Everyone knows that Organization of Petroleum Exporting
Countries (OPEC), a group of sovereign countries, controls a
major chunk of oil production. But most people do not know how
exactly OPEC controls the production and prices of crude oil. In
this article the author analyzes the history of oil industry to understand
how and why the OPEC controls oil prices.
The relationship between the sovereign
states and oil companies have
been problematic ever since the US
and European oil companies struck
oil outside US in the first decade of
the 20th century. The issue was about
the sovereignty and ownership of
the oil fields. Typically in those
days, the oil companies leased the
oil fields from the states and paid
them a royalty. The royalty was generally
12.5% of the profits. However,
the sovereignty issue was manageable
as almost all of the oil producing
countries (Iran, Iraq and Indonesia)
were colonies of the European powers
in the early part of the century.
The first major problem came in
Mexico during the 1910s, following
Mexican revolution. In 1910, about
90% of the oil fields in Mexico were
owned by the US and the European
companies. After the revolution,
Mexicans succeeded in recapturing
their oil assets. The Article 27 of the
Mexican Constitution of 1917 declared
that underground resources—
the “subsoil—belonged not to those
who owned the property above, but
to the Mexican state. In those days
Mexico was the second largest oil
producer in the world after US. But
Everyone knows that Organization of Petroleum Exporting
Countries (OPEC), a group of sovereign countries, controls a
major chunk of oil production. But most people do not know how
exactly OPEC controls the production and prices of crude oil. In
this article the author analyzes the history of oil industry to understand
how and why the OPEC controls oil prices.
Control Over
Crude Oil Prices
The OPEC Story
S T R A T E G I C M A N A G E M E N T
these policies made the foreign companies
to shy away from Mexico.
The process of nationalization of oil
assets was completed in 1938, when
Cádenas government nationalized
oil industry by
forming a
n a t i o n a l
oil comp
a n y —
Petroleos
Mexicanos
(PEMEX).
S i n c e
Mexico did
not have the technology
for oil
exploration,
it soon lost
its status
as a major
o i l - p r o -
d u c i n g
nation. |
