RENEE MONTAGNE, HOST:
In Vienna this week, the annual meeting of OPEC. That cartel includes some of the world's largest oil producers, and it used to be that the world held its breath when OPEC met. Any meeting could end up with a boost in oil prices. Now, the cartel's power appears to be waning. Here's David Kestenbaum of NPR's Planet Money on how that happened.
DAVID KESTENBAUM, BYLINE: If you control the supply of oil, you can without firing a single weapon, cause massive disruption around the world, huge lines at gas stations and news stories destined to be replayed years later, like this one from NPR in 1974.
(SOUNDBITE OF ARCHIVED BROADCAST)
UNIDENTIFIED MAN #1: How long have you been waiting in line?
UNIDENTIFIED MAN #2: About five minutes. I just cut in front of a whole bunch of people.
UNIDENTIFIED WOMAN #1: Did that guy behind you tell you that he cut into the line? Twice, I got out and talked to him. He's just so obnoxious. He's so blatant about it.
KESTENBAUM: Some OPEC countries were upset at the U.S. for supporting Israel. So they issued an embargo saying, U.S., we are not going to sell oil to you. Also we're going to start cutting production, drilling a little less oil. Instantly, the price of oil quadrupled.
JEFF COLGAN: A big, big change.
KESTENBAUM: Jeff Colgan has studied OPEC. He's at Brown University's Watson Institute.
COLGAN: For 20 years prior to 1973, oil prices had been not only low, but very stable. So it was a real shock to the West.
KESTENBAUM: It became known as the oil weapon. Ironically, OPEC had learned its tricks for controlling the price of oil from us. Dan Yergin has written about this in his book "The Prize." Back in the 1930s, there was an oil glut in the United States. People here were trying to figure out a way to keep prices up.
DAN YERGIN: The oil price - it had dropped so low, it was like 10 cents a barrel. And if you pulled into a gasoline station, as a premium in the 1930s, they would give you a chicken to try and lure you to buy gasoline.
KESTENBAUM: A chicken?
YERGIN: Yeah, a chicken - that was the premium that you got. It was not, you know, like a coaster or a cup or something; you got a chicken.
KESTENBAUM: The government gave an organization called the Texas Railroad Commission the authority to set limits for how much oil people were allowed to produce. It worked. It kept the price up. This, Yergin says, was the inspiration for OPEC.
There is a hard, economic truth about cartels, though. They are very, very hard to keep together. Everyone is better off if they stick together, but everyone also has an incentive to cheat - to sell more than they promised. Jeff Colgan has studied OPEC's track record over the years. He says it's a pretty lousy cartel - lots of cheating, countries pledging to pump only a certain amount, but then pumping more.
COLGAN: I think the main problem that OPEC faces is its internal cohesiveness, right? The members themselves don't have the political will to agree with each other, and it's not surprising when you look at, you know, Iraq and Iran fought a major war with each other. Saudi Arabia and Iran are - have a big religious divide - one's Sunni, one's Shia. And then Venezuela is often on its own.
KESTENBAUM: If countries can't agree, it's hard to control the price of oil. Venezuela, right now, is in the midst of a budget crisis. It would probably like higher oil prices. Saudi Arabia, on the other hand, may not want a higher price. Higher prices encourage competitors to get into the business - competitors like the United States. With the fracking boom, the U.S. is on its way to overtaking Saudi Arabia, as the largest oil producer in the world. The U.S., of course, not a member of OPEC. David Kestenbaum, NPR News. Transcript provided by NPR, Copyright NPR.
