When the secretary general of the Organization of Petroleum Exporting Countries (OPEC) was asked on the group's 35th anniversary what he thought OPEC's greatest achievement was during the three-and-a-half decades of its life, he unhesitatingly replied: "The fact that it is still around."1 This candid answer pretty much sums up the organization's struggle for survival in the face of much internal dissention and external opposition, repeated announcements of its demise, and periodic forecasts of its inevitable disintegration. The recent reentry of Iraq into the global oil market after years of U.N. embargo was widely predicted to signal the end of OPEC for the sixth time. Yet the cartel seems to have overcome the latest crisis, defection, quota violations, and external complexities and started its seventh life, offering this paper an opportunity to investigate the group's formula for survival.
FROM INFANCY TO MATURITY
OPEC was founded by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela in September 1960 with the declared objective of "coordinating and unifying" the oil policies of the member countries. Yet, both of these goals have since remained distant arid elusive. At no time thereafter were national policies ever unified, and often not even sufficiently coordinated. In the first ten years, political differences between Iraq and newly independent Kuwait over territorial sovereignty precluded meaningful collaboration. Iran and Saudi Arabia vied for leadership on matters of production and prices. Arab and non-Arab members quarreled over direction and tactics. The multinational oil majors which were OPEC's raison d'étre and sparring partners dismissed it as a "crybabies' club." Western governments, for all intents and purposes, chose to ignore it. And, skeptics argued that like all other commodity cartels, the group could not, and would not, last. The argument was that the organization was the product of an artificial accord between competing oil exporters which lacked the power to keep members in line on pricing and volume restraints. It was bound to fall apart.
The recognition and challenges began to surface when it became clear that OPEC could effectively mobilize its members' resources and their negotiating skills to exact concessions from the oil majors. After the historic 1971 Tehran Conference (where the price setting initiative passed from the companies to the oil exporting governments), the buyer's market for oil was ended, and OPEC finally came of age2; threats of litigation, punishment, and even military intervention were raised. Bilateral negotiations between companies and governments were deliberately prolonged by the majors. Sales to independent oil refiners were whenever possible torpedoed by the multinationals. And, after OPEC's success in substantially raising the oil price in 1973, the organization which had been derided as a "tooth-less tiger" was now denounced as an evil for engaging in price fixing, restraint of trade, and inflicting hardships on the poor oil-importing Third World countries. Attacks on the organization continued thereafter to this day. As a means of "destroying the cartel,"3 it was suggested that, if they entered the United States, OPEC officials be arrested as criminals under U.S. anti-trust laws,> conveniently forgetting that the Webb-Pomerene Act of 1918 clearly allowed American companies to engage in price fixing in export trade, as did the 1916 Shipping Act. Other suggestions for crippling OPEC ranged from a judicious use of the Strategic Petroleum Reserve,4 to establishing a partnership between the United States and Saudi Arabia at the exclusion of other OPEC members,5 exerting U.S. political pressure backed by military power,6 and imposing a hefty tax on oil imports or domestic fuel consumption.7
Meanwhile, a thorny new element found its way into the oil equation: OPEC was involuntarily and unjustly dragged into the Arab-Israeli conflict. As the 1973-74 oil price explosion followed the Yom Kippur War and the Arab oil embargo on Israel's allies and protectors, OPEC's cause became the antithesis of Israel's interests. Although nearly half of the organization's members were not Arabs, and none of them had participated in the oil boycott, OPEC emerged as a whipping boy for the sympathizers, friends, and admirers of the Jewish state. The oil group was subsequently spared no insult. OPEC founders were called "camel sheikhdoms." OPEC ministers were denounced as "outlaws" and "thugs."8 The organization was termed a "price-gouger,"9 and an "inept Mafia mob."10 Subsequently, economic analyses of OPEC as a commodity cartel frequently suffered from a distinct political bias and an anti-Arab undertone.
OPEC'S PREMATURE OBITUARIES
When the second oil shock (1979-80) worked itself out in the world economy, the demand for OPEC oil declined by nearly 35 percent within two years, and the group's fortune was reversed in the early 1980s, the detractors' tune was suddenly changed. Some columnists claimed that OPEC as a cartel "hardly ever existed;" others found the organization clearly "out of the driver's seat." And, still others emphatically asserted that "OPEC is 100 percent dead.11 After the oil price collapse in 1986 to as low as $10/b, the doomsayers argued that the crude price would tumble to "$5 a barrel within a couple of months," and would at best remain between $10 and $20 a barrel "for the rest of the century."12 After Iraq's invasion of Kuwait in August 1990, OPEC was declared in total disarray; having ceased to function as expected; and projected never to be the same again.13 When Gabon announced in 1993 that it would follow Ecuador and quit the organization, a well-known columnist wrote: "OPEC's glory days are over. OPEC was yesterday's nightmare."14 And, when oil prices entered into a long period of near stability, ranging between $13 and $18 a barrel, (substantially below the cartel's "target" level of $21 a barrel) during 1991-93, OPEC was said to have lost its relevance.15
The story of OPEC's seemingly unnatural existence, and thus inevitable disintegration, has been one of the most puzzling examples of "expert" forecasting in the postwar period. A leading U.S. energy economist has been telling everyone willing to listen (including a number of congressional committees) since the early 1970s that OPEC could not last long if politicians only listened. OPEC's "massive" excess capacity, deliberately withheld to prop up the oil price, it was argued, was the organization's Achilles' heel. A fall in the real oil price would turn one of the producers greedy and desperate, and would induce it to cheat (i.e., produce beyond its quota). Then everyone else would follow, causing the crash.16 An Israeli-American analyst has repeatedly argued in the same vein, but from a different angle. His projection of the oil price tending toward its "competitive" level is based on the presumption that OPEC's quota discipline would be increasingly corroded by the member states' ever-rising need for cash.1 7 An oil oversupply would emerge sooner or later (because of a greedy overreach) under which OPEC's effectiveness to control production and manipulate prices would be substantially reduced.18
The clearest forecast of the eventual oil glut and price collapse was made right after Iraq's invasion of Kuwait, when OPEC suspended its quota allocation and urged all non-belligerent members to produce oil as much as they could to keep prices from overshooting. It was widely believed that once the two warring nations resumed oil exports the market would crash.19A knowledgeable former Saudi oil minister went so far as to predict a price collapse to rival the crash of 1986.20
Yet, the experts were proven wrong once again. Despite its near catastrophic ruins and damaged oil wells, Kuwait returned to the international market late in 1992, and resumed near full capacity production after 1993. In early December 1996, under U.N. Resolution 986, Iraq began to pump its oil abroad for the first time in six years. Earlier U.N. sanctions had banned Baghdad's foreign oil sales as punishment for its transgressions. The high drama did not materialize. And, OPEC remained alive and well, conducting business as usual. The ministerial meetings of November 1996 and June 25, 1997, routinely voted to keep its production ceiling at 25.053 mb/d until the end of 1997. The crude price which had also been expected to move towards its "competitive" level of $5-$9 a barrel rose above $23/b for the North Sea Brent in London and $25/b for the West Texas Intermediate in New York, the highest levels since the Persian Gulf war.
To paraphrase OPEC's secretary general, the organization's staying power for more than 36 years against all odds has been no small feat. The cartel survived an unfriendly, if not actually hostile, external environment. It endured several price and output crises and two near death experiences when three of its five founding members went to war against one another. It received virtually no meaningful help from non-OPEC exporters on matters of supply/price coordination. And it was repeatedly rebuffed by the major importing countries on its proposal for a producers consumers dialogue to stabilize oil prices and ensure security of supply for consumers and security of demand for producers.
To be sure, OPEC's life has never been smooth or trouble-free. The membership never became a cohesive or like-minded group. The organization was not always able to enforce strict output quotas and, since the early 1980s, not even capable of acting as a price-setting association. Yet, except for the loss of two small members, the original founders plus six other major oil exporting countries have so far confounded all expert prognoses. The question is, why?
THE CARTEL THAT WASN'T
Contrary to the widespread perception of OPEC's responsibility for triggering three oil shocks each time by jacking up the price of crude oil beyond "competitive" levels, the oil exporting governments could neither claim all the credit for their windfall gains nor all the blame for getting rich at the expense of oil importers and engineering the worldwide recessions that followed each price rachet. While it is assumed that OPEC had a strongly active role in the oil-price determination, a look back at the events shows that the organization often reacted passively and defensively to external stimuli, and followed realized market prices time after time, albeit to its own benefit.
Although OPEC's declared "principal interest" was "order and stability in the market for fair and reasonable prices," the organization did at no time succeed in achieving either goal. At no period in this century were oil prices as volatile as in the last 26 years of OPEC's existence. Crude prices rose nearly 14 times between the summer of 1973 and mid-1981 from $2.5/b to $34/b; they fell by 70 percent in the subsequent five years to less than $10/b in 1986; they went up by nearly four times to $41/b after Iraq's invasion of Kuwait in 1990; they dropped by two-thirds to $13.5/b by mid-1993; and finally they surged again by nearly 100 percent to over $25/b between 1993 and 1997. So much for stability. As for reasonableness, the real (inflation-adjusted) price of crude oil in early 1997 was barely above the average level of 1973. Adjusted for price level changes, crude prices in 1990 would have had to rise to $80/b to match the highs of 1979-80. And even at $40/b in 1990, oil remained cheaper than most alternative forms of energy at the time.
The point emphasized here is that regardless of whether the oil price is too high or not, in none of the global supply and demand "crises" since 1972 has OPEC been the principal initiator or instigator. In October 1973, it was the Arab-Israeli war and the Arab oil embargo against the West that caused crude prices to surge in the spot market, leading the Middle East producers to adjust their prices upward. Later in the year, also, it was again the oil auction in the spot market that further pushed the oil price upward before the OPEC price was set. In 1979 it was the Iranian revolution (stopping Iran's oil export almost totally for a few months, and then reducing it to one half of the previous level) that catapulted prices from around $12/b to nearly $40/b for a brief period. And, it was the outbreak of the Iran-Iraq War that reduced both countries' exports, and kept prices temporarily high for a while. Finally, it was Iraq's invasion of Kuwait in August 1990, when both countries' exports, estimated between 4-41/2 mb/d, were shut down completely that prices went up from $17/b to $41/b in a very short period. In all these "supply crises," the price push did not originate from OPEC, but came from the market, while the organization took advantage of the situation and benefited from it, fairly or otherwise.
OPEC's impotence was more particularly noticeable in confronting the oil demand behavior. From 1973 to 1997, OPEC faced three major challenges on the demand side. First, in 1974- 75, when the rising trend of crude oil exports (from 20.2 mb/d in 1970 to 27.5 mb/d in 1973) was halted, and the demand for OPEC oil fell to 27.2 mb/d in 1974 and less than 24 mb/d in 1975, largely as a result of reduced global consumption. As a result, the value of petroleum exports which had soared to over $120 billion in 1974 from only about $37 billion in 1973 dropped to less than $107 billion in 1975. Second, during the 1980-86 period when OPEC sales plummeted from nearly 23 mb/d to less than 13 mb/d, resulting in a badly shrunken exports income from over $283 billion in 1980 to less than $77 billion in 1986. And, the third time, in 1990-94 when, despite more than, 11 percent rise in crude exports, oil revenues fell from more than $147 billion to about $120 bill ion.21 In all these periods, again, OPEC proved powerless to reverse the free market's course, or to save its own skin.
A KNACK FOR SURVIVAL
With the possible exception of the deBeers diamond syndicate, no other commodity cartel in recent memory (bauxite, cocoa, coffee, nickel, potash, rubber, tin, and wheat) has lasted as long as OPEC. The secret of OPEC's longevity, however, did not lie in any magic trick. OPEC's survival was due to several congruent factors: (1) a solid core of common interests that transcended individual member's differences in national agenda and political outlook; (2) an underlying resilience that frequently eluded and stupefied the experts; (3) a willingness to learn from past mistakes; (4) an ability to go with the flow; (5) a good "insurance protection" policy in the form of downstream operation; (6) support from some unexpected quarters; and (7) solidarity with other developing countries.
The first and most crucial reason for OPEC's survival so far has been the predominance of an ideal oligopoly, with rationally behaving members composed of a strong leader and a number of smaller followers. Possessing the lion's share of the world's proven crude oil reserves, enjoying a substantial share of global crude oil production, and controlling more than 58 percent of international oil trade, OPEC has embodied a classic oligopoly case: a few sellers having a large share of the market; a staple, largely undifferentiated, commodity for which there is no alternative sales strategy but price differentials; and a uniquely strategic product for which there are few cost-effective, close substitutes. Interestingly enough, two sources - one symbolizing OPEC's high-stake politics, and the other epitomizing anti-OPEC economic and academic opinion - seem to agree on the "oil-is-unique" thesis. A leading oil expert states unequivocally that "supply and demand do not count much in the oil markets where fear makes people try to buy more than they want to use and refuse to sell what they do not need."22 And OPEC's secretary general insists that the market needs OPEC, as it has needed throughout history, to regulate the market in the form of such "dominant entity" as Standard Oil and the "seven sisters."23 The group's leadership was, for the most part, in the hands of Saudi Arabia, which had most of the qualifications for that position. The kingdom had (a) sufficient reserves and additional (unused) production capacity which enabled it to take advantage of a surge in demand; (b) ample foreign exchange reserves to be able to cushion a decline in oil income; (c) access to world capital markets to supplement oil receipts in order to continue domestic development plans; and (d) a small economy with relatively limited need for supplemental resources during a depressed oil market. For most of the period, the rest of OPEC member-ship performed the standard followers' role because they had not much excess capacity to benefit from a thriving market; they had insufficient foreign exchange revenues to withstand a depressed market without cutting down the level of economic activity; and their access to the world capital markets was limited.
But, Saudi leadership was not constant, widely appreciated or flawless. And these caused some of OPEC's problems. During the early 1970s, Saudi Arabia, with the largest reserves, was expected to act both as a price leader and a swing producer. Yet in the Tehran conferences of 1971 and 1973, it was Iran which led the move for a steep price increase matching the spot market to the Saudi kingdom's ill concealed displeasure. It was only after the 1979 Iranian revolution, and particularly after the outbreak of the Iran-Iraq War (1980-88) that Saudi Arabia gradually became OPEC's principal mover and shaker, and the organization's arbiter.
Saudi leadership during the 1980s, however, was far from absolute or unchallenged. The new Islamic Republic of Iran, in alliance with other OPEC "hawks," Algeria and Libya, repeatedly took a position in favor of restrained output; high fixed official prices; and individual quota allocation on the basis of such factors as population, basic needs, and domestic absorptive capacity. The kingdom was opposed to all three, at least most of the time. Wrangling over prices, quotas, and other matters between the radicals (championed by Iran) and conservatives (led by Saudi Arabia) continued in nearly all semiannual meetings of OPEC ministers. For example, in June 1980, while the hawks succeeded in raising the price of the benchmark crude to $30/b, Saudi Arabia chose to retain its oil price at $28/b. When the pressure of falling demand for OPEC oil finally forced Riyadh to accept output ceiling and quota allocation in March 1982, Tehran denounced its own low quota as unfair, and refused to cut its output. A year later, Iran again opposed the lowering of the official price from $34/b to $29/b.
In December 1985, when the Saudis abandoned their "swing producer" role and pushed OPEC's majority to try to capture a larger share of the global market, Iran, Algeria, and Libya objected to the decision, arguing that an open "price war" would hurt the members even if their market shares increased. When Saudi Arabia's "market share" strategy failed as Iran had argued, a brief period of Saudi-Iranian cooperation followed where overall allocation quotas were restored again in August 1986, and a new total production ceiling was established. A change in the course of the Iran-Iraq War against Iran after 1986, reduced Tehran's temporary clout, and the Saudis retook the mantel of effective leadership. In the December 1987 ministerial meeting, when Iran's position in favor of a $20/b benchmark crude (instead of $18/b) was opposed by Saudi Arabia and Kuwait, even Algeria and Libya abandoned Tehran after merely faint support.
For a brief period in mid-1990, Iraq became OPEC's superpower and its "enforcer"24 as Baghdad pushed the "reference price" by $3 to $21/b and forced Kuwait and the UAE to cut their output. But, with Iraq crippled under a U.N. embargo, and Iran's economy increasingly in distress, the Saudis once again became OPEC's undisputed masters after Iraq's crushing defeat in 1991. Thus, for all intents and purposes since 1979, OPEC has been largely Saudi Arabia. With one or two notable exceptions, the Saudis have set the OPEC agenda, and dominated its resolutions. A minority of OPEC radicals (Iran, Algeria and Libya) with intermittent tacit sympathy from the neutrals (Ecuador, Gabon, Indonesia and Venezuela) were occasionally successful in making a point, but not usually in achieving a major goal.
The second reason for OPEC's staying power has been its members' resilience and spirit of compromise for the sake of solidarity. Political and economic differences, and continued intramural quarrels, have been OPEC's hallmark. Yet, while the group was counted out after each open rift, the membership was invariably reunited, and the organization remained intact, out of necessity. There is ample evidence that in order to preserve unity and survival, member countries occasionally accepted certain decisions by the organization that involved sacrifices of the national interest, if not sovereignty. All through the eight-year war between Iraq and Iran, two founding members, when OPEC was expected to fall apart, the ministers from all thirteen countries met regularly and conducted the organization's business with representatives from the warring nations sitting at the same table. Interestingly, a quota dispute between Iran and Iraq, which had deadlocked OPEC's ministerial meeting of August 1986, was resolved by a formula presented by Iran to accommodate Baghdad! When OPEC faced perhaps the most ominous crisis of its 30-year history in August 1990, following Iraq's invasion of Kuwait, and many analysts once again wrote OPEC's obituary, the organization as such was unaffected. In fact, the ministerial meeting of early December 1990, which all 13 ministers attended, was one of OPEC's shortest, least controversial, and more successful ones - promising the nervous market that output control and quota allocation that were abandoned in September would be reinstated once the crisis was over. Iraq, the occupier, did not object to the seating of the oil minister of the Kuwaiti government in exile, and the latter did not veto the appointment of an Iraqi as deputy secretary general.
Thanks largely to this resilience, the members were able to keep oil prices from falling to their lowest "competitive" levels by restraining output. Despite frequent violations of allocated quotas by virtually all able members, each country independently concluded that it would benefit more from cooperation than from confrontation, i.e., by staying within tolerable peripheries of its quota to support the targeted price instead of trying to improve its position at the expense of others by a substantial price cut and temporary large sales.
The third reason for OPEC's outlasting other cartels has been its willingness to learn from its past mistakes and put the lessons learned to work. OPEC has learned that in order to maintain oil's predominance as an energy source and OPEC's share in the world's petroleum market, its price target must be: (a) competitive with the costs of major energy alternatives (e.g., gas, coal and nuclear power); (b) high enough to attract investment in oil exploration; (c) not so high as to encourage the development of marginal wells in non-OPEC areas, or nonconventional energy substitutes (e.g., solar, wind, thermal and fusion); and (d)"affordable" to the major oil-importing countries, i.e., not much more than their annual inflation rates. With regard to the output level, OPEC has realized that the best way to secure reliable annual income, and to avoid a price collapse is to: (a) act as a residual supplier, content with supplying that portion of annual increase in the demand that is not met by non-OPEC exporters; (b) maintain internal discipline and solidarity within the organization by putting appropriate pressure on price cheaters or quota violators; (c) expect little cooperation from non-OPEC rivals whose national interests are best served by not joining OPEC; and (d) keep the club small and exclusive to include only members with similar long-term output capacity and interests in order to be flexible and responsive, and to avoid damaging confrontation and chaos.25
The desire for moderation, and the trend toward the convergence of interests, have been increasingly evident in OPEC's collective behavior in the last three years. OPEC hawks, led by Iran, have gone routinely through the motions, in each semiannual ministerial meeting, of proposing a cut in the output ceiling in order to obtain the "reference" price of $21/b. Yet, they subsequently went along with the majority in maintaining the same level during 1994-1997, and even marginally increasing it in June 1996 to accommodate Iraq's reentry. In tum, the Saudis, chastened by their two earlier policy mistakes - first, volunteering to act as a "swing producer" in 1982 by cutting output to support the price, and then trying for a large market share in 1986 by expanding production - have learned to play their cards more smartly since the Persian Gulf war. Thus, in mid-1992, when rising world demand for OPEC oil put new pressures on oil prices, Riyadh shifted from its traditionally restrained price stance, and did not propose or press for a higher OPEC output ceiling. The same accommodating policy was followed in the November 1996 ministerial meeting, even though the oil market price had exceeded the Saudis' own reportedly preferred price of $18/b, and the organization's $21/b target. Although world oil prices were some 25 percent ($5/b) higher than a year earlier, Saudi Arabia, supported by OPEC's traditional low-price advocates, agreed to continue limiting their output in order to support the prevailing prices. Kuwait's minister also declared himself "happy" with prices at that level.26
The fourth factor behind OPEC's long life has been an intangible phenomenon which may be called the evolution of falling expectations. The organization's inability to reach its price target of $21/b, or to gain a larger share of the growing market during 1992-95, convinced it to abandon an active pursuit of both. The OPEC basket price of $18.28 in April 1995 was the highest monthly average since April 1993, and remained below that level for the whole year. Most of the 2 mb/d increase in demand for oil during 1993-95 went to non-OPEC producers, while OPEC's output remained only about half a million barrels on average over its official ceiling of 24.52 mb/d.27 While the situation subsequently improved, and out of the 1.8 mb/d increase in the global demand for oil during 1997, some 600,000 barrels are expected to be supplied by OPEC (mainly Iraq), the cartel has continued to act as a residual supplier, albeit under protest, and seems resigned to its reduced role. A candid editorial on the occasion of OPEC's 35th anniversary admitted that the organization was no longer in the driver's seat. And, as a back-seat driver, it persistently complained that it was "wrong" to expect OPEC, with only 41 percent share of the market, to bear the brunt of market supply adjustment; that those who were opposed to a producer-consumer dialogue were "out of step;" and that cooperation between the two groups was a "must" for guaranteeing future security of both supply and demand.28 Yet, OPEC leaders were keenly aware (and stoically convinced) that an agreement with non-OPEC producers to jointly restrain the overall supply was neither welcomed by the latter nor probably in their best interests. OPEC's triumph in 1973, when the oil price-setting role was formally wrested from the international oil majors, gave the organization false hope that it could control both its share of the global oil supply as well as world oil price, despite the theoretical and practical incompatibility of the two objectives. By 1993, the group found itself incapable of achieving either goal without substantial sacrifice and risk. There was no choice but to accept the inevitable.
Two initiatives adopted by members in recent years as an "insurance policy" have been the fifth reason for OPEC's continued life. First, the members' growing interest in "downstream" operations (e.g., refining and marketing) has created certain secure outlets for their crude oil, thus reducing their dependence on fickle foreign buyers. The "integrationists" are also partially relieved from much concern over raising crude prices at the expense of refiners and distributors as long as they themselves can gain profits at the gas pumps and other outlets for petroleum products. Second, a change in attitude toward the major international oil companies, dictated perhaps more by economic necessity and political expediency than by a shift in nationalistic or ideological sentiments, has opened up new vistas for mutual long-term benefits. Invitations by Algeria, Indonesia, Iran, Iraq, Kuwait, Nigeria, and Venezuela to the oil majors for production sharing agreements may yet prove to be the smartest way to divert capital investment from high-cost non-OPEC areas to low-cost OPEC fields. As a savvy oil analyst has put it, who would want to invest in stormy seas off the Shetland Islands if one could invest in Saudi Arabia?29 Instead of constantly begging non-OPEC producers to share the market in an "equitable" manner, some OPEC members have decided to open up their reserves to foreign private investment, and improve their own share with greater ease. Such joint-ventures go beyond mere access to the badly needed foreign capital and technology: they involve secure export outlets, predictable buy-back prices, and regulated markets.
OPEC has also been helped to stay alive by a sixth reason: high-cost oil producers (including the United States). While the consuming public and free market economists undoubtedly prefer a world without OPEC, and while new drilling and exploration technology has brought down oil production costs in non-OPEC fields, "marginal" oil producers everywhere have tacitly welcomed OPEC's cushion. If OPEC were to produce 60 mb/d, at $6 a barrel, as some academicians wish it could and think it should,30 there would be plenty of unhappy faces all over the oil world from the Texas and Oklahoma oil patches, to Colombia, Egypt, Malaysia, China and some 30 other high-cost producing countries across the globe. Few of these may want to "cooperate" with OPEC; but none wishes its demise, and they all quietly sing its tune. Presidents Nixon, Ford, Carter, Reagan and Bush are all blamed for having "failed to stand up to OPEC cartel's greed."31
Finally, OPEC's long life has been helped, if only marginally, by the goodwill it has created in the developing world and the sales opportunities it has created in the developed world's collective military industrial complex. By challenging the West in the 1975-76 Paris Conference on International Economic Cooperation on behalf of the Third World, OPEC opened the door toward a North-South dialogue, and gave developing countries a strong voice and a pivotal role in the center of the international economic community. By establishing the OPEC Fund for International Development, and foregoing its share of profits from the sale of IMF gold holdings, it showed its generosity towards fellow-developing countries. By 1997, the OPEC Fund for International Development had contributed a total of nearly $4.635 billion in loans and grants to 95 less-developed countries in Africa, Asia, the Middle East, southern Europe, Latin America and the Caribbean. Of this total amount, more than $1,750 million had been given to the least-developed countries.32 Through this benevolence, OPEC has maintained its solidarity with the East and the South, blunting the major oil importing countries' attempt to isolate and cripple it.
Other OPEC well-wishers and indirect sustainers are believed to have included its "many powerful and well-connected clients."33 Topping the list among the latter have been global weapons manufacturers and arms dealers who have found no better and surer market for their wares than the OPEC Middle East.
Charting the course of OPEC's future is a hazardous exercise. A seasoned oil analyst has given OPEC only a 50-percent chance of remaining a price-controlling force by the end of 1997 and thinks it will have virtually no influence on the market by the end of the decade. The argument is that the cartel's four options - pushing up the daily output to get a larger share of the market, maintaining production at current levels to support the price level, cutting exports drastically to raise crude price, or inducing non-OPEC producers to restrain output - will be self-defeating, ineffective, or both.34 Another analyst has concluded that "OPEC's ability to rig the market" has withered away as its members' need for oil revenues has risen.35
In a static setting, these prognostications may not be without merit. In the immediate run, OPEC's options are indeed limited. Maintaining output at current levels would result in a continuous loss of incremental demand to non-OPEC. Cutting down daily output to increase per barrel prices, would require output reduction by more than the excess capacity that exists (or is shortly attainable) in non-OPEC areas. This could be done only at the cost of near financial bankruptcy, as it would cause the loss of both market share and probably also total export revenues. Conversely, OPEC's own excess capacity of 3-5 mb/d could be utilized to gain a larger share of the global market. But this could be accomplished only at the cost of more rapid exhaustion of depletable reserves, and would most probably also end up in smaller overall export revenues due to much lower prices. The only way out would be for non-OPEC producers to run out of excess capacity, or for global oil demand to increase substantially.
But under a dynamic, and OPEC friendly scenario, both of these developments are not only possible, but also not improbable. Projections of future oil balance differ widely largely due to differences in assumptions about global and regional economic growth, energy efficiency, and the availability of competing substitutes.36 While some analysts have been repeatedly predicting for the last ten years that the oil prices are on their "long downward slide," and that the pre-1990 price of $14/b is not "unsustainable,"37 other experts are of a different mind. Some industry analysts see signs that a long run of low oil prices which began in 1986 has been ended, and that the levels reached in 1996 are likely to continue.38 The International Energy Agency projects that world oil needs in 1997 will grow by 2.5 percent (1.8 mb/d) to 73.6 mb/d. Oil analysts believe that at least one-third of the larger demand will have to be met by OPEC. Further down the road, the oil demand from China, Southeast Asia and other developing economies, estimated to be up by 5 mb/d by the year 2000, will have to be met largely from OPEC sources.39 With a synchronous global economic expansion expected to occur in the next few years, ending 15 years of sluggish demand for commodities, the oil supply is projected to be under great pressure again. Energy demand is expected to double in the next two decades in East Asia and increase 75 percent in Latin America, and the number of vehicles worldwide is to double to 1 billion by the year 2000.40
The lack of major oil finds, despite intense worldwide drilling in Southeast Asia, Latin America and Africa during the last fifteen years, leaves OPEC still with about 77 percent of the world's proven reserves. The unexpected surge of oil coming from the North Sea in 1994-1995, and the resulting sluggish oil prices during the period, may have "masked OPEC's long-term strength," according to industry experts, but the fundamentals have not changed. As demand for energy rises, OPEC is the only area with reserve capacity to meet the needs. The U.S. Geological Survey forecasts OPEC's share of the market by the year 2010 to reach 50 percent. The only wild cards in this scenario are the Commonwealth of Independent States (including the Russian Federation, itself)4 1 where major oil fields are promising, but production and marketing are still marred by a number of difficuIties.42
The pressures for energy efficiency also seem to be waning. Signs are that as the inflation-adjusted price of gasoline at the pump has reached a 77-year low in the United States, conservation measures are increasingly disregarded, and that people now drive big cars for more miles at higher speeds.43
OPEC's immediate problem arising from Iraq's resumed oil exports has been solved for now by a com bi-nation of fortuitous circumstances. Despite the organization's nearly 1.2 mb/d of crude production over and above its self-imposed ceiling, in the third quarter of 1996, the OPEC basket prices had shot up beyond the $21/b target due to cold weather, a temporary shortfall in North Sea output, record low oil industry stocks (partly in anticipation of price corrections), and a higher than expected rise in oil demand. These conditions changed, and prices fell below OPEC's target during 1997, as quota violators refused to reduce their output to accommodate Iraq's exports and counter other factors.
In the short run, thornier issues confront the organization. The number one problem continues to be supply control as the only effective and workable option for maintaining the oil price above the target. Quota violation has, in recent years, become endemic; and, although denied by all, it is practiced by most. Strict enforcement (even if possible) may result in further defections. Having lost two small members - Ecuador and Gabon - OPEC might be abandoned by others who might find it more profitable to stay outside than to be inside: they could sell whatever their capacity allows at OPEC supported prices without any output restrictions and without paying hefty membership fees. Lifting of Iraq's full embargo, and a potential injection of another 2.5-3.0 mb/d of crude into the market would further seriously complicate quota allocation. The ability of Russia and other CIS oil producers to capture a significant share of the market would be a serious challenge. On the other hand, cooperation by non-OPEC, non-Western oil producers (China, Egypt, Malaysia, Oman and Yemen) which have shown interest in such efforts in the past, might help OPEC's efforts to keep prices firm.
What the long-term future holds for OPEC will be more difficult to predict. The fundamentals are based on the world demand for OPEC oil, and OPEC's capacity to meet or exceed that demand. Global need for OPEC fuel will hinge upon the rate of world economic growth, improvements in energy efficiency, adoption of new conservation measures, environmentalists' success in replacing oil with "cleaner" sources of energy, the magnitude of the oil flow from CIS countries, and new (however modest) finds in non-OPEC areas. Assuming a rise of 1.5 mb/d-1.8 mb/d in world demand for oil each year to 2005 (and no appreciable change in the CIS position) there may be 1 mb/d of new demand for OPEC oil. OPEC's ability to take advantage of this increased demand will, in tum, depend upon adequate output capacity, satisfactory quota allocations among remaining members, and enforceable intragroup discipline. Capacity expansion is the greatest dilemma facing OPEC: How much would be needed? And who should pay for it? On the assumption of 35 mb/d of demand for OPEC oil, and allowing for about 3 mb/d of OPEC's current excess capacity (without Iraq), there might be a need for at least 5 mb/d of additional capacity by the year 2005 requiring some $20-25 billion of new investments (depending on location and technology). Other estimates go higher in both volume and cost. But, irrespective of the numbers, neither OPEC members nor anyone else would be willing to undertake the required mammoth investment without the assurance of a secure market at profitable prices.
Quota allocation and observance will be other familiar challenges. For example, members that have already been investing in new capacity (e.g., Iran, Indonesia, Saudi Arabia, Kuwait and Venezuela - to name a few) will be reluctant to give up their current share to accommodate Iraq (or any reduced total ceiling); they will no doubt insist on a new quota system based on output capacity or average daily output instead of the July 1990 arrangement. Any new formula would also be subject to protracted disputes as members in a financial crunch (e.g., Iran, Iraq, Algeria, Venezuela, and others) would likely insist on obtaining a larger quota allocation. Disgruntled quota recipients may decide to ignore their allotment and produce more, thus undermining the collective goal.
A rising OPEC worry is the possibility of a shift in major oil-consuming countries from concern over supply security to environmental considerations. Alarmed by the so-called greenhouse effect, resulting from carbon-dioxide emissions, environmentalists are pressing for a tax on oil products. Any such tax is likely to curb the demand for crude oil and hurt OPEC.44
Despite these uncertainties, it would probably still be too soon to write OPEC off or to predict its future as a mere debating society, or an energy information center, or a research laboratory for fossil fuels. OPEC may never be able to control both world oil prices and its own market share simultaneously - as it never did. But as long as its five large members around the Persian Gulf alone continue to possess more than two-thirds of the world's proven oil reserves, it can always drive crude prices down by raising production, or keep them from a free fall by output restraint. OPEC will expire when these members - and particularly Saudi Arabia - find no benefit in keeping it alive. With about 77 percent of the world's proven petroleum deposits, but only 41 percent of the global crude oil output, members have a powerful incentive to band together because they know that OPEC's market strength is more than likely to change in their favor. The pertinent question is not whether OPEC can survive another 36 years, but whether it can serve its membership (and the-world at large) in a more effective and constructive manner. As its secretary general has put it, OPEC has the potential to create its own success or to sow the seeds of its own failure.45
1 "Interview," OPEC Bulletin, September, 1995, p.7.
2 For an engaging account of OPEC's birth and growing pains, see Daniel Yergin, The Prize, (New York: Simon and Schuster, 1991), particularly Ch. 26.
3 Michael Kinsley, "The Time is Right to Finally Destroy OPEC," The Wall Street Journal, March 5, 1987.
4 M.A. Adelman, "Keeping OPEC Off Balance," The New York Times, May 16, 1988.
5 E.L. Morse, "How to Make OPEC Obsolete," The New York Times, July l, 1991.
6 Elie Kedourie, "Avoiding a Third Gulf War," The New York Times, March 13, 1991. See also Robert Keatley, "OPEC, Once the World's Big Bad Wolf...," The Wall Street Journal, January 29, 1993.
7 Charles Krauthammer, "Down With Oil Prices!," The Washington Post, March 15, 1991.
8 Michael Kinsley, "Higher-Priced Oil...," The Washington Post, September 11, 1986.
9 Eliyahu Kanovsky, "Don't Prop Up the OPEC Cartel," The Wall Street Journal, June 18, 1991.
10 Jim Hoagland, "Needed: New Order for Oil," The Washington Post, October I, 1990.
11 For the sources of quotations, see Jahangir Amuzegar, "A World Without OPEC," The Washington Quarterly, Autumn, 1982.
12Alan Bayless, "A Bear in the Oil Patch," The Wall Street Journal, April 28, 1987.
13 Mark Potts, "OPEC at Crossroads," The Washington Post, August 20, 1990.
14 Hobart Rowen, "OPEC: Toothless Tiger," The Washington Post, January 7, 1993.
15 W.J. Cook, "Why OPEC Doesn't Matter Anymore," U.S. News and World Report, December 13, 1993.
16 David Warsh, "Energy Expert Says the Price of Oil is Merely a Study in Monopoly," The Washington Post, November 28, 1990.
17 Eliyahu Kanovsky, "The Coming Oil Glut," The Wall Street Journal, November 30, 1990.
18 C.H. Farnsworth, "OPEC Isn't the Only Cartel That Couldn't," The New York Times, April 24, 1988.
19 See The Washington Post, May 12, 1991, p. Hl6.
20 "Oil Prices in Peril," Middle East Economic Digest (MEED), April 19, 1996.
21 All figures are from OPEC's Annual Statistical Bulletin, 1993, 1994, and 1995.
22 M.A. Adelman, loc. cit, footnote 4.
23 Rilwanu Lukman, "Can OPEC Survive?" OPEC Bulletin, April 1996.
24 T.W. Lippman, "Overnight, Iraq is OPEC's Most Important Member," The Washington Post, August 3, 1990.
25 Cf. Y.M. Ibrahim, "OPEC is Back," The New York Times, September 24, 1989.
26 Bhusham Bahree, "Oil Prices are Expected to Stay Strong," The Wall Street Journal, November 27 and 29, 1996.
27 OPEC's ceiling was raised to 25.033 mb/d in June 1996, taking into account Gabon's leaving the group and making allowances for Iraq to produce 1.2 mb/d.
28 See "Commentary," OPEC Bulletin, September 1995.
29 Peter Kemp, "OPEC Faces up to Fading Influence," MEED, June 16, 1995.
30 Peter Passell, "Cheap Oil, Expensive Cartel," The New York Times, March 20, 1991.
31 Hobart Rowen, "The 'Right' Price for Oil," The Washington Post, March 21, 1991.
32 See OPEC Fund for International Development, Annual Report, 1996, (Vienna: 1997).
33 Raymond Learsy, "Did We Fight the War to Save OPEC?," The New York Times, March 8, 1991.
34 Ch. T. Maxwell, "The End of OPEC as We Know It?," The Wall Street Journal, December 27, 1995.\
35 Paul Blustein, "An Unstable Middle East Won't Put the U.S. Over a Barrel," The Washington Post, September 18, 1996.
36 Oil price forecasting has become akin to crystal ball gazing of late. In February 1996, a London think-tank's officials were predicting that if Iraq returns to the market in the second half of the year, one should expect "a crash to rival 1986," with prices dropping as low as $5/b. (MEED, February 23, 1996, p. 3, and April 19, 1996, p. 3) Oil prices in the second half were actually highest in four years and two-and-a-half times that of 1986.
37 Eliyahu Kanovsky, loc. cit., footnote 17.
38 Bhushan Bahree, Loc. cit, footnote 26.
39 See T.L. Friedman, "OPEC's Lonely at the Tap," The New York Times, April 3, 1994.
40 B.J. Willingham, "Energy Shortage Looms Again," The Wall Street Journal, July I 3, I 994. See also, Simon Haydon, "Oil Prices Will Keep Rising," The Washington Post, June I, 1994; and Julie Corwin, "Oil Prices Will Rise," US. News and World Report, January 2, 1995.
41 See Anthony Hyman, "Kuwait by the Caspian?," The Middle East, October 1994.
42 See Agis Salpukas, "For Oil Industry, That Next 'Elephant' Proves Elusive," The New York Times, March 20, 1994. See also "OPEC View of the Oil Market," OPEC Bulletin, July 1997, pp. 14-19.
43 M.L. Wald, "How America Perpetuates Its Gas Crisis," The New York Times, May 5, 1996.
44 See "More Realism, Less Idealism," OPEC Bulletin, July 1997, p. 3.
45 See Rilwanu Lukman, "Petroleum Investments in the Middle East," OPEC Bulletin, June 1997, p. 6.