Table of Contents
The official OPEC flag
Founded by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela on September 14, 1960, OPEC (the Organization of the Petroleum Exporting Countries) is an intergovernmental group that collectively owns and supplies around 80% of the world’s proven oil reserves.
OPEC mission statement is: “to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.”
Noble mission statements aside, the organization has enjoyed and, perhaps, exploited their uniquely powerful position: they serve dual roles as the majority owner and supplier of oil. Moreover, OPEC remains immune to the U.S.’s antitrust regulations, which outlaw uncompetitive measures that often lead to the public getting ripped off. Such control over the oil market has led many, including economists, to refer to OPEC as an international cartel.
In this article, we pose the question: does OPEC rig oil prices to unethically profit off of the citizenry? The Zero Theft Movement will explore whether OPEC continues to keep a vice grip over oil supplies and if potentially rigged oil markets continue to let crony capitalists rip off everyday Americans.
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OPEC has been headquartered in the city of Vienna since 1965, even though Austria has never had a membership stake in the organization.
13 countries across the globe currently comprise OPEC (as of 2020).
The organization’s five founding members hold the most amount of proven crude oil reserves in the world. Venezuela, holding the top spot, has 302.81 billion barrels of oil, which amounts to a bit over a quarter of all of OPEC’s oil reserves.
Note: Ecuador decided to leave OPEC at the beginning of 2020.
The formation of OPEC signified a major power shift from corporations to the nations with sovereignty over their natural wealth and resources. This had been very much a part of the United Nations’ human rights initiatives.
“The right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the well-being of the people of the State concerned.”
As far as oil is concerned, the U.S. and its Seven Sisters (seven transnational corporations that operated as a cartel) dominated the market from the 1940s until the 1970s. The U.S. was the largest oil producer and controlled oil prices until the middle of the 20th century. For most of the latter part of the 20th century OPEC controlled the oil markets and prices in the years to follow. OPEC took ownership of their abundant oil resources, phasing out and replacing the Seven Sisters as the leading global oil power. OPEC has since come to play a prominent role in establishing oil prices.
Vienna Group (OPEC+) Members
To gain further control of the oil market, OPEC brought ten other major oil-exporting countries into the fold in late 2016. This expanded cartel goes by the name OPEC+ (Organization of Petroleum Exporting Countries Plus) and holds close to 90% of the world’s proven oil reserves.
The ten nations comprise the ‘Vienna group’ and include:
- South Sudan
OPEC+ oil production in 2020. From Bloomberg.
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How Much is the Oil Industry Worth?
*Figures from Statista
According to a National Employment Law Project report, “For decades, U.S. workers have seen stagnant wage growth despite rapidly increasing productivity, and the U.S. have reinvested less and less of their profits, now at a record high, into their employees, operations, expansion, and new job creation. Our analysis confirms this by showing an outsized share of corporate profits being spent on stock buybacks.”
Is OPEC+ an Oil Cartel?
According to Investopedia, “As a cartel, the OPEC+ member countries collectively agree on how much oil to produce, which directly impacts the ready supply of crude oil on the global market at any given time. As a result, OPEC+ exerts influence over the global market price of oil and, understandably, tends to keep it relatively high in order to maximize profitability.”
As many members of OPEC can be classified as rentier states, wealth generated through oil exports functions as a substantial portion of their economies. Their economies would collapse without oil, but at the same token, thrive if they sell the resource at a high price. They have reasons to keep oil prices artificially high to maximize profitability.
Is the price of gas and oil rigged much higher than it would be in a free market?
Competition and U.S. Shale Oil Extraction
While OPEC does possess much of the global oil reserves, they do not have total control. For one, members of the organization don’t necessarily agree on all decisions, sometimes subverting each other’s oil prices in retaliation when negotiations fail.
Furthermore, the U.S. has an existing supply of shale and regularly produces more oil than all other countries. Another Investopedia entry claims, “…with the discovery of shale oil in the U.S.A and advances in drilling techniques, America has re-emerged as a top producer of oil.”
The U.S. can boost production in order to counter OPEC’s output cuts and price fixing. Also, as alternative energy sources continue to develop, the world’s reliance on crude oil will continue to wane.
Game Theory and Understanding OPEC+’s collusion
Collusion occurs when ostensible competitors agree to work together. In business, it manifests in anticompetitive, and often illegal, measures that often involves price fixing and/or bid rigging. Collusion allows businesses to unethically boost profits for goods/services at the expense of customers by decreasing or outright eliminating competition.
Per Energy Education, a website encyclopedia founded by University of Calgary professor Jason Donev, “The governments of the OPEC countries agreed to coordinate with petroleum firms (both state owned and private) in order to manipulate the worldwide oil supply and therefore the price of oil. When firms agree to collude, that is they agree to a certain price and quantity for a good or service, they create a cartel.”
You might wonder why Saudi Arabia or Venezuela, for example, do not break off and act independently. They have low production costs and the oil reserves to generate wealth with black gold. We turn to game theory for an explanation for the formation and continued collusion of OPEC+.
For an individual country focused on generating maximal profits, extracting as much oil as possible is typically the dominant strategy. Regardless of what other ‘players’ are doing, generating as much of a supply as possible is in all player’s best interests (assuming they are acting alone). But everyone amping up supplies creates downward pressure on prices, reducing returns for all.
This situation exemplifies the prisoner’s dilemma.
Instead of all the nations competing in a free market, the members of OPEC+ have decided to accept some loss in individual control in order to collectively dominate and profit from the oil industry. In essence, OPEC acts as a single player, a single supplier. The organization’s control over the market allows its members to stabilize oil profits at an artificially high rate.
It should be mentioned that OPEC members have had major disagreements before. OPEC collusion might often happen, but it definitely doesn’t occur all the time.
The Cartel Effect and the Global Battle for Oil Market Share
OPEC has, over its sixty year tenure, manipulated oil prices, creating ripple effects all around the globe. Only in recent years has the U.S. actually become a genuine competitor to the organization.
Here are the noteworthy examples of how the U.S. has been negatively impacted by OPEC’s dominion over the oil market:
1973 Oil Crisis in the U.S., or the OPEC Oil Embargo
OPEC’s oil embargo against the U.S. (as well as other countries) became a real possibility when President Nixon decided to break the Bretton Woods Agreement by taking the U.S. off the gold standard in 1971. While the price of gold shot up, the price of the dollar plummeted due to the suddenness of the decision.
As we mentioned earlier, many of the members of OPEC operated (and continue to operate) as rentier states. This meant their economies, substantially or completely reliant on income generated through oil exports (i.e. petrodollars), suddenly became much less profitable because all of their contracts used USD.
However, it wasn’t until the U.S.’s decision to assist Israel in the Yom Kippur War in October 1973 that the Arab countries in OPEC retaliated. They started a year-long oil embargo against all countries who had decided to ally with Israel. In that short span, the inflation-adjusted oil prices went up from $25.97 per barrel (bbl) to $46.35 bbl.
After the spike in oil prices caused by the oil embargo, black gold has generally maintained artificially high costs.
The U.S. experienced a period of ‘stagflation’ (stagnation + inflation) that troubled many Americans from 1973-1975. Due to government mandated wage-price controls, companies could not lower prices on their goods, nor could they afford to pay their workers’ wages. This led to people getting laid off, and an economy that had less and less people willing to spend money. The U.S., while producing gas domestically at full tilt, could not match the supply they had before. They could not keep oil prices down, significantly exacerbating the stagflation. Oil was just another high-priced necessity Americans struggled to afford.
A sign in front of a gas station in Oregon. Gasoline rationing became a part of American life.
Photograph taken by David Falconer in May 1974, from the National Archives and Record Administration.
1979 oil crisis in the U.S.
The second oil-shock of the 70s was a combination of foreign political revolt and domestic policies. Although global oil supply dropped by only ~4%, the reaction of oil markets dramatically increased crude oil prices over the next 12 months, more than doubling to $39.50 bbl, triggering gasoline shortages and long lines at gas stations comparable to the 1973 oil crisis.
The Iranian people revolted against the monarchy in 1978, deposing the Shah Mohammed Reza Pahlavi. When the Iranian revolution came to an end in early 1979, the global supply of crude oil dropped significantly, creating shortages everywhere. The fact that OPEC holds much of the world’s oil supplies, regardless of what they decided to do with it, can create significant issues. Especially when there’s political unrest in the state.
Nevertheless, the U.S. government must take some of the blame for the domestic policies that made the crisis much more deleterious than it would have been otherwise. Seeing the Iranian revolution, the U.S. decided to regulate oil supplies in early 1979, hiking up prices at the pump. Also the Department of Energy (DOE) inadvertently created supply shortages by forcing large refiners to give some of their supply to smaller operations. While this decision had good intentions, the small refiners simply did not have the resources to efficiently produce usable oil in large quantities.
Wage stagnation appears to have been an issue since the 70s, with the end of the Bretton-Woods Agreement. Do you think workers are receiving less than they perhaps should?
U.S. Emergence as a Major Oil Producer
Around 2007-2008, the U.S. finally discovered an effective method to drill for shale (underground rock formations replete with gas and oil). Extractions before the discovery did not yield enough resources to justify the steep drilling price, but this development in the late 2000s enabled the country to quickly rise the ranks and become the top oil producer in the world.
By 2014, the U.S.’s oil production had disrupted the supply controls of OPEC, causing the prices to be at a four year low. The organization, despite the increasing supplies and lowering prices, decided to maintain its rate of oil production. Although the innovations in shale drilling had made the process much more effective and profitable than before, extraction prices were still high. Much higher, in fact, than the costs of oil production in the OPEC states.
By encouraging a drop in oil prices, OPEC knew that their returns would take a hit. But the members viewed it as necessary damage to make the returns on shale nominal at best, in effect forcing the U.S. to back down and slow their oil production. The Scientific American reported that right after the Saudi Arabia’s oil production announcement “the U.S. West Texas Intermediate [WTI] crude oil benchmark price fell below $66 bbl—right into the sweet spot between $60 and $70 bbl that OPEC hopes will curb U.S. oil production.
Forbes contributor Ariel Cohen writes, “More than 120 American companies filed for bankruptcy between August 2015 and May 2017, while the number of active drilling rigs plunged by a half. The $60-$90 per barrel (bbl) break-even prices that shale drillers had grown accustomed to no longer existed. Weaker operators perished.”
Saudi Arabia-Russia Oil Price Conflict
For the first time in history, U.S. oil prices turned negative in 2020 due to a lack of demand.
OPEC de facto leader Saudi Arabia and non-opec mega producer Russia could not come to terms on cutting oil production in March. In retaliation, Saudi Arabia began boosting production and offering discounts to Russia’s key markets. Russia had refused to reduce oil production in order to price out American shale drillers, reminiscent of the 2014 oil conflict detailed above.
“WTI plunged 24.59%, or $10.15, to settle at $31.13 per barrel. It was WTI’s second worst day on record. International benchmark Brent crude slid $10.91, or 24.1%, to settle at $34.36 per barrel.”
Saudi Arabia and Russia managed to come to an agreement a month later, cutting millions of barrels from production. OPEC+ has since extended their supply controls, and will continue to do so to restore the price of oil, which currently sits at ~$42 bbl.
A Reuters report states: “Saudi Arabia, OPEC’s de facto leader, and Russia have to perform a balancing act of pushing up oil prices to meet their budget needs while not driving them much above $50 a barrel to avoid encouraging a resurgence of rival U.S. shale production.”
If history repeats itself, many U.S. companies will not survive this period, but we will have to see what transpires as the year comes to a close.
NOPEC, the Measure to Disband the OPEC+ Cartel
NOPEC (No Oil Producing and Exporting Cartels Act) first emerged in 2007. The legislation intends to extend the Sherman Antitrust Act to OPEC:
“Amends the Sherman Act to declare it to be illegal and a violation of the Act for any foreign state or instrumentality thereof to act collectively or in combination with any other foreign state or any other person, whether by cartel or any other association or form of cooperation or joint action, to limit the production or distribution of oil, natural gas, or any other petroleum product (petroleum), to set or maintain the price of petroleum, or to otherwise take any action in restraint of trade for petroleum, when such action has a direct, substantial, and reasonably foreseeable effect on the market, supply, price, or distribution of petroleum in the United States.”
The United States Chamber of Commerce vetoed the bill, arguing that it could set a dangerous precedent of violating human rights. In other words, the legislation could cause a snowball effect where an infringement on a nation’s sovereignty over its natural resources might lead to further violations by foreign states. NOPEC sputtered out and disappeared from political discourse for around a decade.
In 2019, Patrick Leahy (D-Vt.), Amy Kloubachar (D-Minn.), Chuck Grassley (R-Iowa), and Mike Lee (R-Utah) introduced the NOPEC bill in the Senate. This new initiative has concerned many of the members of OPEC+, making them wary to even discuss oil prices amongst themselves. As of September 2020, little progress has been made with the bill, so we eagerly await news on developments regarding NOPEC.
Do YOU think OPEC+ Rigs Oil Prices?
Oil production is close to matching consumption. The same goes for exports to imports, resulting in the plummeting net imports.
Due to the shale revolution in the U.S., it appears the nation will no longer be beholden to the fixed prices of OPEC+ oil. That, however, does not mean the U.S. did not have to pay rigged prices up until recent years. The graph above shows how much more we were importing vs. exporting all the way to the late 2010s.
Plus, the prices on U.S. oil exports will continue to be greatly influenced by OPEC+ due to their sheer market share. As seen in the aforementioned Reuters report, Russia and Saudi Arabia actively try to regulate prices in order to limit U.S. returns from shale. The future will likely involve a showdown between the U.S. and OPEC+, the megaproducer against the mega-owner. We should also consider the possibility that the high price of shale drilling becomes untenable, forcing the U.S. to rely on OPEC+ imports again.
Ultimately, the key question is not so much whether OPEC+ controls prices. It comes down to unethical profits. Have they unethically profited? Globally, not just in the U.S. Or do they truly act as benevolent stewards of the oil market, stabilizing it so members can get their fair share while ensuring prices never get too high?
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