Petroleum Exporting Countries (OPEC). Specifically it will discuss how the United States deals with OPEC and oil prices, and how the United States has failed to create a viable energy policy that will allow the country not to depend on OPEC's control of the oil market. OPEC is a group of countries that export oil around the world that have banded together to control the supply and price of oil. The United States heavily depends on oil from the OPEC nations, which is one reason that the country's oil prices have risen so dramatically in the past year or so. OPEC controls the world when it comes to oil, and the United States has not learned how to deal with OPEC effectively, and so Americans are paying the price at the pumps.
OPEC was formed in 1960 by the oil-producing countries primarily in the Middle East as a reaction to fluctuating oil prices by oil manufacturers, which were predominantly owned and operated by American and British firms. The first group of nations to initiate and form the consortium were Venezuela, Saudi Arabia, Kuwait, Iraq and Iran (Reuda). Forming OPEC was a reaction to foreign oil interests, and they felt they would have more control over the development and management of their own oil reserves. As time went on, membership grew to include Algeria, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. However, Ecuador and Gabon suspended their memberships; Ecuador in 1992 and Gabon in 1994. Headquartered in Vienna, Austria, the group has historically been dominated by Saudi Arabia, because it has the largest oil reserves of any of the member nations. OPEC has dominated world oil prices almost since its inception, and has caused inflation in oil-importing countries like the United States. For example, instead of an equal split in profits on oil from their countries, OPEC initiated a large royalty percentage on each barrel of oil. In 1973 they fixed the price of oil across the board and the price increased almost 70% virtually overnight (Reuda). Thus, OPEC can do whatever they like with oil prices, and there is little or nothing other nations can do to stop them.
Since they control oil prices, they can raise the cost of a barrel of oil at will, and they can also decrease production to create false shortages that also raise the price of oil. Their actions affect the world, and since they control most of the world's oil supplies, there is little other nations can do about OPEC's dominance and control over the supply and price of oil. As one expert notes, "It is the classic case of how a handful of otherwise weak nations, by historic chance and determination, can change their destiny dramatically and force the powerful nations to acquiesce to their demands time and time again" (Ghosh 3). How did OPEC get so powerful, and why has the United States not developed alternative strategies to cope with the wide swings in oil prices?
OPEC first raised oil prices dramatically in 1973, and then placed an embargo on oil against the United States and the Netherlands, which began the first energy crisis in the United States. Long lines at the gas pumps and rising gasoline prices were common during the time. As author Ghosh continues,
The dependence on OPEC oil increased dramatically in the United States during the last decade and a half. According to a study by the Federal Energy Administration (FEA), U.S. oil imports rose 150% between 1968 and 1973, from about 2.5 million barrels a day (m/b/d) in 1968 to 6.3 m/b/d in 1973. Imports from the Arab oil-producing countries had risen to 31.9% in 1976 from a paltry 2% of total U.S. oil imports in 1970 (Ghosh 3).
To continue, "During the 18-month period ending October 2000, gasoline and diesel prices hiked up over 50% throughout the United States" (Rueda), and they have risen even more dramatically in recent time. Thus, the OPEC nations knew the United States was dependent on their oil, and they could charge whatever they liked. This disregard of the global marketplace has directly caused two major recessions in the U.S. economy, one in 1973 through 1975 and another in 1980. While recessions often decrease the amount of oil a country consumes, they still are a windfall for OPEC nations because of the drastically increasing oil prices that go directly to the OPEC member nations.
After this energy crisis abated, the U.S. began using less foreign oil, and thus dependence on OPEC decreased somewhat. One reason was many Americans turned to smaller, more efficient Japanese imports, which got better gas mileage. Throughout the 1980s and much of the 90s, gas prices remained relatively stable and OPEC did not manipulate the market too much. Many people believe there is a shortage of oil in the world, and this is one reason prices have risen so dramatically. However, an expert in foreign affairs disputes this theory. He writes, "There is no shortage of oil. During the last two decades, the costs required to exploit and discover oil reserves have fallen by over 80%. Technological advances, including improved platform designs and drilling methods, allow companies better access to hard-to-tap oil" (Rueda). Thus, the shortages created by keeping oil off the market are simply false, manipulated shortages. There is enough oil for the world, but when only a few countries control it, there are bound to be problems with distribution, agreement, pricing, and legislation. As author Claes notes, "It must be applied with care, however, for OPEC is not a true cartel. Members currently agree on a common price structure, but they have never reached any kind of formal agreement on sharing of production cutbacks, the hallmark of a full-fledged cartel" (Claes 241). To compound the problem, several of the member countries have, at times, been at war with each other or opposed to each other's political policies -- such as when Iraq invaded Kuwait in 1991, and when Iran and Iraq fought during the 1980s. Because of this, member countries have often attempted to thwart each other's oil production and sale, affecting the entire group and the entire world with their infighting and disagreements (Claes 135-136).
In recent times OPEC has again raised the price of oil to over $50 per barrel, and cut production, causing a widespread and dramatic rise in gasoline prices in America and around the world. Many experts believe Americans will be paying over $3.00 per gallon of gasoline by the end of 2005. While U.S. dependence on foreign oil decreased during the 1980s and 1990s, today it is higher than it has ever been, for a variety of reasons. One expert notes, "The United States has no national energy policy to enable us to manage our energy future to meet the pressing and sometimes conflicting goals of affordability, environmental protection, economic development, and security" (Sterzinger 5). Thus, our dependence on foreign oil remains high, while our research into alternative forms of energy remains quite low. That is not to say that many lawmakers and politicians have not addressed the issues of OPEC's price fixing and manipulations. In the late 1990s, several members of the Congress drafted legislation geared toward controlling OPEC through foreign aid withdrawal and other sanctions and measures geared toward nations who support OPEC's price-fixing. A Georgetown University professor who has studied the issues notes,
Sens. Specter and Biden suggested legal action on two fronts. First, the U.S. should file a lawsuit before the International Court of Justice at the Hague, on the grounds that conspiracies and cartels in restraint of trade are a violation of international law. Second, the United States should pursue OPEC in federal court, on the grounds that OPEC's price-fixing behavior violates U.S. antitrust law (Rueda).
This has not occurred for a number of reasons that mostly lie within legal and court ramifications. Many experts believe that OPEC manipulation violates the American Sherman Antitrust Act, but that there is little legal precedence to bring the conglomerate to court in the U.S. And that serious attempts to sue OPEC would probably not succeed. Basically, the U.S. had jurisdiction over trade and anti-trust laws here in the United States, but the jurisdiction over foreign countries is nil, and so, our laws do not apply to foreign corporations or cartels. In addition, historically, U.S. courts have been extremely reluctant to hear cases that involve foreign governments; they usually simply throw them out of court and do not hear them at all (Rueda). In addition, OPEC traditionally holds their meetings to set prices and policy abroad from their own member countries, and so, jurisdiction is further complicated. It is interesting to note that the OPEC nations have never held one of the conference meetings in the United States.
And what about the future of OPEC? How has the world allowed the consortium to exist and manipulate oil prices for so long? As the legal ramifications…