Foreign Policy

OPEC's Obituary

by Fadhil J. Chalabi

In late November, the Organization of Petroleum Exporting Countries (OPEC) decided to increase its production quota by 2.5 million barrels per day (mb/d) in a bid to embrace reality. OPEC had lived for four years with a quota that was not real and far below the organization's actual production. However, the new quota can be no less fictitious than the old one. Analysts predict that if Saudi Arabia--which got the lions share of the incremental quota--Kuwait, and the United Arab Emirates produce their new quota, and if limitations on Iraqi oil sales continue, the market will be over-supplied by almost 1 mb/d and there will be a serious impact on oil prices. Saudi Arabia will have to decide between stabilizing world prices by opting not to produce its incremental quota or living with lower prices.

Twenty years ago, such an event would have been front-page news. Back then, the media accorded OPEC meetings a status normally reserved for superpower summits. The decisions of oil ministers could shake the global economy from Tokyo to Washington. But, this latest decision barely registered as more than a blip in anything other than trade and financial publications. It illustrates an indisputable and often overlooked fact: OPEC's decisions are not taken seriously anymore.

OPEC is not yet dead, but it is definitely a shadow of its former self--a far cry from the days of the 1979 oil shock, when U.S. News and World Report branded OPEC "The Cartel That Has the World by the Throat." The steep decline in OPEC's power is mainly due to the shortsighted policies of its members, who have often proved to be their own worst enemies. But, other events, beyond OPEC's control, have undermined its influence.

Put bluntly, the world changed while OPEC stood still. For instance, responding to the oil shocks of the 1970s, nations began to conserve energy and use it more efficiently. Moreover they began to rely increasingly upon alternative energy sources. In Japan, the share of oil in total primary energy consumption fell by 23 percent between 1973 and 1996, while the share of natural gas and nuclear energy increased by more than 10 and 14 percent respectively. Recently, international environmental initiatives to cut carbon emissions and control global warming have accelerated this trend.

An expanding global oil supply has also sapped OPEC's power. During the 1970s, the OPEC countries took control of their oil industries and nationalized the foreign oil companies' operations on their soil. Deprived of the opportunity to invest in most of the OPEC countries, the major oil companies looked for investment opportunities in nations such as Norway and the United Kingdom. As a result, OPEC's oil now accounts for only 26 percent of the world's energy requirements outside the former Soviet Union and the United States, compared with 56 percent 20 years earlier. Oil ventures in the Central Asian states of the ex-USSR will even further glut the world market.

Recent technological innovations have also played a role in pumping up the oil volume. The expense and risk associated with finding and developing oil in difficult places has been sharply reduced, as has the time it takes for oil to be brought on-stream and produced. The revolution in oil technology has significantly expanded output among non-OPEC producers, most notably in the North Sea, the U.S. side of the Gulf of Mexico, and off the shore of West Africa.

There is perhaps no better indicator of how much times have changed than the differing impacts of the two wars in the Persian Gulf. The Iranian crisis in 1979 and the Iran-Iraq War in 1980 created an oil shortage that proved to be a financial windfall for OPEC. But, the aftershocks from the 1991 Gulf War have emerged as a mixed blessing. On the one hand, sanctions imposed upon Iraq for the past seven years have kept a major producer off the market. Had Iraq been allowed to export without constraint and to expand its production from its large oil reserves, OPEC would have totally collapsed.

On the other hand, the war and its aftermath led to financial difficulties for both Kuwait and Saudi Arabia, in spite of the latter's financial gain from the Iraqi embargo. Saudi oil replaced Iraq's oil market share by almost 80 percent, in effect doubling its income. However, the extravagant spending and lavish subsidies bestowed on Kuwaiti and Saudi citizens, together with big-ticket weapons purchases from the United States, have all helped to drain their coffers. Oil investment and maintenance must take a back seat to other spending priorities.

All this being said, the future is not entirely bleak for OPEC. According to recent forecasts, global primary energy demand is expected to climb 40 percent by the year 2010, with fossil fuels still accounting for nearly 90 percent of that consumption. Asian countries alone will account for 44 percent of that increased demand, and present OPEC with a potential market opportunity.

But, it will require more than Asia to make OPEC sustainable in the long run. Gone are the days of "oil shocks" and "oil nationalism." The catchwords of today's global marketplace are "integration" and "interdependence." The developing countries that once viewed the West as an adversary now woo American and European investors. While some OPEC members undertake sweeping economic reforms, the Gulf States remain largely (but perhaps temporarily) adamant in their resistance to privatization, deregulation, and fiscal discipline. If OPEC is to remain viable, it must once and for all learn to forsake old habits in the face of new realities.

Fadhil J. Chalabi is the executive director of the Center for Global Energy Studies in London