News ID: 274233
Published: 0235 GMT September 15, 2020

OPEC’s sixtieth anniversary: The pivot of the global oil market

OPEC’s sixtieth anniversary: The pivot of the global oil market

Part 2 By Mamdouh G. Salameh*

However, the NOPEC idea is nothing new and dates back to 2000. Both former presidents George W. Bush and Barack Obama threatened to use their veto power to halt it from becoming law. This time around, however, there is a good chance that President Trump would sign such a bill into law. 7 Trump has been critical of OPEC for years and during the 2016 presidential election that war of words escalated to the front pages of international newspapers.

While the Congress has every right to prevent concentrations of power that interfere with trade and reduce economic competition within the United States, it has no extraterritorial jurisdiction whatsoever on other countries’ commercial practices. What commercial practices OPEC members agree to follow vis-à-vis their oil trade are their own affair and nobody else’s. If the United States doesn’t like OPEC commercial practices, then it should stop buying oil from OPEC members. 

The United States has so far broken the rules of the World Trade Organization (WTO) by imposing sanctions on virtually everybody and walked away from United Nations-recognized Iran nuclear deal and also the UN-supported Climate Treaty without batting an eye lid. Moreover, the United States has been manipulating oil prices through the petrodollar and also through exaggerated claims about rises in US oil production and huge build-up in its oil and refined products inventories in order to depress oil prices and achieve geopolitical and economic aims.  

If NOPEC ever becomes a law and the United States tries to sue any OPEC member under the NOPEC Act, OPEC members collectively should retaliate by withdrawing every single penny they keep in the United States and stop investing in the US altogether. They could also nationalize American interests in their oil industries and discard the petrodollar and adopt the petro-yuan instead.

The whole debate might again be academic as it was nearly every year in the early 2000s, except for one thing: Donald Trump is now president. He supported prior Congressional efforts to revamp US law to put OPEC in the antitrust crosshairs. And in recent months he has railed against the oil-exporting group on Twitter for allegedly driving up the price of gasoline.

 

Is OPEC really a cartel?

A cartel is defined as an association of manufacturers and suppliers whose goal is to increase their collective profits by means of price fixing, limiting supply, preventing competition or other restrictive practices. Antitrust laws attempt to deter or forbid cartels. 8

While OPEC may resemble a cartel in some aspects, it is not a cartel.  How could it be a cartel when it was founded as a counterweight against the previous “Seven Sisters” cartel of multinational oil companies which dominated every aspect of global oil through price fixing, limiting supplies and suppressing competition for the sole purpose of maximizing its profits.The main purpose behind the founding of OPEC was to give producers more control over their own oil.

When OPEC was founded in Baghdad in 1960, its constitution stipulated that its raison d’etre is to defend the rights of its members by ensuring a stable global oil market and stable prices. That is exactly what OPEC has been doing for the last 60 years and will continue to do so as long as it remains an organization of petroleum exporting countries.

OPEC with its huge proven reserves and production capacity has every right to ensure oil prices are fair enough to provide its members with a reasonable return on their finite assets thus enabling them to explore for new oil and expand production capacity to meet global oil demand. In so doing, they are rendering a great service to the global economy from which the United States benefits. Furthermore, OPEC has never excluded competition. And the proof is that US shale oil is being exported around the world. 

One would expect a cartel to curb production in order to raise the price of its product as well as to share market among its members. However, OPEC has never once tried to fix a specific price, nor has ever been able to achieve this goal. Wishing a certain price is totally different from fixing it. The fundamentals of the global oil market are the ones that have always determined the oil price helped occasionally by geopolitics. OPEC has no control on these fundamentals and, therefore, has no control on the movements of prices. It merely takes advantage of market conditions and follows the dictates of the market. For instance, OPEC was not able to prevent prices from falling in the 1980s even after it adopted the production quota system in 1982. Moreover, OPEC was neither able to temper oil prices in 2008 when prices rocketed to $147 a barrel, nor was it able to stop the 2014 oil price crash.

When it comes to limiting oil supply, a true cartel like the “Seven Sisters” was able to do exactly that because it was virtually in control of global oil resources. OPEC has never been in such a situation. It only accounts for 42.0 percent of the global oil market with the rest of the oil-producing nations of the world accounting for 58.0 percent. The United States and Russia both account for 12 percent each.

Furthermore, it was never ever the intention of OPEC to harm customers or the global economy knowingly. Any adverse impact on the global economy or on customers was merely a collateral damage resulting from international policies aimed at either undermining the economies of the OPEC members as a geopolitical tool or enabling their own economies to benefit from low oil prices at the expense of the OPEC members.

OPEC has not been involved in any disputes related to the competition rules of the WTO, even though the objectives, actions and principles of the two organizations diverge considerably. A key US district court decision held that OPEC consultations are protected as “governmental” acts of state by the Foreign Sovereign Immunities Act, and are, therefore, beyond the legal reach of US competition law governing “commercial” acts. 9

Still, OPEC shouldn’t be unduly worried about the NOPEC Act. It has enough muscle to retaliate against the United States. Were the United States to mount a lawsuit against OPEC or any of its members, the organization could stop all its oil exports to the US and even cut its oil production to force prices up. This will harm the US economy most being the world’s largest consumer of oil.

Another measure OPEC could take against the United States is to replace the petrodollar with the petro-yuan in their oil transactions. That would be the biggest ever retaliation against the US.

 

Conclusions

Only OPEC+ stood between the destructive power of the COVID-19 pandemic and the collapse of the global oil market and the whole oil industry.

Its huge production cuts put a floor under oil prices and prevented them from sinking below $20 a barrel. OPEC+ efforts to stabilize the global oil market and prices were acknowledged worldwide even grudgingly by the United States.

On its sixtieth anniversary, both the global economy and the global oil market owe OPEC+ an extraordinary debt of gratitude.

 

* Mamdouh G. Salameh is an international oil economist. He is one of the world’s leading experts on oil. He is also a visiting professor of energy economics at ESCP Europe Business School in London.

 

Footnotes:

7. Ibid.,

8. Wikipedia, the free encyclopedia.

9. Keith Johnson, ‘Proposed Law Would Allow US to Sue OPEC for Manipulating Oil Market’, FP, July 18, 2018.                              

 

   
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