By
Robert J. Samuelson
For nearly half-a-century, the organization has been a cartel
in name only. Now it may be the real deal.
For much of its 47-year existence, the Organization of the
Petroleum Exporting Countries (OPEC) has been a cartel in name
only. It could not, in practice, control oil prices because
many of its members regularly breached the production quotas
that were intended to regulate the market. So OPEC generally
followed oil prices up and down, as supply and demand conditions
shifted. But now OPEC may be the real deal: a cartel that works.
If so, that's bad news for us.
Look
no further than last week's OPEC meeting in Vienna. Oil ministers
declined to increase production
despite a fairly
obvious case for doing so. Not only were oil prices fluttering
just above $100 a barrel, but the United States is either in
or near a recession and much of the rest of the world
faces a noticeable economic slowdown. The OPEC ministers
were unmoved. Indeed, they indicated that they might actually
reduce production if weak demand-presumably reflecting
weak economies-threatens to depress prices. Not good.
What's
wrong is that a fall of oil prices is one of the mechanisms
by which a recession or economic slowdown corrects itself.
Lower prices for gasoline, home heating oil and diesel fuel
improve consumer purchasing power. They muffle inflation and
increase confidence. In this sense, they're an important "automatic
stabilizer" for a faltering economy. If the automatic
stabilizer is disarmed-or, worse, transformed into an automatic "destabilizer"-then
the slowdown or recession may get worse.
Oil
producers don't much care. High prices have been good to
them. Since 1999, annual oil revenues for
OPEC countries
have more than quadrupled, to an estimated $670 billion in
2007, says energy economist Philip Verleger Jr. What's less
clear-to experts, at any rate-is whether OPEC has merely
benefited from good luck (tight oil markets) or has acted as
a true cartel, restricting output and raising prices.
The right answer is: both.
Of
good luck, there's little doubt. Two massive oil miscalculations
both aided OPEC. First was a widespread underestimate of world
demand, especially from China. Since 1999, China's oil use
has almost doubled, to 7.5 million barrels a day (mbd) in 2007.
(In 2007, world oil use was 86mbd, up 13 percent from 1999.
American oil use was 20.8mbd, up 7 percent.) Second was an
overestimate of supply. War, civil strife and nationalization
have depressed production in Iraq, Nigeria, Iran, Venezuela
and elsewhere. Total global capacity might be 4.5mbd higher
without these setbacks, says the Energy Policy Research
Foundation (EPRINC), an industry research group. The combination
of higher demand and stunted supply has pushed up prices.
But
that's only the half of it. Go back to late 2006. Crude prices
were slipping from about $70 a barrel
in August toward
$50 a barrel (a level that, a few years earlier, seemed astronomical).
A true cartel would cut production to prop up prices. That's
what OPEC did. In two steps, it reduced oil output by about
800,000 barrels a day, notes economist Larry Goldstein of EPRINC. "By
July, 125 million barrels of oil inventory had been wiped out," he
says. At the end of 2007, inventories (measured by days of
supply) were at their lowest point in three years. Prices rose.
Without OPEC's supply cuts, they wouldn't now be at $100 a
barrel.
OPEC's
present market power dates to early 1999, says economist Verleger.
Oil prices then were about $10 a barrel.
The 1997-98
Asian financial crisis had cut demand; supply was essentially
unregulated. Saudi Arabia undertook frantic negotiations
with other major producers, including Iran, Kuwait, Venezuela
and non-OPEC members Russia, Norway and Mexico. The result
was an agreement to cut production sharply. Compliance with output
quotas was surprisingly good; countries were terrified by
the collapse of their oil revenues. "That's when OPEC started
acting like a cartel," says Verleger. To
some extent, we are paying for past shortsightedness. Dependence
on oil imports, now almost 60 percent of our supply, is inevitable.
We simply use too much and produce too little. But we could
limit OPEC's market power by curbing our demand and increasing
our supply. As the worldwide gap between supply and demand
rises, it becomes harder for producers to control the market.
More have spare capacity; more are tempted to increase production
to raise revenues. Controlling supply today is easier because
most producers are operating near their potential. The surplus
is concentrated in a few countries, especially Saudi Arabia,
which can adjust production to influence prices.
The
American approach is to rant at foreign producers on the
silly presumption that they should subordinate
their interests
to ours. The resulting self-righteousness rationalizes
a refusal to do much that would actually influence their
behavior
and
limit their freedom of action. It was only last year that
Congress raised fuel-efficiency standards for new cars and
light trucks:
the dampening effects on oil consumption will be years
in coming. We have steadfastly rejected higher gasoline
taxes to curb unnecessary driving and strengthen demand for
fuel-efficient
vehicles (better to tax ourselves than let foreigners tax
us
through higher prices). And we have consistently restricted
oil drilling in Alaska and elsewhere.
It
is a fair commentary that, by doing so little to check its
own thirst for imports, the United States has
unwittingly
contributed to OPEC's present triumph. The extent of that
triumph will be tested this year and next. The U.S. Department
of Energy projects that non-OPEC oil supplies-from Brazil,
Canada and Kazakhstan, among other places-will increase. Meanwhile,
a weaker global economy may dampen demand. Even OPEC may be
unable to hold prices at today's high and undesirable levels.
Whatever happens, the long-term threat of a global oil cartel
will remain. We should be taking the hard steps to limit its
power. Considering our past complacency, we probably won't.
Robert
J. Samuelson is Newsweek 's
most recognized writer. In addition to his Newsweek column,
Samuelson writes for The
Washington Post, The
Los Angeles
Times, The Boston Globe and other papers.
Petroleumworld does not necessarily share these views.
Editor's
note: This Article was originally published
by Newsweek, Mar 7, 2008.
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