The Real Gas Threat - from OPEC

March 26th, 2008 11:39 AM

     Skyrocketing gasoline prices may be pushing the U.S. economy over the edge, but the oil-rich lords of the Organization of Petroleum Exporting Countries (OPEC) oil cartel don’t give a hoot.

     Chakib Khelil, OPEC’s president and Algeria’s oil minister, has warned that oil may go to $120 a barrel. Khelil is an optimist – if one or more of the major oil producers, such as Iran or Venezuela, gets embroiled in a conflict or otherwise destabilizes, oil could go up beyond $130 a barrel, experts say.

     And OPEC, whose members are getting rich and fat strapping astronomical oil prices on the backs of working American families, have the audacity to blame the U.S. for the current outrage: “…the truth is that the current prices are linked to US economic problems as well as to the value of the dollar,” Khelil said, according to a recent London Times report.

     Both President George W. Bush and Vice President Dick Cheney have traveled to Saudi Arabia to beg King Abdullah I to open the spigot. Cheney spent four and a half hours on the King’s horse farm. He knows Abdullah since his days as Secretary of Defense when U.S. troops saved the Saudi Kingdom’s neck from the marauding armies of Saddam Hussein in 1990. The Iraqi dictator’s forces, already positioned in Kuwait, could have taken the Saudi oil fields in a matter of days.

     Yet the Saudis, ever reluctant allies, listened politely and appeared ready to do little else.

     While the OPEC summit held earlier this month agreed to hold production steady, the prices for light sweet crude on the New York Mercantile Exchange (NYMEX) reached an all-time high, almost $112. And the Saudis are certainly not the biggest problem when it comes to squeezing the oil pipeline for money.

     At summit after summit, the Saudis have resisted calls from Iran, Venezuela and Algeria – the OPEC hawks – to actually cut production. And what a gathering these meetings are. Venezuela’s Hugo Chavez competes with Iran’s President Mahmoud Ahmadinejad for the anti-American invective prize. You can have your pick between “Yankee imperialism” and the “Great Satan”!

     Granted, there are several other issues contributing to rising oil prices besides OPEC’s rigidity. These include the steadily growing demand from China, India, the Middle East, Africa, and other developing economies. The weakened U.S. currency and a flood of depreciating U.S. dollars into commodities futures markets – to preserve investor value – are also key factors in the oil price bubble.

     Yet, it is OPEC’s resistance to adding productive capacity, liberalizing the oil and gas sector and allowing foreign investment to participate on an equal playing field which now threatens America’s – and the world’s – economic prosperity. The path to today’s intolerable status quo has been long indeed.

     Since its inception in 1960, OPEC, which is dominated by Persian Gulf producers, successfully restricted its member states’ petroleum production, artificially distorting the world’s oil supply to line its members’ pockets.

     The production quotas of OPEC members are determined at semi-annual meetings of their petroleum ministers and are at times changed through telephone consultations. This supply-fixing strategy has brought devastation to the U.S. and global economies several times:

    In 1973, OPEC’s actions in response to U.S. support for Israel, which was attacked by Egypt and Syria in the Yom Kippur War, resulted in a worldwide economic recession that lasted from 1974 to 1980.
      In 1980, OPEC’s failure to increase production in the face of the Iranian revolution resulted in historically high oil prices of $81 per barrel (in 2005 dollars).
      In 1990, OPEC refused to increase production sufficiently to keep prices stable as Saddam Hussein occupied Kuwait.

     The cartel’s operations ensure that the oil and gas economies of its member states are insulated from foreign investment flows. Members of OPEC have not worked to enhance the rule of law and property rights and have imposed severe restrictions to prevent foreign investors from owning upstream production assets (oil fields and pipelines). This is a testament to the cartel’s de facto monopoly over the petroleum market.

     Indeed, the only serious challenge to the organization came in 1978 when a U.S. non-profit labor association, the International Association of Machinists and Aerospace Workers (IAM), sued OPEC under the Sherman Antitrust Act, in IAM v. OPEC. But the case was rejected in 1981 by the U.S. Court of Appeals for the Ninth Circuit. OPEC, the court affirmed, could not be prosecuted under the Sherman Act due to the foreign sovereign immunity protection it claimed for its member states.

     That decision was wrong. Government-owned companies that engage in purely business activities do not warrant sovereign immunity protection, according to prevailing legal doctrines. Yet, the Bush Administration threatened to veto congressional legislation which would have allowed application of U.S. antitrust law against OPEC.

     Cartels keep prices high and competition out. They also keep oil-producing economies down. The petrodollar glut empowers resistance to much-needed economic reform in the oil-producing countries. State subsidies for everything from unprofitable state industries to bloated bureaucracies to the lavish lifestyles of the super-rich at the top of the oil pyramid continue unabated, funded by Western consumers.

     High oil prices, which OPEC facilitates, serve to transfer wealth from Western consumers to petroleum producers. This wealth transfer funds terrorism through individual oil wealth and government-controlled “non-profit” foundations. It also permits hundreds of millions of dollars to be spent on radical Islamist education in madrassahs (Islamic religious academies). 

     Today, OPEC benefits from the largest transfer of wealth from the West in history. As Gal Luft, Director of the Institute for Analysis of Global Security recently wrote, at current oil prices the United States sends $460 billion per year overseas to finance its daily purchase of 12 million barrels of imported oil. This amount of money is about the size of our defense budget and three times the size of the ''economic stimulus'' package recently passed by Congress.

     Dependence on imported oil threatens the U.S. with a long-term economic decline and loss of sovereignty, according to Luft. It allows OPEC governments, many of which do not have our best interests in mind, not only to laugh all the way to the bank but to own the bank. The recent buyout by foreign governments of chunks of America's prime symbols of economic prowess – like Citigroup, Merrill Lynch, Morgan Stanley, and Blackstone Group – is only a preview of what is yet to come should the petrodollar-fueled transfer of wealth continue.

     At current oil prices it would take OPEC just six days to buy GM and three years to buy a 20-percent voting block in every S&P 500 company. This kind of buying power, amassed by the oil producers, can eventually threaten the West's economic and political sovereignty, and influence not only our domestic business practices, but also our most deeply held ethical, religious, and spiritual values.

     America is facing a choice. The U.S. and other oil consumers in Europe, Japan, assisted by China and India, can take serious steps to diversify their energy sources and open up hydrocarbon sectors worldwide to allow investment and ownership by international companies. This would require more transparency and liberalization of investment and improvement in the rule of law, including better protection of property rights.

     Or we can continue with the status quo, in which case proud Americans will increasingly become the groveling dependents of the super-rich OPEC oil sheikhs.

-- Ariel Cohen, Ph.D., is Senior Research Fellow in international energy security at The Heritage Foundation and a guest columnist for the Business & Media Institute.