Righting a free oil market

By many accounts, these are the days of resource nationalism. China tries to control exports of its rare earth minerals. The United States restricts certain exports of advanced computer chips. Even a few West African countries that dominate cocoa production often collude to control prices for the world’s chocolate-makers.

Yet history teaches that a zero-sum mentality of resource manipulation or price-fixing among rivals often ends up pushing consumers to find creative ways to adjust. Cartels or monopolies then crack apart. The natural state of free competition in a market returns. And the notion that one can only get ahead if somebody else loses starts to recede.

A good example of how mercantilism can melt away could be happening now. On Tuesday, one of the world’s top oil producers, the United Arab Emirates, announced it is quitting OPEC, along with the cartel’s stringent quota system among member states to rig global petroleum prices. The UAE, which produces about 12% of OPEC’s oil, said it would now align its prime export “with demand and market conditions.”

The Gulf Arab nation has other reasons to exit. A fellow OPEC member, Iran, has bombed the UAE more than it has Israel during the recent war. Saudi Arabia, the cartel’s strongest member, differs with the neighboring UAE on many geopolitical issues. And the UAE wants to align more closely with nations that practice market fundamentals in anticipation of the end of the fossil fuel era.

And it seeks to quickly monetize its current oil deposits, free of quotas. “Oil, no matter how much we defend it, it’s in decline mode,” UAE Energy Minister Suhail al-Mazrouei said publicly in 2022. “To assume oil is going to be there forever is wishful thinking.”

Most of all, oil-consuming nations have adjusted since OPEC’s oil embargo of 1973 and its price-fixing ever since. In particular, the U.S. shale-oil revolution has eroded the cartel’s clout. At its peak, OPEC had 16 members and controlled most of the world’s proven oil reserves. As some of its smallest-producing members have quit, and now that oil giant UAE is leaving, its market share will be less than 50%. It will be left with only 11 members.

Further defections are now widely anticipated. As Robert Frost poetically opined, “Something there is that doesn’t love a wall.” One of history’s most powerful cartels might finally be discovering that it cannot put up barriers to market freedom and creative ideas in energy uses. Material resources may be finite. But not the resources available to human thinking.