This is OPEC Mattering at 40

Yesterday was, in many ways, 40th birthday of my academic subfield.  What is called "international political economy" (IPE), or, increasingly, "global political economy," really got its start with two events in the early 1970s — the collapse of the Bretton Woods monetary system, and the 1973 OPEC oil embargo during the Yom Kippur War, which was launched forty years ago yesterday.  Those two events reminded international relations scholars that, gee, economics can affect world politics too.  It suddenly became much more legitimate to use the words "political economy" in an international relations article. 

Speaking from experience, 40 is all about "reflecting on lost youth" and "thinking about middle age" and "meh movies where Megan Fox is sorta funny." So given the august anniversary, it’s worth considering how OPEC is doing as it approaches middle age.*  Meghan O’Sullivan provides an excellent appraisal of this very question over at Bloomberg View.  Some good parts: 

Most commentators have focused, with good reason, on the West’s greatly enhanced ability to withstand similar shocks were they to occur today. Equally important, although generally overlooked, is the reality that OPEC has no incentive or real ability to inflict them on the world.

Go to OPEC’s website and you will be greeted not by articles remembering the havoc the organization caused in the name of Arab unity 40 years ago, but by a banner touting “Communication and cooperation.” That much of the Western world is remembering the embargo this week, while OPEC makes no mention of it, is not an effort by the organization to disguise its latent power and ambitions. Rather, it is almost inconceivable that OPEC would launch such an embargo today….

the most powerful OPEC members don’t want to see huge spikes in oil prices. There are still “price hawks” within the organization: countries such as Iran and Venezuela, which see a higher price of oil as their only path to greater revenues, given constraints on increasing their production. But OPEC as a whole learned some powerful lessons from the 1973 embargo. The 1980s oil glut, and the correspondingly low oil prices, was directly related to the price spikes of 1973 and 1979. This contributed to the “stagflation” that plagued Western economies and tempered their demand for oil.

The 1973 crisis also launched widespread efforts in the West to find and develop “non-OPEC” oil, to increase energy efficiency, and to bring alternative sources of energy online. OPEC has no self-interest in tanking the fragile economic recoveries of today with high oil prices — or in further catalyzing the already vigorous pursuit of non-oil energy sources.

Finally, re-creating a 1973-type oil embargo would require OPEC to take oil production off the entire market, not just ban its export to specific countries. OPEC’s decision then to reduce oil production by 5 percent per month is what caused the embargo to pinch; this was in contrast to the two largely unremarkable oil embargoes undertaken in 1956 and 1967, which simply barred exports to specific countries, resulting in initial hiccups that were quickly and relatively inexpensively resolved through the redirection of oil trade.

A commitment to an across-the-board reduction today would require a level of discipline and coordination that may be beyond OPEC’s capabilities. Unlike the 1970s, when the annual oil revenues of many OPEC countries exceeded their immediate and pressing costs, most OPEC countries today need all the revenue they can get to meet their budgets. In the wake of the Arab revolutions, governments are wary of measures that would require reining in the generous social and other expenditures seen as necessary to stave off political unrest. While Saudi Arabia has the discipline to bear the burden of cutting oil production each month, it also has grave concerns about steps that could jeopardize overall revenues — and invite political instability to the kingdom.

All this is not to say that OPEC will never use the “oil weapon” again. But if I had to put money on it, I’d say the cartel is far more likely to increase global oil supply for political reasons than it is to restrict it. Fixated on avoiding a repeat of 1973, most of us tend not to appreciate that OPEC — and, again, Saudi Arabia in particular — has more recently used its ability to lower the price of oil to achieve political objectives than it has to raise it.

Read the whole thing.  If anything, O’Sullivan underplays some of the economic trends working against OPEC, including the diversification of energy sources, the raising of CAFE standards for U.S. automobiles, and the insatiable energy appetite of OPEC members.  Not all of these trends will be game-changers — it is certainly true, for example, that the growing energy capacity of the United States will not reduce the energy dependence of other countries on OPEC oil — but combined, they suggest that OPEC’s economic power has been greatly diminished. 

More generally, this 40-year anniversary should be a reminder to other actors who might think that the power of supply is what matters in the global political economy *cough* China and rare earths^ *cough*.  That’s the most ephemeral form of economic power in world politics. 

So, happy anniversary, OPEC!  And happy birthday to IPE! 

*Yes, I know OPEC is actually more than fifty years old, but let’s just let this metaphor run on, shall we?

^Yes, I know that it’s not entirely clear whether China ever embargoed rare earth exports a few years ago, but that doesn’t matter for the point I’m making.