February 2005: OPEC and the Alberta Advantage

Alberta's oil riches created by OPEC, not by politicians or CEOs
February 1, 2005

To fully understand oil-rich Alberta’s status as Canada’s most affluent province, and how it achieved that prosperity, it is necessary first to look briefly at the history of the Organization of Petroleum Exporting Countries, or OPEC.

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In March, 1975, in the Palace of Nations near Algiers, a group of men assembled to do a piece of business that would affect the fortunes of the entire world. The meeting was hosted by the president of Algeria, Houari Boumédienne. Among the assembled élite were the Shah of Iran, Saddam Hussein of Iraq, Carlos Pérez, president of Venezuela, and the sheikhs of Abu Dhabi and Kuwait. These were the leaders of the Organization of Petroleum Exporting Countries—OPEC—and they controlled the life-blood of the industrial age: oil. The crowd applauded as the Shah of Iran embraced and kissed Saddam Hussein. It was an ecstatic moment.

The oil men had much to celebrate. They had clinched their control over the world’s most desirable commodity and their countries were about to become fabulously rich. The price of oil, under $3 a barrel only two years earlier, was now four times that, and would go much higher.

It might seem that what they had accomplished was the victory of a cartel over the free market, but that was not the case. What OPEC had achieved was the victory of one cartel over another. Oil and the free market are not well acquainted.

The oil patch has always conjured up a romantic image of rugged individualists competing in a wide-open market, and there is some truth to this—at the lower levels. Where the real power lies, however, it is a different story: few industries have produced more vocal advocates of the free market, and few industries have seen less of it. As John D. Rockefeller proclaimed late in the 19th century, early in the oil game, “Individualism has gone, never to return.”

John D. knew whereof he spoke. Son of a devout Baptist mother who tied him up and beat him when he disobeyed and a patent-medicine-peddling father who taught him how to cheat, he understood discipline and sharp practice like few men. While others toiled in the oil fields of Pennsylvania, the first great oil state, the ex-bookkeeper bought a refinery business and conspired with other refiners and the railroads to undercut the producers with cheap transport. He bought up oilfields to integrate his company from production to marketing. He established the Standard Oil Trust to get around investment laws and hired teams of lawyers to defend his actions, while befriending and bribing legislators. He monopolized oil, becoming in the process more powerful than governments.

Ultimately, the U.S. Supreme Court broke up Standard Oil, but that did not end the monopoly of oil. It merely set the stage for the emergence of the “Seven Sisters” cartel, so-called by Enrico Mattei, former head of Italian State Oil. Three of the sisters, Standard Oil of New Jersey, Standard Oil of New York, and Standard Oil of California, (ultimately Exxon, Mobil, and Socal), were daughters of Rockefeller’s empire, birthed by the trust-busters. The other major players were two American companies, Gulf and Texaco, and two European companies, Shell and British Petroleum.

With new supplies coming onto the market after the First World War from the Middle East, Venezuela and Mexico, the sisters were faced with an oil glut. Competition threatened to get out of hand. Consequently, in 1928, the heads of Exxon, Shell and British Petroleum formed a cartel. The conspirators agreed to fix market share, tailor growth in supply to avoid gluts and rig prices. The agreement was accepted by the other sisters and most other American companies that operated internationally. It couldn’t be rigidly enforced—it was after all, secret—but it guided the behaviour of the international oil industry well into the 1960s.

The biggest pie in the oil patch, the Middle East, had already been divided up. A syndicate that included British Petroleum, Shell, and the German Deutsche Bank agreed not to take concessions in the former Ottoman Empire except through the consortium. Included were all the major oil-producing countries in the region except Iran and Kuwait. Anthony Sampson, in his definitive book The Seven Sisters, referred to the agreement as “the most remarkable carve-up in oil history.” It lasted until 1948.

By the early 1970s, big change was afoot. In 1969, King Idris of Libya was overthrown by a group of army officers headed by a young colonel, Muammar al-Qadhafi. Qadhafi took on the companies, broke their solidarity, and bullied them into accepting increased prices for his Libyan crude, achieving in months what OPEC had failed to do in years. Things worsened for the companies as the producers began to demand part ownership of the concessions, led by a former favourite of the cartel, Sheik Zaki Yamani, Saudi Arabia’s oil minister. In 1973, with an oil shortage looming, Qadhafi declared that he intended to nationalize 51% of the companies operating in Libya and set a price of $6 a barrel for his crude, double that of the Persian Gulf.

In October, the oil companies met with OPEC to negotiate a price. Yamani asked for $5 a barrel, but the companies refused. In the meantime, war had broken out as Egypt and Syria invaded Israeli-occupied territory, and the Arabs were threatening an oil embargo of Israel’s supporters. Yamani warned they would no longer negotiate prices with the companies. OPEC set the price of oil on its own, and its Arab members began their embargo. The cartel had passed into new hands, and in a few months the price of a barrel of oil jumped to $11.65.

The OPEC cartel is by no means perfect. With differing amounts of reserves and productivities, and differing national and international goals, the oil states do not always agree on strategy. The price of oil rises and falls with their solidarity. Nonetheless, OPEC has brought the oil kings of the Middle East possibly the biggest free lunch in history.

The Alberta story

What does this story of cartels and government interference in the marketplace have to do with Alberta? Merely everything. These are the forces that created modern Alberta. Just as OPEC created one of the great wealth and power shifts in the modern world,  so it created the greatest wealth and power shift in Canadian history. Peter Foster, in The Blue-Eyed Sheiks, referred to it as “the most significant turnabout in political relationships since the birth of Confederation.”

Alberta’s oil industry did not always show such potential. It didn’t get really serious until 1947 when Imperial Oil (child of Exxon), following a discouraging series of dry holes, drilled into an ancient reef near the small town of Leduc in central Alberta, and the well gushed oil. Alberta crude began to flow west into British Columbia and into the northwestern states and east into Ontario.

And there it ran headlong into a competitor too powerful to challenge on its own—imported oil. Foreign oil could be offloaded from tankers in Montreal more cheaply than it could be shipped by pipeline from Western Canada, yet it was in Eastern Canada that producers were obliged to look for a large and secure market. The major companies, subsidiaries of the Seven Sisters, were not concerned. They bought foreign crude from their parent companies, refined it in their eastern refineries, and marketed it through their gas stations. Independent Alberta companies, on the other hand, desperately wanted secure access to the eastern markets. They begged the federal government to protect them from the foreigners. In their favour was the election in 1957 of a Conservative government headed by westerner John Diefenbaker.

“The Chief” came through for his western brothers and sisters. Like his predecessor, John A. Macdonald, he instituted a national policy to facilitate east-west trade, in this case a national oil policy which, among other things, established the Ottawa Valley Line. All markets west of the Ottawa Valley were to be reserved for western crude; markets to the east could continue to enjoy cheaper foreign imports. Ontario consumers were to pay higher than market prices to subsidize the Alberta oil industry, including of course its royalties to the Alberta government. The national oil policy was pronounced in 1960, coincidentally the same year OPEC was formed.

The policy served western independent producers well until the dramatic events of 1973, after which it was no longer needed. As the OPEC cartel flexed its muscles, driving international oil prices sky-high, immense riches accrued not only to its members, but also to non-members like Alberta which, no longer having to compete with cheap imports, rode its golden coattails to enviable prosperity.

The federal government, fearing the effect of rapidly escalating oil prices on the Canadian economy and feeling also that the windfall should be shared by all Canadians—and led now by an easterner, Pierre Elliott Trudeau—tried to keep a lid on the price of crude, while capturing its share of the bonanza and expanding its influence in the industry. Its efforts, culminating in the National Energy Program (NEP), sparked the bitterest federal/provincial feud in Canadian history.

When it was over, Alberta was not rolling in as much wealth as it thought it deserved, but it was filthy rich, nonetheless. Oil prices were temporarily maintained below the world price, but still managed to triple in two years and quadruple in five, and Alberta would take half the increase in royalties. The province’s royalties from oil and gas production rose from $214 million in 1972/3 to $3.4 billion in 1979/80. Billions more accrued from lease sales. Alberta boomed, its cities and towns surged with growth, attracting migrants from British Columbia to Newfoundland, all seeking a piece of the action. Its political clout increased correspondingly. Without OPEC aggression, the NEP, and the provincial/federal wrangling that followed , there would have been no Reform/Alliance Party and the face of Canada’s politics would be very different. OPEC “made” many of Alberta’s most successful companies and businessmen, including a large slice of its economic oligarchy. In 2003/4, oil and gas revenues flowed in at a rate of  $22 million a day, yielding $2,700  a year for each and every Albertan.

Albertans are inclined to believe their unique prosperity was built on free market principles, but this is more fable than fact. That anathema of free-marketers, government intervention in the marketplace, has—from Diefenbaker to OPEC—been the best thing that ever happened to Alberta, providing the province with a sumptuous free banquet. Albertans should genuflect in gratitude to Muammar al-Qadhafi, catalyst of the shift in power from the cartel of oil companies to the cartel of oil countries, or perhaps to Sheik Yamani of Saudi Arabia, prime mover behind OPEC’s 1973 machinations. These men, not Peter Lougheed or Ralph Klein, nor the CEOs of the oil companies, were the architects of Alberta’s affluence.

(Bill Longstaff—[email protected]—is a Calgary-based free-lance writer and the author of Democracy Undone: The Practice and the Promise of Self-Governance in Canada. His latest book is No Free Lunch and Other Myths, from which this article was adapted.)