Rejoice: Opec’s days are numbered
THERE was a time when the Organisation of the Petroleum Exporting Countries (Opec), the cartel of oil producing nations, was the world’s Enemy Number One. The group wielded terrifying powers: it could make or break economies by increasing or reducing the supply of oil, sending its price rocketing or crashing. No longer: Opec, while still a destructive force, has mutated from scary to ridiculous. Rather than fearing its meetings, people are starting to see their funny side: a bunch of squabbling, self-interested nations that are unable to agree on anything.
Take yesterday’s meeting. It was hoped Opec would hike output, perhaps by 5-6 per cent, to compensate for the reduced supply from Libya and try and dampen oil prices, now so elevated that they are cutting demand and actually hitting producers. It was not to be. The meeting descended into farce, with members angrily ganging up on each other and describing the gathering as the worst-ever. Less amusingly, the price of oil jumped on news of the bust-up.
Marc Ostwald, a strategist at Monument Securities whose notes are invariably interesting, convincingly argues that yesterday’s fiasco confirms that Opec is moving closer to break-up. This would be wonderful news for oil consuming nations – and it would finally eliminate a 40-odd year distortion at the heart of the global economy. All cartels are bad – but cartels of states are the worst.
The problem for Opec is that its membership’s interests are so divergent. It has 12 member countries: six in the Middle East (Saudi Arabia, Kuwait, Qatar, the United Arab Emirates, Iran and Iraq), four in Africa (Algeria, Angola, Libya and Nigeria), and two in South America (Ecuador and Venezuela). Algeria, Venezuela, Iraq were definitely against increasing output, as almost certainly were Iran, Angola and Nigeria. This suggests only the Gulf Cooperation Council countries, friends of the West, backed an increase. The biggest beneficiaries of the cartel’s dwindling influence may well prove to be non-Opec energy producers such as Russia and Kazakhstan. This would come with its own problems, of course, but competition is always better than monopolies, including in the supply of oil.
So why did so many countries not want to increase output, despite the high price of oil? Opec countries are desperate to use foreign exchange reserves from oil sales to subsidise the price of increasingly expensive food imports to avoid a popular uprising and thus the fate of Egypt and Tunisia. Many Opec members would struggle to increase their production, most notably Iran, or need a lot more investment to do so (Algeria, Angola, Iraq, Nigeria and Venezuela fall into this camp). Last but not least, many Opec nations hate the US as much as ever.
Opec’s woes are another reminder that the post-World War II international order is disintegrating. The Eurozone, the World Bank/IMF, the dollar’s rule as the world’s reserve currency, the illusion of unity at the G20 and even the United Nations are losing their credibility. Instead of bemoaning this collapse of outdated institutions, we should look forward to building a much looser, less Western-centric, network-based global order, built on trade, globalisation and security pacts rather than on bureaucracies. One thing is sure: the new world order has no room for obsolete cartels such as Opec.
allister.heath@cityam.com
Follow me on Twitter: @allisterheath