Conventional wisdom holds that the OPEC oil cartel has the world in
its grasp. It can manipulate prices by tinkering with supplies. Last
month OPEC released a new study on world oil demand that seemed to
signal the cartel was readying to tighten the taps because higher
prices were slaking the world's thirst for oil. The American Petroleum
Institute released fresh data showing that demand for oil products in
the United States (the world's largest market) dropped a whopping 3
percent from the year earlier. The news about lower demand has caused
oil prices to fall a bit, and all eyes are on OPEC's wizards to tighten
supplies.
But the conventional wisdom is mostly wrong.
OPEC (which stands for the Organization of the Petroleum Exporting
Countries) is no wizard. For the most part, its actions lag behind
fundamental changes in oil supply and demand rather than lead them.
OPEC looks like a masterful cartel when, in fact, it is mainly just
riding the waves.
It is hard to figure out exactly what
goes on behind's OPEC's closed doors, but glimpses are possible by
probing what the cartel members say about prices and how they set
quotas. Over the last five years, OPEC members have announced
ever-higher price goals only after the market had already delivered
those high prices. As the market has soared, OPEC has followed. Only in
the last few months has Saudi Arabia suggested that the cartel would be
better off if prices reversed because high prices would encourage the
world's big oil consumers to wean themselves from oil. It proffered
$125 a barrel. The markets shrugged and kept on rising until real facts
about slowing demand revealed that fundamentals were changing.
OPEC
also sets quotas so that each member knows its role. Throughout its
history, OPEC has faced the difficult task of holding the cartel in the
face of strong incentives by each member to cheat. Today's oil market
makes that job easy because nearly every member, except Saudi Arabia,
is producing at full capacity. OPEC, more or less, has nothing to do.
In
fact, the last time OPEC made a major adjustment to its
quotas—September 2007—it jiggered them to reflect what its members were
already pumping. Algeria got a big boost because it was already
supplying nearly 50 percent more than its quota. Kuwait, Libya and
Qatar also got boosts that aligned their OPEC quotas with existing
reality. OPEC also set, for the first time, a quota on Angola's output.
Since then, Angola has attracted a steady stream of new production
projects, which makes it inevitable that OPEC will adjust Angola's
quota to reflect the new reality. (Iraq has no quota; it has troubles
enough without pretending to align its oil output to OPEC strictures.)
Nigeria
and Venezuela got haircuts because their political troubles meant they
were already producing far less than their quotas. Indonesia also cut
its quota and a few months later left OPEC because it realized that as
a big oil user it actually had more in common with oil importers than
its fellow OPEC members. These changes in quotas were reflections of
political realities that OPEC doesn't control.
Today's
oil cartel, even more than in the past, is really about Saudi Arabia.
But Saudi Arabia also is no wizard at the controls of the world market.
The Saudis can adjust their output a bit since they control nearly all
of spare capacity in the world market. (Earlier this month they pledged
another 200,000 barrels per day to dampen pressure from the United
States and other governments that are reeling from high oil prices. But
that move was more symbolic than real as the markets were already
expecting the new supplies.)
Saudi Arabia is on the
front lines of the new reality in world oil supply. It is proving much
harder and more costly to bring on more supplies. The Saudis have an
ambitious plan to increase output about one third over the coming
decade, but they are finding that will be a stretch. Their fellow OPEC
members are in a similar situation, and those hard facts also produce
high oil prices. In fact, the Middle East members of OPEC are, today,
producing at just the same level as they were three decades ago because
none of them invested much in finding and producing new supplies. High
prices into the future reflect these fundamental facts rather than the
assumption that OPEC is a masterful cartel.
Conventional
wisdom holds that because OPEC is raking in more cash than ever, it has
never been stronger than it is today. In fact, OPEC has rarely been
weaker. It is the accidental beneficiary of forces that have caused
today's high prices, and it will be nearly as powerless when prices
come down.
The real solutions to today's high oil
prices require more attention to demand. Blaming OPEC, while good
political theater, won't have much impact. Legislation now working its
way through the U.S. Congress would actually attempt to break up the
oil cartel. Such schemes won't work, and the political effort would be
better spent on policies that redouble the nation's efficiency,
producing more oil from diverse sources here at home, and in finding
ways to move beyond oil altogether.
