If OPEC’s 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.

OPEC is 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,

The 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.

WHO OWNS THE OIL?

OPEC is 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 markets.

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.

Wealth 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 million. 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 [2001].)

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.)

THE BLIND LEADING THE BLIND

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:

The 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).

Unless 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).

Adelman 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, Genie 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.

CONCLUSION

OPEC is 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.

OPEC’s 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.