Venezuela's contribution to OPEC: Juan Pablo Perez Alfonso

Chapter 25 of Daniel Yergin's The Prize (New York, 1992) describes the origins of OPEC, in which Venezuela was heavily involved.  According to Yergin, talk about beginning a society of oil-exporting states began in the 1950s, and the Venezuelan Minister of Mines and Hydrocarbons, Juan Pablo Perez Alfonso, had a "catalystic role" in making the organization a reality (509).

Perez Alfonso left Venezuela after being briefly imprisoned after the 1948 coup.  He and his family moved to Washington DC, where he spent much of his time studying the American oil industry in the Library of Congress.  He became very interested in the structure and policies of the Texas Railroad Commission (TRC), an organization that regulated Texan oil production to match changes in demand.  Many of his ideas about OPEC were inspired by the TRC (512).


Perez Alfonso considered oil wealth dangerous to the newly formed 1959 democratic government.  In his opinion, oil was a national resource and should be used in the present, but also preserved for future generations.  Following these ideals, his first goals while in office were to:

1. increase the Venezuelan government's share of oil rents
2. transfer control of production and marketing of oil away from the foreign oil companies and into the hand of the government (511)

The intention was that the soveriegn government and not foreign companies should be making basic decisions about oil production.  These ideas fit neatly in with the burgeoning nationalist movements occuring in the Middle East.

One big issue that was faced by Venezuelan oil producers was that their $0.80/barrel oil was much more expensive than what was coming out of the Middle East for $0.20/barrel.  Even if Venezuela did gain control of its oil production, it would do no good if the market could always be glutted by cheaper oil from the Middle East.  Perez Alfonso's brainstorm was to create a global oil alliance similar to the TRC that would protect Venezuela's production by fixing the cost of oil and ration low-cost production at the same time. 

In 1959 Eisenhower finally ceded to the independent oil producers and capped imports of foriegn oil to protect domestic consumption.  Forty percent of Venezuela's oil was destined for the U.S., and they were hard hit by these new regulations.  Perez Alfonso saw an opportunity to put his dream into action and flew to Washington to pitch the idea of a Western Hemisphere oil system, where Venezuela would have fixed production quota to the United States (512).  He was ignored, and his attention turned to Cairo and the 1959 Arab Oil Conference.  It is interesting to consider how the modern international oil system would look today if the United States had listened to Perez Alfonso in 1959.

At the Oil Conference Perez Alfonso had the opportunity to speak with Abdullah Tariki "The Red Sheikh" who was at that time the head of the Directorate of Oil and Mining Affairs in Saudi Arabia.  Though Tariki worked for the royal family, he was paradoxically a fervant nationalist.  The two managed to convene representatives of all the oil exporters during the conference and, though no one could speak officially for their country's government, they made a "Gentleman's Agreement" which recommended the following to their governments (518):

1. governments should establish an Oil Consultative Commission
2. the price structure should be defended
3. national oil companies should be created
4. the existing 50/50 principle (50% of revenue to the national government and 50% to foriegn oil companies) should be replaced with a more favorable 60/40 system.
5. domestic refining capacity should be built and the producers should become more intergrated to assure stable markets.

The reality of the oil market in 1959 was that there were two types of oil prices: the market price, which was the actual price at which the companies sold the oil; and the posted price, which was the price used when revenue was returned to the national government.  These prices were ususally quite similar, but the Soviets began a price war by cutting the market price, causing oil companies to begin to lose profits. As a counter-measure Jersey Standard Oil cut the posted price in 1960, which was the incentive Perez Alfonso needed to call the Gentleman's Agreement into effect.  On September 14, 1960 OPEC was formed with 5 founding members (Saudi Arabia, Kuwait, Iraq, Iran and Venezuela) who between them produced 80% of the world's oil (519).

The foriegn oil companies had to accept the new 60/40 principle and the balance of power in the international oil market was subtly shifted, though the new organization did little to rock the boat until the 1970s.  However, oil companies had been duly warned to not make any major decisions without consulting OPEC and they never again changed the posted price.

There are a few parts of this history that interest me particularly:

1. The man who fought for national control of the Venezuelan oil industry recognized the danger the natural resource held for his country
2. OPEC might not have been formed had the United States listened to the original idea of a Western Hemisphere oil alliance.  Peak American oil was still a ways off at that juncture and it must have been difficult to imagine a future where the United States could have a critical need for international sources of oil.
3. Part of what inspired Perez Alfonso to create OPEC as a united oil producing front was the high production cost of Venezuelan crude.  As the saying goes, "Necessity is the mother of invention."  What other measures could high oil production costs make nations take?  I'm not really sure where I am going with this last thought, but I thought it was worth noting...