The Successful Failure That Is OPEC

OPEC and the dynamics of cartel economics were discussed last Thursday at the Cato Institute.  A new study releasedby Andrew P. Morriss & Roger E. Meiners of Securing America’s Future Energy shows that OPEC is sloppy, unstable, but – at times – successful in raising oil prices much to the chagrin of the rest of the world.  At the same time, OPEC been known to crash the market, and inflict damage upon economies that would’ve been much less severe if the oil market wasn’t a cartel.  The main thesis of the study is that the oil market isn’t free, which in turn – hurts everyone else.

One of the highlights within this study details how:

OPEC thrives on the oil dependence of the U.S. and others: “Not surprisingly, such demand considerations are a constant worry for OPEC, which fears demanders will diversity out of oil products if prices rise too high or become unpredictable. OPEC’s long term interest is therefore in a price that is high enough to provide its members with substantial economic rents, but not so high as to reduce the total economic rents it is able to collect over time by encouraging diversification out of oil by demanders.

When the world’s only remaining superpower needs to do business with you, you’re in a great negotiating position.  Yet, OPEC still costs us money.

OPEC’s market manipulation is costing Americans money: “One way to see the impact of cartelization on individual Americans is to consider gasoline prices in the context of family budgets. When gasoline was about $1.40 a gallon in 2002, the average family spent $1,235 on gas and oil, which was about 3.036% of total family expenditures. By 2007, when gasoline averaged about $2.80 a gallon, the average family spent $2,384 on gasoline, which was about 4.803% of total household expenditures. The Consumer Price Index rose 15.25% from 2002-2007. If we increase gas and oil prices at the same rate as the overall CPI, then annual expenditures on gasoline in 2007 would have been $1,423, which is $960 per year less per household than was actually spent. In 2007, there were 120 million households, so a reasonable estimate of the cost of OPEC is that the cartel’s efforts cost American consumers $115 billion in that one year alone. … The total cost to the U.S. economy of monopolistically-priced oil has been estimated to be more than $500 billion for the year 2008

What about increased production?  Will that offset prices?  The New York Times reported last November that the U.S. could be the largest exporter of oil by 2020, and a net importer by 2030. Yet:

Increased U.S. oil production does not change the fact that oil prices in the U.S. are determined by a global market: “Whether oil is produced in the U.S. or in another country, it is part of a world market. Prices adjust for transportation and refining costs, but crude oil is a global commodity. So increased production in the United States need not mean that oil will be cheaper in the United States, just that revenues will be captured domestically.

Most of all, the political apparatuses of OPEC’s member states are the epitome of instability. Instability leads to volatile markets, which has hurt everyone, including member states. If budgets from OPEC states are based on the price of oil and it drops below what was projected, you could be in for a serious jolt of austerity. Additionally, the structure of OPEC breeds corruption, making it harder to foster a more market-oriented approach to oil production.

These are some of the perils of cartel economics, and OPEC’s domination of the oil market.  It hurts U.S. economic interests, especially those involved in the shipping of goods.  Given the economic state our nation finds itself in– thanks to Obamanomics – petrol politics should become more prevalent in our national discourse.

OPEC has cornered the market, but it’s shoddy structure threatens everyone.

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