Ciao OPEC: Cartel Mythology & Millennium Myopia

The image of OPEC has long been that of the arbiter of global crude prices, dominant player in the fine-tuning of excess production capacity, self-appointed inter-State mechanism for collusion as a cartel of the "Oil Great & Good" (managing the energy market in "global interest"), public expression of exporter unity in world petroleum governance, and a body with ultimate power to shape the direction, levels and timings of world oil prices.

This is an image born of much history, the lingering aftermaths of past periodic crisis, an embedment in the global oil mindset, intensive public relations and much Vienna-initiated spin – along with an often excessive media indulgence and official propensity to promote if not absorb the mythologies of the States that constitute OPEC and its assumed implied control over oil. Reality is a lot different.

Regular scheduled talk-fests and meetings (Vienna, Geneva, elsewhere), and the flurry of periodic oil diplomacy to meet crises of high or low prices, or some temporary deviance from an assumed stability, have tended to reinforce the orthodox view. The recursive pattern is striking. The concerned media gathers as a herd. Lights, camera and action follow. The market may even appear to follow "orders", but often it does not. And sometimes it is perception, not fundamentals, that has governed the short term while the long-term crude price has lived a "life of its own".

Even so, a deeper diagnosis shows that OPEC has lacked the conditions required to act as a cartel, and it has become increasingly marginal in a global oil game within a globalised and more complex world than that portrayed by the market image assiduously cultivated. Over a number of years, the organisation has lost its edge, and it has had to suffer the consequences of some deserters over time (eg. Gabon, Ecuador). OPEC's market share of world crude supply has even fallen. Members have been known regularly to cheat covertly and overtly on Quota allocations. Intra-OPEC cohesion has often been illusory, and common strategy on numerous occasions woefully lacking. The de facto exclusion of Iraq over so many past years has been implicitly welcomed, most by those that have eaten the Iraqi lunch, and its possible (but by no means certain) that Iraqi re-entry into OPEC and thence need for much-enhanced Quota, now a source now of concern, will fracture the final illusions.

Indeed, the general prerequisites for cartel operations have been long missing. The cartel has not always benefited its Members, much less a developing world of oil importers, many of these weak and impoverished States. And even the collusion achieved has not been cost-free, as non-OPEC has opened acreage, attracted capital and built a production profile of substance (consider Angola, Sudan, Equatorial Guinea, Ecuador, now Russia, and in time others are to be expected). Nor has OPEC exhibited unmitigated unity of purpose in interest and presumed common realities. And most of all, it has not in fact evidently controlled the world oil market. Even OPEC's now famous targets and price bands – wide enough to drive a car through, at USD 22-28/Barrel – have not been sacrosanct. Diverse strategic intent amongst Members, legendary in their positional differences, has also not been much evident. What has often been good for one has not been for others. Finally, OPEC has lacked the tools, ability and desire to "punish" Member deviance – this being the leitmotif of any sound cartel.

Indeed, the capacity and willingness to collude on a systemic basis have rarely been strong, and even less so for some nowadays. For a few notables, there have been direct revenue benefits in cheating. For others, the "OPEC-line" (a shifting goal post at the best of times) has been but a convenient cover for the pursuit of pure national pecuniary interests. Much of the organisation's spin has been a compromise around multiple agendas – some commercial, some familial, others inevitably political. And the infusion of critical political dictates has often overridden the logical imperatives of price stability, making declared good intentions but a charade for naked interest – whether or not the latter have been "good or bad".

Not surprising now then that some long-established Members are having second thoughts about continuity and future collusion, at least within the bowels of their Government establishments and National Oil Companies.

Nigeria has a target for 3.0 MMBOPD by 2005, and 4.0 MMBOPD in 2010, and production capacity much exceeds the allocated Quota. The divergence of future critical need and OPEC-mandated allocation will accentuate, and with Member adherence ordained the constraints on corporate oil producers will invoke diminishing returns. Even here of late, the role of Nigeria's force majeure oil production cuts, occasioned by events in the Niger Delta, has probably been more significant in market impact that OPEC pronouncements. Algeria too has fast rising oil production that threatens its Quota limit. Both countries encourage large investments from abroad, and have succeeded in attracting major capital commitments in exploration and development for deepwater acreage and discovered fields. Both will inevitably need to quit OPEC in time.

And Iraq will now develop more reserves and produce more oil, and in time exceed most likely any Quota that OPEC as now constructed can readily offer. Venezuela in effect also has taken a trajectory under the Chavez Government (with oil production collapse, slow reconstitution) that has made it irrelevant as a coherent OPEC player.

All of this leaves the Gulf players in the OPEC driving seat, and a probability that in the near-to-medium term GOPEC (Gulf-OPEC) will emerge as the inheritor of another flawed and failed international cartel.

Nor indeed has OPEC been able to induce any new candidates to acquire membership. Observer Status accorded from time to time to solicited candidates has rarely translated into direct and sustained cooperation. The temporary "pact" struck with Russia in the recent past was a dismal failure. Privatised corporate oil in Russia knows better its real interests. And even Angola would never take it upon itself now to join, to thus and have its promising oil future written in Riyadh or Vienna.

There exist many deep-seated reasons for this apparently confused state of affairs in which the "cartel reigns, but does not rule". Myopic vision with lack of insight from segments of the "oil herd" has been one. The publicity generated on OPEC has sustained its image longer than its real operative shelf life. Media fantasy (the equivalent of "oil sex"), intense journalist-OPEC co-dependence, and the steady seduction of almost all by OPEC's spin machine have been others.

But there is more. That both condensates and gas have also been typically excluded from the OPEC paradigm (with condensates excluded from Quota, gas considered "irrelevant") makes the entire model of an oil cartel inherently problematic at best, this especially so in a game that is in essence one of global energy, not just crude oil.

Neglect of the investment realities of the global oil game, and how it has fundamentally changed, have also been primordial in this global myopia. It seems that too few analysts and followers-of-fashion have read enough long-term or contemporary oil history to differentiate multiple myths from complex facts, and even fewer have departed the mindless prism of the neo-classical economic model to interpret or intuit the forces operating on many levels shaping the fast-evolving global crude oil markets on the supply-side, let alone those in the demand world.

For if the crude oil game is one that could be "modeled", or found to fit reasonably with any analogues, it would be one of chaological character and dimension. This is not usually a paradigm taught or practiced in the halls of academia, within broker's offices, or in the realms inhabited by most oil analysts.

That shifting and turbulent events now appear to be emerging to redesign the global oil paradigm is evident (witness Iraq, and its potentially clear, plus unintended and even unknown consequences, for oil markets). Washington too could impact global oil supply and optics equally radically in further regime realignment, potential sanctions lifting, and through measures that reorder the market landscape. This should be, and now is more, self-evident.

None of this ought not to disguise the fact that OPEC has been one of the great illusions of the Twentieth Century, and one carried into the 21st Century era sustained by the deadweight momentum of intellectual stasis, policy stagnation, statistical and interpretive rigidity, all combined with the prevalent power of past thinking.

In a nutshell, OPEC is "so Twentieth Century". But for now, it is time to kiss the OPEC mythology goodbye, and deal more clearly, as had in fact to be done incoherently before, with the realpolitik and "messiness" of global crude oil prices, which have been inherently combined with attendant non-economic correlates. Ciao OPEC.

Dr Duncan Clarke, Chairman & CEO, Global Pacific & Partners International Ltd: London, Houston, The Hague, Johannesburg. Contact: Tel. + 44-207.487.3173