The Triumph of OPEC

OPEC's present market power dates to early 1999, says economist Verleger. Oil prices then were about $10 a barrel. The 1997-98 Asian financial crisis had cut demand; supply was essentially unregulated. Saudi Arabia undertook frantic negoti­ations with other major producers, including Iran, Kuwait, Venezuela and non-OPEC members Russia, Norway and Mexico. The result was an agreement to cut production sharply. Compliance with output quotas was surprisingly good; coun­tries were terrified by the collapse of their oil revenues. "That's when OPEC started acting like a cartel," says Verleger.

To some extent, we are paying for past shortsightedness. De­pendence on oil imports, now almost 60 percent of our supply, is inevitable. We simply use too much and produce too little. But we could limit OPEC's market power by curbing our demand and increasing our supply. As the worldwide gap between supply and demand rises, it becomes harder for producers to control the market. More have spare capacity; more are tempted to increase production to raise revenues. Controlling supply today is easier because most producers are operating near their potential. The surplus is concentrated in a few countries, especially Saudi Ara­bia, which can adjust production to influence prices.

The American approach is to rant at foreign producers on the silly presumption that they should subordinate their interests to ours. The resulting self-righteousness rationalizes a refusal to do much that would actually influence their behavior and limit their freedom of action. It was only last year that Congress raised fuel-efficiency standards for new cars and light trucks: the dampening effects on oil consumption will be years in coming. We have steadfastly re­jected higher gasoline taxes to curb unnecessary driving and strengthen demand for fuel-efficient vehicles (better to tax ourselves than let foreigners tax us through higher prices). And we have consistently restricted oil drilling in Alaska and elsewhere.

It is a fair commentary that, by doing so little to check its own thirst for imports, the United States has unwittingly con­tributed to OPEC's present triumph. The extent of that tri­umph will be tested this year and next. The U.S. Department of Energy projects that non-OPEC oil supplies—from Brazil, Canada and Kazakhstan, among other places—will increase. Meanwhile, a weaker global economy may dampen demand. Even OPEC may be unable to hold prices at today's high and undesirable levels. Whatever happens, the long-term threat of a global oil cartel will remain. We should be taking the hard steps to limit its power. Considering our past complacency, we probably won't.

© 2008