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If OPEC is a cartel, it’s not a very good one

This book tells you what you need to know about Saudi Arabia, OPEC, and global oil politics

(Oxford University Press)

Last week’s announcement by OPEC countries that they were going to reduce oil supply has provoked angry reactions from U.S. politicians. They argue that OPEC, and its leading member, Saudi Arabia, was helping Russia by keeping oil prices higher. Jeff D. Colgan is the Richard Holbrooke associate professor of political science and director of the Climate Solutions Lab at Brown University. He is also the author of a recent book on oil politics, “Partial Hegemony: Oil Politics and International Order.” I interviewed him over email about how his book helps explain the current OPEC controversy.

Q: You describe “oil for security” deals, under which oil producing countries like Saudi Arabia cooperate with the United States on energy in exchange for protection. Why are Saudi Arabia and other countries less happy with such deals?

A: Saudi Arabia’s diplomats argue that it provides the United States with significant benefits, such as continuing to price oil in dollars (which helps maintain the dollar as the global currency) and purchasing lots of weapons from U.S. defense companies. Americans, on the other hand, look at what the Saudis do with those weapons in Yemen and elsewhere, and aren’t so convinced about those “benefits.” Moreover, Washington has a growing frustration with Saudi unwillingness to nudge world oil prices toward what the U.S. wants; on the contrary, the Saudis seem to be helping Russia by propping up oil prices. Along with other long-standing irritants from the Saudi point of view, such as U.S. support for Israel, recent events have put a lot of strain on the relationship. To a certain extent, those strains also appear in the U.S. relationship with other Gulf monarchies like Kuwait and UAE.

Q: Is the U.S. political and economic relationship with Saudi Arabia sustainable?

A: The U.S.-Saudi relationship has survived many ups and downs over the last 80 years. There have been some remarkable low points in the past, including the 1973 oil embargo against the United States and the 9/11 attacks of 2001, in which 15 of the 19 terrorists were Saudis. Oil has always glued the two countries together, creating strategic and economic incentives for them to cooperate despite such tensions. Lately, however, the relationship seems to be under as much strain as it ever has been. The killing of Jamal Khashoggi, the horrific war in Yemen and now the support for Vladimir Putin has seriously tarnished Saudi Arabia’s image.

Q. U.S. politicians are talking again about “NOPEC” legislation, which would remove OPEC’s immunity from U.S. anti-cartel laws. But you argue that OPEC isn’t actually a cartel. Why not, and what is it?

A: OPEC might well be a cartel in a legal sense, meaning that it is a group of producers that collude to try to restrict supply and influence prices. But OPEC is not a cartel in an economic sense, because its attempts to collude are highly ineffective. From 1982, when OPEC first introduced production quotas, to 2009, when my analysis ended, OPEC member countries cheated on their quotas a whopping 96 percent of the time, on a month-by-month basis. Saudi Arabia has some market power on its own, but OPEC “collusion” has not added to that power, historically speaking. There just isn’t a lot of correlation between OPEC quota announcements and actual oil production by OPEC members. Other than a few very rich petrostates like Saudi Arabia, most OPEC members, such as Nigeria, Venezuela and Iran, are desperately trying to produce and sell as much oil as they can, regardless of OPEC’s statements.

You argue that punishments play an under-considered role in global political order. Does the United States have viable options for punishing Saudi Arabia?

A: It remains to be seen. The biggest threat the U.S. can make is to withdraw military protection, but carrying out that threat is something that can only be done once, and would destroy what’s left of the relationship. Short of that, Washington could do other things, like withholding intelligence from the Saudis, restricting access to financial markets, or refusing to sell certain weapons — but those options have downsides for the United States, too.

What will happen to the U.S. relationship with oil producing countries, as the world moves closer to a post-carbon economy?

A: That’s the trillion-dollar question, on some level. Like most oil analysts, I expect global oil demand to remain healthy for at least another decade, and even after that a certain portion of the global oil market is likely to be with us for a very long time. Oil is simply too important, as a petrochemical feedstock and a transportation fuel for at least some applications, like jet fuel, even if electric vehicles take off commercially for ground transportation. Still, some countries, especially those producing high-cost oil like that found in Canada or Venezuela, are likely to see oil revenues become a trickle over time. And while some low-cost oil producers like Saudi Arabia and UAE will probably continue to export oil profitably for many years to come, their strategic importance to the United States could decline precipitously. There are some signs that those countries are already beginning to think about how to prepare for a future in which they can no longer rely on American military protection to guarantee their national sovereignty.

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