Time for the GCC to leave OPEC
Should the 169th OPEC meeting held earlier this month be its last? As former British Prime Minister Winston Churchill said, “To improve is to change; to be perfect is to change often.” For Saudi Arabia and the remaining Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar and United Arab Emirates), which together account for around 40 percent of the world’s oil reserves and the lion’s share of OPEC’s collective output, their future oil strategy should be an exclusively GCC affair, away from the stress and dysfunction of OPEC.

At first, this may sound like a move that would have profound consequences for the global economy. In fact, OPEC has long pretended to wield an influence it no longer possesses, confirming the irrelevance of disbanding it to the world’s oil markets and beyond. In a detailed study of the history of OPEC, Brown University’s Jeff Colgan demonstrated that OPEC’s members behave almost identically to non-OPEC members, implying that, contrary to popular belief, OPEC is an impotent cartel. Colgan went on to show that the myth of OPEC’s power persists because its members reaped diplomatic benefits and because it served as a willing scapegoat for the economic woes of oil importers. Apart from not being able to blame OPEC for crises that the so-called cartel actually had no hand in engineering in the first place, for most of the world’s leaders, it would be business as usual without the organization.

OPEC has recently started to cause problems for the GCC. In early 2016, a group of U.S. senators called for the creation of a committee to investigate OPEC’s past and present actions, accusing it of damaging U.S. interests. The impetus of the investigation was the threat declining oil prices posed to U.S. oil jobs. The committee apparently favors the “do as I say – not as I do” mantra; for example, it accused OPEC of anti-competitive behavior, despite the fact that the multi-decade U.S. export embargo is the very essence of anti-competitive behavior. Regardless, the GCC countries should evaluate the returns from their OPEC membership. (Bahrain and Oman are not members.

OPEC’s downsides extend beyond drawing the ire of U.S. politicians. The conflict within the group over a coordinated cut in output has led to intense international pressure on Saudi Arabia. The April meeting of oil producers in Doha led to more claims of Saudi intransigence, despite the fact that Saudi Arabia has the largest excess oil capacity in the world by an enormous degree. Seasoned policymakers such as Energy Minster Khalid Al-Falih have no problem ignoring commercially unwise proposals, but why bear the irritation if OPEC membership yields so little?

OPEC’s main problem is that in addition to being ineffective in practice (Colgan found that members exceed their quotas 95 percent of the time – rendering their behavior indistinguishable from that of nonmembers), theoretically speaking, it is destined for failure. Its membership excludes United States and Russia, two of the world’s top oil producers, and two of OPEC’s most important members, Iran and Saudi Arabia, have severed diplomatic ties. Additionally, OPEC’s members are all over the world and their economies are completely different. Those insisting on OPEC behaving as a cartel should ask themselves why there are no other notable international cartels in any other commodities, including natural gas, coal, defense systems, nuclear materials or any other goods – the economic incentives to cheat are simply too strong.

The key for the GCC oil bloc should be to pursue fundamentally different goals than its global progenitor. Influencing prices by modifying output should be taken off the menu completely. In the past, Saudi Arabia would maintain excess capacity so that it could compensate for supply disruptions among other producers, decreasing the likelihood of sharp price increases. Saudi Arabia’s western allies were aware of this and rewarded the kingdom for this service. Shale oil and record global oil inventories mean that this service is no longer necessary, and completely liberalizing the price of oil is not a source of concern for the global economy. Currently, any output taken off the market by the GCC is instantly replaced by the nimble oil companies operating in the United States.

The question you might be asking yourself is: Why now? The six countries have been trying to emulate the European Union’s hugely successful single market, contrary to the beliefs of Brexit supporters, but the GCC version has been malfunctioning in part due to senior policymakers prioritizing other projects. This is understandable given that the most important component of the GCC economy – oil – generates income in a manner that is unaffected by the adherence of the member states to single market directives. In contrast, the E.U. single market has been so beneficial to E.U. citizens and businesses precisely because it has enhanced international trade, a main engine of their economies, a painful truth that many Brexit supporters may be about to learn.

The GCC has the chance to become a major player in international markets and, at the heart of it all, oil. If the GCC wants to be globally competitive, its members need to work together to continue their recent success in Asia. That means establishing commercial relationships with their Chinese, Japanese and Korean counterparts based on GCC-level planning, not just each country acting on its own. If the Saudi Aramco valuation figures seem astronomical (in the trillions), then imagine the value of projects stemming from strategic partnerships between Aramco, Qatar Petroleum and Kuwait Petroleum.

In the words of English philosopher Sir Francis Bacon: “Things alter for the worse spontaneously if they be not altered for the better designedly.

October 2017
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