From the WSJ Opinion Archives
BUSINESS WORLD
Our New Buddy, OPEC
Iraq and the myth of "energy dependence."
For decades the Organization of Petroleum Exporting Countries, a k a OPEC, was a prime bogeyman of U.S. foreign policy. Two years ago, Republicans in Congress were pushing a bill to arraign the group under U.S. antitrust laws for price fixing. Even the airlines were thinking about getting into the act amid surging fuel costs. Likely target: Citgo, a juicy antitrust defendant because it's a wholly owned subsidiary of Venezuela's national oil company.
Nothing ultimately came of these twitches, but OPEC remains a neuralgic subject. The latest jump in oil prices spurred Chuck Schumer and 31 other senators last week to call on the White House to release oil from the Strategic Petroleum Reserve to drive gasoline prices back down.
Sen. Schumer's devotion to cheap pump prices is unstinting: It was his seventh such demand in 48 months. One thing has changed, however: OPEC is now us, so to speak.
Last month a new U.S.-sponsored Iraqi representative took his seat at the group's latest meeting in Vienna, and it was to make room for Iraq's growing output that OPEC announced the production cuts that so dismayed Mr. Schumer. Yet it was hard not to hear the U.S. government quietly applauding this embrace of its proto-regime in Iraq by the supposedly criminal oil cartel.
Before we collapse in a puddle of cognitive dissonance, maybe we need to take a new look at the connection between OPEC and our energy insecurities.
Contrary to much casual journalism, OPEC hardly controls prices. The group accounts for less than 40% of world supply, insufficient to establish an effective cartel. Nor does it have any club with which to enforce its edicts. Member governments invariably produce and sell all the oil they can, never mind any formal quotas.
The exception is Saudi Arabia, owner of the world's largest reserves and lowest production costs. The Saudis spend immense capital to maintain more production capacity than they use, allowing them to influence (or threaten to influence) prices over the short run.
Like any cartel, OPEC appears to be effective when prices are rising and ineffective when prices fall. Of course, this leaves out the possibility that prices would behave about the same if OPEC didn't exist.
Surveying the landscape, A.F. Alhajji and David Huettner (at the Colorado School of Mines and University of Oklahoma, respectively) conclude that the oil market is basically competitive, albeit with a "dominant producer" in Saudi Arabia. In other words, we can dispense with the common media fantasy that were OPEC to cease its criminal ways, oil prices would fall permanently to $10 a barrel.
A fact of life for any commodity producer, especially in a capital-intensive industry, is a necessary preoccupation with how prices will behave in the future, which in turns depends on the output plans of fellow competitors. Traditional antitrust treats it as desirable that such industries operate in ignorance, though the upshot is probably anything but consumer-friendly. Prices are more volatile, the future is murkier, and therefore both producing and consuming industries invest less than they would if the market were better informed.
On balance, OPEC serves a marginally useful role by demystifying Saudi intentions. It certainly doesn't deserve to be a primary focus of U.S. foreign policy. Instead, trouble arises because much of the world's oil is concentrated in a vulnerable corner of the globe; also, because much of it is controlled by governments, not private companies, and governments sometimes let political hatred cloud their commercial judgment.
Yet not even these facts are sufficient to justify our nation's heavy rhetorical investment in energy insecurity. You also have to add to the computation a fundamental misdiagnosis of the 1973 "oil" crisis, whose worst effects (gas lines, spot shortages) were the self-inflicted consequences of U.S. domestic price and allocation controls.
In any event, nowadays U.S. consumption of Persian Gulf oil totals about $18 billion a year, less than we spend on computer parts from Asia. The price mechanism works: Oil would flow in greater volume from higher-cost sources in the unlikely event of a catastrophic disruption of supplies from the Gulf. Canada, for instance, has 180 billion barrels in oil sands that are producible, judging by a new Shell project, at $15 a barrel.
Yet so ingrained are the false assumptions of energy insecurity that many pundits and politicians continue to insist that the U.S. has been remiss in failing to impose monumental costs on itself in pursuit of "energy independence."
This is nothing but the isolationist illusion reclothed, and nonsensical even by the assumptions that such people embrace. If we stopped importing oil, oil wouldn't be any less important to the world economy, the world economy would still be critical to our prosperity, and we'd remain the only country with military power to protect the flow of oil.
Instead, here's the real reason we care about the security of the Gulf: Oil is wealth, and wealth attracts bandits. For the past 60 years we have been committed to the proposition that the world can prosper by peaceful trade, not by nations trying to seize resources by force.
By one count, Americans have spent nearly $1 trillion on this cause since 1973 (and another $1.7 trillion in defense of Israel), an outlay impossible to explain in terms of fuel security. Likewise, the further costs we're courting on behalf of Iraq hugely outweigh the real value of that country's oil to us.
This is where Sept. 11 inescapably changed the picture. Spending another trillion dollars and waiting three more decades for the Middle East to grow up politically suddenly seemed like a bum bet. History occasionally calls on us to do more than twiddle our thumbs. In fact, $87 billion to put a democratic Iraq on its feet might turn out to be one of the better bargains Congress has ever seen--and it has nothing to do with oil.
Mr. Jenkins is a member of The Wall Street Journal's editorial board. His column appears in the Journal on Wednesdays. He is also editor of OpinionJournal's Political Diary, a new premium e-mail service. Click here for subscription information and a sneak preview.
