Over the Barrel: Breaking the Middle East Oil Cartel
By Kevin Holtsberry Posted in Foreign Affairs — Comments (21) / Email this page » / Leave a comment »
I am not the first person to note the irony, but let me say it again: if we went to war in Iraq for cheap oil we got screwed. The price for a barrel of oil just topped $72 and it doesn't seem to be going down significantly any time soon. As a result, the price of gasoline is increasing just in time for summer. Economists are worried that these high prices will slow economic growth. Throw in uncertainty surrounding Iran and things don't look so pretty.
So who is to blame for all of this? (Besides Bush, Cheney and the rest of the Blood for Oil gang, of course!) In his book, Over the Barrel: Breaking the Middle East Oil Cartel, Raymond Learsy argues that OPEC (The Organization of the Petroleum Exporting Countries) bears a good deal of the blame and yet avoids facing the anger and frustration these prices engender. While Learsy believes there is plenty of blame to go around - including the President and his friends in the big oil companies - he saves his real ire for the powerful oil cartel. He sets out to detail the history of this powerful organization and to explain how we can work together to destroy it.
While almost everyone will find something to disagree with in terms of Learsy's various arguments, the subject is critical and the history is fascinating and important. If you are interested in the intersection of geopolitics, business, and energy this is a book you should read.
Learsy's argument can be broken into three stages: where we are, how we got here, and how can we get out. The first stage is rather simple: we have rising oil prices with no end in site. We have unstable and unfriendly regimes getting rich off of these higher prices and our own domestic economy suffering. Ironically, the oil wealth has done nothing but undermine the economic foundations of the oil producing countries and, to make matters worse, many of these countries are using the wealth to fund terrorism.
Learsy argues that this situation is not simply the result of normal economic factors like supply and demand but rather of ignorance, deception, and the intentional manipulation - with the collusion of many in the West - to keep prices high. He argues that scarcity is a myth that is promulgated by those who have an interest in high oil prices (oil companies and environmentalists alike) and that the rest of the world is kept in the dark by the oil producing countries. Not having verifiable numbers (on true production capacity, known reserves, etc.) prevents the market from functioning efficiently. Instead, hysteria rules the day and pushes prices ever higher.
The big oil companies are always treading a difficult balance between increasing profits and pushing prices high enough to cause significant decreased demand and the search for alternative fuels. In a normal market this tension help keeps prices down. Competition also dampens prices as producers and others along the supply chain compete to increase efficiency so as to lower the cost but not their profits.
And this is where OPEC comes in. Learsy outlines the history of this organization and how they have always managed to take advantage of the West's greed and weaknesses. They came into existence when the big oil companies – the so called Seven Sisters - were attempting to squeeze more and more profits out of their product without giving more back to the country from which the product originated. Throughout the 70s and 80s they survived because the oil companies didn't take them seriously. They have grown in strength because Western governments are afraid to undermine the supposed stability that these regimes bring and because the domestic oil business lobbies to keep prices high.
The basic cost of producing oil is remarkably steady and yet the price keeps getting pushed higher. Despite the fact that they only represent 40% of worldwide oil production, OPEC is able to leverage its clout and keep applying the upward pressure. They constantly talk as if they are only interested in stability and assure us that they will do whatever it takes to keep the world economy supplied with the oil it needs. But in reality, every chance they get they push for more profits and higher prices.
So what does Mr. Learsy propose to do about it? A lot of conventional things mostly: cut demand; tap the Strategic Petroleum Reserve; go after OPEC in international courts; invest in energy efficiency; further develop and deploy the use of alternative energy and fuels; etc. Some of his recommendations are more creative. He recommends a government controlled gasoline purchase permit program that works like an emissions cap and trade program but for gasoline. But most of his recommendations are just the standard strategies for weaning ourselves off fossil fuels.
As I noted above, there are plenty of nits to pick about Learsy's arguments. I am sure some will want to argue the relative scarcity of oil. Others will want to argue about how much influence OPEC really has given that they don't control a majority of world oil production. Some will argue the science, some will argue the economics, others the politics.
I don't want to get into the weeds of those arguments as I have neither the expertise nor the time to do so. But I think it is clear that OPEC's influence mostly comes at the expense of US economic and national security interests. Our coddling of Saudi Arabia and our refusal to stand up for consumers means more money for corrupt dictators and not only less money in American pockets but less economic development for the oppressed people of the oil producing countries.
The point is that these issues are important and need to be addressed. Over the Barrel is a readable and thought provoking look at the power of a corrupt and secretive cartel whose very purpose undermines the economies of the West.
Politicians of both parties seem unwilling to do anything about it. The only way they will is if more people are made aware of the situation and take steps to change it.
Anyone who is interested in the intersection of politics, geology, economics, and energy will want to read this book and wrestle with its arguments. You might not agree with them, or all of them, but you should think about the consequences of the issues raised. This issue is not going away. The sooner we take action the better.
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Don't get distracted by OPEC or even the price of oil. The price at the pump has to do with a whole lot more than that. Not the least of which is EPA regs... something that is completely within our control. For a couple decades now we have been trading marginal improvements in emissions for very large sums of money, and this process continues even with prices as high as they are now. The EPA doesn't care what the costs of compliance with it's regulations are.
Some of his recommendations are more creative. He recommends a government controlled gasoline purchase permit program that works like an emissions cap and trade program but for gasoline.
So, basically ration stamps that you can trade? That is about as good of an idea as price controls and a worse idea than the massive taxes some have advocated.
I'm not an expert on oil and the markets, so perhaps somebody who is can help me out. My understanding is that the reason a gallon of gas has gone up in the US has almost nothing to do with supply and demand, or with the cost of producing a barrel of oil.
Instead gas prices, as I understand it, are rising mostly due to what is a speculative bubble. That is, oil is traded on the futures markets, and these markets are betting that the price of oil will rise. Which tends to make the price of oil rise. But based on such underlying factors as the supply of oil and gasoline on hand, prices could/should be lower.
I may be off base here, in which case I invite correction.
Learsy addresses this when it comes to oil. Since little is really known about the true production capacity, reserves, etc. the market is very sensitive to inuendo and external events. He argues that OPEC and those who benefit from higher prices always spout the conventional wisdom about scarcity and uncertainty and thus help drive the prices up.
In other words, a lack of transparency warps the commodity markets. I think this is true in a number of fields.
Of course high oil prices were Cheney/Rove/Bushitlers plan all along.
It makes me wonder if anyone has bothered learning the history of the oil industry.
Going all the way back to the whale oil industry, then into petroleum starting in 1870,
the industry has ALWAYS been characterized by a cycle of intense highs and lows, more than any other commodity.
When people do not know the past, sometimes the future looks more frightening than it should.
What Learsy is complaining about is the lack of downward pressure. In the past we had boom and bust cycles because if prices got too high economic growth would plummet. Learsy argues that because of changes in the economy OPEC is able to keep up the upward pressure and avoid the kind of ugly down turn that would cause the prices to drop precipitously.
He wants Bush to use the strategic petroleum reserve as a lever to lower prices.
in the late 1980's oil dropped to a realtive all time low, Opec could do nothing about it.
In the short term, the market is a voting machine. In the long term, it is a weighing machine. It's certainly possible to have speculative bubbles (or crashes for that matter), but in the long term the price is determined by fundamentals on the ground.
And the economy is mostly immune to the effects of high oil prices, what is the big deal? Why should we release the SPR oil? Even if our economy is mostly immune to these effects, other economies are not. There will be a lessening of demand as prices increase.
This whole deal is certainly complicated, and unfortunately some basics are often glossed over for perceived short term gains.
From memory, we have 6 to 700 million barrels in our strategic reserves. The target size is meant to cover a complete lack of imports for 90 days. We could put that on the market to ease price pressures. At 2 million BPD that could create a huge effect, while creating more problems. It could be considered anti-competitive, thus drawing the ire of the WTO. Plus it doesn't drive down quantity demanded, nor is it a new supply discovery. To whatever extent it gets drawn down, we have to fill it back up. A year or two later we likely will find ourselves in the same situation, if not worse.
I often see arguments that we need to reduce our oil independence to prevent cash flow to OPEC. Keeping money out of the hands of some of those countries would be nice, but it will continue whether we're using oil or not. If America could switch to (insert magic gasoline alternative) tomorrow, the market price would tank. The Saudis et al would be making much less money, but it would still be quite profitable for them as they sold to the rest of the world. The Saudis are the low cost producer of oil. They'll be selling regardless of price. The rest of the world would then benefit from energy which would probably be much cheaper than whatever alternative(s) we go with.
The biggest thing we could do, instead of waiting for government regulation, or new technology, etc., is to simply prove a willingness to live a more oil-free existance -- or to change our behavior, as an economist might say. An American willingness to carpool to work would probably be just as effective as opening the reserves.
suspend all or some of the taxes on gas.
Here in NY we pay:
- Federal gas tax
- NY state excise tax
- Petroleum business tax
- NY state sales tax
- Spill tax
- County sales tax
Adds up to 60 cents per gallon or so. Why don't they post this info at the gas stations and why are prices listed with tax included?
Due to collecting sales tax on gas - the state makes out quite well with high pump prices. I doubt any legislator has the guts to recommend temporarily suspending at least the sales tax on gas.
They will never remove or suspend these taxes, just forget it.
But, it will get more interesting. As gas prices rise, consumption will decrease, its inevitable. So guess what happens to tax revenues? Why, they go down of course. But the state is addicted to these taxes, it has already spent them. You know what's coming don't you? Yep, a tax increase to cover the lost tax revenues of course.
It follows as the night the day ...
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I'm pretty sure that gasoline taxes here in NY are a percentage of the per-gallon price. So there's no dimunution of revenue as the price rises. Consumption decreases but the total amount of dollars expended for fuel doesn't, so the state and the localities make out fine.
I think most other places tax gasoline at a set rate per gallon, so your analysis applies to them.
You would certainly know better than me. I'm not familiar with New York taxes, I used to commute to work in NY from Miami during part of my Pan Am days and I made a concerted effort to put that part of my life behind me :-)
But I do believe that some states' taxes are fixed per gallon so I'd expect these kinds of things to happen sooner rather than later. Governments just works that way. Here in Miami we had a toll road increase to pay for --- new toll collection equipment! Go figure.
As much as anyone may want to blame OPEC for our loss of economic growth due to the increasing cost of oil, the only real people we can blame for our dependence and reliance on oil is the American government and greedy corporations. However, the drive for greed will actually save us from this despicable position.
The solution is entailed in oilendgame.com, the only (partially) government funded and easily available plan to produce a post-oil economy.
In short, the combination of lighter and stronger materials, more fuel efficiency, and the formation of a significant domestic biofuels program will cripple OPEC and create more wealth for the United States than most people would think possible.
We cannot blame OPEC because this whole situation happened once already during the 1970s after the 1973 war and the ban on OPEC exports to the USA. What happened due here? Oil prices shot up, stagflation occurred, and economic depression set in. What was the solution? Increasing fuel efficiency, lighter vehicles, and eventually OPEC was literally broken by 1986, the ban was ended, and cheap fuel became the standard of the day throughout the 1990s.
The United States can do this again, through technological innovation and the reliance on domestically produced fuel. Moreover, once Hemp becomes legal, literally all of our energy needs will vanish in a matter of a decade as there is no single other plant than can produce as much ethanol as hemp. Not corn, not switchgrass, Nothin! Moreover, new enzymes have been developed to easily turn cellulose into Ethanol, increasing ethanol efficiency by over 4x compared to only 5 years ago, and the efficiency will only increase as this technology becomes mainstream.
Bottom line is, we can blame everyone for our oil problems, but the only real solution will be implemented by ourselves (i.e., the United States)
Peace and good day.
READ OILENDGAME.COM!!!
...what happened in Hawaii? Weren't they talking a year ago about plain old-fashioned price-controls on gasoline, applied at the wholesale level? Whatever happened to that? If I recall correctly, the state legislature passed it and the governor wanted to veto it but she was going to chicken out.
I always think of Pan Am as one of the old-fashioned "great companies," an organization that had more of a purpose in life than just making shareholders richer. And of course a lot of that came from Juan Trippe. It must have been a great place to work, back in the day. Too bad they couldn't make it in this day and age, when absolutely nothing matters except making shareholders richer.
These were tied to average mainland prices (rather than some arbitrary number), so I don't know how much of an effect they've had. Maybe none at all.
With what result in mind? If there is some kind of international antitrust law, I'd really like to know about it.
If we actually brought a case against OPEC to the ICJ, we might be able to get some stern letters written.
There is a lot of good stuff in there, but I was disappointed at the emphasis on composites and hydrogen. Sorry, Mr. Lovins, but most of us can't afford a million-dollar car.
Composites are fantastic, but very, very expensive. And hydrogen is also fantastic, but do you know anyone who wants a tank of hydrogen at 5,000 PSI in their car? With hydrogen, storage and infrastructure are huge issues that likely won't be solved in the next decade, despite the storage pellets recently developed in Denmark.
If we were to aggressively pursue ethanol, biodiesel, and telecommuting, we could solve this problem within a few years. They are all very doable solutions, and ethanol and biodiesel are becoming cheaper very quickly.
Ain't no secrets here.
And since the main use of petroleum in the U.S. is for gasoline, the quickest short-term remedy is to find new ways to make do with less gas consumption.
Would be easier if certain pols hadn't blocked higher CAFE standards back in the 1990s, and if that hadn't led to the Hummer H2s and elephantine SUVs of today. People can't just trade in those puppies overnight.
As Rocky Balboa said in the first Rocky movie, "You shoulda planned ahead." We didn't. Now we pay.
OPEC Members
Member States of the Organization of Petroleum Exporting Countries
State membership, Date of membership and Status
Iran September 1960 Founder Member
Iraq September 1960 Founder Member
Kuwait September 1960 Founder Member
Saudi Arabia September 1960 Founder Member
Venezuela September 1960 Founder Member
Qatar December 1960 Full Member
Libya December 1962 Full Member
Indonesia December 1962 Full Member
United Arab Emirates November 1967 Full Member
Algeria July 1969 Full Member
Nigeria July 1971 Full Member
Ecuador* November 1973 Full Member
Gabon December 1973 Associate Member
* Ecuador left OPEC in 1992 (1412/13 AH).
THESE ARE THE CURRENT OPEC MEMBERS TO DATE. THE REASON THEY AREN'T A MONOPOLY AND NOT SUBJECT TO INTERNATIONAL LAWS AS SUCH IS BECAUSE THEY ARE JUST A CARTEL. WITH THE EXCEPTION OF SAUDI ARABIA, OUR NORTHERN NEIGHBORS IN CANADA (WHO ARE NOT OPEC MEMBERS) ARE THE 2ND LARGEST OIL PRODUCERS IN THE WORLD. ALSO OF NOTE IS THAT THE USA OUT-PRODUCES MANY OF THE OPEC NATIONS AND EVEN MORE INCREDIBLE IS THAT THE US EXPORTS (YES, I SAID EXPORTS OIL). WHY? GREAT QUESTION. I WISH I KNEW THE ANSWER. MEXICO ALSO OUT-PRODUCES MANY OF THE OPEC NATIONS. SO BASICALLY NORTH AMERICA PRODUCES ENOUGH OIL TO PROVIDE FOR NORTH AMERICA YET WE FEEL THE NEED TO LINE THE POCKETS OF THE COUNTRIES THAT WANT TO WIPE US OFF THE FACE OF THE EARTH. I DON'T GET IT SO I DEFER TO SOME OF THE MORE INTELLECTUAL MEMBERS OF THIS SITE. IF WE TRULY WANT TO BREAK THE STRANGLEHOLD THAT OIL HAS ON US (AND I DON'T BELIEVE WE DO) THERE ARE MANY THINGS WE CAN DO AS A NATION, AS A GOVERNMENT, AND AS AN INDIVIDUAL. FIRST, WE NEED PUBLIC TRANSPORTATION THATS RELIABLE,CHEAP,SAFE, AND MOST OF ALL, CONVENIENT. SECOND, INSTEAD OF EXPANDING HIGHWAYS, ROADS AND INTERSTATES TO ACCOMODATE MORE AND MORE CARS, BUILD ELECTRIC TRAIN TRACKS RIGHT DOWN THE CENTER OF THEM. EVIDENTLY IF THERE IS A NEED FOR A 10 LANE INTERSTATE (LIKE I-10 IN CALIFORNIA OR I-95 IN THE DC-VA-MD BELTWAY) THEN THERE IS NEED FOR MASS TRANSIT COMING FROM THE SUBURBS SURROUNG THE LARGE METROPOLIS'. I DON'T PROPOSE BECOMING EUROPEAN IN OUR USE OF TRAINS BUT IT WORKS. THE REASON IT WORKS IS BECAUSE IT IS ALL THE QUALITIES I MENTIONED ABOVE PLUS ONE EXTRA. IT'S ALWAYS ON TIME, UNLIKE MASS TRANSIT IN THE US WHICH IS RARELY ON TIME, OFTEN DIRTY, AND USUALLY UNSAFE (NOT MECHANICALLY, BUT PERSONALLY). THIRD, WE SHOULD SIMPLY OUTLAW THE MANUFACTURING OF VEHICLES FOR DOMESTIC SALE THAT AREN'T FLEX FUEL CAPABLE. THIS IS THE ONE AND ONLY AREA THAT WILL BRING DOWN OIL PRICES BECAUSE IT WILL FORCE THEM TO COMPETE FOR MARKET SHARE. AS ANY CAPITALIST KNOWS THIS IS THE ONLY WAY TO LOWER PRICES. IT STARTS WITH THE INDIVIDUAL. IF WE WAIT FOR POLITICIANS TO IMPLEMENT THINGS LIKE THIS IT WILL NEVER HAPPEN. POLS DON'T HAVE THE SAME CONCERNS AS THE COMMONERS, AFTER ALL, WE PAY FOR THEIR GAS, THEIR AIRFARES, AND THEIR ULTRA-INFLATED PERKS AND BENEFITS. WHAT REAL MOTIVATION DOES A POL HAVE EXCEPT TO BE VOTED OUT OF POWER. THERE AREN'T ANYMORE MR. SMITHS GOING TO WASHINGTON. THE SYSTEM IS TOO CORRUPT FROM TOP TO BOTTOM FOR ANY 1 PERSON TO FIX. A MASS EXIT OF LEADERSHIP IS THE ONLY WAY BUT ARE WE STILL IDEALISTIC ENOUGH TO BELIEVE THAT VOTERS CAN STILL MAKE A DIFFERENCE. OR ARE WE JUST CYNICAL ENOUGH TO THINK THAT THE PARTY LINES ARE DRAWN IN THE SAND AND THAT WE WILL NOT CROSS THEM.
When I get home, I frequently find that there are a lot of dirty dishes on the kitchen counter. What sort of things should I do to fix this problem? It's easy to come up with half a dozen answers to that question, of course. And I bet your answers are pretty much the same as mine: do the dishes, make the teenager do the dishes, remember to do the dishes after dinner the night before so there aren't so many. There just isn't a clever, magical solution to the problem of dirty dishes.
Likewise, we live in a world with a limited supply of oil, and most of it is in the hands of thugs, who will charge us big bucks for it and use the money to do bad things. What do we do about it? Well, we can drill for oil in the places that aren't owned by thugs, we can get our energy from other sources, and we can use less energy in general. Again, these aren't particularly clever solutions, but they're the ones that work.
You can argue about which of the three things are more important. My take is that conservation is the most important one, because you can turn down the thermostat and start riding the bus now, where new drilling and new "alternative" power plants will take years to get going. But, in the end, those are the three things we have to work with: conserve, pump out more oil, and wean civilization off oil altogether.