Despite US Accusations, OPEC Is Not a Cartel
The Founding of OPEC
The Organisation of the Petroleum Exporting Countries (OPEC) is an intergovernmental organisation of 15 nations founded in 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia and Venezuela) and headquartered since 1965 in Vienna, Austria. OPEC accounts for an estimated 42.6% of global oil production and 71.8% of the world’s proven oil reserves giving it a major influence on the global oil market and prices that were previously controlled by the so-called “Seven Sisters” (Exxon, Mobil, Chevron, Gulf Oil, Texaco, BP & Shell) cartel of the world’s largest multinational oil companies.
The stated mission of the organisation is to "coordinate and unify the oil policies of its member countries and ensure the stabilisation of oil markets in order to secure an efficient, economic and regular supply of oil to consumers, a steady income to producers, and a fair return on capital for those investing in the oil industry. OPEC is also a significant provider of information about the international oil market. Moreover the OPEC Reference Basket of Crudes has been an important benchmark for oil prices since 2000.
The formation of OPEC marked a turning point toward national sovereignty over natural resources and OPEC decisions have come to play a prominent role in the global oil market and international relations. The effect can be particularly strong when wars or civil disorders lead to extended disruptions of supply. In the 1970s, restrictions in oil production led to a dramatic rise in oil prices and in the revenue and wealth of OPEC with long-lasting and far-reaching consequences for the global economy. In the 1980s, OPEC began setting production quotas for its member nations; generally, when the quotas are reduced, oil prices increase. This has occurred most recently from the organisation's 2008 and 2016 decisions to trim oversupply.
The influence of OPEC has closely followed the peaks and valleys of the world's demand for oil. September 14, 2018 marked the group's fifty-eight anniversary — more than a half-century of existence characterised by embargo, conflict, and even war.
Today’s OPEC, even more than in the past, is really about Saudi Arabia. Decision-making inside OPEC is quite complicated most of the time. This is because the policies of its de facto leader Saudi Arabia sometimes differ radically from other OPEC members’ in relation to prices and supplies.
If OPEC has gone through a turbulent couple of years after the 2014 price collapse, it is because its de facto leader decided for purely political reasons to flood the global oil market in defiance of OPEC’s time-honoured and agreed policy of cutting production to bolster oil prices. This time at its 166th meeting on the 27th of November 2014 OPEC decided under strong pressure from Saudi Arabia not to cut production.
Saudi Arabia was forced to eventually discard its strategy and engineer with Russia an OPEC/non-OPEC production cut agreement whereby OPEC & Russia cut production by 1.8 million barrels a day (mbd) in support of oil prices effective the 1st of January 2017.
Anti-OPEC Bill Could Be a Game-Changer for Oil Markets
In its effort to wrest more control over global oil markets away from foreign producers, the US Congress has been pushing a bill that would let the US sue OPEC for an alleged oil price fixing. The bill called “No Oil Producing and Exporting Cartels Act,” or NOPEC, was first introduced in May this year.
However, the NOPEC idea is nothing new and dates back to 2000. Both former presidents George W. Bush and Barack Obama threatened to use their veto power to halt it from becoming law. This time around, however, there is a good chance that President Trump would sign such a bill into law. Trump has been critical of OPEC for years and during the 2016 presidential election that war of words escalated to the front pages of international newspapers.
While the Congress has every right to prevent concentrations of power that interfere with trade and reduce economic competition within the United States, it has no extra-territorial jurisdiction whatsoever on other countries’ commercial practices. What commercial practices OPEC members agree to follow vis-à-vis their oil trade are their own affair and nobody else’s. If the United States doesn’t like OPEC commercial practices, then it should stop buying oil from OPEC members.
The United States has so far broken the rules of the World Trade Organisation (WTO) by imposing sanctions on virtually everybody, walked away from United Nations-recognised Iran nuclear deal and also the UN-supported Climate Treaty without batting an eye lid. Moreover, the United States has been manipulating oil prices through the petrodollar and also through exaggerated claims about rises in US oil production and huge build-up in its oil and refined products inventories in order to depress oil prices and achieve geopolitical and economic aims. One who lives in a glass house shouldn’t throw stones.
If NOPEC ever becomes a law and the United States tries to sue any OPEC member under the NOPEC Act, OPEC members collectively could retaliate by withdrawing every single penny they keep in the United States and stop investing in the US altogether. They could also nationalise American interests in their oil industries and discard the petrodollar and adopt the petro-yuan instead.
Political anger at OPEC tends to rise alongside oil prices; the first effort to use antitrust law against OPEC came in the late 1970s after a pair of nasty oil shocks. But subjecting foreign states to US legal action is always a sensitive subject. At the time, lower courts avoided the political hot potato by ruling, among other things, that other governments have sovereign immunity from the long arm of US law.
Now, rising oil prices are again stoking predictable anger in Washington prompting the same legislative exercise. But the NOPEC bill, even if passed, would take a long time to play out in court.
However, the whole debate might again be academic as it was nearly every year in the early 2000s, except for one thing: Donald Trump is now president. He supported prior Congressional efforts to revamp US law to put OPEC in the antitrust crosshairs. And in recent months he has railed against the oil-exporting group on Twitter for allegedly driving up the price of gasoline.
Is OPEC Really a Cartel?
A cartel is defined as an association of manufacturers and suppliers whose goal is to increase their collective profits by means of price fixing, limiting supply, preventing competition or other restrictive practices. Antitrust laws attempt to deter or forbid.
OPEC is not a cartel. How could it be a cartel when it was founded as a counterweight against the previous “Seven Sisters” cartel which dominated every aspect of global oil through price fixing, limiting supplies and suppressing competition for the sole purpose of maximising its profits. The main purpose behind the founding of OPEC was to give producers more control over their own oil.
When OPEC was founded in Baghdad in 1960, its constitution stipulated that its raison d’etre is to defend the rights of its members by ensuring a stable global oil market and stable prices. That is exactly what OPEC has been doing for the last 58 years and will continue to do so as long as it remains an organisation of Petroleum Exporting Countries.
OPEC with its huge proven reserves and production capacity has every right to ensure oil prices are fair enough to provide its members with a reasonable return on their finite assets thus enabling them to explore for new oil and expand production capacity to meet global oil demand. In so doing, they are rendering a great service to the global economy from which the United States benefits. Furthermore, OPEC has never excluded competition. And the proof is that US shale oil is now being exported around the world.
One would expect a cartel to curb production in order to raise the price of its product as well as to share market among its members. However, OPEC has never once tried to fix a specific price nor has ever been able to achieve this goal. Wishing a certain price is totally different from fixing it. The fundamentals of the global oil market are the ones that have always determined the oil price helped occasionally by geopolitics. OPEC has no control on these fundamentals.
Therefore has no control on the movements of prices. It merely takes advantage of market conditions and follows the dictates of the market. For instance, OPEC was not able to prevent prices from falling in the 1980s even after it adopted the production quota system in 1982. Moreover, OPEC was neither able to temper oil prices in 2008 when prices rocketed to $147 a barrel nor was it able to stop the 2014 oil price crash. This raises the question of whether OPEC was ever able to increase the price of oil by curbing its production or whether OPEC simply took advantage of high prices caused by political problems and conflicts between some members.
When it comes to limiting oil supply, a true cartel like the “Seven Sisters” was able to do exactly that because it was virtually in control of global oil resources. OPEC has never been in such a situation. It only accounts for 42.6% of the global oil market with the rest of the oil-producing nations of the world accounting for 57.4%.
Furthermore, it was never ever the intention of OPEC to harm customers or the global economy knowingly. Any adverse impact on the global economy or on customers was merely a collateral damage resulting from international policies aimed at either undermining the economies of the OPEC members as a geopolitical tool or enabling their own economies to benefit from low oil prices at the expense of the OPEC members.
OPEC has not been involved in any disputes related to the competition rules of the WTO, even though the objectives, actions, and principles of the two organizations diverge considerably.
Still, OPEC shouldn’t be unduly worried about the NOPEC Act. It has enough muscle to retaliate against the US. Were the United States to mount a lawsuit against OPEC or any of its members, the organisation could stop all its oil exports to the US and even cut its oil production to force prices up. This will harm the US economy most being the world’s largest consumer of oil.
Another measure OPEC and Saudi Arabia could take against the United States is to replace the petrodollar with the petro-yuan in their oil transactions. That would be the biggest ever retaliation against the US.
Will Saudi Arabia Leave OPEC?
A study by King Abdullah Petroleum Studies and Research Centre claims that Saudi Arabia is mulling over its future membership of OPEC with the realisation that demand for oil will one day peak and Saudi Arabia needs to prepare for that day.
Saudi Arabia was one of the original five founders of OPEC. Although Saudi Arabia is acknowledged as the de facto leader of OPEC, it is not within its power to decide to dissolve the organisation. OPEC will remain an influential organisation whether Saudi Arabia stays as member or not.
Of course, Saudi Arabia has always the option to withdraw its membership of OPEC but to what advantage. Saudi Arabia draws a lot of political and economic influence from being part of an influential organisation such as OPEC. Were it to decide to withdraw from OPEC, it will certainly lose a lot of influence in the global oil market not dissimilar to Britain’s loss of economic clout in the global economy by its decision to withdraw from the European Union (EU).
And despite the advent of electric vehicles (EVs), the demand for oil in absolute terms is not projected to peak though a wider use of EVs could decelerate the rate of growth of demand. There will never be a post-oil era throughout the 21st century and the probably far beyond. Still, Saudi Arabia doesn’t have to leave OPEC to prepare for a peak in oil demand.
If the objective of leaving OPEC is to give itself a free hand in its oil policies and increase its production freely, this is not going to happen because Saudi Arabia’s oil production peaked at 9.6 million barrels a day (mbd) in 2005 and has been in decline since. Even the 400,000 barrels a day (b/d) which Saudi Arabia added to the market a month ago under intense pressure from President Trump didn’t come from new production but from oil stored on board tankers and on land. Saudi Arabia has no spare capacity. So a Saudi Arabia speaking on behalf of OPEC with 71.8% of global proven reserves and 42.6% of global production is far more influential in the global oil market than having the world pondering about the true volume of its proven oil reserves and production capacity.
Saudi Arabia’s partnership with Russia is not an alternative to OPEC. This is a tactical partnership used by President Putin to enhance his country’s influence over the global oil market. Russia is an energy superpower capable of living with an oil price of $40 or less compared with Saudi Arabia’s need for an oil price above $100 to balance its budget. Moreover, Saudi Arabia and Russia are diametrically opposed to each other ideologically and politically. Russia supported by China is trying to undermine the current unipolar role currently enjoyed by the United States whist Saudi Arabia will do anything to remain in the United States’ good books. So such a partnership will be very short-lived.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of ESCP Business School.
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