A derek pumps in a oil field in Kuwait on Jan. 15, 2003. (Joe Raedle/Getty Images)
Just a couple months ago, some were declaring the old oil order
dead after the Organization of the Petroleum Exporting Countries (OPEC)
failed to agree on coordinated action at its April meeting in Doha.
That meeting was meant to bring about a production freeze to arrest
the downward spiral of prices that began in July 2014. Instead, the Doha
meeting was over before it began.
Iran refused to slow production until it had regained its pre-sanctions
position in the market, so Saudi Arabia canceled the freeze and
continued to produce at peak levels.
Last week, with oil trading at six-month highs, OPEC members once again had high hopes to show that the organization remains relevant as they gathered in Vienna. Yet, once again, the meeting ended without agreement, resulting in no change to the current policy of essentially unlimited production.
Read More
So does the verdict that OPEC is dead still stand, signaling the end
of an era in which it supposedly ruthlessly controlled the price of oil?
In fact, that era barely existed in the first place. The failed meetings confirm a longstanding truth: the world’s most famous cartel has never really been a cartel.
Rather than the arbiter of global energy, OPEC is and has always been a dysfunctional, divided, and discouraged organization.
My recent research has taken me through the history of oil,
particularly the relationship between oil revenues, economic
development, and the geopolitical balance of power in the 1960s and
1970s. Oil’s history has been dominated by a struggle for balance, a
contest between competing interests, both economic and political, and
between the fundamental market forces of supply and demand.
OPEC has never been shielded from or been able to fully thwart these forces.
Early Days: Divided and Powerless
When it was created in 1960, OPEC was meant to offer members a
greater say in how their oil was produced and priced, addressing the
disproportionate power wielded by private Western corporations. Its
larger goal, to bring order to the chaotic world of global energy, has
always been elusive.
OPEC was formed from frustration. In the 1950s, the world was awash in oil
as small nations in the Middle East and Latin America discovered
enormous deposits, and Western oil companies sought to tap them to meet
rising demand.
To gain access to those deposits, the major oil companies (known as the “Seven Sisters”)
signed concessionary agreements with local governments, allowing them
to pump, refine, transport, and market a nation’s oil in return for a
royalty, typically 50 percent of profits.
This arrangement gave the companies control over the oil—they set production levels and prices—while governments simply collected a check and had little influence on anything else.
In February 1959, amid an oil glut, the Seven Sisters decided that a price correction was necessary. And so they unilaterally began cutting the posted price,
from $2.08 to $1.80 by August 1960. (Back then, oil prices didn’t
always follow market forces and were typically set by producers.)
Read More
The cuts meant a significant loss of revenue for the oil-producing
states. In protest, the oil ministers of Iraq, Iran, Venezuela, Saudi
Arabia, and Kuwait met in Baghdad that September and formed OPEC to achieve a more equitable arrangement with the Sisters.
In reality, the oil-producing states could do little to coerce the
companies into offering better terms. The Seven Sisters dominated global
markets and were capable of shutting out individual producers. Oil was
abundant, and nationalization seemed out of the question because the
companies could successfully exclude an offending country from the
market, as they did with Iran in 1951.
In addition, the United States itself was the world’s top producer and immune from supply shocks thanks to import quotas..
If OPEC threatened to take production offline in order to put pressure
on the companies, the U.S. could increase its own to make up the
difference, as it did during a partial Arab oil boycott in 1967.
In the end, OPEC did not possess enough market share to make a meaningful impact.
A New Balance of Power
Besides being relatively impotent, OPEC couldn’t agree on a
consistent policy among its members. Saudi Arabia wanted to keep
production levels low and prices consistent, preserving the global
economy and the political status quo. Iran and Iraq, with huge military
and development budgets, wanted prices pushed as high as possible in
order to maximize revenue.
According to scholar and oil consultant Ian Skeet,
an attempt to extract more favorable terms from the Sisters in 1963 was
sabotaged by the shah of Iran, who sought a separate agreement.
During the 1960s, OPEC met, debated, and released grandiose statements on their rights, yet failed to form a united front.
Read More
Nevertheless, significant changes were occurring at the time. Demand for oil
shot up, while production in the U.S. stagnated. The ability of the
Seven Sisters to control the market was undermined by international
competitors drilling new fields in North Africa, where Libya’s Muammar Qaddafi threatened to shut off supply if he didn’t get higher prices.
The companies were under more and more pressure
to deliver satisfactory terms to the OPEC members. The price of oil,
which had held steady at $1.80 a barrel for years, began ticking
upwards. American import quotas ended, leaving the U.S. more vulnerable to supply shocks as its production capacity steadily declined.
These conditions, while not the result of actions by OPEC, gave the
organization an opportunity to influence the market and upset the
balance of power.
The Oil Price Revolution
This shift accelerated in the 1970s as war broke out between Israel and its Arab neighbors, creating an opportunity for OPEC to wrest control from the Western oil companies.
To punish the U.S. for supporting the Jewish state, Arab oil producers (not OPEC, as popularly believed) cut production and declared an embargo. Together with the war, this destabilized energy markets as demand outpaced supply.
Amid the fighting, OPEC met with the Seven Sisters in Geneva and
demanded an increase in the posted oil price. After rejecting a small
change, OPEC announced it would double the price to $5 and later doubled
it again to $11.65.
Read More
This triggered a massive shift in economic power, what Stanford University professor Steven Schneider
called “the greatest non-violent transfer of wealth in human history.”
With the uptick in oil revenues, OPEC states spent lavishly on economic
development, social programs, and investments in Western industry and
steadily nationalized their domestic industries, pushing out the Seven
Sisters.
How did the balance of power seem to shift so suddenly? Among other
reasons, the major oil companies could not agree among themselves on a
new price and were actually tempted by the high profits that would
result. In other words, OPEC had seized control of the oil market
largely due to circumstances beyond its control.
The Oil Crisis
Despite its victory, OPEC had come no closer to resolving its
internal divisions. This became evident when another energy crisis hit.
In January 1979, the shah of Iran fled amid revolution, and global oil markets panicked.
Prices soared, from $12.70 to over $30 by 1980. Iran’s 6 million
barrels per day (bpd) disappeared, and other OPEC states eagerly seized
the opportunity to sell oil at costly premiums, sending the price even higher.
In the ensuing years, Saudi Arabia tried to impose a quota system, with overall production capped at 20 million bpd. Most members ignored their quotas or over-produced to gain greater revenue.
Meanwhile, the West worked to improve energy efficiency and invested
heavily in non-OPEC oil sources, including Alaska, Canada, and the North
Sea. By 1985, OPEC’s market share had fallen below 30 percent. OPEC dropped its production quota
to 19 million bpd, then 17 million, to account for diminishing demand,
but only the Saudis obeyed the rules, losing market share as other
producers pumped above the quota level.
By 1986, the Saudis had had enough. Without warning, the Saudi oil
minister announced that Saudi production would increase. Overnight,
Saudi production shot up more than 2 million bpd, flooding the market and sending prices plunging below $10 a barrel. Sick of watching other OPEC members cheat them out of profits, the Saudis chose to enforce new discipline through an artificial market shock.
Just as the kingdom did in 2014, this move indicated Saudi
willingness to use its massive reserves to “correct” the market and push
out high-cost producers, even at the cost of its OPEC allies.
Feeling the Pain
OPEC’s fortunes have oscillated since the 1986 shock. Cooperation remained elusive.
A 2011 meeting, dubbed “the worst ever”
by recently-removed Saudi oil minister, Ali al-Naimi, produced
disagreements over production levels. Acrimony reigned as OPEC states
ignored calls for economic diversification in favor of oil-fueled
economic growth.
High prices during the early 2000s accounted for a huge boom in oil revenues for OPEC members. For Venezuela and Nigeria,
oil accounts for over 90 percent of all exports. Most OPEC states
believed that high demand would last forever, that high prices could
fund government programs and that the good times would never end.
Yet the good times appear to be over. OPEC has failed to control the downward spiral in prices, reportedly begun by Saudi Arabia
in November 2014 to flood the market with cheap crude to put new and
old competitors—U.S. shale producers and Iran—out of business. Saudi
Arabia pursued its political interests and existing market share,
leaving other OPEC members to fend for themselves.
The death of OPEC has been announced in some quarters, with its long-term decline seemingly assured as global energy enters a new era.
It is possible that Saudi Arabia may emerge from this current crisis
unscathed, free to embark upon its recently announced Vision 2030 plan
for an “oil-less” economy, however dubious that plan might appear.
It’s possible that OPEC may succeed in concerted action in the future.
But its recent failures suggest that political interest will be more
likely to divide OPEC and prevent mutual self-interest from uniting its
members.
Gregory Brew is a Ph.D. student in history, energy, and foreign
relations at Georgetown University. This article was originally
published on The Conversation.
0 comments:
Post a Comment