Competition Is a Sin: An Evaluation of the Formation and Effects of a Natural Gas OPEC

By Ehrman, Monika | Energy Law Journal, January 1, 2006 | Go to article overview

Competition Is a Sin: An Evaluation of the Formation and Effects of a Natural Gas OPEC


Ehrman, Monika, Energy Law Journal


I. INTRODUCTION

"Competition is a sin."

- John D. Rockefeller

A monopoly is nothing but a magician's trick-an illusion where producers artificially control supply to maintain the perception of scarcity.1 While the Organization of Gas Exporting Countries (OPEC) has successfully maintained control over crude oil prices, the question arises whether a similar organization will form to control the natural gas market.

Monopolies are not a new international or domestic phenomenon. During the late nineteenth century in South Africa, DeBeers founder Cecil Rhodes recognized that if diamonds became commonplace their value would decrease substantially.2 The diamond industry was consolidated under Rhodes's influence, and the international diamond cartel has since regulated the diamond gemstone market and maintained the fragile illusion of scarcity.3

Seventy years before the birth of OPEC the legendary Standard oil controlled 90% of the petroleum industry.4 The ubiquitous company was the impetus for American antitrust legislation under the Sherman Act, and its dissolution would create the seven sisters: Exxon, Mobil, Chevron, Marathon, Amoco, Conoco, and Atlantic Richfield (ARCO).5 Ironically, it would be the offspring of Standard oil that would act as a catalyst in the creation of OPEC.

This paper will analyze the effect of an Organization of Gas Exporting Countries (OGEC) that is already in the process of forming.6 Part II of this paper details the creation of OPEC and compares it with the formation of OGEC; part III discusses the high demand of natural gas and how it affects the rise of OGEC; part IV describes the challenges facing OGEC formation; part V discusses options for OGEC structure; part VI analyzes the effects of OGEC formation; and part VII discusses strategies for the prevention and mitigation of OGEC establishment. Finally, although this paper discusses international effects, it will focus mostly on the United States.

II. FORMATION OF OGEC

"[A] little-known, four-year-old organization called the Gas Exporting Countries Forum ... says it wants to promote cooperation with gas-consuming nations and 'does not seek to control... pricing and supply'.... That's exactly the line of inquiry that led to the formation of [OPEC]....

OPEC began with a secret meeting over fourteen cents.8 In 1959, five countries gathered together in Cairo to discuss their lack of sovereignty over their natural resources.9 These countries were troubled by the fact that the major international oil companies had built huge financial empires by exploiting their hydrocarbon resources while the governments received a meager royalty.10

The delegations of several countries were noncommittal; both Venezuela and Iran attended as observers.11 Iraq did not even have an official delegation because of its hostilities toward Egypt.12 Yet, out of the disarray emerged an agreement to create an oil Consultation Commission (Commission).1 The Commission's purpose was to resolve the countries' unfair treatment by foreign oil companies and the lack of control over their oil reserves. They agreed to establish national oil companies, since at that time only Iran had its own. 4 Most importantly, they approved the "national coordination of the conservation, production and exploitation of oil resources."15

The pact was kept secret from outside countries and even within the signatories' own countries the pact was not disclosed.16 In Iran, the National Iranian Oil Company had no knowledge of the Commission's creation.17 Operations within the countries took place; Venezuela established an embassy in Cairo and the members studied the Texas Railroad Commission to examine the intricacies of oil production programming.18

On one fateful day in August 1960, Esso19 reduced the posted price of Arabian light crude by fourteen cents per barrel.20 The price of Arab Light Crude fell from a now incredulous $1. …

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