It is premature to write off OPEC
The recent fall of oil prices, plus the difficulties faced by the Organization of Petroleum Exporting Countries in agreeing on a production and pricing policy to prevent their further plummeting, have once again raised the question whether OPEC can survive. After all, what good is a ''cartel'' if it cannot control prices and secure the interests of its members?
Yet the very raising of this question reflects a prior error - either intentional or accidental - in calling OPEC a cartel, and thus attributing to it qualities and powers it has never had. Examining the issue of OPEC's survival first requires understanding what it really is and always has been.
Far from being a tightly knit cartel, OPEC is a heterogeneous group of countries with widely different economic needs and resources, and deeply divided along ethnic, political, and ideological lines. Twenty-two years ago, these countries came together to form OPEC only because of the tactics of the oil companies in cutting prices arbitrarily and thus eroding the exporters' income. Even so, agreement reached among OPEC members was very limited, reflecting their differences, and was essentially designed to keep the oil companies from playing individual exporters against one another and from forestalling common exporter positions on royalties and taxes.
OPEC's rules and institutional characteristics have also reflected its members' diversity and the limited nature of their accord. OPEC is not, and has never been, a supranational organization. Its decisions must be reached by consensus and, even then, are not legally binding on its members. Thus during its first 10 years, OPEC could do no more than agree on general positions regarding taxes and royalties. Furthermore, OPEC members failed not only to agree on a mandatory production policy, but also to give any effective support to one another in their disputes with the oil companies - the ''majors'' - and continued to compete for each other's markets. OPEC remained ineffective and incapable of taking any initiative. Not surprisingly, the price of oil actually fell in real terms.
Only in the late 1960s, when external factors began to change, was OPEC able to show any signs of effectiveness. The growth of independent oil companies gave OPEC countries more latitude in their dealings, permitting them up to a point to play the oil companies against one another and to become more mutually supportive. OPEC's position was also strengthened by rising global energy consumption and by a change in US energy policy in favor of higher global oil prices, both to encourage US domestic production and to cut the competitive edge enjoyed by European countries that used cheap Middle East oil. Thus the apex of producer-state cooperation was reached during OPEC negotiations with the oil companies that led to the Tehran and Tripoli agreements of 1971 and resulted in small oil price increases. Yet these agreements were the result rather than the cause of changes in global energy markets.
Throughout this period, therefore, changes in oil prices were caused more by external factors than by OPEC actions. Indeed, OPEC remained incapable of agreeing on a mandatory production policy, the only measure that could have given it control over prices and essential to any cartel.
The event that eventually pushed oil prices sharply upward and gave OPEC its sinister aura was the 1973 oil embargo. Generally forgotten, however, is that OPEC did not impose the embargo. Rather, it was imposed by the Organization of Arab Petroleum Exporting Countries (OAPEC) which, in addition to OPEC's Arab members, has included a number of other Arab states. In fact, the non-Arab members of OPEC - including Iran and Venezuela - continued to export oil to the embargoed countries. Also, the embargo was conceived as a political weapon and not as a strategy to push up oil prices.
Nevertheless, OPEC as a whole also took advantage of the panic and vulnerability of the consuming countries - set against the background of steeply rising global energy demand - to increase oil prices. It further decided henceforth to set oil prices unilaterally, without consulting the oil companies. Now the tables were completely turned.
But in view of the differing political and other non-oil interests of its members, OPEC could not for long keep the initiative completely in its own hands , and disagreements soon surfaced within the organization regarding pricing and production policies. Saudi Arabia was the champion of lower prices - for economic and political reasons that largely centered on its relationship with the US - and used its tremendous flexibility in production levels to influence OPEC policy, sometimes openly threatening to flood the market. As a result, from 1975 until the Iranian revolution of 1979 there were no drastic oil price increases. Then, prices shot up again, as Iranian production fell and some panic-buying occurred. This time, as well, external factors were more important than OPEC actions in pushing up oil prices. Indeed, Saudi Arabia contributed to the current oil glut by adopting a policy of overproduction in order to prevent any upward pressure on oil prices because of the Iraq-Iran war.
In view of the record, therefore, it is clear that OPEC's difficulty today in agreeing on a common production and pricing policy is in the nature of the institution rather than an aberration. In fact, as global energy demand rose, there was no critical need to agree on production limits, which meant that OPEC was only a shadow-cartel: that basic principle had never really been tested. By extension, it is unlikely that current disagreements within OPEC will alone lead to collapse of the organization itself, particularly since none of its members can afford politically to be held responsible for its demise. Rather, OPEC is likely again to revert to a period of inaction and relative quiet. By the same token, however, a renewed rise in global energy demand or some unexpected political event could again create an environment within which OPEC can reassert its power over oil pricing.
This may nor may not come to pass, depending on whether the circumstances that have been depressing prices will prove to be temporary or the result of structural changes in the pattern of global energy production and consumption - e.g., large-scale conservation, a shift to other sources of energy, or long-term and large-scale availability of non-OPEC oil. If the latter proves to be true, it is unlikely that OPEC will again be able to exert a determining influence over oil prices. Paradoxically, however, such a development might also bring OPEC's members closer together - as did the unfavorable conditions of 1960 that made its creation possible - and thus prevent its further weakening.
Therefore, while OPEC has never been a true cartel as understood in classical economics, it is far too early to write its obituary.