How we can screw OPEC.

Commentary about business and finance.
Nov. 23 2005 5:02 PM

My Cartel Is Bigger Than Your Cartel

How we can screw OPEC.

Psst! Wanna join an oil cartel? Click image to expand.
Psst! Wanna join an oil cartel?

What if there were a simple way to unite the world's democracies and China in a common cause, cut the trade deficit, shrink the federal budget deficit, and extend the temporary tax cuts—all while sticking it to Iran, Saudi Arabia, and Hugo Chávez? It may sound like the fondest fantasy of neocon foreign-policy fantasists like Michael Ledeen. But Jayanta Sen, a University of Chicago-trained economist who teaches at Nevada State College, thinks he's hit on a way to make it happen. In a recent paper, he urges the great oil-consuming nations of the world to unite and form a buyers' cartel. To defeat the market power of a malevolent force like OPEC (the Organization of Petroleum Exporting Countries) we need a countervailing force for good: OPIC (the Organization of Petroleum Importing Countries).

In today's global oil markets, the large producers—OPEC—essentially collude to limit supply, thereby influencing the price. OPEC (including Iraq) produces enough oil to sate only about 40 percent of global demand, according to the U.S. Department of Energy. (Here's a great chart on global supply and demand.) But because its members speak with one voice, and because the cartel loosely enforces production quotas, OPEC has an enormous influence on the global price of oil. Needless to say, OPEC's members include the national oil companies of some of our least favorite regimes, including the Islamic Republic of Iran and Venezuela.

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High demand—OPEC's members today say they get about $50 per barrel for their oil—constitutes a huge windfall for oil producers. When the market for crude is hot, the rents—the difference between the cost of production and what producers are able to sell it for—accrue solely to the producers. Each day, the United States and other oil-importing countries transfer massive amounts of wealth to the Saudi ruling family and other unsavory OPEC regimes. Sen estimates that between 1998 and 2005, with crude rising from $12 to $54 barrel, the United States' collective annual bill for imported oil rose from $40 billion to about $185 billion.

But what if big oil buyers did to cartel members what they have been doing to us for decades: use their concentrated market power to influence prices? Sen notes that the world's 10 largest oil importers—the United States, Japan, China, Germany, South Korea, France, Italy, Spain, India, and Taiwan—imported about 32.6 million barrels per day in 2004, almost exactly what OPEC produces. Oil prices are high precisely because of the growth in these importing countries. And the more we grow, the more oil we'll need, and the more cash we'll ship to OPEC.

The cartel would purchase 32 million barrels a day at a price it names and deems to be fair—the producers' cost of production plus some profit. We can't expect the Saudis to give it away at cost, after all. But ultimately, the market would still set the price of oil, as refiners, companies, governments, and traders compete to buy crude. OPIC could offer to buy OPEC oil at $20 per barrel, and then these other entities would buy it competitively from the cartel. Let's say that market price settles at about $50 per barrel. Instead of flowing into coffers on the Arabian Peninsula, that $30-per-barrel rent would be split among OPIC member governments proportionally according to consumption. Domestic OPIC producers would continue to produce oil as they wished and sell it into the larger market.

Wouldn't such a buyers' cartel discourage exploration? Perhaps. Oil producers within the buyers' cartel, such as Gulf of Mexico drillers, wouldn't be subject to the same restrictions. They could sell their crude where they wanted, but might make less than they make now. And OPEC's oil prospectors might explore less, knowing their returns on an oil strike would be lower.

The more important problem: The Saudis and their friends would respond by shutting down the global economy, making the oil shock of the '70s look mild by comparison. Sen thinks that the demands for price reductions could be phased in. "You can't go to Saudi Arabia and say: Today you're getting $50, tomorrow you'll get $20." Sen suggests that even at these lower prices, OPEC countries would be making out like bandits. Back in 2000, Saudi Prince Faisal bin Turki said that "our cost of production is currently 1 dollar and 50 cents per barrel compared to the global average of about 5 dollars per barrel." The rise of OPIC might also destabilize governments in places like Kuwait and Saudi Arabia and embolden anti-Western Islamists there.

One thing OPIC wouldn't do is cut the price of gasoline at the pump. But it could help strapped consumers indirectly. Sen estimates that the U.S. government could collect $150 billion per year in the OPIC regime. With that cash, it could cut the federal gas tax, provide tax rebates, or extend temporary rate cuts, and still have cash left over to shore up Social Security or spend on prescription drugs. Oh, and it would relieve pressure on the dollar by cutting the trade deficit by 40 percent.

It sounds too good to be true, and of course it is. OPIC is both admirably simple and hopelessly complex. And it doesn't have a prayer of working. But as we gripe about our collective incompetence as consumers to do anything about the price of oil, it's nice to think about.

Daniel Gross is an editor and columnist at the Daily Beast.