[Originally published in The Boston Globe.]
THE GLOBAL energy market can be a scary place for America. For decades, one of the biggest reasons has been the cartel known as OPEC.
Saudi Arabia and the 11 other nations that make up the Organization of Petroleum Exporting Countries collude openly, setting production limits and shaping the world oil market in their interests. Concerns about OPEC have driven American energy policy ever since a devastating six-month embargo by Arab oil producers in 1973 plunged the nation into recession and seared the four-letter acronym into the national consciousness.
Today the group still holds 80 percent of world oil reserves; ambassadors from the most powerful economies in the world attend its biannual meetings with deference, and dangle aid and other enticements in the hopes of winning OPEC’s allegiance. With American antagonists like Iran and Venezuela in its membership, OPEC amplifies the ability of relatively small countries to buck the desires of Washington.
But a closer look at OPEC’s real influence over the oil market suggests that we’re making a huge mistake about its global power, says Brown University political scientist Jeff Colgan. A specialist in oil and global conflict, Colgan tracked almost three decades of oil production data and compared it to official OPEC policy, which sets quotas for member countries. What he found surprised him: OPEC’s decisions were all but irrelevant.
As formidable as OPEC is seen to be, its members appeared to produce whatever they felt like, regardless of official policy; Colgan found that OPEC decisions weren’t actually affecting world oil supplies, or world oil prices. The group seemed unable to control its members or accomplish the one thing that even its detractors might appreciate: bring stability to the market.
“It drives me nuts,” Colgan says. “Washington spends bandwidth on OPEC that could be better dedicated to something else.”
Colgan’s research, published this summer, made a splash within the small circle of OPEC scholars, and even his critics concede that his findings require a reassessment of our understanding of the cartel. His thinking has yet to trigger policy changes, however. Although skepticism about OPEC has been rising—just last week, New York Times columnist Joe Nocera wrote about a 2013 Foreign Policy article titled “The End of OPEC”—most policy makers and academics still consider OPEC the key player in world energy markets, and the only one in a position to unilaterally disrupt the global flow of petrochemicals.
If Colgan is right, the implications go beyond OPEC: They suggest that petroleum is not the global bugaboo that many politicians and policy makers think. In this argument, Colgan has company: His findings echo earlier research suggesting that today’s American economy is no longer vulnerable to shocks in oil prices, or temporary supply disruptions caused by Middle Eastern wars.
His meticulous research suggests that OPEC is a sort of high-level con, which awards its member states unwarranted influence, wastes US time and energy, and distorts our energy policy and even our military priorities. An honest reckoning of power in the oil market might not only lead the United States to fear OPEC less, but even to behave a little more like it.
WHEN OPEC was formed in 1960, the oil industry was dominated by a different cartel. It was called the “Seven Sisters,” and was made up of western companies. Many of them have changed their names since then but are still industry giants, like ExxonMobil, BP, and Royal Dutch Shell.
The developing countries that actually held the world’s oil reserves wanted more clout. Saudi Arabia, which had the world’s largest and most accessible oil fields, was joined by four other founding members: Kuwait, Iraq, Iran, and Venezuela. Soon, nine more nations joined the group and opened a headquarters in 1965 in Vienna, the home of other important international institutions like the International Atomic Energy Association.
OPEC became a household name after the infamous oil embargo of 1973, which left a lasting psychological imprint on Americans. Gas stations closed on Sundays. Customers waited in interminable lines for their ration. Homeowners and businesses couldn’t afford to leave their heaters running at full blast throughout the winter. The economy went into a tailspin.
Forgotten in the bitter memory is that the embargo wasn’t actually imposed by OPEC, but by the Arab members of the cartel, along with Egypt, Syria, and Tunisia, in retaliation for America’s support for Israel in the October 1973 Arab-Israeli War. That distinction was lost, and policy makers ever since have railed against the dangers of dependence on OPEC oil. The legacy of the oil embargo drives American diplomacy, the rules governing worldwide oil contracts, and even the US case for hydraulic fracturing, or fracking, which contends that the political benefits of “energy independence” outweigh fracking’s environmental and economic drawbacks.
Today, economists point out, the world energy market is far more integrated and interdependent than it was in 1973, when most oil was bought and sold in bulky, long-term contracts that made it hard for the market to quickly adjust to any change in supply.
Now producers need the profits as much as consumers need the gas. And despite the size of OPEC’s reserves—half of which are held by just two countries, Saudi Arabia and Venezuela—oil production is far more widely spread out than it used to be. Countries like the United States, Canada, and Mexico can satisfy a great deal of short-term demand even if their supplies will run low in a few decades. (In fact, the recent surge in US oil production last year made it the world’s largest oil producer, though its reserves are limited and the extraction process is only profitable when oil prices are high.) Oil is now bought and sold in a market that changes daily, so if one supply suddenly goes offline—like the oil industries of Libya and Iraq during various points of the last decade’s turmoil—other countries can step in to fill the gap in a matter of days.
Political scientists and economists have explored OPEC’s efficacy in multiple papers over the years, and almost all of them have concluded that even if it doesn’t function as a seamless cartel, it is the single most pivotal factor in setting global oil prices. It is this consensus that Colgan’s research punctures. He looked at official quotas since 1982, and found that OPEC member countries cheat an astonishing 96 percent of the time, pumping more than their permitted quota. He created a mathematical model to predict how much oil each country would produce if it were not constrained by the cartel’s quotas, and he found that when it came to a country’s oil production patterns, it didn’t seem to matter whether it was in OPEC or not. New members didn’t reduce production when they joined OPEC, and quota changes didn’t affect production levels.
Despite its reputation, Colgan found, OPEC simply doesn’t fit the definition of an effective cartel. Saudi Arabia—the sole producer with the spare capacity huge enough to unilaterally alter world supplies—floods the market or slashes capacity to suit its own needs, as it did in 2008 and is threatening to do again today in order to drive US fracking companies out of business. Almost all of the time, other OPEC members pumped as much as they could, whether prices were high or low.
Michael Levi, an energy and oil expert at the Council on Foreign Relations, acknowledges Colgan’s point that OPEC’s control of production and prices is not absolute, but believes he’s going too far in calling it powerless; cartels by definition aren’t transparent, and OPEC might still wield plenty of influence over member behavior. “It would be awfully unwise for policy makers or market participants to quickly flip to an equally over-confident belief that OPEC doesn’t matter,” he says.
American politics pretty much guarantees they won’t flip soon: In today’s debate over whether the United States should export its own oil, it’s still OPEC whose wrath the White House fears, rather than the more likely retaliation it might face from individual countries like Saudi Arabia. And OPEC is a convenient punching bag on Capitol Hill: Since 1999, the US Congress has introduced no fewer than 15 versions of a “NOPEC” bill, which would require the government to punish members of the international oil cartel. All the bills have failed, but they attract high-profile support. When they were senators, both Barack Obama and Hillary Rodham Clinton voted for NOPEC bills.
COLGAN CALLS the cartel’s reputation a “rational myth”—a made-up story perpetuated because it serves an interest. OPEC initially was founded to control the oil market, but by the time member countries realized it didn’t, they were reaping too many political benefits from OPEC’s perceived clout to dissolve the organization.
OPEC membership has unquestionable benefits on the world stage: Colgan measured the number of ambassadors to members and found that joining OPEC provides a noticeable bump in foreign missions. When countries like the United States are worried about global oil production levels, or prices, they make pleas to the biggest player in the market, and that means OPEC.
For America, though, the fear of OPEC has costs. For one thing, it means the United States misses opportunities to exploit the fissures between OPEC countries, which often have diametrically opposed interests (today for instance, Iran wants low production and high prices to help it survive sanctions; Saudi Arabia, meanwhile, wants low prices in order to regain its dominant market share). Since the 1973 embargo, almost every aspect of US energy policy appears designed to protect consumers and the economy from a price shock or supply disruption, even though today the United States is itself an oil giant that gets rich off the sale of oil and gas.
There are real lessons to take from OPEC as we have long understood it—and from comparing countries that have wisely managed their oil wealth, like Norway, to those that have used it to mask domestic stagnation, like Saudi Arabia and Venezuela. Whether a country is an oil exporter or importer, it’s a smart investment to reduce consumption and diversify sources as much as possible, including toward wind and solar power. The most impressive oil exporters husband their energy profits, treating them as a limited windfall rather than a sustainable and permanent revenue stream.
The experience of the OPEC countries also highlights the tension between gas pricing, environmental stewardship, and national interests in ways that are increasingly relevant for the United States. Traditionally, low fuel prices have boosted the US economy, but increased pollution and dependency. High gas prices are good for an energy policy built around restraint—less consumption, less pollution—and now they actually have an economic benefit as well, boosting the burgeoning domestic oil sector.
Even if OPEC is not the power we thought, the group’s recent history has lessons for us, most simply that it’s not a bad idea to maximize the profits you can draw from your limited reserves of underground oil. Pump less to drive prices up, pump more when you need cash (or extra energy), and worry less about the global economy than about your own bottom line and long-term fiscal health. That might be the formula of a villainous cartel—or just good business sense for a nation.