungodly amount of oil. You can just kind of tap the Saudi desert floor a few times and oil gushes out. So in 1983, they agreed to smooth oil prices for the OPEC countries by swinging their production, adjusting their output to keep prices steady. And that may seem like an enviable position because when prices get too high, you get to pump more and sell it at a nice price in order to bring prices down. - And a good time, a good, a bad time, it's really worse. - Yeah, bad times, Ibrahim says, being the swing producer really is worse. Because when prices are down, you gotta pump less and you make less. So you're basically dealing with the boom and bust cycle all on your own. And then there was a bigger problem that Ibrahim says Saudi Arabia started to notice. As soon as the quotas were imposed, it became very tempting to skirt them. All those countries sitting there with that sweet, sweet or sour, sour crude ready to pump, selling it at that high price really looks tempting. What if we just pumped a little bit more than our quota? - Who know? - Some OPEC countries were not really willing to find a joint solution. - So they were cheating on their quotas? - Yes, some of them, yes, they did. Was that a big problem? - It was a major problem. - OPEC didn't have a solid way to police countries on their quotas. And so, countries would cheat often. They're being essentially free riders. - Absolutely, some countries continue until today, all the time. - Do Saudis look down on the cheaters and say, "Ah, yes, yes, yes." - And all that cheating, it eventually ticked off Saudi Arabia so much that they decided in 1985 to show everyone who was boss and just flood the market with oil. And that crashed the price of oil everywhere. It got so low that in the spring of 1986, some gas stations were slinging gallons for pennies. - Cheap gas, real cheap gas. - 19 cents is a heck of a lot cheaper than it usually is. - That's right, 19 cents a gallon. The low price part-- - For a second there, OPEC was in disarray. But it did not die. OPEC rebuilt the quota system, added some members, regained their status as the most important player in the global oil market. But recently, their power has waned. Among other things, the US is now producing a ton of oil, which means OPEC is a smaller player. And that plus the normal cartel dynamics of everyone cheating, plus the war in Iran has made keeping the gang all together harder than ever. And that is part of the answer to the last piece of our listener Valerie's question. Basically, what's up with the United Arab Emirates Ditch and OPEC? We're gonna tackle that bit after the break. (upbeat music) So, the reason listener Valerie email us in the first place was of course, because the United Arab Emirates, home to Dubai, Abu Dhabi, a bunch of oil wealth, recently decided to leave OPEC. They left at the beginning of the month. Why, and what will this mean for Valerie when she's at the pump trying to fill up her diesel camper van? For more on that, we called up legendary OPEC watcher, Kate Durian. Kate lived in the UAE for almost two decades, went to nearly every OPEC meeting for even longer. She even brought her son along to some. I think they had a sort of junior OPEC reporter badge made for him. Apparently her son picked up the trade pretty quickly. One time, he yelled at the Saudi oil minister? Are you going to change the price of oil? And everybody laughed. Nobody would dare ask the minister that question, you know. Little guy had a lot to learn. OPEC isn't a cartel, it's just a supply management organization. The Saudi oil minister doesn't control the price of oil. He just, anyways, wrong question. The question at hand, why did the UAE leave OPEC? Kate says the UAE is an interesting case. Recently, they've been grappling with this problem that honestly, all oil producing nations have to confront. It's called the green paradox, which is, as the globe decarbonizes, the incentive for oil producers is to pump more, pump as much as possible so they can get as much money for their oil right now before demand collapses. So the UAE, along with trying to diversify their economy by becoming a financial hub and investing in data centers and aviation has been wanting to increase their production. But OPEC has been holding the Mac. Stink, no, stick to your quota. Well, what was the first sign that you saw that the UAE might not be happy with this situation ship? - Well, you know, when you cover the Middle East and I've been doing it for a good decades, you have to read tea leaves, you know. You've got to look at the little nuances because they don't come out and say it, right? Kate says she's seen tensions for years in those tea leaves. Like the Saudi crown prince and the Abu Dhabi crown prince stopped going out of their way to say nice things about each other. And maybe more importantly, the Emirates started complaining more and more about their quota, which wasn't increasing, even though they'd made all these investments in their oil fields and vastly increased their production capacity. They were basically saying, we've grown up. Stop treating us like the little brother. Kate says things really came to head in 2021. She was covering the OPEC meeting. Saudi Arabia proposed modest increases to quotas but based on old production capacities. - And the Emirates said, no, we're not taking this because you're using a baseline from back in 2018 when our capacity was much lower. We have higher capacity now. We want a higher production quota. And so they scuttled the agreement and it became public. - In a really serious way. The oil ministers did dueling TV appearances and Kate was thinking, hang on, this is very unusual. These countries don't normally argue in public. They try to do it behind closed doors. - The stalemate lasted weeks and it got nasty. Saudi Arabia even banned flights from the UAE. Eventually everyone figured out a way to save face. The UAE got higher quotas. But to keen tea leaf readers like Kate, it was clear. The UAE wanted out. And after the US and Israel started a war with Iran and Iran, a fellow OPEC member started bombing the UAE. That's when they finally said, see you later. The UAE left OPEC. That thing we told you about how hard it is to keep a cartel together. We're seeing it happen in real time. Now, what does that mean for Valerie's summer camping budget? The whole reason we're doing this episode is because we got a question from a listener, Valerie, who asked us, can we expect to see gas prices fall at some point, given the UAE's departure? Do you have an answer to that? - No, I mean, how much more can they produce? This is the thing. Iran's blocking of the Strait of Hormuz has prevented a large portion of Emirati oil from even leaving the country. So Kate says the UAE leaving OPEC isn't going to have much of an effect right now. - The only way you're going to get gas prices to come down is if the Strait reopens, if everything returns to normal. - Oh, sure, but after the Strait opens. - After the Strait opens, you know what's going to happen? Europe stocks, you have to rebuild stocks. And people are going to be rebuilding stocks. - Countries will refill their strategic reserves. Companies will refill their tanks, their tankers, their refineries. But it's going to take a long time to get back to normal. - You know how much we've lost so far? We've lost 700 million barrels. At the loss of 10 million barrels a day, if you multiply it, we're going to get to a billion. I mean, that's a billion barrels. It's going to be, it's going to take a while for all these tankers to be taken out to sort of get to their destinations. It's really not going to happen overnight. Prices will come off, but they're not going to come off to and extend that, you know. That's going to make a huge difference. - In short, Kate doesn't think there's any major relief coming anytime soon. And even after things do get back to normal and the UAE gets to sell as much oil as it wants, no quotas, it'll only add about one and a half percent to the world's overall oil supply. So listen to Valerie, will prices at the pump go down? Kind of depends on how OPEC responds. Do they want a punishing price war with the UAE? Or do they want to keep the price high? Collectively, they're going to have to decide. You know, I want a Jalansky, had the go-to newsletter for oil for decades. Now, our friends over at the indicator have launched the go-to newsletter for fun economic insights of the 2020s. It's not on Bible paper, you can't tuck it into a suit pocket, but you can find it in your email inbox if you subscribe at npr.org/indicatornewsletter. You won't regret it. If you have a question about how the world works, even if you're embarrassed you have it, please send it to us. Our email is [email protected]. This episode of Planet Money was produced by James Need, with help from Willa Rubin. It was edited by Marion McEun, fact-checked by Sierra Wattes, and engineered by Robert Rodriguez. Alex Goldmark is our executive producer. Few book recommendations. Anna's book about Wanda is called "Queen of the Oil Club." Ebrahim has a book where he reveals more secrets than he would tell us. It's called "Oil Leaders." And the greatest book ever on oil is Daniel Yurgen's "The Prize." I couldn't have done the show without it. I'm Nick Fountain, this is NPR. Thanks for listening, and thank you for asking, Valerie.