Oil prices: OPEC is not 'The real cartel'
The belief that OPEC "sets" world oil prices and is powerful enough to impose its will on the rest of the world is as misleading as is the belief that the majore international oil companies (Exxon, Shell, British Petroleum, Texaco, Standard Oil of California, Mobil, and Gulf) have so little power that they ahve no choice but to accept OPEC's decisions. IT comes as no surprise, therefore, that Clifton C. Garvin, chairman of Exxon, recently told Forbes Magazine that the reason for the companies' fantastic profits in 1979 "was the tightening in world markets that enabled OPEC to double prices."
What Mr. Garvin did not say and what Energy Action has concluded in a recent thorough and well-documented report is that the seven major companies deliberately and concertedly began that "tightening in world markets" in 1978 -- prior to the Iranian oil production shutdown.
This conclusion is of significance for the public and especially for its elected representatives, most of whom have refused to recognize the menacing power of the international companies and the deleterious effects of their actions on the supply and price of oil in world markets. The major companies, not OPEC, initiated the latest round of oil price increases. For its part, OPEC has responded to the price leadership shown by the companies. And such price leadership could not exist were it not for the still vast power these major companies have over the noncommunist world's supply of oil.
What has always disturbed the major companies is the specter, actual or potential, of a surplus of oil in the market. To avoid a surplus, which depresses prices and profits, the major companies have usually found ways, legal and illegal, to limit the availability of oil supplies.
Prior to the early 1970s, the seven major companies were able, to a large extent, to determine the availability of oil in the non-communist world. Following the so-called "OPEC Revolution," the companies' power over oil production was reduced. Yet, even though OPEC captured a large area of decisionmaking, the companies, because of their marketing power and their financial and technical expertise, retained great control over the supply and price of oil in the world. This power was exercised and made painfully evident in 1978 and 1979.
All throughout 1977 and the first six months of 1978, the world crude oil markets were glutted. Prices were actually declining in both real and nominalm terms. OPEC members like Algeria, Libya, and Nigeria were competing with each other, cutting prices to attract their international major oil company customers to purchase crude oil. Thus, despite its cartel label, OPEC was thoroughly incapable of cutting production to eliminate or even reduce the surplus. On the contrary, many OPEC members were trying to increasem production.
The international majors, however, aware of OPEC's inability to set production rates, were worried about eroding prices and profits. Having the motive, capability, and opportunity, they started to close ranks and eliminate the "oversupply" of oil early in 1978 -- well before the "crisis in Iran" and OPEC's December, 1978, confrence. Because of their ownership of and prefential access to large volumes of crude oil, their ownership and control over the largest and most economical oil tankers, pipeline, export refineries, terminals, storage facilities, and marketing outlets in the most strategically important markets, the major companies were able to reduce their stocks of refined products, cut back refinery operations, reduce imports into major consuming areas and decrease oil production from OPEC -- all in the face of increasing consumption. As a result, the companies were able to drive up prices first for refined products and them for crude oil.
Beyond their ability to fine-tune their worldwide refining, transportation, and storage operations to restrict the supply of oil products, the major companies also retained a large degree of flexibility in determining the production levels for various OPEC producers. In teh first six months of 1978 OPEC crude production was reduced by 450 million barrels comapred to the first six months of 1977.
The four Aramco partners -- Exxon, Texaco, SoCal, and Mobil -- reduced their purchases of oil from Saudi Arabia alone by just over 316 million barrles in this period. In fact, between January and August, 1978, Aramco shipped 20 percent less oil than in the year before. Moreover, when the Saudis directed Aramco to increase the amount of lower-quality oil production relative to the better-quality oil, the companies delayed the implementation of this policy, precisely at the time when demand for the better-quality oil was greatest.
Similar flexibile oil purchase arrangements exists between the companies and other OPEC members. Together with their other worldwide operations, these arrangements have allowed the major companies to make some of the most important supply and price decisions in the marketplace.
The effective reestablishment of the companies' pwoer to control the market also derives from their ownership of new, large, and profitable sources of crude oil in Alaska and the North Sea. Exxon and BP together control 74 percent of Alaska's Prudhoe Bay field, while all the majors together dominate production in the North Sea. In early 1978 as oil from these sources was entering the market, the companies at first lowered prices and forced competing oil from OPEC producers out of the market. This action not only made OPEC oil less expensive to the companies but assured profits for the Alaskan and North Sea oils. Once these supplies were flowing, however, a tightening of supplies would mean greater profits on both the reserves in the ground and the inventories purchased at the lower prices.
In December, 1978, the OPEC members did not so much agree to increase the world price of oil as ratify the increases already set by the companies. The companies welcomed the opec decision, because public attention and anger could be directed at OPEC and away from themselves. This was particularly useful since the companies continued to drive up prices after the OPEC meeting. North Sea producers raised prices in January (and in later months) and only in response did some OPEC countries raise prices above the levels set in December.
The companies, not OPEC, are the real cartel. The companies, not OPEC, tightened supplies in 1978 and 1979. The companies, not OPEC, initiated the world oil prices increases in 1978 and 1979. The companies, not OPEC, still control the oil flowing into consuming countries. The comapnies' ability to manipulalate the market was even noted by former Energy Secretary Schlesinger. When asked why he didn't use his power to force the companies to refine more oil in 1979, he replied that the companies could, in response, simply choose "to defer the importation of the oil an dkeep it on the high seas for a longer period of time."