OPEC, the Petroleum Industry, and United States Energy Policy

By Arabinda Ghosh | Go to book overview
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3
The Pricing Mechanism of OPEC

1.

The manipulation of the crude oil price structure was and is the most important weapon in the OPEC arsenal. It was mainly through the imposition of ever-increasing tax and royalty payments on the profits of per-barrel crude oil that the cartel gained so much prominence during the last ten years. With unity that surprised almost everyone, the organization's thirteen nations have worked together until very recently to raise the crude oil price by proclamation, and have succeeded beyond their original dreams. They wanted to maintain the basic price structure at any cost, and when during the summer of 1974 supply became so excessive as to lead to secret price-cutting, the principal members of the organization kept the cartel from severe dissension by resorting to sharp production cutbacks and by not expanding new facilities. Only during the last round of price-increase deliberations at the end of 1976 was there the first crack in the united front of the organization, when all other members wanted to raise crude prices by 10 percent while Saudi Arabia and the UAE advocated a hike of only 5 percent.

The pricing mechanism for the international trade in oil that arose before World War II was known in economics as the basing-point system. 1 In the early part of the 1920s, when states in the Gulf Coast areas of the United States and Mexico were the leading exporters of oil, the price that prevailed in the Gulf of Mexico became the basing point for the calculation of price. That meant that if oil was to be exported from any part of the world, the price prevailing in the Gulf Coast plus the freight from the Gulf Coast to the country of destination would be charged, irrespective of the actual freight cost to that country. When the actual freight rate was lower than this artificial rate, the buyer was being charged for a "phantom" freight in addition to the base price and the actual freight. Similarly, when the actual freight charge was higher than the basing-point freight charge,

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