OPEC, U.S. Energy Policy, and Oil Price Dependence

Introduction: OPEC and U.S. Energy Dependence

This paper examines the Organization of the Petroleum Exporting Countries (OPEC). Specifically, it discusses how the United States deals with OPEC and oil prices, and how the United States has failed to create a viable energy policy that would allow the country to avoid dependence on OPEC's control of the oil market. OPEC is a group of oil-exporting countries that have banded together to control the supply and price of oil. The United States heavily depends on oil from OPEC nations, which is one reason the country's oil prices have risen so dramatically. OPEC effectively controls the world oil market, and the United States has not learned how to deal with OPEC effectively — so Americans are paying the price at the pumps.

OPEC was formed in 1960 by oil-producing countries, primarily in the Middle East, as a reaction to fluctuating oil prices set by manufacturers that were predominantly owned and operated by American and British firms. The first nations to initiate and form the consortium were Venezuela, Saudi Arabia, Kuwait, Iraq, and Iran (Rueda). Forming OPEC was a reaction to foreign oil interests; these nations 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 later suspended their memberships — Ecuador in 1992 and Gabon in 1994.

The Formation and Growth of OPEC

Headquartered in Vienna, Austria, the group has historically been dominated by Saudi Arabia, which holds the largest oil reserves of any member nation. 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 (Rueda). Thus, OPEC can manipulate oil prices largely at will, and there is little 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 artificial shortages that further raise prices. Their actions affect the entire world, and since they control most of the world's oil supplies, there is little other nations can do about OPEC's dominance. 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 triggered the first major energy crisis in the United States. Long lines at gas pumps and rising gasoline prices became common during this period. As author Ghosh documents:

"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).

OPEC's Price Controls and Their Economic Impact on the United States

Furthermore, "during the 18-month period ending October 2000, gasoline and diesel prices hiked up over 50% throughout the United States" (Rueda), and prices have risen even more dramatically in recent years. The OPEC nations were well aware that the United States was dependent on their oil, and they could charge whatever they liked. This disregard of the global marketplace directly caused two major recessions in the U.S. economy — one from 1973 through 1975 and another in 1980. While recessions often decrease the amount of oil a country consumes, they still represent a windfall for OPEC nations because of the drastically increasing oil prices that flow directly to member nations.

After this energy crisis abated, the U.S. began using less foreign oil, and dependence on OPEC decreased somewhat. One reason was that many Americans turned to smaller, more fuel-efficient Japanese imports with better gas mileage. Throughout the 1980s and much of the 1990s, gas prices remained relatively stable and OPEC did not manipulate the market as aggressively. Many people believe there is a genuine shortage of oil in the world, and that this is one reason prices have risen so dramatically. However, an expert in foreign affairs disputes this theory, writing, "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 withholding oil from the market are simply artificial, 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, 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). Compounding the problem, several 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 throughout the 1980s. Because of this, member countries have often attempted to thwart each other's oil production and sales, affecting the entire group and the entire world with their internal conflicts and disagreements (Claes 135–136).

In more recent times, OPEC 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 would 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, it subsequently rose to its highest level ever, 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, dependence on foreign oil remains high, while research into alternative forms of energy remains quite low.

That is not to say that lawmakers and politicians have not addressed the issues of OPEC's price fixing and market manipulation. In the late 1990s, several members of Congress drafted legislation aimed at controlling OPEC through foreign aid withdrawal and other sanctions directed at nations that support OPEC's price-fixing. A 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).

Conclusion

A very helpful resource that covers both the OPEC organization and how it works, along with a detailed examination of the laws and statutes that govern U.S. antitrust law and why they do not apply to foreign cartels such as OPEC. Contains several comparisons of energy usage in America and around the world, along with specific legal cases that have shaped the current policy of not hearing lawsuits about foreign entities in U.S. courts.

Sterzinger, George. "OPEC and U.S. Energy." Harvard International Review 25.4 (2004): 5.

This resource discusses OPEC from a current perspective, especially rising oil prices and world problems following the September 11, 2001 terrorist attacks. It also contains relevant information on alternative fuels and how OPEC is positioning itself to corner the alternative fuel market in the future.