How to Ruin OPEC’s Birthday

Fifty years ago this week, five of the world’s top oil-producing countries convened in Baghdad to form the Organization of the Petroleum Exporting Countries (OPEC). The goal of the cartel was to “assert its member countries’ legitimate rights” and gain “a major say in the pricing of crude oil on world markets.” OPEC did just that. In the decades that followed, its members nationalized international companies’ oil fields and infrastructure assets, instated a quota system, and gained the upper hand in price negotiations. Within a decade, they had become the most powerful cartel in modern history.

As their collective power grew, OPEC members learned to use oil as an instrument of geopolitical power. Their boldest experiment occurred in 1973, when the cartel’s Arab members imposed a painful five-month oil embargo to deter Western nations from supporting Israel in the Yom Kippur War. Since then, OPEC has earned a reputation as a club of greedy, non democratic governments whose oil ministers, who gather in Vienna every few months to set the price of crude, hold everyone else’s economic fate in their hands.

But OPEC’s well-deserved reputation as a bully obscures another fact: For all its bluster, the group seems almost uninterested in actually getting all its oil out of the ground. Today, the cartel’s 12 members account for 78 percent of global oil reserves, but produce only one-third of the actual oil supply; the world’s non-OPEC producers, with little more than a fifth of the world’s oil at their disposal, pump twice as much. Even with the 2007 induction of two new members, Angola and Ecuador, who collectively produce as much oil each day as Norway, OPEC produces today less oil than it did before the 1973 embargo.

And though OPEC prides itself on controlling almost all the market’s spare production capacity — the main protection the world’s economy has against supply disruptions — its performance as a buffer against oil shocks is similarly unremarkable. The cartel has seldom used its vaunted capacity to rescue an oil-starved market. Time and again when disruptions occur, OPEC drags its feet and ignores consumers’ pleas to open the spigot and provide some relief. Instead, it insists, as it did when oil prices spiked to nearly $150 a barrel in July 2008, that the market is well-supplied and that high oil prices are the work of speculators and SUV-driving soccer moms.

OPEC members, meanwhile, are in most cases responsible for the very same supply disruptions they claim to be interested in countering: We have the cartel’s members to thank for not just the 1973 embargo, but also Saddam Hussein’s attacks on Iran and Kuwait, Nigeria’s endless war in the Niger Delta, and the 2003 oil strike in Venezuela. OPEC may claim to be the global economy’s fireman, but its members have spent more time behaving like arsonists. The cartel’s machinations have gone toward exactly one end: maintaining a virtual monopoly over the world’s most necessary fuel, while blocking competition from alternative energy sources.

Half a century of a transportation sector dominated by OPEC has numbed us to this reality and led us to accept the cartel’s shenanigans as a fait accompli. We shouldn’t. In a modern global economy where free trade, open markets, and strict anti-trust laws are bedrock principles, there is no room for a cartel dominating any commodity — not least the most strategic one of all.

So far the U.S. Congress has mainly fought OPEC the American way: in court. In 2000, the Senate Judiciary Committee unanimously approved the NOPEC (No Oil Producing and Exporting Cartels) bill, which would have enabled the Justice Department to sue in federal court “any nation … that is engaging in cartel or conspiracy to limit the production of oil.” Responding to the public’s rage over high gas prices the House of Representatives passed the measure in 2008. The Senate did not, but George W. Bush’s White House announced that it would veto NOPEC if it ever made it into law, sparing us the media circus that would have inevitably followed had the U.S. government tried to sue Venezuela’s Hugo Chávez or Iran’s Mahmoud Ahmadinejad. Amid the NOPEC theatrics, the United States surrendered the only actual leverage it ever had over OPEC: In 2005, it approved the admission of Saudi Arabia — which effectively runs the cartel — to the World Trade Organization.

Efforts by Congress and successive administrations to address OPEC’s domination over the oil market through policies that increase either the availability of petroleum (like domestic drilling) or the efficiency of its use (like increasing mandatory fuel-efficiency standards) have proved equally futile, due to the global nature of the oil trade and humanity’s near-total reliance on the fuel for transportation. Whenever non-OPEC producers like the United States increase their production, OPEC decreases supply accordingly, keeping the overall amount of oil in the market the same. OPEC’s response to conservation is similar. When gasoline prices soared in 2007 and 2008, American drivers reduced their consumption by as much as 10 percent — a savings of nearly a million barrels a day. In response, OPEC throttled supply down by 4 million barrels a day. In other words, when we drill more, OPEC drills less. When we use less, OPEC, again, drills less.

To weaken OPEC we must change the playing field altogether — we must force the cartel to compete against not just other oil suppliers, but other fuels and energy sources. We need new vehicles that enable a whole new kind of fuel competition.

A shift from cars powered by oil to cars powered by electricity — whether plug-in hybrids or pure electric vehicles — would have tremendous impact on the oil market. Electricity is cheap, clean, scalable, and readily available. Most importantly, 98 percent of U.S. electricity is generated from non-petroleum energy sources such as coal, natural gas, nuclear power, and renewable energy.

But studies project that electric vehicles will not reach a market penetration deep enough to threaten OPEC before 2030, which means that we need near-term solutions as well. One option is a simple technical fix which, according to General Motors, costs just $70 per car: turning every new vehicle sold in the United States into a flex-fuel vehicle. Cars powered by internal combustion engines could run on any combination of gasoline and alcohol fuels such as ethanol and methanol made from coal, natural gas, and biomass. The spot price for methanol from natural gas, currently under $1 a gallon, is competitive on a per-mile basis with gasoline.

Congress could make this happen by imposing an open fuel standard, requiring new vehicles to be flex-fuel-capable. Such a standard would put a virtual cap on the price of oil. Consumers would opt for the most economic fuel on a per-mile cost basis and thus shift to substitute fuels the next time OPEC allows the price of oil to exceed a certain threshold. Because no automaker can give up on the U.S. market, the open fuel standard would become a de facto global standard. Cars sold anywhere in the world would be flex-fuel models, allowing small and developing countries to develop competitive fuel markets and domestic alternative fuel industries, while protecting themselves against economically devastating oil shocks.

An open fuel standard would add just $70 to the cost of a new car, the equivalent of filling up a couple of tanks at the pump. Such minimal investment would enable the United States for the first time to challenge OPEC using the weapon the cartel fears most: competition at the pump. Neglecting to adopt such a standard, and thus maintaining oil’s virtual monopoly over transportation fuel and strategic importance, is the best birthday gift the United States could give its least-favorite cartel.