Although triggered by a price reduction imposed on oil producers by the major international oil companies – the Seven Sisters – at the time, OPEC’s emergence was not seen as a particularly important development. Thirteen years later, however, with Arab members of OPEC imposing an oil embargo on the US and Europe in response to their support for Israel in the Yom Kippur war of 1973, the potential power of the oil exporters became very evident.

OPEC’s emergence was effectively part of the post World War II upheavals involving decolonisation, Arab nationalism, and the developing countries’ aim for national control over the natural resources element of the New International Economic Order that crystallised in the 1970s.

The 1970s were especially turbulent. First, there was a fundamental shift in the control of oil from the major oil companies to the mainly Middle Eastern producers. Major changes in the relations between the oil majors and the oil producing countries reflected forced movements into national ‘participation’ (or shareholdings) limited at first but soon expanding rapidly to controlling interests, with nationalisation then increasingly the objective and eventually the reality.

Second, the embargo and the reflection of the power in the hands of the OPEC oil producers was a significant security and economic concern, particularly in the US, Europe and Japan.  US officials argued the need to break the OPEC cartel and the International Energy Agency was established to achieve a common consumer position. Conservation methods were widely adopted with government encouragement and high oil prices stimulated considerable development of non-OPEC oil. It is also widely held that the very high 1970s oil prices contributed to prolonged stagflation in the US and global economy.

Third, in a basic shift in the international order, the oil producers are now rich and courted by the West. OPEC oil revenues in real terms (today’s dollars) went from less that $100 billion in 1972 to nearly $600 billion in 1980. While dropping substantially in low price years, they exceeded $900 billion in the price peak year 2008. While much of the increased income has been for modernisation in the Middle East and elsewhere, much has also been for military acquisitions and some to support religious militancy, unhelpfully for the West’s war on terror.

OPEC’s relationship with oil prices is subject to considerable debate. Its main objectives have been stable oil prices and economic prosperity. It did not set prices but like the Texas Railroad Commission (TRC) in the US in pre-OPEC days, controlled prices through regulating US production levels paralleling the oil majors’ control internationally.

While its quota system ensures that OPEC influences prices, differences exist about how far that influence goes. Copying the TRC model, OPEC established quotas for each member, pro-rationing as the need arises. It sets production quotas based on assessments of prospective market requirements. Given oil market complexity and imperfect information, OPEC influence cannot be precise; it can only aim to influence prices towards its desired price – increasingly now seen as a floor.

Much depends upon other market influences and how far OPEC’s market signalling efforts are accepted by market operators, increasingly significant given the increased influence of futures markets on oil prices. Often criticised for increasing price volatility, OPEC, or commonly Saudi Arabia, has at times succeeded in limiting price surges, such as during the Iran-Iraq war, the first Gulf War, and the US invasion of Iraq.

Continuing problems for OPEC are that when prices are high it takes time to respond, even when spare capacity exists, and there is no cost penalty in delay; when prices are falling, it is difficult to ensure producers implement production cuts.

Although this may all seem like ancient history, it has relevance today. OPEC’s market share, currently some 40 per cent of world production, is expected to grow. Longer term global reliance on OPEC crude oil supplies is expected to increase since production from non-OPEC sources will grow less than the expected demand. It is often assumed that OPEC production will fill the gap. It may do so but OPEC’s approach has varied over its half century of existence and could do so again.

Three potential changes are possible. First, OPEC has been constrained historically in its pricing objectives by a concern over the potential impact of high oil prices on the global economy. Its view now is that while cheap oil harms producers, price increases do not greatly affect consumers; it is now more concerned with floor prices – currently apparently around $70 a barrel – than price ranges. Second OPEC, essentially Saudi Arabia, has seen maintaining spare capacity as giving it ability to increase production when price surges occur; this has a cost and given the first point there is questioning of Saudi Arabia’s acceptance of this cost. Third, there is now a concern to give more weight to the interests of future generations by conserving oil resources.

Any or all of these changes could affect future oil prices.

Stuart Harris is Emeritus Professor in International Relations at the ANU and was formerly Secretary of Australia’s Department of Foreign Affairs and Trade.