Reasons for today's high oil prices are so numerous that levels
above $60 per barrel seem almost inevitable: from rising global
demand and new nationalism in Latin America to a tense standoff over
Iran's nuclear program.
Those issues are all real enough. But behind them all is a bigger
factor, so obvious it almost passes notice: the OPEC cartel. Without
the supply constraints imposed over many years by the Organization
of Petroleum Exporting Countries, the price of oil today would be
far lower, analysts say.
"We live in a world where there's a functioning cartel in the oil
market," says Amy Myers Jaffe, an energy expert at Rice University's
Baker Institute for Public Policy in Houston. "If we had a
functioning open market," she reckons, "the price of oil would be
$15 [a barrel]."
That's a rough estimate, based on current production costs in the
Middle East and the price levels of not so long ago. Other experts
might pick a higher figure.
Still, the prevailing view among oil analysts is that prices have
risen so much that oil-importers face an unusual level of
uncertainty as they chart energy policies for the years ahead. Even
OPEC is worried, they say.
"OPEC is a strongly anticompetitive force. There's no question
that they have withheld oil from the market," says James Smith, an
oil and gas management expert at Southern Methodist University in
Dallas. But "I think they're quite alarmed at $60 or $70."
A too-high price poses two threats: It could tip a now-strong
world economy toward slowdown or recession, and it could fuel a push
by consuming nations to reduce their reliance on oil.
OPEC hardly has a perfect track record of imposing its will on
the world market for oil. The member governments, including major
players such as Saudi Arabia, Iran, Nigeria, and Venezuela, agree on
quotas for production, not publicly announced price targets.
OPEC's target: about $25 a barrel?
Many analysts believe that OPEC has sought to keep oil prices
within a range of $22 to $28 per barrel, although that number may
have ratcheted upward as member nations reap easy profits without
pushing the world economy into recession.
Like all cartels, OPEC is a force as much for what it doesn't do
as what it does.
Even as world demand has risen, the 11 cartel members produce
barely the amount of oil now that they did in 1977, according to a
congressional report prepared last year by economist Theodore Boll
of Congress's Joint Economic Committee.
"Crude oil is an abundant resource," the report concludes.
"Production cost in the Middle East is less than $5 per barrel, and
even in higher cost areas is nowhere near today's price."
In a perfectly competitive marketplace, willing sellers would
compete with one another to produce oil and sell it to willing
buyers at a profit.
OPEC's long-standing policies, by constraining production
capacity, have both raised the price and increased the volatility of
prices. Today for instance, in the tight world market engineered
largely by OPEC, neither cartel members nor other nations can
quickly bring much new oil to the market.
That has pushed prices up.
Ms. Jaffe at Rice University bases her $15-a-barrel estimate on
the prevailing costs of production for the world's biggest
producers, and on the fact that prices have been there in the not-
so-distant past. Crude oil hovered near that level often from the
late 1980s through the 1990s.
Other nations have ramped up their production in recent years,
but are wary of going too far, uncertain when OPEC might loosen its
own spigots and send prices falling again.
Given today's tight market, with demand growing in Asia and
elsewhere, some analysts say $60 per barrel is a logical price. …