The Organisation of the Petroleum Exporting Countries (OPEC)’s supposed mission is to coordinate and unify the petroleum policies of member countries and ensure the stabilisation 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 to those investing in the petroleum industry.
The abovementioned undertaking sounds noble in theory, but common practice by OPEC member states is considerably in conflict with its intended mission. OPEC cannot with a clear conscience claim to have secured an “economic” supply of oil to consumers at this time when we have seen the price of crude oil reach record levels, crippling the airline industry and many other sectors which are heavily reliant on this commodity. This oil cartel has consistently violated the basic law of supply and demand, which dictates ruling prices at which goods and services are traded.
OPEC member states earned as much in the first half of 2008 as they did in the whole of 2007. According to the US department of energy, members of the Saudi Arabia-led oil exporters’ cartel took home $645bn between January 2008 and June 2008, just below the record $671bn they earned in 2007. The insane levels of crude oil price cannot be attributed to any astronomical increase in production costs, but rather to the rampant economic growth and industrialisation in many countries, especially China and India, speculation in the commodities markets and largely to the illegal invasion of Iraq in 2003.
The war in Iraq alone significantly impacted on the production output. The barrel of crude oil was around $27 in 2003 when the American warlord George W. Bush and his band of outlaws invaded Iraq and ousted Saddam Hussein. Today the price of crude oil per barrel is sitting comfortably above $110. That is a whopping 407% increase in only five years. This is ignoring the increase in annual revenue of OPEC member states since 1999, which has more than quadrupled to an estimated $671 billion in 2007. We can partly blame China for this increase in demand.
While the surge in the price of Brent crude oil in some instances could be attributed to the rise in global demand, it has been largely due to the manipulation of prices by OPEC. Towards the end of 2006 the price of Brent crude oil was slipping from about $70 a barrel toward $50 a barrel. OPEC did not hesitate to intervene by cutting production output in order for prices to rise; and they did by the end of 2007.
In 2005 OPEC conveniently abandoned production quotas which governed the price of Brent crude oil between set parameters. If the price went below the minimum price per barrel, production would be cut in order for the price to move back to an optimal level and conversely, if it went above the maximum price per barrel, production would be raised.
The economies of the majority of OPEC member states are largely dependent on oil production and it is in their best interest that prices of Brent crude oil continue to rise even to unsustainable levels. It would therefore be a harebrained presumption that these countries should subordinate their interests to those of the rest of the world.
Many civilised economies have legislated against anti-competitive behaviour and it boggles my mind why OPEC is allowed to continue to manipulate prices. What role can the UN play in this instance to put pressure on these oil cartels to behave or ensure that OPEC is dissolved to allow for bilateral agreements between individual oil exporting countries and the importers to be the basis on which prices can be negotiated? Such a move would be met with resistance, as OPEC member states are estimated to earn about a record $1,245bn this year.
Even attempts by the rest of the world to offset the astronomical increase in oil prices against the prices of their exports to the OPEC member states may be fruitless, as these oil exporting countries have the absorptive capacity to sustain their foreign spending. However, such sustained spending would in the long-run put inflationary pressures on their economies.
South Africa unfortunately is largely dependent on the export of Brent crude oil, which accounts for about 64% of the local consumption; the balance complemented by synthetic fuels produced from coal and natural gas. We are at the mercy of oil cartels. It is countries like Venezuela, although a member of OPEC, which have been exporting their oil at discount prices to Latin American countries, including Cuba, whom we need to build and sustain long-term trade relations with.
It provides some relief to learn that South Africa has signed energy cooperation agreements with Venezuela when President Hugo Chavez met with President Mbeki in Pretoria. Because this deal is signed we may forgive the Venezuelan Energy and Petroleum Minister, Rafael Ramirez, who said his country would propose OPEC production cuts if prices of Brent crude oil continue to fall. We place hope in the belief that savings from below-market prices of Venezuelan oil would be reflected at fuel pumps to provide ordinary consumers with much needed relief and not redirected to National Treasury.
OPEC member states are not behaving any differently to the organised crime gangs during the prohibition era of the 1930s. They need to have their wings clipped.