How OPEC Lost Control of Oil

The words in the headlines seemed vaguely familiar: OPEC meeting, oil output curtailed, prices rising. But if you are having haunting visions of long lines and $2.50-per-gal. gasoline, relax. When representatives of oil-producing countries meet in Vienna this week, they will try to avert the disaster that was arising because prices have been collapsing. Asia’s stalled economies and a very warm winter have cut oil consumption way below what was projected for 1998. Result: a 50% plunge in oil prices from early 1997, to $13.31 per bbl. And with storage tanks brimming, the price looked poised to fall even further–to $10 per bbl., or lower.

The world’s oil exporters were suddenly looking at a loss of revenues that could have exceeded $100 billion. That’s enough petrodollars to get otherwise reluctant countries to negotiate, including OPEC members Saudi Arabia and Venezuela, and non-OPEC Mexico. Their plan: cut back production to firm prices. And OPEC’s tried-and-true remedy may work again. News of a pending deal pulled prices up to almost $17 a barrel last week. The market response indicates confidence that the exporters will make their cuts stick. And if they don’t, prices will fall again.

But this is a deal no one wanted to make. Saudi Arabia, the world’s largest producer, didn’t care to cut production in support of prices only to end up merely making room for others to capture its business. Venezuela, on a high-octane drive to double production within a decade, was not about to cut back unless non-OPEC countries shared the pain.That insistence reflects reality: OPEC accounts for only 55% of total world crude-oil exports. In fact, the second largest exporter is nonmember Norway.

What a change from a little more than a year ago, when many expected a tightening oil market to send prices soaring above the $25-per-bbl. level that oil then commanded. How sweet is it for motorists, then, to have enjoyed gasoline prices that, adjusted for inflation, are lower than at any time in memory–and lower than average prices during the Depression. Even the higher crude-oil prices of the past few days, should they hold, will add only 5[cents] to 10[cents] per gal.–still keeping retail gasoline prices near their historic lows.

What could generate such a turnabout in our petroleum fortunes? The industry has changed fundamentally since previous oil shocks that seemed to portend ever higher prices. Oil is coming into the market from every corner of the globe. Current exploration hot spots include the newly independent nations around the Caspian Sea and offshore West Africa. This diversification acts as an insurance policy against supply disruptions. The growing role of natural gas in the overall energy mix provides a further buffer. Information technology has also allowed the industry to search for oil and make a profit at $15 per bbl., about half the threshold of just a decade ago. For example, the industry has adapted the computer-visualization techniques Hollywood used in movies like Jurassic Park for 3-D seismic visualization of potential reserves deep underground.

At the same time, governments in general are having increasing trouble keeping up with the bracing new global competition and the pace of technological change. The traditional boundaries of the nation-state are being eroded by the lowering of trade barriers, the increase in foreign investment and the rapid integration of capital markets that is being driven by computers and cheap communications. Governments simply have less say over what happens in their domestic economies. In our new book, The Commanding Heights, we call this shift globality, the next step beyond globalization. It describes the high-velocity interconnected world economy in which the familiar borders are being surmounted or made irrelevant.

While this process is happening in almost every sector of the economy, it is particularly striking in oil, in which politics and business, almost from the beginning, have been so intertwined. One of the lasting lessons of the oil crisis is the way in which markets can, given flexibility, sort out what seem to be intractable problems. Oil companies are no longer seen as “national champions” essential to national objectives–not when oil is bought and sold every day in huge volumes on the futures markets.

Governments have decided that they have sufficiently secured their sovereignty. Now what they focus on is revenues. That is why many governments are withdrawing from business and privatizing all or part of their state-owned oil companies. Those that are not are being put on a firm commercial footing. From Algeria to Venezuela, countries that were formerly closed to exploration and production by foreign companies are reopening their doors. This hardly means the disappearance of politics and security issues–the Persian Gulf War demonstrates that–but these are not the day-to-day drivers anymore. So even though OPEC governments meet to ratify production cutbacks, it is the market that now has the power.

Daniel Yergin and Joseph Stanislaw are co-authors of The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World.