Opec portrayed again as the whipping boy

Dr Mohamed A Ramady

• Last Updated: June 28. 2008 11:17PM UAE / June 28. 2008 7:17PM GMT

No pleasing: Opec is doing its best to pump more oil to ease surging prices but continues to be the focus of western discontent. Maewan Naamani / AFP

Opec is dominating the news again. On the one hand, Opec – specifically Saudi Arabia – is doing its best to pump more oil and ease high prices, despite indications that demand is slowing and there is a lack of spare capacity in most member countries. Saudi Arabia is one of the few with the ability to pump more oil, and has committed itself to producing an extra 500,000 barrels per day.

On the other hand, there are loud voices being heard that want to take legal action against Opec, tax its windfall “profits”, and even seize Opec assets if it does not pump more oil or bring down prices, as if by waving a magic wand.

This is dangerous talk that will only make those Opec members who are trying to ease oil prices more resentful, and lead them to examine ways of shifting sales to Asian markets.

The goodwill visit of the Chinese Vice President, Xi Jinping, to Saudi Arabia, Qatar and Yemen, coming so soon after the Jeddah energy meeting last week, is a timely reminder of China’s pull in the region and its willingness to strengthen co-operation with Saudi Arabia and other energy producers.

There are no voices raised in China, or anywhere else apart from the US, to impose punitive sanctions against Opec. Those who are advocating anti-Opec measures are still caught in a mindset of the past. They can never, it seems, forgive or forget the emergence of a powerful producer organisation during the 1970s that changed the balance of power of world energy trade.

Recent debates about the forays of Middle East sovereign wealth funds have only added to feverish rhetoric on how to emasculate the upstart nouveau riche of the world.

Others, however, have learned from Opec, and last year the world’s major gas producers decided to do something to protect themselves from the eroding purchasing power of the dollar. The announcement that Qatar was hosting a meeting of gas producing countries to explore pricing co-ordination and future strategy led to accusations of another energy cartel, which Qatar quickly denied. But the issue of energy cartels, their power and effect on consumers, set minds working. In the end, Russia, which is the world’s largest gas producer, will head a new committee to study “gas pricing, infrastructure and consumer-related issues”.

But it was not only in the Gulf that the issue of a new energy cartel was making news; in Washington, too, the US house of representatives approved, by a large majority, legislation making oil production and export cartels illegal under the Sherman Antitrust Act. The stage has been set for a troublesome legal battle over what constitutes a true cartel.

It would seem that even the gas producing countries are not in one mind on the need for setting up such a gas cartel. While Qatar and Egypt opposed the idea, Iran and Venezuela were in favour of it, which seemed somewhat odd, as neither of these countries were gas exporters.

Gas producers however, share one disadvantage compared to oil producers – gas contracts are based on long-term, bilateral agreements between governments. Oil producers have more flexibility, as prices are set on the open market with both long-term and spot contracts. However, the fact that this group of energy producers was meeting was a cause for concern among consumers, particularly from gas importing European nations who depend on Russian gas supplies.

In Qatar, the Russian delegation took great pains to ease European concerns, and the Russian energy minister reportedly went as far as to have said that speculation of a gas version of Opec was the product of “a sick mind”.

Why do cartels arouse such strong emotions from consumers? And is Opec, or the proposed gas cartel, if it ever materialises, a cause for concern?

For a cartel to truly operate and control prices, a number of essential conditions must be met, as any elementary economics textbook tells us. These include a small number of producers in the cartel. Secret price fixing by members is also observable. And there must be entry barriers to others who want to enter the industry. Market demand and cost conditions must be stable, and finally, if the cartel is found out, its members are eventually subjected to some form of legal sanction.

The history of Opec is replete with examples of non-compliance to most of the above conditions. Members of Opec range in size from producer giants to small players, which makes discounts difficult to monitor. Some members may exit, as Indonesia did last month, after it became a net importer of oil. Membership of Opec is voluntary, and other major oil producers such as Russia are outside Opec, while cost and demand conditions are not totally in the control of Opec. Technological advances have brought marginal fields in non-Opec countries into production, such as the recent gigantic offshore Brazilian finds. “Higher” prices have encouraged consumers to reduce demand, by being more energy efficient, or switching to alternative energy such as nuclear power and biofuel.

The Opec of today sells about 31 million barrels a day out of a total world demand of about 80 million barrels, or 38 per cent, compared with the Opec of the late 1970s, which enjoyed more than 65 per cent of global market share at a time when cartel control was perhaps more justified.

Given the above mixed bag of results, is the US house of representatives’ “Nopec” legislation justified? The legislation would, in effect, make it a violation of the Sherman Antitrust Act for any foreign state or its agent to limit the production or distribution of oil or natural gas in order to set or maintain a price. A foreign state engaged in such conduct would be stripped of immunity from the jurisdiction of US courts.

This is all heady stuff, and it is not certain that the full US senate will take up the measure, or that the US administration will support it, as it might cause problems with key Middle East energy allies. Even before the 328-84 House vote last month, President George W Bush pledged a veto, saying Opec might retaliate against US interests or cut oil production further. Continuing high oil prices might make it attractive however, for some senators to play to grassroots American electorate politics. Opec is once again a convenient whipping boy.

This is where cool heads are needed, to head off a serious confrontation between energy producers and consuming countries. Already, populist American journalists are espousing the “seizure” of Opec assets, such as the Venezuelan government-owned Citgo headquarters, or Saudi Aramco assets in New York, in retaliation for “overcharging” hard-working American consumers.

In the final analysis, maybe some good has come from having the world’s collective attention focused on the issue of depleting global energy resources. The current oil crisis has also drawn attention to the mutual interdependency of consumers and producers in reaching long-term, fairer prices, and establishing supply relationships that generate some form of equitable stability for both.

It is far better to send messages of co-operation to each other through meetings such as the one held in Jeddah, rather than through congressional Acts. In practical terms, there is no true energy cartel in the world today, whether oil or gas, given the multitude of non-cartel operators and alternative energy sources.

Dr Mohammed Ramady is Visiting Associate Professor, Finance and Economics at King Fahd University of Petroleum and Minerals, Saudi Arabia