The Trouble With OPEC

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trouble with OPEC is revealed by its name: The Organization of
Petroleum Exporting Countries. Why countries? Why not companies?

members were companies, it would be either a trade association
or a state-licensed cartel. What is the difference? Political
power. The state does not grant to a trade association the right
to exclude non-member competitors from a market. A cartel does
receive this authority from the state.

a multinational cartel. Ever since the price hike of 1973, OPEC
has been the Mother of All Cartels. But it is not a group of
companies that organize to keep up prices, and then seek the
support of a civil government to keep out competitors. OPEC
is not a group of profit-seeking private capitalists seeking
to overcome competition. OPEC is an organization of civil governments
that seeks to keep out competitors. Then it seeks to impose
production quotas on its members and avoid “cheating,” i.e.,
secret price cutting by members in order to sell more oil than
their respective quotas allow. OPEC is run by a group of profit-seeking
government-employed socialists seeking to overcome competition.

OPEC was
modeled after America’s most powerful state regulatory agency,
the Texas Railroad Commission,
which was set up in 1891 by Governor James Hogg. (Hogg is fondly
remembered in Texas for having named his daughter Ima. It is
not true, as many Texans believe, that he had a second daughter
named Ura.) The Texas Railroad Commission regulates a
lot more than railroads
, including energy. It lost much
of its power over oil prices when OPEC replaced it.

OPEC was
formed in 1960. According to OPEC’s Web site,

Organization of the Petroleum Exporting Countries (OPEC) is
a permanent, intergovernmental Organization, created at the
Baghdad Conference on September 10—14, 1960, by Iran, Iraq,
Kuwait, Saudi Arabia and Venezuela. . . . 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.

Here are
the standard goals of every government and every cartel: “fair”
prices, “stable” prices, “efficiency,” and a “regular supply.”
Above all, it seeks “a fair return on capital.” Undergirding
every cartel and every government system of controls is this
idea: the free market and open competition cannot attain these
objectives. This is because the free market expands through
price competition. And we all know what established producers
think of price competition! The free market begins with the
private ownership of the means of production, including the
legal right to make voluntary agreements. This is what all bureaucrats
hate. So do all cartel members.


a cartel that puts pressure on members not to expand production
through price competition. The question nobody ever asks is
this: Where did these countries get their oil? The reason why
is that everyone knows the answer: they stole most of it from
private citizens. This practice is universally accepted in the
closely related worlds of government public policy, academia,
and financial journalism as “business as usual” in the energy

Oil is
a natural resource. It lies beneath the land or the sea bed.
Whoever owns the land or the sea bed should own the oil. But
there is no private ownership of oil in the oil-exporting cartel.
Only in the sense that a nation is in fact an extension of a
feudal family can it be said to have been privately owned. But
now that family uses the monopoly of state violence to control
access to the oil.

OPEC was
born in acts of state expropriation. OPEC is the Organization
of Petroleum Expropriating Countries. Its members use the income
from the sale of the oil to fund the favorite projects of the
bureaucrats who control both the oil and the weaponry of the
state, which includes the educational system.

The finance
ministers invest the money. In the bonanza that began in 1973,
they turned most of the money over to large, multinational banks.
Thus was born the “petrodollar,” the word coined by Prof. Ibrahim
Oweiss. The large banks decided that they could not maximize
their return by recycling the inflow of petrodollars by making
small, high transction-cost loans to individual firms. So, they
made large loans to governments, especially Third World governments,
that agreed to take all of the money and use it for socially
beneficially projects. It was so easy to loan the money. It
has not been easy to get repaid.

generated by oil-consuming Western capitalism flowed into government
coffers in the Middle East, Venezuela, Mexico, and Nigeria.
It did not accrue to private individuals. It was then sent briefly
to privately owned, government-guaranteed banks — another
cartel — and was then handed over to Third World politicians
to fund projects that would enhance their power, they hoped.

The result
in OPEC’s nations and the national recipients of petrodollars
was a vast expansion of state bureaucracy and the creation of
a series of welfare states. Saudi Arabia is the model. In 1973,
there were 6.7 million Saudis. Today, there are 22
. The fertility rate is 6.3 children per woman.

Oil revenues
have allowed the Saudi government to create a massive welfare state.
Per capita income in 1973 was about $2,500. It grew to about
$19,000 in 1981. Today, it is in the range of $7,000. (See the
chart, The Demographic Squeeze in the report, Key Trends
in Saudi Arabia

Want a
revolution? First, create tax-funded, universal education. Next,
replace jobs in the free market with jobs in government. Then
add Wahabbism’s version of Islam. Send tens of thousands of
young men to Islamic training schools at government expense.
Then send them into the world, untrained in anything except
the Koran. Unemployment in Saudi Arabia approaches 40%. Similar
percentages are found in Yemen, United Arab Emirates, Kuwait,
and Iran (45%). (Ibid, Over-dependence on Non-Productive
Government Jobs Has a Cost.)


None of
this was foreseen by academic economists and establishment oil
experts as late as 1972. One of the most respected experts in
1972 was economist M. A. Adelman of the Massachusetts Institute
of Technology. In 1972, Johns Hopkins University Press published
Adelman’s large book, The
World Petroleum Market
, in which he made a famous predictions
about the price of oil. He predicted a long-term secular decline
in the price of oil. Within a year, the OPEC embargo began,
and oil went overnight from $1 a barrel at the wellhead ($3
in Rotterdam) to $12 a barrel.

This book
has become legendary as perhaps the most rapidly outmoded monograph
in the history of academic economic forecasting. Here are selected
insights from the book:

governments are less able to operate a successful cartel than
the companies. Not only do they lack the companies’ experience,
but they also lack the intercompany contacts at two levels:
crude production and sales (the joint ventures) and the refined
product markets. . . . Thus the increasing
role of the governments in the market will tend to increase
competition and reduce prices (p. 224).

We can
therefore expect the following pattern during the early 1970s.
From time to time, either in pursuance or in violation of
the Tehran-Tripoli agreements [1971], the tax is increased,
whereupon prices increase as much or more, but then tend to
erode as the companies compete very slowly at the crude level
and less slowly at the products level. Thus over the near
term prices increase, in steps, yet at any given moment there
is a buyers’ market — i.e., more is available than is
demanded at that price (p. 252).

As will
be seen later, theory and experience both suggest that if
and when the United States becomes a larger importer, the
effect will be to lower prices (p. 253).

the producing nations can set production quotas and, what
is more important, obey them, they will inevitably chisel
and bring prices down by selling incremental amounts at discount
prices. . . The world oil cartel of the 1930s was eroded by
this kind of competition, and so will be the new one in the
1970s (p. 258).

underestimated both the growing demand for oil and the power
of OPEC’s robber states to police their ranks. His 1972 forecasts
remain the most stupendously inaccurate in recent academic history.

What may
seem astounding to those outside the academic community is this:
Adelman is still taken seriously as an expert in the economics
of the oil market. Johns Hopkins still keeps in print his books,
Out of the Bottle: World Oil Since 1970
(1995; $60)
and The
Economics of Petroleum Supply: Papers by M. A. Adelman

(1993; $85). Johns Hopkins has targeted the ultimate sellers’
market in the book industry: university libraries, which will
pay this kind of money for the opinions of the most legendary
academic mis-forecaster of our era.

More recently,
Adelman joined with M. C. Lynch to write “Fixed View of Resources
Creates Undue Pessimism” for The Oil and Gas Journal
in 1997. What creates legitimate pessimism regarding the future
availability of oil is that Adelman is on the side of the debate
over oil that says there will be no problem with oil supplies.
“There’s always more where that came from!” In the world of
the economist, the crucial question, “At what price?”, is always
asked selectively.

The power
of governments to disrupt markets is not taken seriously by
some free market economists. They assume that the market will
always get around a problem created by government. But the answer
to the question, “At what price?”, may be far higher and more
painful than academic economists forecast. The modern mixed
economy is all too often on the side of government, or, as Ludwig
von Mises once titled a book, planned chaos.


the world’s richest cartel. Its goal is to use the threat of
violence to maintain high net revenues for member governments
that have stolen land and the reserves of oil and natural gas
that are under this land. The result has been the rising price
of oil, the extension of the welfare state, the creation of
massive dependence on the state by rapidly growing populations,
and severe unemployment for formally educated graduates of tax-funded
university systems.

Into this
witch’s brew of misallocated scarce economic resources come
Osama bin Laden and radical Islam on one side and United States
troops on the other.

member nations began by denying the right of peaceful exchange
to private land owners. It may end when others in the Middle
East, far more skilled at inflaming the passions of violence,
follow OPEC’s example. By centralizing wealth, OPEC’s member
nations have created highly visible targets, either for theft
(jealousy) or destruction (envy).

And to
think that it all began in Texas with a politician named Hogg.

5, 2003

North is the author of Mises
on Money
. Visit
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