While this editorial note is being written there is precious little news about the second OPEC summit, scheduled to be convened later this month in Caracas.
Based on preliminary information the agenda of the heads of OPEC states does not include any revision of objectives in the forty year old statute of the organization.
And all likelihood's indicate that the same four decade old principles are being re-endorsed in the draft communiqué of the summit.
It seems, therefore, appropriate to examine if the objectives laid out for OPEC under the prevailing situation forty years ago are still valid and good enough
for the entirely different world of today.
If not then what is preventing the organization from a suitable revision of the said objectives and goals?
The objectives and principles in question are dealt with in articles 2 and 4 of chapter one of OPEC statute:
Article 2:
a) The principal aim of the Organization shall be the co-ordination and unification of the petroleum policies of Member Countries and the determination of the best means for safeguarding their interests, individually and c collectively.
b) The Organization shall devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations.
c) Due regard shall be given at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on their capital to those investing in the petroleum industry.
Article 4:
If, as a result of the application of any decision of the Organization, sanctions are employed, directly or indirectly, by any interested company or companies against one or more Member Countries, no other Member shall accept any offer of a beneficial treatment, whether in the form of an increase in oil exports or in an improvement in prices, which may be made to it by such interested company or companies with the intention of discouraging the application of the decision of the Organization.
As it can be seen most such objectives are quite relevant to the prevailing circumstances in the 60's when there was an open confrontation between giant oil companies' interests and that of oil exporting countries. Such an encounter does not exist now and the circumstances are completely different.
Today OPEC is facing IEA (International Energy Agency) which fronts for the major oil consuming countries. In this regard following points relating to the OPEC objectives and principles are worth noting:
1) A casual review of the OPEC history and causes of the foundation of the organization reveals that the founding members had no intention of confronting the consumers but the main aim was to create close cooperation among members to counter the unjust conduct of the major oil companies and their unreasonable pressure against the producing states.
Then, the said companies kept the prices of their oil purchase very low and by reporting very high production costs managed to minimize the amounts of "royalties" they were supposed to pay the countries in which they were producing oil.
Obviously any unilateral action against such companies by a single country was hardly practical if not impossible. This was because the entire oil industries of the said states were predominantly under unquestionable control of those companies.
The oil rich countries were still in dire need of capital and technologies provided by giant oil companies. Under the circumstances, if any single producing nation tried to demand a fairer treatment, naturally the companies would take their assets elsewhere.
Hence a coordinated and collective conduct of the suffering states was essential and the issue is clearly dealt with in article 4 of the statute. As mentioned earlier such a subject is not an issue any longer, or at least it is not the main one.
2) In part "c" of article 2 the "necessity of securing a fair return on the capital of those investing in the petroleum industry "has been stipulated. Whereas in part "a" of the same article "the principal aim of the organization" has been to "safeguard" the interests of member countries "individually" and "collectively"! Why, then, should there be any reason for an organization, designed to defend and safeguard the interests of the oil producing member nations, to emphasize on ensuring a fair return for the opposite front? It is no business of OPEC to see that those companies are making profit or not.
More particularly so when in a free market economy competition is the key to the better utilization of resources. Today, anyhow, the rules of the functions are well defined and the said issue has no place any longer.
3) As mentioned earlier OPEC was not at all created to confront the oil consuming countries, on the contrary IEA, spearheaded by America, assumed the role of confronting and containing OPEC members.
That is exactly why right from the inception of IEA some industrial countries who had friendly relationships with OPEC members, were not prepared to accept membership of the Agency.
They were of the belief that dialogue, between producers and consumers, was the rational way of resolving problematic issues.
This was invariably opposed to by Americans who tried to indirectly induce their own ways of managing oil production by OPEC and hence they needed the members to be weak-kneed.
The past experience has proved such a policy ineffective because OPEC members have no choice other than following a policy of understanding and compromising with the consumers.
4) In view of the existence of future and paper markets and very serious fluctuations of the prices, the issue of "price stability", stipulated among primary objectives of the statute, makes no sense any more.
The issue should, therefore, be replaced by rationalization of prices and containment of their fluctuations.
5) Securing steady income runs contrary to efficient supply because at times gaining a preset income may require a cut in the supply.
In paragraph "b" of article "2" the clause "ensuring stabilization of prices in international markets" appears contradictory to what has been cited in paragraph "c" of the same article "an efficient, economic and regular supply of Petroleum to consuming nations".
It may not always be possible to have "stabilization of prices", "efficient supply of oil" and "regular" all at the same time. The reason is obvious.
Price is a follower of supply and demand equation and any change in either will change the price. For instance, if there is a fresh discovery and production of oil in a non-OPEC state, the supply increases while the demand may remain unchanged, the price will naturally drop.
Under the circumstances if OPEC wishes to stabilize the price (paragraph b) then it has no choice but to cut the supply. This contradicts paragraph "c".
And if the organization chooses not to cut back, then the drop in the price contradicts paragraph "b". The problem is further intensified when there is no clear definition for "efficient supply".
6) In paragraph "c" of article "2" it has been emphasized on the "necessity of securing a steady income to the producing countries".
This too contains unavoidable contradiction with other principles of the statute. The past forty years of experience tells its own tale of constant price fluctuations.
Keeping to the letter of this objective means that if at any given time oil price drops, in order to maintain the steady income, either the production has to increase which will, no doubt, cause a further drop in the price (against the interests of OPEC) or the price has to increase which means the production will have to decrease (against another part of the same paragraph insisting on efficient and regular supply)!
Furthermore, as shown again by the forty years of OPEC's history, if there is no understanding between producers and consumers, securing steady incomes for the OPEC members will prove impossible and they will have to resort to other means to resolve their economic problems.
To avert the impact of world oil price fluctuations on their national economic planning's they have to use mechanisms such as a special "reserve fund" or "oil insurance".
7) In the statute of OPEC, oil has been treated as a unique product, while in today's world oil is being seen as one of the energy carriers. As a result problematic issues related to oil can only be resolved with respect to its position in the global energy basket.
8) In the entire statute there is no mention of the phrase "market share". Whereas, at least in the past two decades, this important issue has practically served as the focal point of attention for OPEC.
Whether from the point of view of "oil share" in the global energy basket vis-à-vis other energy carriers or other oil producers.
9) The new and important environmental and globalization subjects had no place then in the statute. These topics have unquestionable impact on oil related domains now.
10) When OPEC was being founded phenomena such as "petroleum stock markets" and "strategic petroleum reserves" did not exist, so they did not appear in its statute. But now there can be no denying of their effect on the oil market.
As can be clearly seen OPEC is in need of a fundamental revision of its objectives and principles. Following are the main stumbling blocks on the path of the said revision:
Firstly: Necessity of unanimity, in OPEC's procedure of making decision on fundamental and serious subjects, is one major stumbling block.
Rarely are the members unanimous on an issue. Such disagreements, particularly with regards to problems of far reaching effects, have long term consequences.
These will reduce OPEC to nothing more than a group managing their day to day affairs only, at the cost of a long term and well defined strategy.
Secondly: The converging factor amongst all members is almost limited to their common interest in oil. Whereas diverging factors are many.
This is another stumbling block on the path of arriving at serious decisions. Above facts have gradually managed to create a conservative group out of the entire OPEC team, which is only interested in maintaining the status quo.
PROPOSED GOALS FOR OPEC
No doubt, for OPEC to arrive at a new set of ideals would require extensive debates and perhaps conferences at the level of experts and high authorities of all the members. However in view of the global developments, following are few useful suggestions that may pave the way for future discussions on the subject:
1) Co-Ordination amongst the member countries so as to arrive at the best means for safeguarding their basic interests in the world petroleum markets.
2) Ensuring long-term market share of the member countries in the world energy balance, with a view on oil and gas reserves, capital requirements, environmental concerns etc.
3) Ensuring rational world oil prices, taking into consideration production costs, world energy charter, continuous development and averting vulnerability of the economies of the member countries vis- a- vis oil shocks, individually and collectively.
4) Co-Ordination and co-operation of members in regularization of development of production capacities as well as in attaining necessary technologies and investments.
5) Enhancement of the relations with other oil producers in order to coordinate necessary policies and to gain support for the share of oil in the world energy basket.
6) Collective action of the member countries to counter discriminatory policies against crude oil and petroleum products.
7) Collective action against phenomena or structures that mar transparency of the oil market.
OBSERVATIONS
1) The first item of the proposal already exists in the present statute. It is a basic principle which all member are unanimous on.
2) A suitable market share for oil must be seen only within the world energy basket. Policy of consumers, especially in the IEA framework, is to reduce the share of oil in that basket. This policy must be supported.
3) Rationalization of oil prices are far more preferable to their stability.
4) In view of the serious dependency of the member countries on their oil revenues, production reducing shocks are unbearable for them. On the other hand production increasing shocks, which means new producers and hence decline in the price of oil, are again detrimental to their economies and must be averted.
5) Unruly expansion of excess production capacities, particularly by OPEC members whose final productions costs are relatively low, can result in severe rivalries among members and ensue war of prices. Conversely if such capacities are developed within a cooperating framework, then they can later be used to control the market.
6) In recent years and following few decades of constant decrease in the share of OPEC in the oil market, the need to cooperate with other producers, notably Russia, Mexico and Norway, has been realized by the organization.
In fact new players, which did not exist when OPEC was being founded, should be given due consideration when a new set of ideals are being drawn by OPEC members.
Although one can not expect much out of a summit that is due to convene for the second time after 25 years, yet a gathering of highly placed leaders of member countries, with forty years of experience and at such a favorable juncture, could well pave the way for a more powerful presence and success of the organization.
The past experience can only be put to good use if the will for criticizing the said experience exists.
Obviously the very existence of a body and its steady success very much depends on the ability of that body to adapt to the changing prevailing environment.
Source:I.I.E.S.AC.IR
© 2000 Mena Report (www.menareport.com)
