Nobrainer’s Think Tank

This is an intriguing question that has been bugging me for a while. We are usually operating under an “OPEC=>BAD” mantra. So why should a country that we are basically in control of belong to the cartel that we all seem to hate? Let’s look at a bit of OPEC history, then analyze some light research of what’s going on in Iraq.

The member countries are (estimated % of OPEC production in parenthesis):

• Alegeria (4.5%)
• Indonesia (3.6%)
• Iran (12.9%)
• Iraq (6.8%)
• Kuwait (7.9%)
• Libya (5.3%)
• Nigeria (8.0%)
• Qatar (2.6%)
• Saudi Arabia (30.8%)
• UAE (7.8%)
• Venezuela (10.0%)

And formerly

• Ecuador
• Gabon

Six of the eleven are in the Middle East and represent what some call the core OPEC states. That leaves 3 African nations, 1 South American, and Indonesia over there near Australia.

From OPEC’s functions and history:

The OPEC Member Countries coordinate their oil production policies in order to help stabilise the oil market and to help oil producers achieve a reasonable rate of return on their investments. This policy is also designed to ensure that oil consumers continue to receive stable supplies of oil.

OPEC’s objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.

Reasonable rates of return on investment? Stable supplies of oil? Fair and stable prices? “Fair returns?

The Saudis are looking at a 1,000% ROI when oil is only $15 a barrel. Yeah that’s reasonable. Let’s also not look past embargoes and the wars between member states (all involving Iraq under Saddam Hussein to my knowledge). And as usual, unless you are talking about a large redneck festival, I hate the word fair. It simply reeks of an inherent admission of unfairness. As a rule, I believe anyone who refers to anything as fair is a jackass salesman who’s trying to scam me.

Furthermore, OPEC reminds me of the town slut who takes gifts from and sleeps with absolutely everyone then gets upset when you dare question her morals.

Anyway, last October Greg Palast, writing for Harper’s Magazine, did some digging to try to answer the question of why Iraq remains in OPEC.

It appears that Rumsfeld and Wolfowitz were in favor of a free and open Iraqi oil market operating without OPEC constraints whereby Iraq would break up and sell off its oil fields. They believed this would bring in swift investment, high output, low oil prices, and the break up of OPEC. Their plan was foiled when an oil minister with their ideals proceeded to horribly mismanage the situation.

The State Department, however, favored a “production-sharing agreement (PSA) model, under which the state maintains official title to the reserves but operation and control are given to foreign oil companies. These companies then manage, fund, and equip crude extraction in exchange for a percentage of sales receipts.” Advisors to the Iraqi Oil Ministry provided by the State Department were all former oil executives who appreciate that OPEC keeps prices somewhat high. As the article goes on to say, they encourage Iraq to remain in OPEC in order to keep oil company profits and Iraqi income high.

And this is all favored by a VP who couldn’t be happier.

And Dick Cheney, far from “putting the squeeze on OPEC,” has taken his de facto seat there, assenting by silence to the oil monopoly’s piratical price gouging. But hasn’t OPEC’s stratospheric crude prices choked the life out of America’s auto industry and bankrupted half a dozen airlines? In the Vice-President’s bunker the elimination of jobs of Democratic-leaning union members is likely seen as a bonus for the good deed of boosting oil industry profits far above the ozone layer.

So it all makes perfect sense.

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Actually it doesn’t make much sense at all. The base assumption by the parties on both sides is that should Iraq secede from OPEC and go well beyond it’s 4 million bpd quota, that OPEC will suddenly crack apart. Why is that a good assumption?

I’ll get back to that question momentarily.

So why might we want high oil prices? For the big oil companies of course. Why else?

To bust unions? Ok fine by me.

In order to stimulate the development of alternatives that would be cleaner and better for the enviroment? Bush would never do something like that. Unless his big oil buddies are smart enough to be investing early in the next big thing. It just might be possible that the next big thing will be profitable. Wouldn’t that be quite the coup though? The oil buddies become the ethanol/solar/hydrogen buddies who become richer and richer while the world maybe just becomes a better place. That makes too much damn sense to come from someone with a degree from Yale and a Harvard MBA.

To stifle growth in China and India and narrow the trade gap that he gets raked over the coals for all the time?

Or maybe just to curry a little favor with big producers like Russia, or our neighbors Canada and Mexico?

But why should we assume that OPEC would break up to begin with?

One intellectual godfather of this strategy was Ariel Cohen of the Heritage Foundation, who in September 2002 published (with Gerald P. O’Driscoll, Jr.) a post-invasion plan, “The Road to Economic Prosperity for a Post-Saddam Iraq,” that put forward the idea of using Iraq to smash OPEC. Cohen explained to me how such an extraordinary geopolitical feat might be accomplished. OPEC maintains high oil prices by suppressing production through a quota system effectively imposed on each member by Saudi Arabia, which reigns by dint of its overwhelming reserves. The Saudis, to maintain their control on pricing, must keep a lid on production from other members-particularly Iraq, which has the second greatest proven reserves.

This extra crude would flood world petroleum markets, OPEC would devolve into mass cheating and overproduction, oil prices would fall over a cliff, and Saudi Arabia-both economically and politically - would fall to its knees.

If prices were to plummet, why would that drive member states to cheat so badly? Shouldn’t high prices be the motivation to cheat? Certainly the remaining OPEC states would be unhappy. The OPEC market share would instantaneously be reduced. Increases in Iraqi production would then cost OPEC further. But, just as in other times of global oil abundance, we can assume that the remaining OPEC states, primarily Saudi Arabia would reign in their own production in typical fashion to control supplies and thereby global price. Furthermore, I don’t see how increasing Iraqi production would necessarily be different from getting 2 more million barrels to the market per day from say ANWR or the Gulf of Mexico.

In the early 80’s for example, global oil use decreased while non-OPEC nations increased production. In order to prop up quickly falling prices, Saudi Arabia decreased output by more than 75% while prices also fell from about $80 to $23 a barrel. OPEC did not break up and widescale cheating did not occur to my knowledge.

Now while those prices did fall, I think the global economic growth, particularly in China and India, would help consume excess capacity keeping prices in the $30-$40 range (just a guess).

I’m left to believe the most substantial parts of this story remains under the surface. An Iraqi oil market operating without quotas would likely help drive down prices. But for Iraq, they could easily recover that by increased volume. And it seems to me that the oil companies would love access to the cheap, high quality crude instead of the alternatives around world. The real reason Iraq is still in OPEC? Who knows.