March 29, 2008

March 29, 2008 | Commentary on Middle East

The Real World: OPEC, Master of Universe

Skyrocketing gasoline prices may be pushing the U.S. economy over the edge, but the oil-rich lords of the Organization of Petroleum Exporting Countries oil cartel don't give a hoot.

Chakib Khelil, OPEC's president and Algeria's oil minister, has warned that oil may go to $120 a barrel. Khelil is an optimist - if one or more of the major oil producers, such as Iran or Venezuela, gets embroiled in a conflict or otherwise destabilizes, oil could go up beyond $130 a barrel, experts say.

And OPEC, whose members are getting richer every day, while working American families pay more and more for energy, have the audacity to blame the United States for the current outrage: "…the truth is that the current prices are linked to U.S. economic problems as well as to the value of the dollar," Khelil said.

First, U.S. President George W. Bush last January, followed by Vice President Dick Cheney last week, have traveled to Saudi Arabia to beg King Abdullah I to open the spigot. Cheney spent four and a half hours with the king on his horse farm, as he knows Abdullah well since his days as secretary of defense - when in 1990 U.S. troops saved the Saudis from Saddam Hussein's armies.

The Saudis listened politely and appeared ready to do little else. OPEC, at its summit this month, agreed to hold production steady, while the prices for light sweet crude reached an all-time high, almost $112 per barrel. Yet, at every OPEC summit, the Saudis have to resist calls from Iran, Venezuela and Algeria - OPEC's hawks - to actually cut production.

Granted, there are several other factors contributing to the rising oil price bubble: the growing demand from China, India, the Middle East, and other developing economies; the weakened U.S. currency; and a flood of depreciating U.S. dollars flowing into commodities futures markets.

Yet, it is OPEC's resource nationalism - resistance to increasing production, liberalizing the oil and gas sector, and allowing foreign investment to participate on an equal playing field - that now threatens America's, and the world's, economic prosperity. The path to today's intolerable status quo has been based on constraining economic freedom.

Since its inception in 1960, OPEC has successfully restricted its member states' petroleum production, artificially constraining the world's oil supply to line its members' pockets. This supply-fixing strategy has brought devastation to the U.S. and the global economy several times:

• In 1973, OPEC's oil embargo, imposed to punish U.S. for its support for Israel, which was attacked by Egypt and Syria in the Yom Kippur War, caused a worldwide economic recession that lasted from 1974 to 1980.

• In 1980, OPEC's failure to increase production in the face of the Iranian revolution resulted in the previous peak oil prices of $81 per barrel (in 2005 dollars).

• In 1990, OPEC refused to increase production sufficiently to keep prices stable as Saddam Hussein occupied Kuwait.

The cartel's operations ensure that the oil and gas economies of its member states are partially insulated from foreign investment flows. Members of OPEC have imposed severe restrictions on foreign investors, often preventing them from owning oilfields, pipelines, and refineries. This is a testament to the cartel's de facto monopoly over the petroleum market.

Today, OPEC benefits from the largest transfer of wealth from the West in history. As Gal Luft, director of the Institute for Analysis of Global Security recently wrote, at current oil prices, the United States sends $460 billion per year overseas to finance its daily purchase of 12 million barrels of imported oil.

This amount is similar to our defense budget and three times the size of the "economic stimulus" package passed by Congress. This wealth transfer partially funds terrorism, as wealthy individuals and government-controlled "non-profit" foundations pour money for "jihad."

Growing dependence on imported oil threatens America with more terrorism, long-term economic decline and a loss of sovereignty, says Luft. The recent buyout by foreign governments of chunks of America's prime symbols of economic prowess - like Citigroup, Blackstone Group, and others - is a preview of what is yet to come should this transfer of wealth continue.

America is facing a choice. The United States and other oil consumers in Europe and Japan, assisted by China and India, can take serious steps to diversify their energy sources and open up hydrocarbon sectors worldwide to allow investment and ownership by international companies.

Consumer countries should use their position as producers of crucial oil and gas extracting and refining equipment, tanker capacity, and providers of investment and banking services, to encourage access to upstream reserves in energy-rich countries.

Consumers can also condition access to their assets by sovereign investment funds from OPEC countries on reciprocity of investment access in oil-rich states.

The alternative is the status quo, in which case proud Westerners, Indians and Chinese will increasingly become dependents of the super rich OPEC (and non-OPEC) oil barons.

Ariel Cohen, Ph.D., is senior research fellow at the Heritage Foundation.

About the Author

Ariel Cohen, Ph.D. Visiting Fellow in Russian and Eurasian Studies and International Energy Policy in the Douglas and Sarah Allison Center for Foreign and National Security Policy, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation
Douglas and Sarah Allison Center for Foreign and National Security Policy

Related Issues: Middle East

First Appeared in the Middle East Times