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Analysis | If OPEC is a cartel, it’s not very good

Last week’s announcement by OPEC countries that they were going to cut oil supplies has provoked angry reactions from US politicians. They claim that OPEC, and its leading member, Saudi Arabia, helped Russia by keeping oil prices higher. Jeff D. Colgan is the Richard Holbrooke associate professor of political science and director of the Climate Solutions Lab at Brown University. He is also the author of a recent book on oil politics, “Partial Hegemony: Oil Politics and International Order.” I interviewed him via email about how his book helps explain the current OPEC controversy.

Q: You describe “oil for security” agreements, where oil-producing countries like Saudi Arabia partner with the United States on energy in exchange for protection. Why are Saudi Arabia and other countries less happy with such deals?

A: Saudi Arabia’s diplomats claim it will bring significant benefits to the United States, such as continuing to price oil in dollars (which helps maintain the dollar as the global currency) and buying many weapons from US defense companies. Americans, on the other hand, look at what the Saudis are doing with those weapons in Yemen and elsewhere, and aren’t too convinced of those “benefits.” In addition, Washington has a growing frustration with Saudi Arabia’s unwillingness to push world oil prices toward what the US wants; on the contrary, the Saudis seem to be helping Russia by jacking up oil prices. Along with other long-standing irritating factors from a Saudi perspective, such as US support for Israel, recent events have put a strain on the relationship. To some extent, those tensions are also evident in the US relationship with other Gulf monarchies such as Kuwait and the UAE.

Q: Is the US political and economic relationship with Saudi Arabia sustainable?

A: The relationship between the US and Saudi Arabia has endured many ups and downs over the past 80 years. There have been some notable lows in the past, including the 1973 oil embargo against the United States and the September 11, 2001 attacks, in which 15 of the 19 terrorists were Saudis. Oil has always glued the two countries together, creating strategic and economic incentives to work together despite such tensions. Lately, however, the relationship seems to be under as much strain as ever before. The assassination of Jamal Khashoggi, the horrific war in Yemen and now support for Vladimir Putin have seriously tarnished Saudi Arabia’s image.

QUS politicians are talking about “NOPEC” legislation again, which would remove OPEC’s immunity from US antitrust laws. But you argue that OPEC is not actually a cartel. Why not, and what is it?

A: OPEC is arguably a cartel in a legal sense, meaning it is a group of producers colluding to try to limit supply and influence prices. But OPEC is not a cartel in an economic sense because its collusion efforts are very ineffective. From 1982, when OPEC first introduced production quotas, to 2009 when my analysis ended, OPEC member states cheated on their quotas 96 percent of the time on a monthly basis. Saudi Arabia has some market power in its own right, but OPEC’s “collusion” has not historically increased that power. There just isn’t much correlation between OPEC quota announcements and actual oil production by OPEC members. Apart from a few very wealthy petro-states like Saudi Arabia, most OPEC members such as Nigeria, Venezuela and Iran are desperately trying to produce and sell as much oil as they can, regardless of OPEC’s statements.

You argue that punishment plays an undervalued role in the global political order. Does the United States have viable options to punish Saudi Arabia?

A: That remains to be seen. The biggest threat the US can pose is withdrawing military protection, but carrying out that threat is something that can only be done once and would destroy what’s left of the relationship. Beyond that, Washington could do other things, such as withholding intelligence from the Saudis, limiting access to financial markets, or refusing to sell certain weapons — but those options also have drawbacks for the United States.

What will happen to the US’s relationship with oil-producing countries as the world moves closer to a post-carbon economy?

A: That’s the trillion dollar question, at some level. Like most oil analysts, I expect global oil demand to remain healthy for at least another ten years, and even after that, some portion of the global oil market is likely to stay with us for a very long time. Oil is just too important, as a petrochemical feedstock and as a transportation fuel for at least some applications, such as jet fuel, even as electric vehicles take off commercially for land transportation. Still, some countries, especially those producing expensive oil like those in Canada or Venezuela, are likely to see oil revenues decline over time. And while some low-cost oil producers like Saudi Arabia and the UAE are likely to continue to export oil profitably for many years to come, their strategic importance to the United States could quickly diminish. There are signs that those countries are already starting to think about how to prepare for a future where they can no longer rely on US military protection to guarantee their national sovereignty.

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