D. Dowd Muska

 

This Week's Column

   

 

The Cartel That Time Forgot

July 17, 2014

The planet’s just not that into OPEC anymore.

Bloomberg reports that in 2015, the cartel expects “the third consecutive annual drop in demand for OPEC crude.” To America’s professional energy alarmists, left and right, the petro-powerhouse’s sagging dominance isn’t a salutary phenomenon. But to investors, consumers, and skeptics of ideology- and media-driven hysteria, it’s a godsend.

Founded in Baghdad in 1960, OPEC has been the bête noire of developed nations’ politicians, pundits, and Deep Thinkers since the 1970s. That decade, events -- some engineered by OPEC, several imposed by members acting alone, many driven by external affairs -- sent the price of oil to levels once thought impossible. Unemployment, gas lines, and political chaos followed.

To this day, few in the U.S., Europe, and Japan understand the role their governments’ monetary blundering, regulatory stupidity, and foreign-policy lunacy played in creating the double-dip “energy crisis.” Since then, overnight price spikes have not reappeared. But OPEC still takes much of the rap for the unpleasantness of the ‘70s, and elites’ hand-wringing over “dependence” on “foreign oil” lingers. “Biofuels,” gallons-per-mile mandates for automobiles, and the International Energy Agency owe their existences to the “oil weapon” OPEC supposedly wields. As late as 2008, even clear-eyed energy researchers thought the cartel couldn’t be toppled. That year, in Gusher of Lies, author Robert Bryce wrote that OPEC “will have effective control over the bulk of the world’s most important transportation fuel for the foreseeable future, and there’s nothing that the U.S. or any other country can do that will alter that fact.”

A number of developments converged to prove Bryce wrong. Between 2003 and 2013, OPEC’s share of Earth’s oil production dropped from 35.4 percent to 33.4 percent. There are two reasons to believe that the trend will continue -- and accelerate.

First, supply isn’t keeping up with demand. The West’s thirst for oil may be plateauing. But India’s petroleum consumption is up more than 50 percent in the last decade, and China’s has doubled. In the same period, while global crude demand rose by 13.2 percent, OPEC’s output increased by 6.9 percent. With ginormous reserves, can’t members add more spigots? Theoretically, yes, but doing so is costly. Angola, Kuwait, Venezuela, etc. need their existing fountains of revenue for tools to forestall -- and occasionally, suppress -- political dissent, rioting, and juntas. Besides, the state-owned enterprises tasked with tapping OPEC’s petroleum reservoirs are not known for innovative thinking and can-do attitudes.

Second, vendors on the open market are prowling for customers. Since hitting its post-Soviet nadir in 1996, Russia’s river of black gold has widened by 75.1 percent. Its improving economy can’t fully compensate for its stagnant population, and thus, the Motherland has oil to sell. (Importing countries aren’t letting the misdeeds of Russia’s bad-boy president keep them from placing orders.) Growth is greater in nearby Kazakhstan, where production is up by a factor of four since 1993. Brazil, blessed by what U.S. energy bureaucrats call the “world’s largest oil discoveries in recent years,” could soon join the non-OPEC export community.

Mexico made the asinine decision to nationalize oil companies in 1938. Recognizing its mistake, albeit rather belatedly, the country is ending its monopoly and inviting foreigners back. Add a Mexican boost to Canada’s oil-sands boom and the fracking revolution in the U.S., and it’s likely that before 2020, the NAFTA triumvirate will be self-sufficient in petroleum. Then it’s on to exports -- possibly in huge numbers.

Last month, in a piece for The Washington Post, American University’s Jeff Colgan wrote, “With the price of oil set by market forces almost entirely outside of its control, OPEC is along for the ride like everyone else.” Scariest of all for the cartel: alternative-fuel vehicles. If electricity and natural gas grab bigger portions of transportation-fuels consumption, OPEC’s member governments face existential challenges. (Saudi Arabia doesn’t have much of an agricultural sector, Nigeria isn’t a hub for film and television studios, and not many manufacturing conglomerates are based in Ecuador.)

In 1982, as the Land of the Free was reeling from a prolonged case of intolerably expensive gasoline, diesel, and heating oil, The New York Times observed that OPEC was an “ungainly sort of club” whose members occasionally go “to war against one another” and regularly cheat “on official prices to raise sales while publicly accusing their fellows of exactly the same behavior.”

Fractious from the start, and never as mighty as its enemies believed it to be, OPEC is well along the path to irrelevancy. So much for “resource nationalism.”

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska. He lives in Broad Brook, Connecticut.

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