http://www.econlib.org/library/Enc/OPEC.html

Year Nominal Price In Year 2004 Dollars Year Nominal Price In Year 2004 Dollars

--------------------------------------------------------------------------------

1965 1.80 8.64 1985 27.53 42.74
1966 1.80 8.41 1986 14.38 21.84
1967 1.80 8.15 1987 18.42 27.24
1968 1.80 7.82 1988 14.96 21.39
1969 1.80 7.45 1989 18.20 25.08
1970 1.80 7.08 1990 23.81 31.59
1971 2.24 8.39 1991 20.05 25.70
1972 2.48 8.90 1992 19.37 24.27
1973 3.29 11.18 1993 17.07 20.91
1974 11.58 36.09 1994 15.98 19.16
1975 11.53 32.84 1995 17.18 20.19
1976 12.38 33.34 1996 20.81 24.00
1977 13.30 33.67 1997 19.30 21.89
1978 13.60 32.17 1998 13.11 14.71
1979 30.03 65.60 1999 18.25 20.18
1980 35.69 71.48 2000 28.26 30.59
1981 34.28 62.76 2001 22.95 24.26
1982 31.76 54.81 2002 24.10 25.06
1983 28.77 47.76 2003 28.50 29.10
1984 28.06 44.89 2004 36.20 36.20

--------------------------------------------------------------------------------

Source: U.S. Energy Information Administration, U.S. Departments of Commerce and Labor.

http://www.globalsecurity.org/military/world/war/iran-iraq.htm

In the 1980's gas went up in a time of war.
http://www.questia.com/read/23343062?title=OPEC%2c%20the%20Petroleum%20Industry%2c%20and%20United%20States%20Energy%20Policy

8
OPEC Versus the Oil-
Consuming World

Fuel-oil companies in the United States used to come around in the
summer and clean the furnace free. In 1974, after the Arab oil boycott and
the beginning of the energy crisis, they sent notices offering the service for
$28. They also began imposing a service charge on customers who did not
pay their bills within thirty days. This rude turnabout, not to mention the
manifold jumps in the price of heating oil, illustrates many changes in
American business and in personal lifestyles that have resulted from the
Arab oil embargo with its fivefold markup of oil prices within a year.

Thus ended the long era of cheap energy that had helped propel America
to industrial and political greatness. Energy touches all aspects of eco-
nomic life. OPEC's savage price increases plus the awareness of the oil-
consuming countries that foreign supplies can be uncertain have also
hiked the price of coal. Electricity costs, especially those of coastal utilities
that burn imported oil, have rocketed, as customers from Maine to Florida
know all too well.

At the gas pump, prices in the United States averaged $1.35 a gallon for
regular gasoline in 1982 compared to 39.7 cents in October 1973, when the
Arab oil embargo began. The embargo lasted for five months, from
November 1973 to March 1974, but the energy crisis that ensued left its
permanent imprint on our everyday lives. By an act of the U.S. Congress,
the highway speed limit is fifty-five miles an hour in order to conserve gas.
The President has asked the people to form commuter car pools, to walk, or
to ride a bicycle for shorter trips, and overall, to drive 5 percent less--all for
the sake of reducing the country's oil imports from and dollar outflow to
OPEC nations. "Even for America, a continental nation that has fancied
itself a land of plenty, scarcity is the new reality." ¹

-133-

http://www.globalsecurity.org/military/world/war/iran-iraq.htm

Iran-Iraq War (1980-1988)

The Iran-Iraq War permanently altered the course of Iraqi history. It strained Iraqi political and social life, and led to severe economic dislocations. Viewed from a historical perspective, the outbreak of hostilities in 1980 was, in part, just another phase of the ancient Persian-Arab conflict that had been fueled by twentieth-century border disputes. Many observers, however, believe that Saddam Hussein's decision to invade Iran was a personal miscalculation based on ambition and a sense of vulnerability. Saddam Hussein, despite having made significant strides in forging an Iraqi nation-state, feared that Iran's new revolutionary leadership would threaten Iraq's delicate SunniShia balance and would exploit Iraq's geostrategic vulnerabilities--Iraq's minimal access to the Persian Gulf, for example. In this respect, Saddam Hussein's decision to invade Iran has historical precedent; the ancient rulers of Mesopotamia, fearing internal strife and foreign conquest, also engaged in frequent battles with the peoples of the highlands.

The Iran-Iraq War was multifaceted and included religious schisms, border disputes, and political differences. Conflicts contributing to the outbreak of hostilities ranged from centuries-old Sunni-versus-Shia and Arab-versus-Persian religious and ethnic disputes, to a personal animosity between Saddam Hussein and Ayatollah Khomeini. Above all, Iraq launched the war in an effort to consolidate its rising power in the Arab world and to replace Iran as the dominant Persian Gulf state. Phebe Marr, a noted analyst of Iraqi affairs, stated that "the war was more immediately the result of poor political judgement and miscalculation on the part of Saddam Hussein," and "the decision to invade, taken at a moment of Iranian weakness, was Saddam's".

Iraq claimed territories inhabited by Arabs (the Southwestern oil-producing province of Iran called Khouzestan), as well as Iraq's right over Shatt el-Arab (Arvandroud). Iraq and Iran had engaged in border clashes for many years and had revived the dormant Shatt al Arab waterway dispute in 1979. Iraq claimed the 200-kilometer channel up to the Iranian shore as its territory, while Iran insisted that the thalweg--a line running down the middle of the waterway--negotiated last in 1975, was the official border. The Iraqis, especially the Baath leadership, regarded the 1975 treaty as merely a truce, not a definitive settlement.

The Iraqis also perceived revolutionary Iran's Islamic agenda as threatening to their pan-Arabism. Khomeini, bitter over his expulsion from Iraq in 1977 after fifteen years in An Najaf, vowed to avenge Shia victims of Baathist repression. Baghdad became more confident, however, as it watched the once invincible Imperial Iranian Army disintegrate, as most of its highest ranking officers were executed. In Khuzestan (Arabistan to the Iraqis), Iraqi intelligence officers incited riots over labor disputes, and in the Kurdish region, a new rebellion caused the Khomeini government severe troubles.

As the Baathists planned their military campaign, they had every reason to be confident. Not only did the Iranians lack cohesive leadership, but the Iranian armed forces, according to Iraqi intelligence estimates, also lacked spare parts for their American-made equipment. Baghdad, on the other hand, possessed fully equipped and trained forces. Morale was running high. Against Iran's armed forces, including the Pasdaran (Revolutionary Guard) troops, led by religious mullahs with little or no military experience, the Iraqis could muster twelve complete mechanized divisions, equipped with the latest Soviet materiel. With the Iraqi military buildup in the late 1970s, Saddam Hussein had assembled an army of 190,000 men, augmented by 2,200 tanks and 450 aircraft.

In addition, the area across the Shatt al Arab posed no major obstacles, particularly for an army equipped with Soviet river-crossing equipment. Iraqi commanders correctly assumed that crossing sites on the Khardeh and Karun rivers were lightly defended against their mechanized armor divisions; moreover, Iraqi intelligence sources reported that Iranian forces in Khuzestan, which had formerly included two divisions distributed among Ahvaz, Dezful, and Abadan, now consisted of only a number of ill-equipped battalion-sized formations. Tehran was further disadvantaged because the area was controlled by the Regional 1st Corps headquartered at Bakhtaran (formerly Kermanshah), whereas operational control was directed from the capital. In the year following the shah's overthrow, only a handful of company-sized tank units had been operative, and the rest of the armored equipment had been poorly maintained.

For Iraqi planners, the only uncertainty was the fighting ability of the Iranian air force, equipped with some of the most sophisticated American-made aircraft. Despite the execution of key air force commanders and pilots, the Iranian air force had displayed its might during local riots and demonstrations. The air force was also active in the wake of the failed United States attempt to rescue American hostages in April 1980. This show of force had impressed Iraqi decision makers to such an extent that they decided to launch a massive preemptive air strike on Iranian air bases in an effort similar to the one that Israel employed during the June 1967 Arab-Israeli War.

Iraqi Offensives, 1980-82

Despite the Iraqi government's concern, the eruption of the 1979 Islamic Revolution in Iran did not immediately destroy the Iraqi-Iranian rapprochement that had prevailed since the 1975 Algiers Agreement. As a sign of Iraq's desire to maintain good relations with the new government in Tehran, President Bakr sent a personal message to Khomeini offering "his best wishes for the friendly Iranian people on the occasion of the establishment of the Islamic Republic." In addition, as late as the end of August 1979, Iraqi authorities extended an invitation to Mehdi Bazargan, the first president of the Islamic Republic of Iran, to visit Iraq with the aim of improving bilateral relations. The fall of the moderate Bazargan government in late 1979, however, and the rise of Islamic militants preaching an expansionist foreign policy soured Iraqi-Iranian relations.

The principal events that touched off the rapid deterioration in relations occurred during the spring of 1980. In April the Iranian-supported Ad Dawah attempted to assassinate Iraqi foreign minister Tariq Aziz. Shortly after the failed grenade attack on Tariq Aziz, Ad Dawah was suspected of attempting to assassinate another Iraqi leader, Minister of Culture and Information Latif Nayyif Jasim. In response, the Iraqis immediately rounded up members and supporters of Ad Dawah and deported to Iran thousands of Shias of Iranian origin. In the summer of 1980, Saddam Hussein ordered the executions of presumed Ad Dawah leader Ayatollah Sayyid Muhammad Baqr as Sadr and his sister.

In September 1980, border skirmishes erupted in the central sector near Qasr-e Shirin, with an exchange of artillery fire by both sides. A few weeks later, Saddam Hussein officially abrogated the 1975 treaty between Iraq and Iran and announced that the Shatt al Arab was returning to Iraqi sovereignty. Iran rejected this action and hostilities escalated as the two sides exchanged bombing raids deep into each other's territory, beginning what was to be a protracted and extremely costly war.

Baghdad originally planned a quick victory over Tehran. Saddam expected the invasion of the in the Arabic-speaking, oil-rich area of Khuzistan to result in an Arab uprising against Khomeini's fundamentalist Islamic regime. This revolt did not materialize, however, and the Arab minority remained loyal to Tehran.

On September 22, 1980, formations of Iraqi MiG-23s and MiG21s attacked Iran's air bases at Mehrabad and Doshen-Tappen (both near Tehran), as well as Tabriz, Bakhtaran, Ahvaz, Dezful, Urmia (sometimes cited as Urumiyeh), Hamadan, Sanandaj, and Abadan. Their aim was to destroy the Iranian air force on the ground--a lesson learned from the Arab-Israeli June 1967 War. They succeeded in destroying runways and fuel and ammunition depots, but much of Iran's aircraft inventory was left intact. Iranian defenses were caught by surprise, but the Iraqi raids failed because Iranian jets were protected in specially strengthened hangars and because bombs designed to destroy runways did not totally incapacitate Iran's very large airfields. Within hours, Iranian F-4 Phantoms took off from the same bases, successfully attacked strategically important targets close to major Iraqi cities, and returned home with very few losses.

Simultaneously, six Iraqi army divisions entered Iran on three fronts in an initially successful surprise attack, where they drove as far as eight kilometers inland and occupied 1,000 square kilometers of Iranian territory.

As a diversionary move on the northern front, an Iraqi mechanized mountain infantry division overwhelmed the border garrison at Qasr-e Shirin, a border town in Bakhtaran (formerly known as Kermanshahan) Province, and occupied territory thirty kilometers eastward to the base of the Zagros Mountains. This area was strategically significant because the main Baghdad-Tehran highway traversed it.

On the central front, Iraqi forces captured Mehran, on the western plain of the Zagros Mountains in Ilam Province, and pushed eastward to the mountain base. Mehran occupied an important position on the major north-south road, close to the border on the Iranian side.

The main thrust of the attack was in the south, where five armored and mechanized divisions invaded Khuzestan on two axes, one crossing over the Shatt al Arab near Basra, which led to the siege and eventual occupation of Khorramshahr, and the second heading for Susangerd, which had Ahvaz, the major military base in Khuzestan, as its objective. Iraqi armored units easily crossed the Shatt al Arab waterway and entered the Iranian province of Khuzestan. Dehloran and several other towns were targeted and were rapidly occupied to prevent reinforcement from Bakhtaran and from Tehran. By mid-October, a full division advanced through Khuzestan headed for Khorramshahr and Abadan and the strategic oil fields nearby. Other divisions headed toward Ahvaz, the provincial capital and site of an air base. Supported by heavy artillery fire, the troops made a rapid and significant advance--almost eighty kilometers in the first few days. In the battle for Dezful in Khuzestan, where a major air base is located, the local Iranian army commander requested air support in order to avoid a defeat. President Bani Sadr, therefore, authorized the release from jail of many pilots, some of whom were suspected of still being loyal to the shah. With the increased use of the Iranian air force, the Iraqi progress was somewhat curtailed.

The last major Iraqi territorial gain took place in early November 1980. On November 3, Iraqi forces reached Abadan but were repulsed by a Pasdaran unit. Even though they surrounded Abadan on three sides and occupied a portion of the city, the Iraqis could not overcome the stiff resistance; sections of the city still under Iranian control were resupplied by boat at night. On November 10, Iraq captured Khorramshahr after a bloody house-to-house fight. The price of this victory was high for both sides, approximately 6,000 casualties for Iraq and even more for Iran.

Iraq's blitz-like assaults against scattered and demoralized Iranian forces led many observers to think that Baghdad would win the war within a matter of weeks. Indeed, Iraqi troops did capture the Shatt al Arab and did seize a forty-eight-kilometer- wide strip of Iranian territory.

Iran may have prevented a quick Iraqi victory by a rapid mobilization of volunteers and deployment of loyal Pasdaran forces to the front. Besides enlisting the Iranian pilots, the new revolutionary regime also recalled veterans of the old imperial army, although many experienced officers, most of whom had been trained in the United States, had been purged. Furthermore, the Pasdaran and Basij (what Khomeini called the "Army of Twenty Million" or People's Militia) recruited at least 100,000 volunteers. Approximately 200,000 soldiers were sent to the front by the end of November 1980. They were ideologically committed troops (some members even carried their own shrouds to the front in the expectation of martyrdom) that fought bravely despite inadequate armor support. For example, on November 7 commando units played a significant role, with the navy and air force, in an assault on Iraqi oil export terminals at Mina al Bakr and Al Faw. Iran hoped to diminish Iraq's financial resources by reducing its oil revenues. Iran also attacked the northern pipeline in the early days of the war and persuaded Syria to close the Iraqi pipeline that crossed its territory.

Iran's resistance at the outset of the Iraqi invasion was unexpectedly strong, but it was neither well organized nor equally successful on all fronts. Iraq easily advanced in the northern and central sections and crushed the Pasdaran's scattered resistance there. Iraqi troops, however, faced untiring resistance in Khuzestan. President Saddam Hussein of Iraq may have thought that the approximately 3 million Arabs of Khuzestan would join the Iraqis against Tehran. Instead, many allied with Iran's regular and irregular armed forces and fought in the battles at Dezful, Khorramshahr, and Abadan. Soon after capturing Khorramshahr, the Iraqi troops lost their initiative and began to dig in along their line of advance.

Tehran rejected a settlement offer and held the line against the militarily superior Iraqi force. It refused to accept defeat, and slowly began a series of counteroffensives in January 1981. Both the volunteers and the regular armed forces were eager to fight, the latter seeing an opportunity to regain prestige lost because of their association with the shah's regime.

Iran's first major counterattack failed, however, for political and military reasons. President Bani Sadr was engaged in a power struggle with key religious figures and eager to gain political support among the armed forces by direct involvement in military operations. Lacking military expertise, he initiated a premature attack by three regular armored regiments without the assistance of the Pasdaran units. He also failed to take into account that the ground near Susangerd, muddied by the preceding rainy season, would make resupply difficult. As a result of his tactical decision making, the Iranian forces were surrounded on three sides. In a long exchange of fire, many Iranian armored vehicles were destroyed or had to be abandoned because they were either stuck in the mud or needed minor repairs. Fortunately for Iran, however, the Iraqi forces failed to follow up with another attack.

Iran stopped Iraqi forces on the Karun River and, with limited military stocks, unveiled its "human wave" assaults, which used thousands of Basij (Popular Mobilization Army or People's Army) volunteers. After Bani Sadr was ousted as president and commander in chief, Iran gained its first major victory, when, as a result of Khomeini's initiative, the army and Pasdaran suppressed their rivalry and cooperated to force Baghdad to lift its long siege of Abadan in September 1981. Iranian forces also defeated Iraq in the Qasr-e Shirin area in December 1981 and January 1982. The Iraqi armed forces were hampered by their unwillingness to sustain a high casualty rate and therefore refused to initiate a new offensive.

Despite Iraqi success in causing major damage to exposed Iranian ammunition and fuel dumps in the early days of the war, the Iranian air force prevailed initially in the air war. One reason was that Iranian airplanes could carry two or three times more bombs or rockets than their Iraqi counterparts. Moreover, Iranian pilots demonstrated considerable expertise. For example, the Iranian air force attacked Baghdad and key Iraqi air bases as early as the first few weeks of the war, seeking to destroy supply and support systems. The attack on Iraq's oil field complex and air base at Al Walid, the base for T-22 and Il-28 bombers, was a well-coordinated assault. The targets were more than 800 kilometers from Iran's closest air base at Urumiyeh, so the F-4s had to refuel in midair for the mission. Iran's air force relied on F-4s and F-5s for assaults and a few F-14s for reconnaissance. Although Iran used its Maverick missiles effectively against ground targets, lack of airplane spare parts forced Iran to substitute helicopters for close air support. Helicopters served not only as gunships and troop carriers but also as emergency supply transports. In the mountainous area near Mehran, helicopters proved advantageous in finding and destroying targets and maneuvering against antiaircraft guns or man-portable missiles. During Operation Karbala Five and Operation Karbala Six, the Iranians reportedly engaged in large-scale helicopter-borne operations on the southern and central fronts, respectively. Chinooks and smaller Bell helicopters, such as the Bell 214A, were escorted by Sea Cobra choppers.

In confronting the Iraqi air defense, Iran soon discovered that a low-flying group of two, three, or four F-4s could hit targets almost anywhere in Iraq. Iranian pilots overcame Iraqi SA-2 and SA-3 antiaircraft missiles, using American tactics developed in Vietnam; they were less successful against Iraqi SA-6s. Iran's Western-made air defense system seemed more effective than Iraq's Soviet-made counterpart. Nevertheless, Iran experienced difficulty in operating and maintaining Hawk, Rapier, and Tigercat missiles and instead used antiaircraft guns and man-portable missiles.

Iraqi Retreats, 1982-84

The Iranian high command passed from regular military leaders to clergy in mid-1982.

In March 1982, Tehran launched its Operation Undeniable Victory, which marked a major turning point, as Iran penetrated Iraq's "impenetrable" lines, split Iraq's forces, and forced the Iraqis to retreat. Its forces broke the Iraqi line near Susangerd, separating Iraqi units in northern and southern Khuzestan. Within a week, they succeeded in destroying a large part of three Iraqi divisions. This operation, another combined effort of the army, Pasdaran, and Basij, was a turning point in the war because the strategic initiative shifted from Iraq to Iran.

In May 1982, Iranian units finally regained Khorramshahr, but with high casualties. After this victory, the Iranians maintained the pressure on the remaining Iraqi forces, and President Saddam Hussein announced that the Iraqi units would withdraw from Iranian territory. Saddam ordered a withdrawal to the international borders, believing Iran would agree to end the war. Iran did not accept this withdrawal as the end of the conflict, and continued the war into Iraq. In late June 1982, Baghdad stated its willingness to negotiate a settlement of the war and to withdraw its forces from Iran. Iran refused.

In July 1982 Iran launched Operation Ramadan on Iraqi territory, near Basra. Although Basra was within range of Iranian artillery, the clergy used "human-wave" attacks by the Pasdaran and Basij against the city's defenses, apparently waiting for a coup to topple Saddam Hussein. Tehran used Pasdaran forces and Basij volunteers in one of the biggest land battles since 1945. Ranging in age from only nine to more than fifty, these eager but relatively untrained soldiers swept over minefields and fortifications to clear safe paths for the tanks. All such assaults faced Iraqi artillery fire and received heavy casualties. The Iranians sustained an immmense number of casualties, but they enabled Iran to recover some territory before the Iraqis could repulse the bulk of the invading forces.

By the end of 1982, Iraq had been resupplied with new Soviet materiel, and the ground war entered a new phase. Iraq used newly acquired T-55 tanks and T-62 tanks, BM-21 Stalin Organ rocket launchers, and Mi-24 helicopter gunships to prepare a Soviet-type three-line defense, replete with obstacles, minefields, and fortified positions. The Combat Engineer Corps proved efficient in constructing bridges across water obstacles, in laying minefields, and in preparing new defense lines and fortifications.

Throughout 1983 both sides demonstrated their ability to absorb and to inflict severe losses. Iraq, in particular, proved adroit at constructing defensive strong points and flooding lowland areas to stymie the Iranian thrusts, hampering the advance of mechanized units. Both sides also experienced difficulties in effectively utilizing their armor. Rather than maneuver their armor, they tended to dig in tanks and use them as artillery pieces. Furthermore, both sides failed to master tank gunsights and fire controls, making themselves vulnerable to antitank weapons.

In 1983 Iran launched three major, but unsuccessful, humanwave offensives, with huge losses, along the frontier. On February 6, Tehran, using 200,000 "last reserve" Pasdaran troops, attacked along a 40-kilometer stretch near Al Amarah, about 200 kilometers southeast of Baghdad. Backed by air, armor, and artillery support, Iran's six-division thrust was strong enough to break through. In response, Baghdad used massive air attacks, with more than 200 sorties, many flown by attack helicopters. More than 6,000 Iranians were killed that day, while achieving only minute gains. In April 1983, the Mandali-Baghdad northcentral sector witnessed fierce fighting, as repeated Iranian attacks were stopped by Iraqi mechanized and infantry divisions. Casualties were very high, and by the end of 1983, an estimated 120,000 Iranians and 60,000 Iraqis had been killed. Despite these losses, in 1983 Iran held a distinct advantage in the attempt to wage and eventually to win the war of attrition.

Beginning in 1984, Baghdad's military goal changed from controlling Iranian territory to denying Tehran any major gain inside Iraq. Furthermore, Iraq tried to force Iran to the negotiating table by various means. First, President Saddam Hussein sought to increase the war's manpower and economic cost to Iran. For this purpose, Iraq purchased new weapons, mainly from the Soviet Union and France. Iraq also completed the construction of what came to be known as "killing zones" (which consisted primarily of artificially flooded areas near Basra) to stop Iranian units. In addition, according to Jane's Defence Weekly and other sources, Baghdad used chemical weapons against Iranian troop concentrations and launched attacks on many economic centers. Despite Iraqi determination to halt further Iranian progress, Iranian units in March 1984 captured parts of the Majnun Islands, whose oil fields had economic as well as strategic value.

Second, Iraq turned to diplomatic and political means. In April 1984, Saddam Hussein proposed to meet Khomeini personally in a neutral location to discuss peace negotiations. But Tehran rejected this offer and restated its refusal to negotiate with President Hussein.

Third, Iraq sought to involve the superpowers as a means of ending the war. The Iraqis believed this objective could be achieved by attacking Iranian shipping. Initially, Baghdad used borrowed French Super Etendard aircraft armed with Exocets. In 1984 Iraq returned these airplanes to France and purchased approximately thirty Mirage F-1 fighters equipped with Exocet missiles. Iraq launched a new series of attacks on shipping on February 1, 1984.

The War of Attrition, 1984-87

By 1984 it was reported that some 300,000 Iranian soldiers and 250,000 Iraqi troops had been killed, or wounded. Most foreign military analysts felt that neither Iraq nor Iran used its modern equipment efficiently. Frequently, sophisticated materiel was left unused, when a massive modern assault could have won the battle for either side. Tanks and armored vehicles were dug in and used as artillery pieces, instead of being maneuvered to lead or to support an assault. William O. Staudenmaeir, a seasoned military analyst, reported that "the land-computing sights on the Iraqi tanks [were] seldom used. This lower[ed] the accuracy of the T-62 tanks to World War II standards." In addition, both sides frequently abandoned heavy equipment in the battle zone because they lacked the skilled technical personnel needed to carry out minor repairs.

Analysts also assert that the two states' armies showed little coordination and that some units in the field have been left to fight largely on their own. In this protracted war of attrition, soldiers and officers alike failed to display initiative or professional expertise in combat. Difficult decisions, which should have had immediate attention, were referred by section commanders to the capitals for action. Except for the predictable bursts on important anniversaries, by the mid-1980s the war was stalemated.

In early 1984, Iran had begun Operation Dawn V, which was meant to split the Iraqi 3rd Army Corps and 4th Army Corps near Basra. In early 1984, an estimated 500,000 Pasdaran and Basij forces, using shallow boats or on foot, moved to within a few kilometers of the strategic Basra-Baghdad waterway. Between February 29 and March 1, in one of the largest battles of the war, the two armies clashed and inflicted more than 25,000 fatalities on each other. Without armored and air support of their own, the Iranians faced Iraqi tanks, mortars, and helicopter gunships. Within a few weeks, Tehran opened another front in the shallow lakes of the Hawizah Marshes, just east of Al Qurnah, in Iraq, near the confluence of the Tigris and Euphrates rivers. Iraqi forces, using Soviet- and French-made helicopter gunships, inflicted heavy casualties on the five Iranian brigades (15,000 men) in this Battle of Majnun.

Lacking the equipment to open secure passages through Iraqi minefields, and having too few tanks, the Iranian command again resorted to the human-wave tactic. In March 1984, an East European journalist claimed that he "saw tens of thousands of children, roped together in groups of about twenty to prevent the faint-hearted from deserting, make such an attack." The Iranians made little, if any, progress despite these sacrifices. Perhaps as a result of this performance, Tehran, for the first time, used a regular army unit, the 92nd Armored Division, at the Battle of the Marshes a few weeks later.

Within a four-week period between February and March 1984, the Iraqis reportedly killed 40,000 Iranians and lost 9,000 of their own men, but even this was deemed an unacceptable ratio, and in February the Iraqi command ordered the use of chemical weapons. Despite repeated Iraqi denials, between May 1981 and March 1984, Iran charged Iraq with forty uses of chemical weapons. The year 1984 closed with part of the Majnun Islands and a few pockets of Iraqi territory in Iranian hands. Casualties notwithstanding, Tehran had maintained its military posture, while Baghdad was reevaluating its overall strategy.

The major development in 1985 was the increased targeting of population centers and industrial facilities by both combatants. In May Iraq began aircraft attacks, long-range artillery attacks, and surface-to-surface missile attacks on Tehran and on other major Iranian cities. Between August and November, Iraq raided Khark Island forty-four times in a futile attempt to destroy its installations. Iran responded with its own air raids and missile attacks on Baghdad and other Iraqi towns. In addition, Tehran systematized its periodic stop-and-search operations, which were conducted to verify the cargo contents of ships in the Persian Gulf and to seize war materiel destined for Iraq.

The Iraqi Air Force's first real strategic bombing campaign, the so-called war of the cities, aimed at breaking civilian morale and disrupting military targets. Iraq's two efforts early in 1985, from 14 March to 7 April and 25 May to 15 June, were reportedly very effective. Opposition from the Iranian Air Force was negligible to nonexistent, as the Iraqis hit air bases and military and industrial targets all over Iran (in Tabriz, Urmia, Rasht, Bakhteran, Hamadan, Tehran, Isfahan, Dezful, Ahvaz, Kharg, Bushehr, and Shiraz). Even Iraq's lumbering old Tu-16 bombers were getting through, presumably with MiG-25 and Mirage F-1 escorts, as the Iraqis hit targets as far away as Kashan, more than 360 miles from their own bases. Iran's official Kayhan daily confirmed this, reporting that Tehran was being bombed by "Tupolevs (Tu-16 Badger and Tu-22 Blinder bombers) flying at very high altitudes." The brunt of Iraq's bombing offensive, borne by nearly 600 smaller Iraqi combat planes, has fallen on Tehran in an effort to crush Iranian morale. the Iraqis boasted of 180-plane raids on the Iranian capital. Antiwar feeling in Tehran was at an all-time high, as the Iraqis hit the city an average of twice a day and, on two occasions, six times. Among the areas hit were the Bagh-e Saba Revolutionary Guard Barracks, Tehran's main power station, the Military Staff College, the Military Academy, the main army barracks, and the Abbas Abbad Army Base. Southern Tehran's locomotive works and the heavy industrial area near Javadieh were also hit, and even the three military airfields that were supposed to protect the city—Mehrabad, Jey, and Qual'eh Murgeh—were repeatedly attacked with impunity.

Iraq's air force and 'Scud' stikes at Iranian cities pushed the Islamic Republic to look for a comparable response. Iran began the Iran-Iraq War with no SSM capability but managed to import SS-1 'Scud Bs' (R-17Es) in 1985 from Libya and in 1986 from Syria. The Revolutionary Guard Corps, which took charge of the weapons, used them against Iraq between 1985 and 1988. Iran used 'Scud Bs' from Syria, Libya and possibly North Korea against major cities, including Baghdad and Basra. During this first war of the cities, Iran's strategic depth prevented Iraq's missiles from reaching major targets such as Tehran. By 1988, however, Iraq had developed its extended range 'Scud', the al-Hussein, and took Iran by surprise with its strikes on key urban conurbations. In the spring of 1988, Iraq launched up to 200 SSMs against Tehran, Qom and Isfahan. Although only 2000 people were killed in these attacks, they caused panic in the populace and hundreds of thousands fled the cities.

During the war, Iranian leaders frequently exaggerated their capabilities in the missile field. Although their 'Scud Bs' could hit Baghdad, these weapons lacked the accuracy or destructive power to do significant damage. In addition, Iran was unable to match Iraq's quantity of missiles. Iraq fired 361 'Scud Bs' at Iran from 1982 to 1988 and about 160 al-Hussein's at Tehran in early 1988. In contrast, Iran fired 117 'Scuds' throughout the war, including perhaps 60 fired at Baghdad.

The only major ground offensive, involving an estimated 60,000 Iranian troops, occurred in March 1985, near Basra; once again, the assault proved inconclusive except for heavy casualties. In 1986, however, Iraq suffered a major loss in the southern region. On February 9, Iran launched a successful surprise amphibious assault across the Shatt al Arab and captured the abandoned Iraqi oil port of Al Faw. The occupation of Al Faw, a logistical feat, involved 30,000 regular Iranian soldiers who rapidly entrenched themselves. Saddam Hussein vowed to eliminate the bridgehead "at all costs," and in April 1988 the Iraqis succeeded in regaining the Al Faw peninsula.

Late, in March 1986, the UN secretary general, Javier Perez de Cuellar, formally accused Iraq of using chemical weapons against Iran. Citing the report of four chemical warfare experts whom the UN had sent to Iran in February and March 1986, the secretary general called on Baghdad to end its violation of the 1925 Geneva Protocol on the use of chemical weapons. The UN report concluded that "Iraqi forces have used chemical warfare against Iranian forces"; the weapons used included both mustard gas and nerve gas. The report further stated that "the use of chemical weapons appear[ed] to be more extensive [in 1981] than in 1984." Iraq attempted to deny using chemicals, but the evidence, in the form of many badly burned casualties flown to European hospitals for treatment, was overwhelming. According to a British representative at the Conference on Disarmament in Geneva in July 1986, "Iraqi chemical warfare was responsible for about 10,000 casualties." In March 1988, Iraq was again charged with a major use of chemical warfare while retaking Halabjah, a Kurdish town in northeastern Iraq, near the Iranian border.

Unable in 1986, however, to dislodge the Iranians from Al Faw, the Iraqis went on the offensive; they captured the city of Mehran in May, only to lose it in July 1986. The rest of 1986 witnessed small hit-and-run attacks by both sides, while the Iranians massed almost 500,000 troops for another promised "final offensive," which did not occur. But the Iraqis, perhaps for the first time since the outbreak of hostilities, began a concerted air-strike campaign in July. Heavy attacks on Khark Island forced Iran to rely on makeshift installations farther south in the Gulf at Sirri Island and Larak Island. Thereupon, Iraqi jets, refueling in midair or using a Saudi military base, hit Sirri and Larak. The two belligerents also attacked 111 neutral ships in the Gulf in 1986.

Meanwhile, to help defend itself, Iraq had built impressive fortifications along the 1,200-kilometer war front. Iraq devoted particular attention to the southern city of Basra, where concrete-roofed bunkers, tank- and artillery-firing positions, minefields, and stretches of barbed wire, all shielded by an artificially flooded lake 30 kilometers long and 1,800 meters wide, were constructed. Most visitors to the area acknowledged Iraq's effective use of combat engineering to erect these barriers.

By late 1986, rumors of a final Iranian offensive against Basra proliferated. On 08 January 1987, Operation Karbala Five began, with Iranian units pushing westward between Fish Lake and the Shatt al Arab. This annual "final offensive" captured the town of Duayji and inflicted 20,000 casualties on Iraq, but at the cost of 65,000 Iranian casualties. In this intensive operation, Baghdad also lost forty-five airplanes. Attempting to capture Basra, Tehran launched several attacks, some of them well-disguised diversion assaults such as Operation Karbala Six and Operation Karbala Seven. Iran finally aborted Operation Karbala Five on 26 February 1987. Although the Iranian push came close to breaking Iraq's last line of defense east of Basra, Tehran was unable to score the decisive breakthrough required to win outright victory, or even to secure relative gains over Iraq.

In late May 1987, just when the war seemed to have reached a complete stalemate on the southern front, reports from Iran indicated that the conflict was intensifying on Iraq's northern front. This assault, Operation Karbala Ten, was a joint effort by Iranian units and Iraqi Kurdish rebels. They surrounded the garrison at Mawat, endangering Iraq's oil fields near Kirkuk and the northern oil pipeline to Turkey.

Believing it could win the war merely by holding the line and inflicting unacceptable losses on the attacking Iranians, Iraq initially adopted a static defensive strategy. This was successful in repelling successive Iranian offensives until 1986 and 1987, when the Al-Faw peninsula was lost and Iranian troops reached the gates of Al-Basrah. Embarrassed by the loss of the peninsula and concerned by the threat to his second largest city, Saddam ordered a change in strategy. From a defensive posture, in which the only offensive operations were counterattacks to relieve forces under pressure or to exploit failed Iranian assaults, the Iraqis adopted an offensive strategy. More decision-making authority was delegated to senior military commanders. The change also indicated a maturing of Iraqi military capabilities and an improvement in the armed forces' effectiveness. The success of this new strategy, plus the attendant change in doctrine and procedures, virtually eliminated Iranian military capabilities.

As the war continued, Iran was increasingly short of spare parts for damaged airplanes and had lost a large number of airplanes in combat. As a result, by late 1987 Iran had become less able to mount an effective defense against the resupplied Iraqi air force, let alone stage aerial counterattacks.

The Tanker War, 1984-87

Much of Iraq's export capability was lost during the Iran-Iraq War, either to war-related damage or due to political reasons. In 1982, for instance, Syria (allied with Iran at the time) closed the 500-mile, 650,000-bbl/d-capacity Banias pipeline, which had been a vital Iraqi access route to the Mediterranean Sea and European oil markets. By 1983, Iraq's export capabilities were only 700,000 bbl/d, or less than 30% of operable field production capacity at that time.

Iran's revenue share fell after the 1978/79 Iranian Revolution, followed soon thereafter by the Iran-Iraq War for much of the 1980s [and has not recovered since]. All Iranian onshore crude oil production and output from the Forozan field (which is blended with crude streams from the Abuzar and Doroud fields) is exported from the Kharg Island terminal located in the northern Gulf. The terminal's original capacity of 7 million bbl/d was nearly eliminated by more than 9,000 bombing raids during the Iran-Iraq War.

The tanker war seemed likely to precipitate a major international incident for two reasons. First, some 70 percent of Japanese, 50 percent of West European, and 7 percent of American oil imports came from the Persian Gulf in the early 1980s. Second, the assault on tankers involved neutral shipping as well as ships of the belligerent states.

The tanker war had two phases. The relatively obscure first phase began in 1981, and the well-publicized second phase began in 1984.

The relatively obscure first phase began in 1981, and the well-publicized second phase began in 1984. As early as May 1981, Baghdad had unilaterally declared a war zone and had officially warned all ships heading to or returning from Iranian ports in the northern zone of the Gulf to stay away or, if they entered, to proceed at their own risk. The main targets in this phase were the ports of Bandar-e Khomeini and Bandar-e Mashur; very few ships were hit outside this zone. Despite the proximity of these ports to Iraq, the Iraqi navy did not play an important role in the operations. Instead, Baghdad used Super Frelon helicopters equipped with Exocet missiles or Mirage F-1s and MiG-23s to hit its targets. Naval operations came to a halt, presumably because Iraq and Iran had lost many of their ships, by early 1981; the lull in the fighting lasted for two years.

In March 1984, the tanker war entered its second phase when Iraq initiated sustained naval operations in its self-declared 1,126-kilometer maritime exclusion zone, extending from the mouth of the Shatt al Arab to Iran's port of Bushehr. In 1981 Baghdad had attacked Iranian ports and oil complexes as well as neutral tankers and ships sailing to and from Iran; in 1984 Iraq expanded the so-called tanker war by using French Super-Etendard combat aircraft armed with Exocet missiles.

In March 1984 an Iraqi Super Etendard fired an Exocet missile at a Greek tanker south of Khark Island. Until the March assault, Iran had not intentionally attacked civilian ships in the Gulf.Neutral merchant ships became favorite targets, and the long-range Super-Etendards flew sorties farther south. Seventy-one merchant ships were attacked in 1984 alone, compared with forty-eight in the first three years of the war. Iraq's motives in increasing the tempo included a desire to break the stalemate, presumably by cutting off Iran's oil exports and by thus forcing Tehran to the negotiating table. Repeated Iraqi efforts failed to put Iran's main oil exporting terminal at Khark Island out of commission, however.

The new wave of Iraqi assaults, however, led Iran to reciprocate. In April 1984, Tehran launched its first attack against civilian commercial shipping by shelling an Indian freighter. Iran attacked a Kuwaiti oil tanker near Bahrain on May 13 and then a Saudi tanker in Saudi waters five days later, making it clear that if Iraq continued to interfere with Iran's shipping, no Gulf state would be safe. Most observers considered that Iraqi attacks, however, outnumbered Iranian assaults by three to one. Iran's retaliatory attacks were largely ineffective because a limited number of aircraft equipped with long-range antiship missiles and ships with long-range surface-to-surface missiles were deployed. Moreover, despite repeated Iranian threats to close the Strait of Hormuz, Iran itself depended on the sea-lanes for vital oil exports.

These sustained attacks cut Iranian oil exports in half, reduced shipping in the Gulf by 25 percent, led Lloyd's of London to increase its insurance rates on tankers, and slowed Gulf oil supplies to the rest of the world; moreover, the Saudi decision in 1984 to shoot down an Iranian Phantom jet intruding in Saudi territorial waters played an important role in ending both belligerents' attempts to internationalize the tanker war. Iraq and Iran accepted a 1984 UN-sponsored moratorium on the shelling of civilian targets, and Tehran later proposed an extension of the moratorium to include Gulf shipping, a proposal the Iraqis rejected unless it were to included their own Gulf ports.

Iraq began ignoring the moratorium soon after it went into effect and stepped up its air raids on tankers serving Iran and Iranian oil-exporting facilities in 1986 and 1987, attacking even vessels that belonged to the conservative Arab states of the Persian Gulf. Iran responded by escalating its attacks on shipping serving Arab ports in the Gulf. As Kuwaiti vessels made up a large portion of the targets in these retaliatory raids, the Kuwaiti government sought protection from the international community in the fall of 1986. The Soviet Union responded first, agreeing to charter several Soviet tankers to Kuwait in early 1987. Washington, which has been approached first by Kuwait and which had postponed its decision, eventually followed Moscow's lead. United States involvement was sealed by the May 17, 1987, Iraqi missile attack on the USS Stark, in which thirtyseven crew members were killed. Baghdad apologized and claimed that the attack was a mistake. Ironically, Washington used the Stark incident to blame Iran for escalating the war and sent its own ships to the Gulf to escort eleven Kuwaiti tankers that were "reflagged" with the American flag and had American crews. Iran refrained from attacking the United States naval force directly, but it used various forms of harassment, including mines, hit-and-run attacks by small patrol boats, and periodic stop-and-search operations. On several occasions, Tehran fired its Chinese-made Silkworm missiles on Kuwait from Al Faw Peninsula. When Iranian forces hit the reflagged tanker Sea Isle City in October 1987, Washington retaliated by destroying an oil platform in the Rostam field and by using the United States Navy's Sea, Air, and Land (SEAL) commandos to blow up a second one nearby.

Within a few weeks of the Stark incident, Iraq resumed its raids on tankers but moved its attacks farther south, near the Strait of Hormuz. Washington played a central role in framing UN Security Council Resolution 598 on the Gulf war, passed unanimously on July 20; Western attempts to isolate Iran were frustrated, however, when Tehran rejected the resolution because it did not meet its requirement that Iraq should be punished for initiating the conflict.

In early 1988, the Gulf was a crowded theater of operations. At least ten Western navies and eight regional navies were patrolling the area, the site of weekly incidents in which merchant vessels were crippled. The Arab Ship Repair Yard in Bahrain and its counterpart in Dubayy, United Arab Emirates (UAE), were unable to keep up with the repairs needed by the ships damaged in these attacks.

Gradual Superpower Involvement

Iranian military gains inside Iraq after 1984 were a major reason for increased superpower involvement in the war. In February 1986, Iranian units captured the port of Al Faw, which had oil facilities and was one of Iraq's major oil-exporting ports before the war.

In early 1987, both superpowers indicated their interest in the security of the region. Soviet deputy foreign minister Vladimir Petrovsky made a Middle East tour expressing his country's concern over the effects of the Iran-Iraq War. In May 1987, United States assistant secretary of state Richard Murphy also toured the Gulf emphasizing to friendly Arab states the United States commitment in the region, a commitment which had become suspect as a result of Washington's transfer of arms to the Iranians, officially as an incentive for them to assist in freeing American hostages held in Lebanon. In another diplomatic effort, both superpowers supported the UN Security Council resolutions seeking an end to the war.

The war appeared to be entering a new phase in which the superpowers were becoming more involved. For instance, the Soviet Union, which had ended military supplies to both Iran and Iraq in 1980, resumed large-scale arms shipments to Iraq in 1982 after Iran banned the Tudeh and tried and executed most of its leaders. Subsequently, despite its professed neutrality, the Soviet Union became the major supplier of sophisticated arms to Iraq. In 1985 the United States began clandestine direct and indirect negotiations with Iranian officials that resulted in several arms shipments to Iran.

By late spring of 1987, the superpowers became more directly involved because they feared that the fall of Basra might lead to a pro-Iranian Islamic republic in largely Shia-populated southern Iraq. They were also concerned about the intensified tanker war.

Special Weapons

To avoid defeat, Iraq sought out every possible weapon. This included developing a self-sustaining capability to produce militarily significant quantities of chemical warfare agents. In the defense, integrating chemical weapons offered a solution to the masses of lightly armed Basif and Posdoran. Chemical weapons were singularly effective when used on troop assembly areas and supporting artillery. When conducting offensive operations, Iraq routinely supported the attacks with deep fires and integrated chemical fires on forward defenses, command posts, artillery positions, and logistical facilities.

During the Iran-Iraq War, Iraq developed the ability to produce, store, and use chemical weapons. These chemical weapons included H-series blister and G-series nerve agents. Iraq built these agents into various offensive munitions including rockets, artillery shells, aerial bombs, and warheads on the Al Hussein Scud missile variant. During the Iran-Iraq war, Iraqi fighter-attack aircraft dropped mustard-filled and tabun-filled 250 kilogram bombs and mustard-filled 500 kilogram bombs on Iranian targets. Other reports indicate that Iraq may have also installed spray tanks on an unknown number of helicopters or dropped 55-gallon drums filled with unknown agents (probably mustard) from low altitudes.

Iran launched an unsuccessful attack on the Iraqi Osirak nuclear reactor on 30 September 1980. On 07 June 1981 Israel initiated an air attack on the same Iraqi Osirak reactor, destroying it. Iraq launched seven air attacks on the Iranian nuclear reactor at Bushehr between 1984 and 1988 during the Iran-Iraq War, ultimately destroying the facility.

In response to Iranian missile attacks against Baghdad, some 190 missiles were fired by the Iraqis over a six week period at Iranian cities in 1988, during the 'War of the Cities'. The Iraqi missile attacks caused little destruction, but each warhead had a psychological and political impact -- boosting Iraqi morale while causing almost 30 percent of Tehran's population to flee the city. The threat of rocketing the Iranian capital with missiles capable of carrying chemical warheads is cited as a significant reason why Iran accepted a disadvantageous peace agreement.

War Termination

Four major battles were fought from April to August 1988, in which the Iraqis routed or defeated the Iranians. In the first offensive, named Blessed Ramadhan, Iraqi Republican Guard and regular Army units recaptured the Al-Faw peninsula. The 36-hour battle was conducted in a militarily sophisticated manner with two main thrusts, supported by heliborne and amphibious landings, and low-level fixed-wing attack sorties. In this battle, the Iraqis effectively used chemical weapons (CW), using nerve and blister agents against Iranian command and control facilities, artillery positions, and logistics points. Three subsequent operations followed much the same pattern, although they were somewhat less complex. After rehearsals, the Iraqis launched successful attacks on Iranian forces in the Fish Lake and Shalamjah areas near Al-Basrah and recaptured the oil-rich Majnun Islands. Farther to the north, in the last major engagement before the August 1988 cease-fire, Iraqi armored and mechanized forces penetrated deep into Iran, defeating Iranian forces and capturing huge amounts of armor and artillery.

In the fall of 1988, the Iraqis displayed in Baghdad captured Iranian weapons amounting to more than three-quarters of the Iranian armor inventory and almost half of its artillery pieces and armored personnel carriers.

The Iran-Iraq war lasted nearly eight years, from September of 1980 until August of 1988. It ended when Iran accepted United Nations (UN) Security Council Resolution 598, leading to a 20 August 1988 cease-fire.

Casualty figures are highly uncertain, though estimates suggest more than one and a half million war and war-related casualties -- perhaps as many as a million people died, many more were wounded, and millions were made refugees. Iran acknowledged that nearly 300,000 people died in the war; estimates of the Iraqi dead range from 160,000 to 240,000. Iraq suffered an estimated 375,000 casualties, the equivalent of 5.6 million for a population the size of the United States. Another 60,000 were taken prisoner by the Iranians. Iran's losses may have included more than 1 million people killed or maimed.

Without diminishing the horror of either war, Iranian losses in the eight-year Iran-Iraq war appear modest compared with those of the European contestants in the four years of World War I, shedding some light on the limits of the Iranian tolerance for martyrdom. The war claimed at least 300,000 Iranian lives and injured more than 500,000, out of a total population which by the war's end was nearly 60 million. During the Great War, German losses were over 1,700,000 killed and over 4,200,000 wounded [out of a total population of over 65 million]. Germany's losses, relative to total national population, were at least five times higher than Iran. France suffered over 1,300,000 deaths and over 4,200,000 wounded. The percentages of pre-war population killed or wounded were 9% of Germany, 11% of France, and 8% of Great Britain.

At the end, virtually none of the issues which are usually blamed for the war had been resolved. When it was over, the conditions which existed at the beginning of the war remained virtually unchanged. Although Iraq won the war militarily, and possessed a significant military advantage over Iran in 1989, the 1991 Persian Gulf War reduced Iraq's capabilities to a point where a rough parity existed between Iran and Iraq-conditions similar to those found in 1980. The UN-arranged cease-fire merely put an end to the fighting, leaving two isolated states to pursue an arms race with each other, and with the other countries in the region. The Iraqi military machine -- numbering more than a million men with an extensive arsenal of CW, extended range Scud missiles, a large air force and one of the world's larger armies -- emerged as the premier armed force in the Persian Gulf region. In the Middle East, only the Israel Defense Force had superior capability.

The Ayatollah Khomeini died on 03 June 1989. The Assembly of Experts--an elected body of senior clerics--chose the outgoing president of the republic, Ali Khamenei, to be his successor as national religious leader in what proved to be a smooth transition. In August 1989, Ali Akbar Hashemi-Rafsanjani, the speaker of the National Assembly, was elected President by an overwhelming majority. The new clerical regime gave Iranian national interests primacy over Islamic doctrine.

A variety of unresolved humanitarian issues from the Iran-Iraq war include a failure to identify combatants killed in action and to exchange information on those killed or missing. Iran agreed to the release of 5,584 Iraqi POW's in April 1998, and news organizations reported intermittent meetings throughout the remainder of the year between Iranian and Iraqi government officials toward reaching a final agreement on the remaining POW's held by each side. The Iranian government pledged to settle the remaining POW issues with Iraq in 1999. And joint Iran-Iraq search operations were initiated to identify remains of those missing in action.

UPDATED

http://www.econlib.org/library/Enc/OPEC.html

http://www.globalsecurity.org/military/world/war/iran-iraq.htm

http://www.energybulletin.net/node/4345

http://www.zawya.com/printstory.cfm?storyid=ZW20090404000004&l=080515090404

http://archive.gulfnews.com/articles/07/12/29/10178091.html

http://www.opec.org/aboutus/history/history.htm

http://www.wtrg.com/prices.htm

http://www.opec.org/library/FAQs/aboutOPEC/q13.htm

www.house.gov/jec/publications/110/rr110-2.pdf

http://www.telegraph.co.uk/finance/markets/2818635/Oil-market-is-out-of-our-control-says-Opec.html

http://www.kuwaittimes.net/read_news.php?newsid=OTkxNDk0NzEx

http://www.opec.org/library/FAQs/aboutOPEC/q13.htm

OPEC

by Benjamin Zycher

Few observers and even few experts remember that the Organization of Petroleum Exporting Countries (OPEC) was created in response to the 1959 imposition of import quotas on crude oil and refined products by the United States. In 1959, the U.S. government established the Mandatory Oil Import Quota program (MOIP), which restricted the amount of imported crude oil and refined products allowed into the United States and gave preferential treatment to oil imports from Canada, Mexico, and, somewhat later, Venezuela. This partial exclusion of Persian Gulf oil from the U.S. market depressed prices for Middle Eastern oil; as a result, oil prices “posted” (paid to the selling nations) were reduced in February 1959 and August 1960.

In September 1960, four Persian Gulf nations (Iran, Iraq, Kuwait, and Saudi Arabia) and Venezuela formed OPEC in order to obtain higher prices for crude oil. By 1973, eight other nations (Algeria, Ecuador, Gabon, Indonesia, Libya, Nigeria, Qatar, and the United Arab Emirates) had joined OPEC; Ecuador withdrew at the end of 1992, and Gabon withdrew in 1994.

The collective effort to raise oil prices was unsuccessful during the 1960s; real (i.e., inflation-adjusted) world market prices for crude oil fell from $9.78 (in 2004 dollars) in 1960 to $7.08 in 1970. However, real prices began to rise slowly in 1971 and then increased sharply in late 1973 and 1974, from roughly $10.00 per barrel to more than $36.00 per barrel in the wake of the 1973 Arab-Israeli (“Yom Kippur”) War.

Despite what many noneconomists believe, the 1973–1974 price increase was not caused by the oil “embargo” (refusal to sell) that the Arab members of OPEC directed at the United States and the Netherlands. Instead, OPEC reduced its production of crude oil, raising world market prices sharply. The embargo against the United States and the Netherlands had no effect whatsoever: people in both nations were able to obtain oil at the same prices as people in all other nations. This failure of the embargo was predictable, in that oil is a “fungible” commodity that can be resold among buyers. An embargo by sellers is an attempt to raise prices for some buyers but not others. Only one price can prevail in the world market, however, because differences in prices will lead to arbitrage: that is, a higher price in a given market will induce other buyers to resell oil into the high-price market, thus equalizing prices worldwide.

Nor, as is commonly believed, did OPEC cause oil shortages and gasoline lines in the United States. Instead, the shortages were caused by price and allocation controls on crude oil and refined products, imposed originally by President Richard Nixon in 1971 as part of the Economic Stabilization Program. Although the price controls allowed the price of crude oil to rise, it was not allowed to rise to free-market levels. Thus, the price controls caused the amount people wanted to consume to exceed the amount available at the legal maximum prices. Shortages were the inevitable result. Moreover, the allocation controls distorted the distribution of supplies; the government based allocations on consumption patterns observed before the sharp increase in prices. The higher prices, for example, reduced long-distance driving and agricultural fuel consumption, but the use of historical consumption patterns resulted in a relative oversupply of gasoline in rural areas and a relative undersupply in urban ones, thus exacerbating the effects of the price controls themselves. Countries whose governments did not impose price controls, such as (then West) Germany and Switzerland, did not experience shortages and queues.

OPEC is in many ways a cartel—a group of producers that attempts to restrict output in order to raise prices above the competitive level. The decision-making center of OPEC is the Conference, comprising national delegations at the level of oil minister, which meets twice each year to decide overall oil output—and thus prices—and to assign output quotas for the individual members. Those quotas are upper limits on the amount of oil each member is allowed to produce. The Conference also may meet in special sessions when deemed necessary, particularly when downward pressure on prices becomes acute.

OPEC faces the classic cartel enforcement problem: overproduction and price cheating by members. At the higher cartel price, less oil is demanded; output quotas are necessary in that each member of OPEC has an incentive to sell more than its quota by “shaving” (cutting) its price because the cost of producing an additional barrel of oil usually is well below the cartel price. The methods available to engage in such cheating are numerous: sellers can extend credit to buyers for periods longer than the standard thirty days, sell higher grades (or blends) of oil for prices applicable to lower grades, give transportation credits, offer buyers side payments or rebates, and so on.

This tendency of individual producers to cheat on a cartel agreement is a long-standing feature of OPEC behavior. Individual producers usually have exceeded their production quotas, and so official OPEC prices have been somewhat unstable. But unlike the classic “textbook” cartel, OPEC is unusual in that one producer—Saudi Arabia—is much larger than the others. This condition has caused Saudi Arabia to serve, from time to time, as the OPEC “swing” producer—that is, the producer that adjusts its output in order to preserve the official price in the world market. One reason the Saudis have so acted is that downward pressure on the official price imposes larger total losses on them than on the other OPEC producers in the short run. The Saudis, in their efforts to defend the official OPEC price, have periodically reduced their sales, at times dramatically, thus reducing their revenues substantially. In 1983, 1984, and 1986, for example, the Saudis produced only about 3.5 million barrels per day, despite their (then) production capacity of about 10 million barrels per day.

How successful has OPEC been since the early 1970s? Not as successful as many observers believe. Except in the wake of the 1979 Iranian upheaval, and in market anticipation of a possible destruction of substantial reserves in the 1990–1991 and 2003 Gulf wars, real prices of crude oil fell from 1974 through 2003. Prices increased in 2004 and (thus far) 2005, but this has little to do with the effectiveness of OPEC as a cartel. The causes of the 2004 and 2005 price increases were increased demand in Asia; production problems in Venezuela, Nigeria, and other producing regions; a weakening dollar; and an increased terrorist threat to oil production and transport facilities. Over the longer time frame, prices began declining rapidly in the early 1980s, after the Reagan administration ended the price and allocation regulations, which, because of their specific design, increased the U.S. demand for foreign oil. The Saudis then concluded that lower prices and higher production would further their interests; world market prices (in 2004 dollars) fell from $62.76 per barrel in 1981 to $44.89 in 1984, $21.84 in 1986, and $21.39 in 1988. Indeed, prices even unadjusted for inflation often have declined, from $34.28 in 1981 to $14.96 in 1988. Table 1 shows price data; Table 2 contains current estimated reserves, official production capacity, reported production levels, and OPEC production quotas.

Table 1 World Crude Oil Prices (U.S. dollars per barrel)

Year	Nominal Price	In Year 2004 Dollars	Year	Nominal Price	In Year 2004 Dollars

1965	1.80	8.64	1985	27.53	42.74
1966	1.80	8.41	1986	14.38	21.84
1967	1.80	8.15	1987	18.42	27.24
1968	1.80	7.82	1988	14.96	21.39
1969	1.80	7.45	1989	18.20	25.08
1970	1.80	7.08	1990	23.81	31.59
1971	2.24	8.39	1991	20.05	25.70
1972	2.48	8.90	1992	19.37	24.27
1973	3.29	11.18	1993	17.07	20.91
1974	11.58	36.09	1994	15.98	19.16
1975	11.53	32.84	1995	17.18	20.19
1976	12.38	33.34	1996	20.81	24.00
1977	13.30	33.67	1997	19.30	21.89
1978	13.60	32.17	1998	13.11	14.71
1979	30.03	65.60	1999	18.25	20.18
1980	35.69	71.48	2000	28.26	30.59
1981	34.28	62.76	2001	22.95	24.26
1982	31.76	54.81	2002	24.10	25.06
1983	28.77	47.76	2003	28.50	29.10
1984	28.06	44.89	2004	36.20	36.20

Source: U.S. Energy Information Administration, U.S. Departments of Commerce and Labor.

This longer-term downward trend in prices has yielded increased tensions between two rival groups within OPEC. The price “hawks”—for the most part nations with smaller reserves relative to population—have pressed for lower output and higher prices; the principal hawks within OPEC have been Iran and Iraq before the overthrow of the Baathist regime of Saddam Hussein. The price “doves”—for the most part nations with larger reserves relative to population—have argued for higher output and lower prices, so as to preserve over the longer term their oil markets, and thus the economic value of their oil resources. The principal doves within OPEC are Saudi Arabia, Kuwait, and the United Arab Emirates.

Table 2 Crude Oil Reserves, Production Capacity, and Production
1.. Billions of barrels as of January 1, 2005.
2.. Maximum sustainable, thousands of barrels per day as of March 2005.
3.. Thousands of barrels per day as of March 2005.
4.. Thousands of barrels per day as of March 16, 2005.
5.. Includes half the Neutral Zone.

Nation	Reserves ¹	Production Capacity ²	Production ³	Quota ⁴

Algeria	11.8	1,305	1,305	878
Indonesia	4.7	960	960	1,425
Iran	125.8	3,900	3,900	4,037
Iraq	115.0	1,900	1,900	n.a.
Kuwait ⁵	101.5	2,500	2,500	2,207
Libya	39.0	1,600	1,600	1,473
Nigeria	32.3	2,300	2,300	2,265
Qatar	15.2	800	800	713
Saudi Arabia⁵	261.9	11,000	9,500	8,937
United Arab Emirates	97.8	2,500	2,450	2,400
Venezuela	77.2	2,600	2,600	3,165
OPEC total	882.2	31,365	29,815	27,500
World total	1,277.7	87,200	85,000	n.a.

Source: U.S. Energy Information Administration.
Note: Totals may not sum due to rounding. Production capacity and production figures are subject to some dispute.
n.a.: not applicable.

Relatively lower prices serve the interests of the OPEC doves because oil consumers have responded to prior price increases by finding ways to reduce oil consumption below levels that otherwise would have prevailed. For example, U.S. energy use per dollar of gross domestic product (2004 dollars) in 1970 was about 17,000 Btu. By 1988, after the price increases of 1973 and 1979, it had declined to about 11,600 Btu, and by 2003 it had declined further to about 8,900 Btu. Thus, the price doves, led by Saudi Arabia, generally resisted pressures for relatively higher prices.

Over the long run, the real prices of natural resources and commodities usually fall, largely because of technological advances. Crude oil is no exception. From about $47 per barrel (2004 dollars) in the late 1860s, prices fell to about $28 in 1920, about $13 in 1950, about $12 in 1960, and about $7 in 1970. The price increases of the 1970s and the first half of the 2000s are relatively recent phenomena, and historical patterns suggest that they will not be long-lived. Technological advances in seismic exploration have dramatically reduced the cost of finding new reserves, thus greatly increasing oil reserves; proven world crude oil reserves have doubled since 1980. Horizontal drilling and other new techniques have reduced the cost of producing known reserves, while other technological improvements yield both substitutes for oil and ways to use less oil to achieve given ends.

Moreover, advances in technology over time similarly will reduce prices for such substitute fuels as natural gas, thus exerting continuing downward pressure on crude oil prices. Also, an increasing willingness to devote resources toward environmental improvement suggests that the market for crude oil may decline relative to those for such “cleaner” energy sources as natural gas and nuclear power, unless other technological advances yield substantial improvement in the ability to use oil cleanly. Accordingly, the demand for crude oil over the long term may decline relative to the demand for competing fuels, just as wood gradually gave way to coal—which in turn gave way to oil. These long-term market forces suggest that the economic power of OPEC inexorably will erode.

About the Author

Benjamin Zycher is the president of Benjamin Zycher Economics Associates, Inc., and a senior fellow at the Manhattan Institute for Policy Research. From 1981 to 1983, he was the senior economist for energy with President Ronald Reagan’s Council of Economic Advisers.

Further Reading

Adams, Neal. Terrorism and Oil. Tulsa, Okla.: PennWell, 2003.

Adelman, Morris A. The Economics of Petroleum Supply. Cambridge: MIT Press, 1993.

Adelman, Morris A. Genie out of the Bottle: World Oil Since 1970. Cambridge: MIT Press, 1995.

Bradley, Robert L. Jr. The Mirage of Oil Protection. Lanham, Md.: University Press of America, 1988.

Bradley, Robert L. Jr. Oil, Gas, and Government: The U.S. Experience. Lanham, Md.: Rowman and Littlefield, 1996.

Yergin, Daniel. The Prize. New York: Free Press, 1992.

Zycher, Benjamin. “A Counterintuitive Perspective on Energy Policy.” United Nations Economic Commission for Europe, Briefing, November 2002.

Zycher, Benjamin. “Emergency Management.” In S. Fred Singer, ed., Free Market Energy. New York: Universe Books, 1984.

Iran-Iraq War (1980-1988)

Iraqi Offensives, 1980-82

Iraqi Retreats, 1982-84

The Iranian high command passed from regular military leaders to clergy in mid-1982.

The War of Attrition, 1984-87

The Tanker War, 1984-87

The tanker war had two phases. The relatively obscure first phase began in 1981, and the well-publicized second phase began in 1984.

Gradual Superpower Involvement

Special Weapons

War Termination

Page last modified: 27-04-2005 19:17:28 Zulu

Published Feb 14 2005 by Bloomberg
Archived Feb 15 2005

OPEC, EU to Hold Twice-Yearly Meetings on Oil Market

by staffer

OPEC, producer of more than a third of the world's oil, and the European Union plan to hold twice- yearly meetings to discuss how to maintain a stable oil price acceptable to producing and consuming countries.

Officials will meet first in May or June, Laurens Jan Brinkhorst, Dutch minister of economic affairs said today in Jakarta. An appropriate level for OPEC's crude oil basket price, last at $41.44, would be $30 to $35 a barrel, he said.

High oil prices continue to pose a risk to economic growth, said Caio Koch-Weser, deputy finance minister of Germany, Europe's biggest economy, on Jan. 27. EU member states used about 19 percent of world oil consumption in 2003.

``I think that both OPEC and the EU have been taken by surprise at the persistence of the high oil prices,'' said Anthony Nunan, manager of international petroleum business at Mitsubishi Corp. in Tokyo. ``We are in uncharted territory and no- one really knows at what oil price level there will be serious damage to the world's economy.''

Crude oil traded on the New York Mercantile Exchange reached a record of $55.67 a barrel on Oct. 25. The March contract traded at $47.58 a barrel, 14 percent below its all-time high, at 7 p.m. Singapore time.

``We want to achieve a better understanding of market realities and how to prevent oil prices from jeopardizing economic growth,'' Abdulrahman Alkheraigi, an OPEC spokesman, said in a telephone interview from Vienna. ``What hurts the producers will also hurt the consumers.''

Euro Zone Growth

OPEC in 2003 exported 21 percent of its oil to western European countries, including 5.3 percent to Italy, 3.6 percent to France and 1.9 percent to Germany, according to OPEC's Annual Statistical Bulletin in 2003.

``The timing is clearly related to the negative impact of higher oil prices on the growth in the Eurozone,'' said Dariusz Kowalczyk, a senior investment strategist at CFC Securities Ltd. in Hong Kong.

The first meeting will take place in two to three months and involve EU Energy Commissioner Andris Piebalgs, OPEC's acting Secretary-General Adnan Shihab-Eldin and Energy Minister Jeannot Krecke of Luxembourg, which holds the rotating EU presidency.

``It's planned to have meetings of this sort every six months,'' Etienne Schneider, director general for energy in Luxembourg's economy ministry, said by phone today during a visit to Brussels. No venue has been decided for the first gathering, he said.

Failed Efforts

While earlier efforts at cooperation on oil prices between the EU and OPEC hadn't succeeded, last year's record oil price has spurred consumers and producers into action, Purnomo Yusgiantoro, Indonesia's energy minister and former OPEC President told reporters in Jakarta today.

``When the crude price is rising, then the consuming countries ask for cooperation. When the oil price is falling then OPEC wants to cooperate,'' Purnomo said. ``The two sides now feel that cooperation is a must.''

He didn't elaborate on how the two organizations might influence the oil market.

Some analysts and strategists doubt the meetings between buyers in the EU and sellers from within OPEC could affect the price of oil.

``It could have an impact on energy security; not on prices,'' Dariusz Kowalczyk, a senior investment strategist at CFC Securities Ltd. in Hong Kong said. ``If the E.U. could move to establish closer relations with OPEC they could gain more stable access to crude from OPEC.''

The EU depends on OPEC for oil imports and may be keen to foster relations with the producer group for better access to information on upstream development in OPEC countries. The EU used 681.2 million tons of oil in 2003 according to data from BP's 2004 Statistical Review of World Energy.

``The EU is rightly worried about the bigger picture; does OPEC really have the reserves and wherewithal to develop them to meet the growing world demand?'' Nunan said. ``If they don't, then we may have $100/bbl oil soon.''

Wed, Apr 22, 2009, 02:17 GMT

= Rising Inventories Cut Into OPEC's Influence On Oil Market

Saturday, Apr 04, 2009

By Brian Baskin
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--OPEC may have found the limit to its influence over oil prices, as doubts emerge about the group's ability to cut production enough to match weakening demand.

The Organization of Petroleum Exporting Countries, whose members produce about one-third of the world's oil, has enjoyed more credibility than usual in the oil market since prices began to stabilize in December. The group agreed last year to cut production by 4.2 million barrels a day, to counter the worst decline in oil demand in nearly 30 years.

Oil prices plunged from record highs above $145 a barrel in July to below $34 a barrel in December, close to a five-year low. OPEC's unusually high compliance with its announced cuts halted that slide, even as the global economic situation continued to deteriorate. The cuts helped set the stage for a nearly 60% rise in oil prices over the last six weeks, with crude futures hitting a four-month high above $54 a barrel on March 26.

OPEC's hold on the oil market looks less airtight today. The group is struggling to add to its earlier cuts, as U.S. inventories, a widely tracked indicator for the amount of extra oil on the market, are again on the rise. Crude futures are still trading near their recent high, but traders are looking to currency and equity markets for guidance instead of the cartel. Even some OPEC members appear resigned to watching an oil surplus hold down prices.

"I don't expect prices to go below $40 for a long period of time, (OPEC has) succeeded on that level," said Greg Priddy, an analyst with Eurasia Group, a consultancy. "But rallies are going to be limited in the next couple months."

Crude futures settled 8.8% higher at $52.64 a barrel Thursday on the New York Mercantile Exchange. Oil prices had dropped about $7 since March 26 before Thursday's rebound.

Oil futures were recently trading around $51.25 a barrel.

Short Of The Finish Line

OPEC itself tried to shift the market's focus to compliance at its March 15 meeting, when members opted against another production cut.

Since then, the group's production hasn't changed much. Oil Movements, a tanker tracker, said Thursday that it sees compliance at 80% through April 18, not much above where the cuts stood in February. A Dow Jones survey of oil traders, analysts and industry sources finds OPEC compliance at 83% in March, up from 78% a month earlier.

The final 20% or so will almost certainly prove the hardest. Several members, including Venezuela and Iran, are facing budget shortfalls, which could induce them to sell more oil, even at low prices. Any uptick in prices will raise the incentive for all producers to cheat on quotas.

"The problem is, they were able to reach a very high compliance, but to get beyond 85% is looking very difficult," said Ehsan Ul-Haq, head of research with JBC Energy in Vienna.

Demand Quandary

Although stock markets have rallied recently on the prospect of new stimulus from the U.S. and other large economies, oil demand continues to weaken. Total U.S. oil demand fell 4.9% in January in revised Department of Energy data, compared with initial estimates of 2.2%. The worst declines are likely still ahead for European and Asian economies. The World Bank recently projected that developing economies would grow by 2.1% in 2009, down from 5.8% in 2008.

OPEC has its next meeting scheduled for May 28, and analysts say bigger inventories and declining demand will increase the likelihood of a cut. But the economic downturn partly undermines the case for another reduction.

"Cutting to support prices can increase revenues in the short term, but can undermine revenues in the long term if it undermines the economic recovery," said Antoine Halff, deputy head of research at brokerage Newedge USA in New York. "There is a kind of balancing act that producers have to do."

Some OPEC members appear resigned to riding out lower oil prices until major economies begin to recover. OPEC Secretary-General Abdalla el-Badri said the group "can live with prices of around $50 for the time being," adding that "the world economy is in a very bad condition." Oil ministers in Kuwait and Qatar have made similar statements recently.

El-Badri has in the past called for prices at $70 a barrel or higher, as has Saudi Arabia, OPEC's most influential member. The kingdom has remained silent since the March 15 meeting on the prospect of further cuts.

-By Brian Baskin, Dow Jones Newswires; 201-938-2062; brian.baskin@dowjones.com

(Benoit Faucon and Spencer Swartz in London contributed to this article.)

(END) Dow Jones Newswires

04-04-09 0805GMT

With the benefit of hindsight, group is watchful not to let inventories slip out of hand.

What control does Opec have now?

By Himendra Mohan Kumar, Staff Reporter
Published: December 29, 2007, 00:34

Abu Dhabi: The Organisation of Petroleum Exporting Countries (Opec) declared last month it had lost control of the world market, but energy experts say the group has wrested much of the control back since.

"Opec now has more control than it had a month ago. But it's not quite there yet," Ann-Louise Hittle, a Boston-based oil analyst with global consultancy firm Wood Mackenzie, told Gulf News.

"It's a day-to-day thing. There are still risks in the market like low stocks and geopolitical tensions that could cause prices to surge. Speculators are not completely in the driver's seat anymore, but this situation could change," Hittle added.

Oil sector analysts say Opec doesn't want to succumb to pressures to raise supply, since market oversupply was the cause of sharp falls in the price of oil as recently as in the late '90s. In 1998, for example, oil prices on the world market were down to as low as $9 per barrel.

With the benefit of hindsight, Opec is watchful not to let inventories slip out of hand, at a time when the chances of a global economic downturn look real on the back of the severely weakened dollar and the sub-prime mortgage crisis in the United States, the world's largest oil importer.

Oil futures on the New York Mercantile Exchange reached $99.29 a barrel last November 21, the highest since trading began in 1983. There's no telling how high prices might go, or how they might crash once the current mania peters out.

Well-supplied

Opec's comparative hold on the market became visible early this month, when the group at its meeting in Abu Dhabi took the stance to leave output levels unchanged for the time being, based on the assessment that the market continues to be well-supplied.

Prices have maintained levels in the vicinity of $90 per barrel in the intervening weeks. "Opec is now acting like major oil companies used to in the 1950s and the '60s, when they were very careful not to oversupply," says Dr. James Crawford, oil analyst with Sharjah-based Inter Emirates Project Development and General Trading.

With the market seemingly in balance and spare capacity soon to rise to four million bpd, thanks to some new production coming online in Saudi Arabia from next month, Opec believes it can now reap the benefits of high oil prices without taking the blame for it, with the global thirst for crude unlikely to slake in the medium-term.

"Essentially, they [Opec] seem to be comfortable with prices in the high $90s. Oil at $100 per barrel remains the target for traders as well as speculators," says Kate Dourian, Middle East editor of energy information provider Platts. "At the same time, there seems to be no fundamental reason for oil prices to be where they are."

Francis Osborne, oil analyst with London-based KBC Market services, agrees, judging that economic fundamentals at the moment support only $70 per barrel. "Speculative activity accounts for anything above this. Opec has good control of the downside, but at the moment is less credible or effective in providing a ceiling to prices."

In the market's mind "there is genuine concern that the potential exists for shortages to develop," says Osborne. "In the next few years, new capacity development upstream, and in refining in particular, will ease fears of shortage. There may be a period of several years during which the focus will again be on Opec to manage supply."

Ever since it was formed in 1960, Opec has dedicated itself to influencing world energy prices. Member countries produce about 45 per cent of the world's crude oil, as well as 18 per cent of its natural gas. But Opec's oil exports represent 54 per cent of the crude oil traded internationally - despite Russia emerging as the world's biggest oil producer - underlining the organisation's impact.

With forecasts of a strong demand for Opec oil in 2008, the group does appear to have everything going its way.

Yet, as Wood Mackenzie's Hittle points out, it's a two-sided story: oil prices still need to go lower from here to sustain the world's demand growth, especially if the world economy is already slowing.

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five Founding Members were later joined by nine other Members: Qatar (1961); Indonesia (1962) – suspended its membership from January 2009; Socialist Peoples Libyan Arab Jamahiriya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973) – suspended its membership from December 1992-October 2007; Angola (2007) and Gabon (1975–1994). OPEC had its headquarters in Geneva, Switzerland, in the first five years of its existence. This was moved to Vienna, Austria, on September 1, 1965.

OPEC's objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.

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The Organization of the Petroleum Exporting Countries (OPEC)

The 1960s

These were OPEC’s formative years, with the Organization, which had started life as a group of five oil-producing, developing countries, seeking to assert its Member Countries’ legitimate rights in an international oil market dominated by the ‘Seven Sisters’ multinational companies. Activities were generally of a low-profile nature, as OPEC set out its objectives, established its Secretariat, which moved from Geneva to Vienna in 1965, adopted resolutions and engaged in negotiations with the companies. Membership grew to ten during the decade.

The 1970s

OPEC rose to international prominence during this decade, as its Member Countries took control of their domestic petroleum industries and acquired a major say in the pricing of crude oil on world markets. There were two oil pricing crises, triggered by the Arab oil embargo in 1973 and the outbreak of the Iranian Revolution in 1979, but fed by fundamental imbalances in the market; both resulted in oil prices rising steeply. The first Summit of OPEC Sovereigns and Heads of State was held in Algiers in March 1975. OPEC acquired its 11th Member, Nigeria, in 1971.

The 1980s

Prices peaked at the beginning of the decade, before beginning a dramatic decline, which culminated in a collapse in 1986 — the third oil pricing crisis. Prices rallied in the final years of the decade, without approaching the high levels of the early-1980s, as awareness grew of the need for joint action among oil producers if market stability with reasonable prices was to be achieved in the future. Environmental issues began to appear on the international agenda.

The 1990s

A fourth pricing crisis was averted at the beginning of the decade, on the outbreak of hostilities in the Middle East, when a sudden steep rise in prices on panic-stricken markets was moderated by output increases from OPEC Members. Prices then remained relatively stable until 1998, when there was a collapse, in the wake of the economic downturn in South-East Asia. Collective action by OPEC and some leading non-OPEC producers brought about a recovery. As the decade ended, there was a spate of mega-mergers among the major international oil companies in an industry that was experiencing major technological advances. For most of the 1990s, the ongoing international climate change negotiations threatened heavy decreases in future oil demand.

Introduction

Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply.

The U.S. petroleum industry's price has been heavily regulated through production or price controls throughout much of the twentieth century. In the post World War II era U.S. oil prices at the wellhead averaged $24.98 per barrel adjusted for inflation to 2007 dollars. In the absence of price controls the U.S. price would have tracked the world price averaging $27.00. Over the same post war period the median for the domestic and the adjusted world price of crude oil was $19.04 in 2007 prices. That means that only fifty percent of the time from 1947 to 2007 have oil prices exceeded $19.04 per barrel. (See note in box on right.)

Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude, oil prices only exceeded $24.00 per barrel in response to war or conflict in the Middle East. With limited spare production capacity OPEC abandoned its price band in 2005 and was powerless to stem a surge in oil prices which was reminiscent of the late 1970s.

Crude Oil Prices 1947 - May, 2008

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*World Price - The only very long term price series that exists is the U.S. average wellhead or first purchase price of crude. When discussing long-term price behavior this presents a problem since the U.S. imposed price controls on domestic production from late 1973 to January 1981. In order to present a consistent series and also reflect the difference between international prices and U.S. prices we created a world oil price series that was consistent with the U.S. wellhead price adjusting the wellhead price by adding the difference between the refiners acquisition price of imported crude and the refiners average acquisition price of domestic crude.

The Very Long Term View

The very long term view is much the same. Since 1869 US crude oil prices adjusted for inflation have averaged $21.05 per barrel in 2006 dollars compared to $21.66 for world oil prices.

Fifty percent of the time prices U.S. and world prices were below the median oil price of $16.71 per barrel.

If long term history is a guide, those in the upstream segment of the crude oil industry should structure their business to be able to operate with a profit, below $16.71 per barrel half of the time. The very long term data and the post World War II data suggest a "normal" price far below the current price.

Crude Oil Prices 1869-2007

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The results are dramatically different if only post-1970 data are used. In that case U.S. crude oil prices average $29.06 per barrel and the more relevant world oil price averages $32.23 per barrel. The median oil price for that time period is $26.50 per barrel.

If oil prices revert to the mean this period is likely the most appropriate for today's analyst. It follows the peak in U.S. oil production eliminating the effects of the Texas Railroad Commission and is a period when the Seven Sisters were no longer able to dominate oil production and prices. It is an era of far more influence by OPEC oil producers than they had in the past. As we will see in the details below influence over oil prices is not equivalent to control.

Crude Oil Prices 1970-2007

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Post World War II

Pre Embargo Period

Crude Oil prices ranged between $2.50 and $3.00 from 1948 through the end of the 1960s. The price oil rose from $2.50 in 1948 to about $3.00 in 1957. When viewed in 2006 dollars an entirely different story emerges with crude oil prices fluctuating between $17 - $18 during the same period. The apparent 20% price increase just kept up with inflation.

From 1958 to 1970 prices were stable at about $3.00 per barrel, but in real terms the price of crude oil declined from above $17 to below $14 per barrel. The decline in the price of crude when adjusted for inflation was amplified for the international producer in 1971 and 1972 by the weakness of the US dollar.

OPEC was formed in 1960 with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Two of the representatives at the initial meetings had studied the the Texas Railroad Commission's methods of influencing price through limitations on production. By the end of 1971 six other nations had joined the group: Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria. From the foundation of the Organization of Petroleum Exporting Countries through 1972 member countries experienced steady decline in the purchasing power of a barrel of oil.

Throughout the post war period exporting countries found increasing demand for their crude oil but a 40% decline in the purchasing power of a barrel of oil. In March 1971, the balance of power shifted. That month the Texas Railroad Commission set proration at 100 percent for the first time. This meant that Texas producers were no longer limited in the amount of oil that they could produce. More importantly, it meant that the power to control crude oil prices shifted from the United States (Texas, Oklahoma and Louisiana) to OPEC. Another way to say it is that there was no more spare capacity and therefore no tool to put an upper limit on prices. A little over two years later OPEC would, through the unintended consequence of war, get a glimpse at the extent of its power to influence prices.

World Events and Crude Oil Prices 1947-1973

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Middle East, OPEC and Oil Prices 1947-1973

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Middle East Supply Interruptions

Yom Kippur War - Arab Oil Embargo

In 1972 the price of crude oil was about $3.00 per barrel and by the end of 1974 the price of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel by Syria and Egypt on October 5, 1973. The United States and many countries in the western world showed support for Israel. As a result of this support several Arab exporting nations imposed an embargo on the countries supporting Israel. While Arab nations curtailed production by 5 million barrels per day (MMBPD) about 1 MMBPD was made up by increased production in other countries. The net loss of 4 MMBPD extended through March of 1974 and represented 7 percent of the free world production.

If there was any doubt that the ability to control crude oil prices had passed from the United States to OPEC it was removed during the Arab Oil Embargo. The extreme sensitivity of prices to supply shortages became all too apparent when prices increased 400 percent in six short months.

From 1974 to 1978 world crude oil prices were relatively flat ranging from $12.21 per barrel to $13.55 per barrel. When adjusted for inflation the price over that period of time world oil prices were in a period of moderate decline.

U.S. and World Events and Oil Prices 1973-1981

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OPEC Oil Production 1973-2007

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Crises in Iran and Iraq

Events in Iran and Iraq led to another round of crude oil price increases in 1979 and 1980. The Iranian revolution resulted in the loss of 2 to 2.5 million barrels per day of oil production between November, 1978 and June, 1979. At one point production almost halted.

While the Iranian revolution was the proximate cause of what would be the highest prices in post-WWII history, its impact on prices would have been limited and of relatively short duration had it not been for subsequent events. Shortly after the revolution production was up to 4 million barrels per day.

Iran weakened by the revolution was invaded by Iraq in September, 1980. By November the combined production of both countries was only a million barrels per day and 6.5 million barrels per day less than a year before. As a consequence worldwide crude oil production was 10 percent lower than in 1979.

The combination of the Iranian revolution and the Iraq-Iran War cause crude oil prices to more than double increasing from from $14 in 1978 to $35 per barrel in 1981.

Twenty-six years later Iran's production is only two-thirds of the level reached under the government of Reza Pahlavi, the former Shah of Iran.

Iraq's production remains about 1.5 million barrels below its peak before the Iraq-Iran War.

Iran Oil production 1973-2007

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Iraq Oil production 1973-2007

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US Oil Price Controls - Bad Policy?

The rapid increase in crude prices from 1973 to 1981 would have been much less were it not for United States energy policy during the post Embargo period. The US imposed price controls on domestically produced oil in an attempt to lessen the impact of the 1973-74 price increase. The obvious result of the price controls was that U.S. consumers of crude oil paid about 50 percent more for imports than domestic production and U.S producers received less than world market price. In effect, the domestic petroleum industry was subsidizing the U.s. consumer.

Did the policy achieve its goal? In the short term, the recession induced by the 1973-1974 crude oil price rise was less because U.S. consumers faced lower prices than the rest of the world. However, it had other effects as well.

In the absence of price controls U.S. exploration and production would certainly have been significantly greater. Higher petroleum prices faced by consumers would have resulted in lower rates of consumption: automobiles would have had higher miles per gallon sooner, homes and commercial buildings would have been better insulated and improvements in industrial energy efficiency would have been greater than they were during this period. As a consequence, the United States would have been less dependent on imports in 1979-1980 and the price increase in response to Iranian and Iraqi supply interruptions would have been significantly less.

US Oil Price Controls 1973-1981

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OPEC's Failure to Control Crude Oil Prices

OPEC has seldom been effective at controlling prices. While often referred to as a cartel, OPEC does not satisfy the definition. One of the primary requirements is a mechanism to enforce member quotas. The old joke went something like this. What is the difference between OPEC and the Texas Railroad Commission? OPEC doesn't have any Texas Rangers! The only enforcement mechanism that has ever existed in OPEC was Saudi spare capacity.

With enough spare capacity at times to be able to increase production sufficiently to offset the impact of lower prices on its own revenue, Saudi Arabia could enforce discipline by threatening to increase production enough to crash prices. In reality even this was not an OPEC enforcement mechanism unless OPEC's goals coincided with those of Saudi Arabia.

During the 1979-1980 period of rapidly increasing prices, Saudi Arabia's oil minister Ahmed Yamani repeatedly warned other members of OPEC that high prices would lead to a reduction in demand. His warnings fell on deaf ears.

Surging prices caused several reactions among consumers: better insulation in new homes, increased insulation in many older homes, more energy efficiency in industrial processes, and automobiles with higher efficiency. These factors along with a global recession caused a reduction in demand which led to falling crude prices. Unfortunately for OPEC only the global recession was temporary. Nobody rushed to remove insulation from their homes or to replace energy efficient plants and equipment -- much of the reaction to the oil price increase of the end of the decade was permanent and would never respond to lower prices with increased consumption of oil.

Higher prices also resulted in increased exploration and production outside of OPEC. From 1980 to 1986 non-OPEC production increased 10 million barrels per day. OPEC was faced with lower demand and higher supply from outside the organization.

From 1982 to 1985, OPEC attempted to set production quotas low enough to stabilize prices. These attempts met with repeated failure as various members of OPEC produced beyond their quotas. During most of this period Saudi Arabia acted as the swing producer cutting its production in an attempt to stem the free fall in prices. In August of 1985, the Saudis tired of this role. They linked their oil price to the spot market for crude and by early 1986 increased production from 2 MMBPD to 5 MMBPD. Crude oil prices plummeted below $10 per barrel by mid-1986. Despite the fall in prices Saudi revenue remained about the same with higher volumes compensating for lower prices.

A December 1986 OPEC price accord set to target $18 per barrel bit it was already breaking down by January of 1987and prices remained weak.

The price of crude oil spiked in 1990 with the lower production and uncertainty associated with the Iraqi invasion of Kuwait and the ensuing Gulf War. The world and particularly the Middle East had a much harsher view of Saddam Hussein invading Arab Kuwait than they did Persian Iran. The proximity to the world's largest oil producer helped to shape the reaction.

Following what became known as the Gulf War to liberate Kuwait crude oil prices entered a period of steady decline until in 1994 inflation adjusted prices attained their lowest level since 1973.

The price cycle then turned up. The United States economy was strong and the Asian Pacific region was booming. From 1990 to 1997 world oil consumption increased 6.2 million barrels per day. Asian consumption accounted for all but 300,000 barrels per day of that gain and contributed to a price recovery that extended into 1997. Declining Russian production contributed to the price recovery. Between 1990 and 1996 Russian production declined over 5 million barrels per day.

World Events and Crude Oil Prices 1981-1998

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U.S. Petroleum Consumption

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Non-OPEC Production & Crude Oil Prices

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OPEC Production & Crude Oil Prices

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Russian Crude Oil Production

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OPEC continued to have mixed success in controlling prices. There were mistakes in timing of quota changes as well as the usual problems in maintaining production discipline among its member countries.

The price increases came to a rapid end in 1997 and 1998 when the impact of the economic crisis in Asia was either ignored or severely underestimated by OPEC. In December, 1997 OPEC increased its quota by 2.5 million barrels per day (10 percent) to 27.5 MMBPD effective January 1, 1998. The rapid growth in Asian economies had come to a halt. In 1998 Asian Pacific oil consumption declined for the first time since 1982. The combination of lower consumption and higher OPEC production sent prices into a downward spiral. In response, OPEC cut quotas by 1.25 million b/d in April and another 1.335 million in July. Price continued down through December 1998.

Prices began to recover in early 1999 and OPEC reduced production another 1.719 million barrels in April. As usual not all of the quotas were observed but between early 1998 and the middle of 1999 OPEC production dropped by about 3 million barrels per day and was sufficient to move prices above $25 per barrel.

With minimal Y2K problems and growing US and world economies the price continued to rise throughout 2000 to a post 1981 high. Between April and October, 2000 three successive OPEC quota increases totaling 3.2 million barrels per day were not able to stem the price increases. Prices finally started down following another quota increase of 500,000 effective November 1, 2000.

World Events and Crude Oil Prices 1997-2003

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OPEC Production 1990-2007

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Russian production increases dominated non-OPEC production growth from 2000 forward and was responsible for most of the non-OPEC increase since the turn of the century.

Once again it appeared that OPEC overshot the mark. In 2001, a weakened US economy and increases in non-OPEC production put downward pressure on prices. In response OPEC once again entered into a series of reductions in member quotas cutting 3.5 million barrels by September 1, 2001. In the absence of the September 11, 2001 terrorist attack this would have been sufficient to moderate or even reverse the trend.

In the wake of the attack crude oil prices plummeted. Spot prices for the U.S. benchmark West Texas Intermediate were down 35 percent by the middle of November. Under normal circumstances a drop in price of this magnitude would have resulted an another round of quota reductions but given the political climate OPEC delayed additional cuts until January 2002. It then reduced its quota by 1.5 million barrels per day and was joined by several non-OPEC producers including Russia who promised combined production cuts of an additional 462,500 barrels. This had the desired effect with oil prices moving into the $25 range by March, 2002. By mid-year the non-OPEC members were restoring their production cuts but prices continued to rise and U.S. inventories reached a 20-year low later in the year.

By year end oversupply was not a problem. Problems in Venezuela led to a strike at PDVSA causing Venezuelan production to plummet. In the wake of the strike Venezuela was never able to restore capacity to its previous level and is still about 900,000 barrels per day below its peak capacity of 3.5 million barrels per day. OPEC increased quotas by 2.8 million barrels per day in January and February, 2003.

On March 19, 2003, just as some Venezuelan production was beginning to return, military action commenced in Iraq. Meanwhile, inventories remained low in the U.S. and other OECD countries. With an improving economy U.S. demand was increasing and Asian demand for crude oil was growing at a rapid pace.

The loss of production capacity in Iraq and Venezuela combined with increased OPEC production to meet growing international demand led to the erosion of excess oil production capacity. In mid 2002, there was over 6 million barrels per day of excess production capacity and by mid-2003 the excess was below 2 million. During much of 2004 and 2005 the spare capacity to produce oil was under a million barrels per day. A million barrels per day is not enough spare capacity to cover an interruption of supply from most OPEC producers.

In a world that consumes over 80 million barrels per day of petroleum products that added a significant risk premium to crude oil price and is largely responsible for prices in excess of $40-$50 per barrel.

Other major factors contributing to the current level of prices include a weak dollar and the continued rapid growth in Asian economies and their petroleum consumption. The 2005 hurricanes and U.S. refinery problems associated with the conversion from MTBE as an additive to ethanol have contributed to higher prices.

World Events and Crude Oil Prices 2001-2007

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Russian Crude Oil Production

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Venezuelan Oil Production

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Excess Crude Oil Production Capacity

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One of the most important factors supporting a high price is the level of petroleum inventories in the U.S. and other consuming countries. Until spare capacity became an issue inventory levels provided an excellent tool for short-term price forecasts. Although not well publicized OPEC has for several years depended on a policy that amounts to world inventory management. Its primary reason for cutting back on production in November, 2006 and again in February, 2007 was concern about growing OECD inventories. Their focus is on total petroleum inventories including crude oil and petroleum products, which are a better indicator of prices that oil inventories alone.

Impact of Prices on Industry Segments

Drilling and Exploration

Boom and Bust

The Rotary Rig Count is the average number of drilling rigs actively exploring for oil and gas. Drilling an oil or gas well is a capital investment in the expectation of returns from the production and sale of crude oil or natural gas. Rig count is one of the primary measures of the health of the exploration segment of the oil and gas industry. In a very real sense it is a measure of the oil and gas industry's confidence in its own future.

At the end of the Arab Oil Embargo in 1974 rig count was below 1500. It rose steadily with regulated crude oil prices to over 2000 in 1979. From 1978 to the beginning of 1981 domestic crude oil prices exploded from a combination of the the rapid growth in world energy prices and deregulation of domestic prices. At that time high prices and forecasts of crude oil prices in excess of $100 per barrel fueled a drilling frenzy. By 1982 the number of rotary rigs running had more than doubled.

It is important to note that the peak in drilling occurred over a year after oil prices had entered a steep decline which continued until the 1986 price collapse. The one year lag between crude prices and rig count disappeared in the 1986 price collapse. For the next few years the economy of the towns and cities in the oil patch was characterized by bankruptcy, bank failures and high unemployment.

U.S. Rotary Rig Count 1974-2005
Crude Oil and Natural Gas Drilling

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After the Collapse

Several trends established were established in the wake of the collapse in crude prices. The lag of over a year for drilling to respond to crude prices is now reduced to a matter of months. (Note that the graph on the right is limited to rigs involved in exploration for crude oil as compared to the previous graph which also included rigs involved in gas exploration.) Like any other industry that goes through hard times the oil business emerged smarter, leaner and more conservative. Industry participants, bankers and investors were far more aware of the risk of price movements. Companies long familiar with accessing geologic, production and management risk added price risk to their decision criteria.

Technological improvements were incorporated:

Increased use of 3-D seismic data reduced drilling risk.
Directional and horizontal drilling led to improved production in many reservoirs.
Financial instruments were used to limit exposure to price movements.
Increased use of CO₂ floods and improved recovery methods to improve production in existing wells.

In spite of all of these efforts the percentage of rigs employed in drilling for crude oil decreased from over 60 percent of total rigs at the beginning of 1988 to under 15 percent until a recent resurgence.

U.S. Rotary Rig Count
Exploration for Oil

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U.S. Rotary Rig Count
Percent Exploring for Crude Oil

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Well Completions - A measure of success?

Rig count does not tell the whole story of oil and gas exploration and development. It is certainly a good measure of activity, but it is not a measure of success.

After a well is drilled it is either classified as an oil well, natural gas well or dry hole. The percentage of wells completed as oil or gas wells is frequently used as a measure of success. In fact, this percentage is often referred to as the success rate.

Immediately after World War II 65 percent of the wells drilled were completed as oil or gas wells. This percentage declined to about 57 percent by the end of the 1960s. It rose steadily during the 1970s to reach 70 percent at the end of that decade. This was followed by a plateau or modest decline through most of the 1980s.

Beginning in 1990 shortly after the harsh lessons of the price collapse completion rates increased dramatically to 77 percent. What was the reason for the dramatic increase? For that matter, what was the cause of the steady drop in the 1950s and 1960s or the reversal in the 1970s?

Since the percentage completion rates are much lower for the more risky exploratory wells, a shift in emphasis away from development would result in lower overall completion rates. This, however, was not the case. An examination of completion rates for development and exploratory wells shows the same general pattern. The decline was price related as we will explain later.

Some would argue that the periods of decline were a result of the fact that every year there is less oil to find. If the industry does not develop better technology and expertise every year, oil and gas completion rates should decline. However, this does will not explain the periods of increase.

The increases of the seventies were more related to price than technology. When a well is drilled, the fact that oil or gas is found does not mean that the well will be completed as a producing well. The determining factor is economics. If the well can produce enough oil or gas to cover the additional cost of completion and the ongoing production costs it will be put into production. Otherwise, its a dry hole even if crude oil or natural gas is found. The conclusion is that if real prices are increasing we can expect a higher percentage of successful wells. Conversely if prices are declining the opposite is true.

The increases of the 1990s, however, cannot be explained by higher prices. These increases are the result of improved technology and the shift to a higher percentage of natural gas drilling activity. The increased use of and improvements to 3-D seismic data and analysis combined with horizontal and and directional drilling improve prospects for successful completions. The fact that natural gas is easier to see in the seismic data adds to that success rate.

Most dramatic is the improvement in the the percentage exploratory wells completed. In the 1990s completion rates for exploratory wells have soared from 25 to 45 percent.

Oil and Gas Well Completion Rates
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Oil and Gas Well Completion Rates
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Oil and Gas Well Completion Rates
Development

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U.S. Oil and Gas Well Completion Rates
Exploration

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Workover Rigs - Maintenance

Workover rig count is a measure of the industry's investment in the maintenance of oil and gas wells. The Baker-Hughes workover rig count includes rigs involved in pulling production tubing, sucker rods and pumps from a well that is 1,500 feet or more in depth.

Workover rig count is another measure of the health of the oil and gas industry. A disproportionate percentage of workovers are associated with oil wells. Workover rigs are used to pull tubing for repair or replacement of rods, pumps and tubular goods which are subject to wear and corrosion.

A low level of workover activity is particularly worrisome because it is indicative of deferred maintenance. The situation is similar to the aging apartment building that no longer justifies major renovations and is milked as long as it produces a positive cash flow. When operators are in a weak cash position workovers are delayed as long as possible. Workover activity impacts manufacturers of tubing, rods and pumps. Service companies coating pipe and other tubular goods are heavily affected.

U.S. Workover Rigs and Crude Oil Prices
Click on graph for larger view

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Does OPEC control the oil market?

No, OPEC does not control the oil market. OPEC Member Countries produce about 45 per cent of the world's crude oil and 18 per cent of its natural gas. However, OPEC's oil exports represent about 55 per cent of the crude oil traded internationally. Therefore, OPEC can have a strong influence on the oil market, especially if it decides to reduce or increase its level of production.

OPEC seeks stability in the oil market and endeavours to deliver steady supplies of oil to consumers at fair and reasonable prices. The Organization has achieved this in a number of ways: sometimes by voluntarily producing less oil, sometimes by producing more when there is a shortfall in supplies (such as during the Gulf Crisis in 1990, when several million barrels of oil per day were suddenly removed from the market).

Could OPEC drop dollar for euro?

Published Date: December 19, 2007
By Rania El Gamal, Staff Writer

KUWAIT: Could oil producing countries drop the dollar for a more stable currency? Iran's recent announcement that it would stop using the dollar in its oil transactions made that question a plausible scenario for other oil producers to follow with a weakening US economy and a declining dollar. The depreciating US currency worries oil exporting countries as it means a reduction in the value of their dollar reserves and a loss in revenues with the spiraling oil prices. So could Iran's decision signal a tren
d for other oil producing countries to follow?

Iran, the world's fourth largest oil exporter, is urging other members in the Organization of the Petroleum Exporting Countries (OPEC) to also drop the greenback as it is too unreliable. The oil-rich country, argued last month at the OPEC oil ministers meeting, that oil producers are losing revenues because the dollar is performing poorly against the euro. Tehran is pushing OPEC to drop pricing oil in dollars and shift to a basket of currencies, though Saudi Arabia clearly is opposing the notion. Saudi fo
reign minister warned that talking publicly about the dollar's decline could hurt its value even further.

Iran receives non-dollar currencies for 85 percent of its oil products and is already asking its customers to pay in euro or yen. Recently, the Islamic Republic requested that its shipments to Japan be traded for yen instead of dollars. On December 8, Iran's oil minister said that the major crude producer has completely stopped carrying out its oil transactions in dollar.
As OPEC controls only 40 percent of world's oil production, is it possible for other non-OPEC countries to follow Iran's suit and drop the dollar from its oil deals?

Yes, other oil producing countries can always follow Iran and drop the dollar from oil deals - Iraq had done this before the US invasion. Venezuela has talked about this possibility for some time. Russia has also considered such a move," Professor Robert Looney of the National Security Affairs Department at the Naval Postgraduate School in California, told Kuwait Times via email. "On the other hand, there are no clear benefits in doing this - certainly in the short run. Dollars can be easily converted
into other currencies and investments made where the rate of return is highest," he added.

OIL DOMINATES
David E Kirsch, Manager, Market Intelligence Service, PFC Energy says that though oil producers can denominate their oil in any currency of their choosing, dollar still dominates the global oil market.

In addition to Iran's insistence on payment in euros or yen, there are also anecdotal reports of other producers allowing payment in euros as well. This is accomplished, however, through a relatively mechanistic means, by establishing a certain index to calculate exchange rates in a similar fashion to the calculation of actual oil prices in reference to a marker crude," said Kirsch. "The global oil market remains a dollar-denominated one, and the acceptance not only by oil producers and refiners of the m
ain US-dollar denominated contracts - especially WTI and Brent - but also the financial community acceptance of these contracts that keeps oil dollar-denominated," he added.

Currently, crude oil sold is based on three official benchmarks: West Texas Intermediate in the US traded on the NYMEX; Brent traded on the ICE in London; and the Middle East Dubai/Oman crudes as assessed by Platts or settled on the Dubai Mercantile Exchange. All are priced in dollars.

What governs oil deals to be priced in dollars?
The pricing of oil in dollars is not a formal agreement, but instead a practice that began years ago. The oil exchanges are in dollars and thus the market price so it makes sense to keep the whole chain of oil prices in that currency," said Looney. "This is one reason the Iranians have from time to time considered establishing an oil bourse denominated in euros. At this time the conversion of oil pricing from dollars to euros would be very time-consuming and again hardly worth the effort.

Iran has plans to create the Iran Oil Bourse, an open commodity exchange. If established, the exchange would make it possible to trade oil and gas in non-dollar currencies, such as the euro.

In Iran's case, US pressure to end financial transactions with Iranian banks to perform U-turn transactions involving US currencies necessitated a need to shift currencies," Kirsch said.

Tehran is not alone in its desire to establish an alternative to trading oil in dollars. In 2006, Russian President Vladmir Putin expressed interest in establishing a Russian stock exchange which would allow "oil, gas, and other goods to be paid for in Roubles." The Russian parliament has previously discussed adopting the euro for oil deals.

Venezuela, another country with an antagonistic relationship with the US, also holds little loyalty to the currency. The country chose to establish barter deals for oil, which allow Venezuela to trade oil with 12 Latin American countries and Cuba without using the dollar. In September, the country's president Hugo Chavez instructed state oil company Petroleos de Venezuela SA to change its dollar investments to euros and other currencies.

BREAKING DOLLAR ALLIANCE
But Saudi Arabia, the world's largest oil producer, is against changing the oil pricing regime or even publicly discussing the move.

Last month, on the eve of the OPEC meeting, Saudi Foreign Minister Prince Saud Al-Faisal said dropping the dollar from oil transactions is "a sensitive issue". "It will cause the dollar to drop further, thus complicating the problems we are facing from the dollar's fall," he said.

The Saudis have $20,000 billion in oil reserves and $800 billion in US dollar reserves. The whole Gulf countries have $3.5 trillion under management. Dropping the dollar as a reserve currency and changing the oil pricing regime would mean huge financial losses for the Gulf countries, and a big blow to the value of the dollar.

Still the United States is not the main oil importer for all the Gulf countries. For instance, Kuwait exports the majority of its oil (more than 60 percent) to Asian countries such as Japan, India, Singapore, South Korea, and Taiwan. So is it a far-fetched thought that Kuwait, also can ask its Asian customers to pay another currency other than the greenback?

For Kuwait and other oil producers to follow Iran's suit, the rationale is not as clear, says Kirsch.

Certainly a depreciating dollar and expansionary monetary policy is creating problems for Gulf countries -especially those that unlike Kuwait have not adjusted their currency pegs. But most of the necessary adjustments can be made by changing the composition of reserves held," he said. "Thus whether the revenues are received in dollars and converted by the central bank, or in euros is less material at the end of the day, removing much of the urgency in shifting the basis of oil transactions from the dol
lar," he added.

Looney echoes the same concept. "At the present time, I cannot see another Gulf country pricing oil in currencies other than the dollar. For one thing, most of these countries hold large dollar reserves. A move of this sort would create uncertainty about the dollar, thus forcing its value down even further. The resulting loss in the value of reserves would not really be worth any benefits obtained from non-dollar oil pricing," he said.

The Gulf countries, with the exception of Kuwait, peg their currencies to the US dollar. In May, Kuwait broke its dollar peg and shifted to a basket of currencies. Though Kuwait has not disclosed the composition of its basket, but it is believed to be 70 percent dollar-based with the rest in euro, yen and sterling pound.

NON-DOLLAR MARKER
The real question is not whether other oil producers will take payment in euros, but whether or not a new marker can be established in a non-dollar currency?"wonders Kirsch.

The risks in this regard are quite sizeable, as this entails finding essentially a new marker contract that would be acceptable to both paper and physical traders. As the experience with the Dubai Mercantile Exchange demonstrates, establishing a new marker contract with sufficient liquidity is no simple task, even when there is a compelling market rationale for such a contract," noted Kirsch. "Even with current dollar weakness, I do not think we have a clearly compelling case that a new marker currency
must be found, taking away some of the momentum for establishing new financial architecture for global oil markets," he added.

But the composition of official foreign exchange reserves and the currency or basket of currencies on which countries peg their currencies are two separate issues, says Looney.

As you know Kuwait now pegs its currency to a basket with the dollar, euro, pound and yen as the main currencies. This reflects Kuwait's changing trade patterns and makes good economic sense. By doing this there would be little to gain by moving further and actually pricing oil to one of these currencies," he said.

Many countries already are diversifying their foreign exchange reserves with the weakening US dollar. Last month, China, the world's largest holder of US dollar, has signaled plans to diversify its $1.43 trillion of foreign exchange reserves into more stronger currencies.

To a large extent, this shift in holdings-not just by central banks, but especially the portfolio assets of sovereign wealth funds-is already happening as a reflection of the changing value of the dollar, and based largely on commercial considerations," said Kirsch.

GLOBAL ECONOMY
Yet if shifting away from the dollar oil pricing regime happened, how will it affect the global economy?

If Kuwait or other Gulf countries required payments other than the dollar for oil, the effect would be mostly psychological," said Looney.

He explained that the so-called "dollar zone" would be shrinking and many would feel that the dollar would be going through a long period of decline as other countries followed suit. The dollar would fall in value and many countries would take great losses in the decline of the value of their official reserves.

It would create added uncertainty for the world economy and perhaps increased instability in foreign exchange markets. Exports from the US would begin to penetrate the EU, perhaps causing trade wars between the two - one can think of a number of possible scenarios, but there are too many degrees of freedom to point to any clear path the world economy might take," said Looney.

Currencies go through cycles. The dollar is down right now, but once it begins to recover and the euro fall, most of the talk of non-dollar oil pricing will quickly disappear.

Oil market is out of our control, says Opec

By Russell Hotten, Industry Editor
Last Updated: 1:07AM GMT 01 Nov 2007

Crude oil options traders work on the floor of the New York Mercantile Exchange

OPEC oil ministers say they are powerless in the face of many factors driving up the price of crude, with one member of the producers' cartel warning that the 'market is out of control'.

Mohammed bin Dhaen al-Hamli, president of Opec, told a conference in London yesterday that record oil prices are the result of speculative investment and international political tensions. "We are of course concerned about high oil prices," he said. But "the market is increasingly driven by forces beyond Opec's control".

· Asian shares mostly higher but caution lingers

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· Asian markets mixed after weakness on Wall Street

However, there were signs yesterday that the inexorable rise in crude prices could be about to ease, with the cost of a barrel slipping on news that Mexico had increased production and investment bank Goldman Sachs saying that it was time for investors to "take profits".

Mr al-Hamli said that Opec, whose members supply about 40pc of the world's oil needs, was "monitoring" the situation and would increase output if necessary. "If the market needs more oil, we will supply it," he said.

But he added that the oil price, up 34pc since mid-August, was the result of geo-political tensions and speculation by traders. Mr al-Hamli did not refer to specific situations, although analysts have pointed to recent problems on the Turkey-Iraq border and speculation by hedge funds as fuelling recent price rises.

Another oil minister, Qatar's Abdullah al-Attiyah, pleaded: "Please don't blame us for $93 oil... The market is out of control." He said that the oil market is "very confused", but added that this had nothing to do with an imbalance between supply and demand, but to factors outside Opec's control.

However, major energy users believe one solution to the current problems would be for Opec to open the taps. "If oil is going up, keeping at this level may hurt the economy, especially nonoil-producing developing countries," said Nobuo Tanaka, executive director of the International Energy Agency, which advises large oil-consuming countries.

The head of the US Energy Information Administration, Guy Caruso, said: "Our view continues to be that the market is fundamentally tight. We think that the market still needs more barrels as we head out into the next year or so."

US oil futures fell by $3.02 to $90.51 a barrel yesterday, after hitting a record high of $93.80 in the previous session. In London Brent fell $2.40 to $87.92, down from Monday's peak of $90.49.

Oil analysts at Goldman Sachs, which in July predicted that oil may reach $95 a barrel, told investors yesterday that it was time to "sell" oil.

JOINT ECONOMIC COMMITTEE

CONGRESSMAN JIM SAXTON

RANKING REPUBLICAN MEMBER

RESEARCH REPORT #110-2

February 2007

Team Comics

Iran-Iraq War (1980-1988)

Iraqi Offensives, 1980-82

Iraqi Retreats, 1982-84

The War of Attrition, 1984-87

The Tanker War, 1984-87

Gradual Superpower Involvement

Special Weapons

War Termination

Iran-Iraq War (1980-1988)

Iraqi Offensives, 1980-82

Iraqi Retreats, 1982-84

The War of Attrition, 1984-87

The Tanker War, 1984-87

Gradual Superpower Involvement

Special Weapons

War Termination

OPEC, EU to Hold Twice-Yearly Meetings on Oil Market

What control does Opec have now?

Could OPEC drop dollar for euro?

Oil market is out of our control, says Opec

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