Well, as I like to say, I certainly don't expect these columns to win any Pulitzer's. To wit, I really should have explained what countries are members of OPEC before I did last week's article. So please accept my apology as we go back, back, back…to fill in some gaps.

OPEC was formed at a conference held in Baghdad, September 10-14, 1960. There were five original members: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975, the organization expanded to 13 members with the addition of Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador and Gabon. Ecuador dropped out in December 1992 and in January 1995 Gabon was removed from the roster.

Despite all of its press, and influence, it may surprise you to learn that OPEC produces just 40 percent of the world's oil. It does, however, hold more than 77 percent of the world's proven reserves. OPEC also contains nearly all of the world's excess oil production capacity.

Non-OPEC nations thus produce nearly 60 percent of the world's crude oil. But non-OPEC countries have smaller reserves which are being depleted more rapidly than in OPEC. For this reason, it behooves these nations to continue to aggressively pursue new energy sources.

Current non-OPEC production is concentrated in seven countries: Canada, the United Kingdom, Norway, Mexico, China, Russia and the U.S. Five of these seven are net exporters to the world oil market, the U.S. and China being the exceptions. Together, the seven account for about 60 percent of non-OPEC production, with the U.S. and Russia being the largest. The remaining sources of non-OPEC oil are from 14 nations, including Syria, Brazil, Colombia and Oman.

Continuing then where we left off last week.

In March 1974 the Arab oil embargo was lifted but the event had left its mark. American prosperity had depended in part on what the Shah of Iran described as "the mystical power of the oil companies," or, the arrogance with which the industrial world, in the role of colonial power, claimed dominion over the planet's natural resources.

The price of oil continued to rise throughout the '70s. And oil wasn't the only commodity to do so. By 1980, other commodities such as tin, silver and gold rose to all-time highs while rubber, cotton and grain also rose to high levels.

In 1974 the Consumer Price Index rose to 11 percent. This was the highest peacetime price-surge in American history. By 1975, President Gerald Ford had unveiled his "Whip Inflation Now" program.

Meanwhile, between 1973 and '78, annual revenues from oil in the main Arab producing countries grew enormously. For example:

Saudi Arabia's rose from $4.35 billion to $36 billion, Kuwait's went from $1.7B to $9.2B, and Iraq's increased from $1.8B to $23.6B.

But this increase in wealth led to an increase in dependence on the very industrialized countries they had sought to teach a lesson. The producing countries had to sell their oil, and the industrial countries were their main customers. In the course of the 1970s, the excess of demand over supply came to an end, because of economic recession, attempts to economize in fuel consumption, and increased production by countries which were not members of OPEC.

The bargaining position of OPEC grew weaker and a high and uniform price level was going to be difficult to maintain. And the huge surpluses that were created in the producing nations had to be invested somewhere so, for the most part, they were invested in the industrial countries. They had to go to the same nations for technical expertise in order to develop their own economies and they sought outside help in building their armed forces.

The U.S. was also increasingly prepared to threaten force if oil supplies were interrupted again. We were not just worried about revolutions in the producing countries but also the extension of Soviet influence in the region, i.e., the 1979 invasion of Afghanistan.

After the 1973 oil embargo, Kissinger and Nixon had looked on Iran as an important regional ally. Unlike King Faisal in Saudi Arabia, the Shah of Iran did not use his oil to place political pressure on the U.S., although he greatly increased its price. [The U.S. did still supply Saudi Arabia with large amounts of aid]. In addition, Iran allowed the U.S. to refuel ships at its ports and continued American antagonism of the Soviet Union.

Nevertheless, the second oil crisis (which really started in 1978 when Iran led a new price increase), accelerated as a result of the Iranian revolution as well as political reaction to the Camp David Accords between Egypt and Israel. Oil was to hit $40 a barrel by 1981.

But eventually the price peaked due, again, to the simple forces of supply and demand. The industrialized nations began to develop more efficient uses of energy while OPEC failed to maintain a united front on prices and volume of production. The price of crude has generally been in a free fall since '81. Even with the recent price rise, in inflation-adjusted terms, we have a long ways to go to begin to come close to the levels of the late 70s / early 80s.

And one interesting note: there was an item in the Wall Street Journal recently concerning Russia's Gazprom, the world's largest producer and exporter of natural gas. They are proposing a cartel along the lines of OPEC to raise the price of gas, a lot of which is used in Europe. Gazprom is looking to reach agreements with two other major gas producers, Norway and Algeria. If gas prices remain low, Gazprom warned, Russia may balk at extending supply contracts in Western Europe.

Finally, what have we learned from the two price shocks of the '70s? Little. We still import way too much oil. Asia, for example, is back up to around 70% [from the Middle East] in some countries. Should the global economic recovery continue, there is no doubt that the $22 prices of today will look cheap in a year or so.

Sources:
"Energy Information Association;"
"The Great Wave, " by David Hackett Fischer;
"A History of the Arab Peoples," by Albert Hourani;
"A Reassessment of U.S. Strategic Interests in the Post-Gulf War Middle East," by W. Judd Peak

Brian Trumbore