Politics & Policy

Opec Follies

Breaking point.

In September, at the instigation of Saudi Arabia and Kuwait, OPEC cut oil production by 900,000 barrels per day. Claude Mandrill, head of the International Energy Agency, voiced his disappointment, given the continued weakness in the world economy. OPEC’s strategy to maintain prices at persistently high levels works directly against sustained recovery and global economic growth. OPEC president Abdullah bin Hamad al-Attiyah said he received a call from Russia’s oil minister, Igor Yusufov, before the start of the September 24 meeting: “He said he will support us and he will cooperate” if prices look to fall sharply. Mexico also assured OPEC members that it would work with the cartel. OPEC would like to see these friendly sentiments result in output cuts to prop up prices: “Support is nice, but we should cash it in the bank,” al-Attiyah said.

On October 13, to underline his concerns, al-Attiyah reminded non-OPEC members of the collapse in crude oil prices to about $10 a barrel in 1998-99. Currently the price exceeds $30 a barrel. If $10 is a better reflection of what the price of oil should be in a free-market environment, it is fair to say that OPEC’s manipulations have added some $20 to the price of oil–at a cost to U.S. consumers of well over $100 billion per year, and hundreds of billions to the world economy.

Al-Attiyah’s admonition to translate action to cash in the bank begs the questions: whose cash, whose bank, and what actions?

In an illuminating statement early in September, Omar Farour Ibrahim, head of information and public relations for OPEC, advised his readers that it is OPEC’s “fulfillment of our obligations to humanity to ensure continuous flow of oil from the short to the very long terms. Oil is a finite resource. . . . So our pricing policy seeks to obtain a price that is fair and reasonable to the consumer, while at the same time attractive to investors (most of whom are from the West). . . . I wish to observe that the biggest beneficiaries of high oil prices are the developed countries themselves. Virtually all major oil companies hail from these countries. Virtually all revenue earned by the producing nations goes to importing manufactured goods from developed nations or are kept in foreign reserves in these countries.”

According to Ibrahim, then, it is not just developed countries that share in OPEC’s magnanimity, but “humanity” in general.

OPEC has trained consumers–and indeed most people around the world–to believe that oil is a much more finite resource than it in fact is. For example, in 1972 a prominent group of experts known as the “Club of Rome” estimated that only 550 billion barrels of oil remained to be tapped and the world would run out of oil by 1990. Between then and now some trillion barrels of oil have been consumed. Furthermore, according to the International Energy Agency, as of the year 2000, there exist some 2.3 trillion barrels of ultimately recoverable reserves. And that number would be more than 4 trillion barrels if we took into account oil recoverable from tar sands and oil shale. Meanwhile, producers around the world continue to announce new finds. The untapped–and as yet undetermined–supply in Iraq, Russian Siberia, Kazakhstan, Azerbaijan, Turkmenistan, Africa, the deeper ocean floor, and even parts of Saudi Arabia make glut more realistic than scarcity.

OPEC perpetuates the phony theory of scarcity and successfully manipulates the price of oil with the help not only of its own members but also of Russia, Mexico, and other non-OPEC producers. And then there is the quiet acquiescence of those “developed nations”: Sad to say, since the mid 1980s our government has been complicit in OPEC’s success.

Back in 1986, then-vice president George H. W. Bush traveled to the Persian Gulf to urge the region’s oil producers to rein in oil production. Oil prices had hit a low of under $10 a barrel and the economies of Texas, Louisiana, and Oklahoma were hurting badly. In successfully prodding the Mideast oil producers to cut production, the American government became a virtual partner in OPEC’s manipulation of the international oil market. The immediate result was a doubling of oil prices to over $22 a barrel by July 1987. This at a cost to American consumers of $60 billion a year–while hundreds of billions of dollars flowed into OPEC members’ coffers in the years following.

Our government’s support of OPEC and its policies became patently clear after the first Gulf War. It would have been reasonable to expect Kuwait and Saudi Arabia–the former having been rescued, the latter protected–to sever ties to OPEC and assume the responsibility of supplying oil to world consumers on a free-market basis.

Yet for our government to have pressed for such a change in Saudi and Kuwaiti policy would have necessitated rooting out ingrained interests. To this very day our government continues to play along with OPEC’s monopolistic shenanigans, using the rationale of “stability of oil supply.” This is a fiction perpetuated by the domestic oil industry, as well as by the geopolitical and financial prerogatives exercised by certain OPEC producers (e.g., Saudi Arabia and Kuwait) at the highest tiers of government through their massive financial recycling of oil revenues and deeply entrenched relationships with a core of highly connected oil companies, contractors, equipment suppliers, and banking and financial institutions. It is a sad example of crony capitalism high-jacking the national interest.

Since Gulf War I, we have witnessed the dangerous consequences of a policy that appeases and tolerates OPEC. Through the manipulations of OPEC, hundreds of billions of dollars have been drained from the world’s economies and transferred to too many malign and unstable regimes. These riches have helped foster political and religious fanaticism, endangering countries around the world. It has further impoverished developing nations, creating resentment and social instability in countries that need fairly priced energy to develop and grow their economies.

Given the events of 9/11, and given the experience of the dozen years since the first Gulf War, the question must be raised whether OPEC and the political malignity and market distortions it propagates can be tolerated in an era of growing proliferation of weapons of mass destruction.

It is time for the U.S. government to adopt a policy inimical to the existence of OPEC. If the Bush administration is serious about fighting terrorism, furthering transparent governance, and achieving world stability, it will make a stand on this front. We should do everything within the boundaries of foreign policy, law, and trade to bring the predatory nature of the OPEC cartel and its pricing machinations to an end.

‐We could begin by working through the World Trade Organization, which prohibits its members from setting quantitative restrictions on imports and exports. OPEC’s very existence is a prima facie affront to free trade. OPEC imposes a heavy tax on poorer nations, inhibiting their economic development. Here is an issue that could bring “developed” and poorer nations together under the aegis of the W.T.O.

‐As a response to OPEC’s production cuts, the U.S. should immediately suspend purchases for the strategic oil reserve (which is currently filled to 90 percent of capacity) until prices abate. Though not comparable to the OPEC cuts, it would at the very least send a signal that we are no longer standing idly by.

‐We should explore all avenues that might lead to antitrust proceedings against those entities and oil companies which conspire to fix and manipulate production and prices. U.S. policy should encourage other major oil importing nations to act likewise.

‐These efforts should be combined with an active program to develop alternative fuels sources such as hydrogen, ethanol, methane, wind and solar, hydroelectric, and, where possible, coal and nuclear. They should be further reinforced by a renewed focus on conservation and, if need be, gas rationing–not only as a conservation measure but as a negotiating tool to reduce consumption in the face of OPEC production cuts and to assure an orderly allocation to the public in case of a major disruption of supply.

Without OPEC, the price of oil could drop by $10 a barrel, if not more. The savings to American consumers alone would surpass $100 billion per year. The significance to the world’s poorest economies would be greater yet.

These steps–and the many other viable ones–should be taken now. OPEC is an ugly cartel, a sty in the eye of free trade and sound global economic policy. Until we begin to break its stranglehold on global and local economies, OPEC’s monopolistic behavior will only get worse.

Raymond Learsy, a private investor, has been an international trader in oil and chemicals.

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