The Cartel That Never Was

Saudi Arabia finds in the perceived unity and power of OPEC a convenient illusion

Two weeks later, at the regular OPEC ministerial conference in Vienna, Sheikh Yamani told a press conference that the OPEC countries had decided to cut their oil production from 20 million to 17.5 million barrels a day. He further explained that they would allocate production quotas among themselves. The idea of rationing production was first broached in 1965, when the Seven Sisters still controlled the oil fields. The plan, called "the transitional production program," was rejected by both Saudi Arabia and Libya, and abandoned by an OPEC resolution in June of 1966—the only resolution OPEC ever passed on the subject of production cutbacks. In 1978, Venezuela secretly suggested to Saudi Arabia a program for production cutbacks, but the plan was never agreed upon by all OPEC members. Even after the March meeting, Yamani explained, "Saudi Arabia, as usual, disassociates itself from any production program. So, on an official level, we are not part of the decision."

Nevertheless, the Vienna announcement was hailed as confirmation that OPEC was a true cartel—a cartel capable of cutting back production to maintain prices in times of weak demand. In fact, however, no such OPEC decision was ever made at Vienna. To begin with, Iran had never agreed to the plan; it remained merely a pronouncement by Saudi Arabia. Moreover, the "allocations" assigned to the twelve other members were nothing more than the projections each had made of its planned production. At best, the announcement served to camouflage the reality that the cut came almost entirely from Saudi Arabia—not from a united OPEC. In the next four months, Saudi Arabia shut down about one third of its oil fields, and production dropped from some 7.5 million to barely 5 million barrels a day—a feat that cost Saudi Arabia up to $85 million a day in lost revenues. During this same period, most of the twelve other producers in OPEC, including Iran, Nigeria, Algeria, Libya, Venezuela, and Indonesia, actually disregarded the so-called allocations, and increased production. What was involved was not "cheating"—the allocations were never agreed upon—but the exposure of a thin disguise. For behind the announcement of OPEC joint action was a solitary actor, Saudi Arabia, which was attempting to hold up world prices. Unlike a real cartel,. OPEC cannot promulgate actual production cuts among its members because of a simple reality: most OPEC members desperately need the money from oil to remain solvent.

Despite the myth that OPEC states do not need the oil revenues they receive, a secret 1982 CIA analysis showed that they would have a minimum balance-of-trade deficit of $17 billion last year and $25 billion this year. When the economic situation of the individual members is considered, it emerges that only a few have any real room to reduce production without causing financial calamity for themselves.

The members of OPEC fall into two distinct groups. The first is the nine most populous countries, who desperately need every dollar of oil income they can get. For example, Venezuela requires all the revenue from its present production of 2.3 million barrels a day just to pay the multibillion-dollar interest on its foreign debt. Ecuador, which is in even worse financial straits, at full capacity cannot pay its debt charges this year and has been forced into virtual bankruptcy. Nigeria, which imports more than $1 billion worth of goods each month, cannot further reduce oil production without depriving its population of food and other necessities. Gabon, the other Black African member of OPEC, is in a similar financial bind. Algeria, which has a $17.5 billion foreign debt, and Indonesia, which has a $26 billion foreign debt, are almost entirely dependent on oil revenues to avoid defaults. Libya, once a cash-rich nation, recently announced that it will have to continue to produce at least twice its "quota" in order to avoid bankruptcy. Finally, Iran and Iraq, locked in an expensive war, need their oil revenues to pay for arms and ammunition.

In the second group are the three small sheikhdoms on the Persian Gulf—Qatar, the United Arab Emirates, and Kuwait—and Saudi Arabia, which are much less populous and financially stronger. Qatar, however, is at present producing only 400,000 barrels a day, and has very little room to cut back without abandoning a multibillion-dollar project to build a port. The United Arab Emirates now spends almost its entire revenue on social programs and military forces, both designed to quell complaints in the poorer emirates, and it could cut back on oil production only at the risk of inciting unrest. Kuwait, the richest of the sheikhdoms, can afford to reduce oil production to assist OPEC, but it is now producing less than a million barrels a day, and requires the gas from this production to maintain an air-conditioned society and operate its desalinization machinery.

When the mask of OPEC unity is stripped away, Saudi Arabia is left as the only state capable of substantially manipulating oil prices, with perhaps a modicum of assistance from Kuwait and the other Gulf sheikhdoms. But how long can even Saudi Arabia afford to keep up oil prices? To be sure, Saudi Arabia's revenues from oil have been immense. But so have its expenditures. By 1980, it was conservatively estimated that Saudi Arabia's projected five-year plan for development would cost $380 billion—or $50,000 per person. For the coming fiscal year, Saudi expenditures are estimated to be about $93 billion, not including the billions of dollars it lends to Iraq for its war. A secret CIA report estimates that 1982 Saudi oil revenues totaled only $68.6 billion—a decrease of $44 billion from 1981. This sum, together with about $12 billion the country earns from interest on its reserves, and $3 billion from internal revenues, would leave Saudi Arabia with a shortfall in its budget of $9.4 billion. And the deficit would grow by about $12.5 billion for each million barrels a day by which it reduced its production. In 1981, Saudi Arabia had a balance-of-payments surplus of $43 billion; this year, if oil prices remain weak, it may have a deficit as high as $20 billion—the first substantial deficit in more than a decade. At this rate, not even Saudi Arabia can afford to cut back drastically for a prolonged period without depleting its reserves. For example, Saudi reserves, estimated to be $150 billion, would last only about three years if the country cut oil production back by 3 million barrels a day.

Last fall, Saudi Arabia was having increasing difficulty meeting its bills on time, according to the cable traffic between the U.S. Embassy in Riyadh and the State Department in Washington. While Saudi Arabia could possibly reduce its expenditures for social and military programs the better to afford a huge cut in its oil production, such a course would involve political consequences. For example, last fall, when the interior minister ordered a reduction in the government subsidy given Saudis for electricity, King Fahd, according to an American Embassy report, abruptly countermanded the order, apparently because of his concern that it might lead to political unrest, In October, U.S. Embassy cables reported that Saudi pressure was being applied to commercial banks to prevent them from transferring private deposits to international accounts, which might precipitate a flight of capital.

When Sheikh Yamani demanded last December that OPEC nations defend the "OPEC" price of $34 a barrel, he was in reality insisting that these nations defend the Saudi price, under the implicit threat of a price war. For Saudi Arabia had neither the resources nor the will to continue its single-handed manipulation of oil prices. The insoluble problem is that the other producers—with the possible exception of Kuwait—cannot afford to shut down their oil production. OPEC, the cartel that never really was, can offer little relief.

At the Vienna conference, Sheikh Yamani warned that the collapse of OPEC would cause a world financial crisis that would drive many debtor nations, such as Mexico, into bankruptcy. This new line, which echoed through both the financial press and government deliberations, argued against any effective actions of the industrialized world—such as releasing government-controlled oil reserves or imposing new taxes on oil consumption—that would undermine the OPEC price. In early January, however, a secret CIA report circulated in the highest councils of the government arrived at very different conclusions. The report, called "Global Implications of Declining Oil Prices," says that whereas the balance of payments of oil-exporting nations, such as Mexico, Nigeria, and the Soviet Union, would be severely damaged by a sharp decline in oil prices, oil-consuming nations, such as Brazil, South Korea, and India, would correspondingly benefit from the price decrease. This might cause temporary problems for the world banking system, but the losses and gains would eventually cancel out. The CIA study estimates that Saudi Arabia has lost nearly $1 billion a week since last March because of cutbacks made in support of the price of $34 a barrel. If, however, Saudi Arabia lets the price fall, the CIA's econometric model suggests that the world economy would greatly benefit. A drop in oil prices to $20 a barrel, according to the report, would increase the GNPs of twenty-six industrial nations, including the United States, Japan, and most countries in Europe, by an average of 2 percent—an increment sufficient to pull most Western nations out of the current recession. A special section of the report, called "The Soviet Connection," estimates that the same drop in price would mean a loss of $8 billion in hard currency for Russia, because of a drop in both oil sales and sales of arms to Libya, Iraq, and Iran.

For nearly a decade, the OPEC mask has permitted Saudi Arabia to set prices for the world without having to take direct responsibility for its actions. As prices continue to fall, however, the façade no longer hides the bitter rivalries and squabbles among members. Simply because OPEC's members have a common interest in the oil market does not guarantee that they can resolve their rivalry. The paradoxical question "What are we fighting about, since we want the same thing?" applies to their dilemma. The answer is that they are fighting precisely because each wants a larger share of the world oil market. If, however, any one member succeeds in enlarging its share, it will be at the expense of another member. The OPEC members are, and will always be, competitors—not allies. While they may try to hide their fighting from outsiders by means of unenforceable paper agreements, it will persist until it is resolved by a price war.

Oil prices have risen twentyfold over the past decade. Part of this dramatic increase has been the result of the free market's attempt to reconcile dwindling production in America and elsewhere with expanding demand. Another part was the result of the fears generated by wars and upheavals in the Persian Gulf, which in turn led to frantic efforts to hoard oil in anticipation of an uncertain future. And part was the result of the manipulations of a few countries—notably Saudi Arabia and Libya—that cut back production at moments of world crisis. OPEC was undeniably important during this period, but not as a production-fixing cartel. It was a convenient diversion that distracted public attention from the real causes of the oil crisis.

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