Fadhil Chalaby , an Iraqui intellectual, for ten years at the helm of OPEC and friend of Zaki Yamani, the long standing Oil Minister of Saudi Arabia , tells the story of the debate and contradictions within the Orgnization.
When the Organisation of Oil Exporting Countries , OPEC , was created in 1960, it was an answer to a competitive move of the main producers of crude oil, the large international oil companies , who wanted to maintain their control on the industry, and wanted to block possible potential competitors, developing new oil producing areas.
To do that, they reduced the price, sure as they were to have he cheaper oil sources in the world. The move was a normal operation of the oil cartel , made up of the “ seven sisters” which had until that time controlled the whole industry. However, reducing the price meant reducing the money that the companies were paying to the producing countries , as royalties, the money “ due to the King”. Those countries, led basically by Venezuela, were not amused, and create OPEC to defend their own oil income. How this new Organisation would operate to obtain its objectives was not really decided, and it started with the obvious move of negotiating with the oil companies.
At that time , there were two theories on the possible behaviour of OPEC . It could try to swipe away the oil companies, taking over their oil production, refining and distribution , and slowly to become in due time the only owner of the oil. That would imply, among other things, a competitive strategy , with prices low enough to convince the oil companies that the oil business was no more profitable. This was the theory enunciated, but never developed, by Enrico Mattei, the founder of ENI, the Italian oil company, who was driven by his anti colonialism , and by the interest of countries like Italy, who had no access to cheap oil. The other theory , developed by economists, was that the Organisation should behave like a cartel, making sure to keep competitors at bay and pricing its oil in such a way to make not profitable to find new fields, which would in any case not be cheaper to produce that the very large fields in the Arab-Persian Gulf.
This theory was supported by economists who had read in Paul Frankel’s “Essential of Petroleum “ that marginal cost were negligible in oil production, and the industry had to be run by a cartel, that is, the group with control over the cheaper fields. Both theory were proven , in fact, to be very far from what the oil producing countries wanted , that is, to get as much money out of the oil as was possible. That meant that the price had to be increased to a maximum in the first phase to increase the “royalty” , and , after nationalisation of the oil companies, to feed all into the State’s budget. That meant overriding the fear coming from the economists that high prices would reduce demand for oil, at the same time creatingcompetitive productions from areas out of OPEC’s control. Both those fears happened to be proven correct , but OPEC was driven basically by countries with relatively small reserves , that needed money immediately, and were not thinking of the future.
Some Arab ideologists even answered the economists’ fears by saying that oil had to be kept in the ground to service the next generations , so that high prices were a double advantage, providing money now from a reduced production, and keeping some in store for the future. The difference between the economists and the oil Ministers of the majority of the OPEC Countries, has been the whole life of Fadhil Chalaby , an Iraqui intellectual, with PHD from French Universities who did his training in Oil as a Permanent Secretary for Oil in the Iraqui Government and was for ten years the Secretary General of OPEC , although with a slightly different name of the job . The story of this discussion, and of the relative frustration, is perfectly told by his book , which tells the story of a long disagreement , and eventually of a retreat of both Fadhil Chalaby and his great friend, Zaki Yamani , the long standing Oil Minister of Saudi Arabia .
They were both defeated by the urge to get the maximum income possible at any given moment . That was not a theory elaborated in any way, but a must on which the OPEC member fell every time. OPEC ‘s policy was dictated , writes Chalaby quoting a non identified member of OPEC, by the fact “ that OPEC has become a prisoner of its member countries’ budgets”. Still now, the OPEC members , when talking of prices tend to deduce the price they want out of the needs of the States’ budget.
Of course , this flow of money is in some cases “invisible” as some recipients do not show any sign of having invested that huge amount of money for the development of the Country , as the money often runs away in a thousand rivulets. Chalaby tries , at the end of his book, to write a chapter to define OPEC. It is not a cartel , that is ,an organisation that takes maximum care of its market share , and fights with low prices every possible competitor. “The main factor that unites OPEC’s member Countries with their diverse interests is the common goal of immediate short term maximisation of revenues .”That explains why OPEC has lost market share as its high prices encourage exploration . The share of OPEC in the world’s primary energy declined from 27 %in 1973 to 11% in 1984, to 16% in 2005. This is due not only to more oil being found in non OPEC areas, , but also to the development of other sources , like natural gas, nuclear energy , and increasingly , renewables.
To day, the situation of the oil industry is even more complex. Crude oil is now priced on the basis of non OPEC crudes, one North American, “West Texas Intermediate” , and the “Brent” crude in the North sea. Both of them of limited production, or like Brent, menaced by field exhaustion. The actual price is dictated by the futures’ market, and pushed up by the easy flow of cheap capital fuelling speculation. The urgent need to reduce CO2 emissions is driving consumers countries’ Governments to phase out oil as much as possible. The higher the price , the lower the demand , that’s the basic truth that OPEC always denied , with the result of shrinking its market share. It may happen that the playing out of oil will be made possible more quickly than expected , due to the combined action of high prices , energy conservation , the development of cheaper renewables and more efficient electric cars.