OPEC – not as powerful as you might think

Brazil's oil may destabilize OPEC, but not the US.

from the March 5, 2008 edition

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If Brazil joins, it is more likely to destabilize OPEC than enhance the oil cartel's power. If the "analysts" had taken a few more economics courses, they'd have learned that cartels, are notoriously fragile. And one of the main sources of fragility is the entry of new players into the market.

In 1880s America, the railroad companies kept trying to form cartels but they'd fall apart whenever new railroads would ask to join. Why? Because there was only so much demand to go around, and so any time a new company would join, older members were ordered to give up some of their market share, just as OPEC countries would have to do if Brazil joined.

The railroad companies didn't appreciate that idea and it usually led to temporary price wars that sent prices not just falling but plummeting.

The belief that OPEC will avoid this end shows an ignorance not only of economics but of history – recent history as well as the history of 19th-century America.

OPEC gained its status as the oil bogeyman back in the 1970s, and surely, the US suffered through some bleak times that decade. But by the 1980s, US consumers were doing fine, and the nation did even better in the 1990s.

Not so the oil producers. The collapse of oil prices in the 1980s, which occurred mainly because the cartel became too greedy, was so devastating to OPEC producers that some of them didn't recover for 20 years.

They have, in fact, much more at stake in this game than we do, and the last thing they want to do is make the same mistake again.

"Analysts" may believe that there is an evil oil cartel out there that can defy logic, history, economics, and common sense. But OPEC is not omnipotent, and is much less of a threat to the US than those analysts seem to believe.

• Peter Z. Grossman is a professor of economics at Butler University in Indianapolis, and the author of three books on energy issues.

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