Note: Originally published on 27 Sept. 2000.
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:
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.
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".
© 2000 Mena Report (www.menareport.com)