333. Paper Prepared in the Office of Economic Research, Central Intelligence Agency1

8010/74

[Omitted here is a title page.]

THE FUTURE OF OPEC AS A CARTEL

OPEC2 is often described as a producers’ cartel, and, although it has occasionally threatened to act as one, it has not yet been put to the test.

The group has never been forced to act in the traditional manner of a cartel by cutting production in order to raise or maintain prices. At most, it took advantage of the politically motivated Arab oil cutback. Thus, whether OPEC could or would act as a traditional cartel is still an open question. The answer to this question lies in the political and economic situation of each individual OPEC member. In some cases, the personalities of leaders and the traditions and national character of the country involved are also important.

The political imperatives that operate in these countries cannot be overlooked. No OPEC political leader can afford to appear to accept the dictates of Europe or the United States. This is especially true in the more democratic countries such as Venezuela, Kuwait, and Ecuador, where the appearance of “knuckling under to the imperialists” would create a domestic political situation very harmful to the party or person in power. The more autocratic rulers have less to fear from domestic rivals, but they have their international prestige to maintain. The Shah, for example, has identified himself so closely with the latest price hikes that any reduction in these prices would result in considerable loss of face. Moreover, all of the OPEC leaders have a high regard for OPEC itself; none would willingly put himself in a position where he alone would be accused of trying to “break OPEC.”

Few OPEC leaders would risk serious domestic or international political problems for the sake of long-term economic gains. The horizons of most OPEC leaders—Saudi Arabia’s King Faysal appears to be an exception—are limited to their lifetimes or their tenures in office. Immediate domestic or international popularity is more important than [Page 930]nebulous benefits to future generations. Only if the welfare of future generations is a popular present-day issue—as it is in Venezuela, for example—would long-term economic arguments have much force.

On the other side of the international political coin, the OPEC leaders are sensitive to accusations that they are enriching themselves at the expense of their oilless Third World brothers. Some leaders foresee a situation wherein they will be isolated from both the Third World and from their traditional Western friends. King Faysal, for one, is also troubled by the possibility of an oil-induced world recession that could affect the producing countries. Fears of isolation are partly responsible for the various schemes for channeling funds toward the Third World, Iran’s pledge of funds for the IMF, Libya’s proposed three-tier price system, and Saudi Arabia’s advocacy of lower prices.

We have seen no indications of an OPEC consensus that high oil prices will encourage the substitution of other fuels to the eventual detriment of the producer nations. The OPEC leaders’ belief that there will always be an adequate market for oil at a high price as a petrochemical feedstock even if not as a fuel is apparently sincere. Furthermore, they believe that the price of oil substitutes is and will remain greater than the price of most OPEC oil and that each developed country will be reluctant to put itself at a disadvantage relative to others by relying too greatly on high-priced oil substitutes. These beliefs could change as the result of observed consumer country cooperation, technical breakthroughs, or rapid oil and gas development in non-OPEC areas.

In sum, we do not see any near-term groundswell building that would result in an OPEC consensus that the baseline prices agreed to last December are too high or unsustainable. Arguments and estimates that the present situation will result in depressions in the developed world and disasters in the developing world will fall on deaf ears. The OPEC countries’ collective inclination is to wait and see while considering many and implementing some schemes to recycle a portion of their burgeoning revenues to the Third World.

However, an OPEC consensus that prices are too high is not an essential prerequisite to a general price rollback. The present OPEC prices were not set by a consensus arrived at through analysis of alternative prices. The Persian Gulf price was ramrodded through by the Shah against Saudi opposition; the other OPEC members later raised their prices to comparable levels.

Three countries—Venezuela, Iran, and Saudi Arabia—aspire to leadership roles in OPEC, and of the three only the Saudis have the ability and inclination to lower prices. In both Venezuela and Iran the leadership can see the time—within two decades—when their oil production will drop drastically and the economic future of their countries will have to depend on other factors. Given this time frame, [Page 931]a policy of maximizing revenues now with little concern for the role of oil in the world economy in the next century is attractive. The idea that technology coupled with government policies in the major consuming nations may well relegate OPEC oil to a minor role in the energy equation at the turn of the century is of no great importance.

For the Saudis, however, the value of oil in the marketplace several generations hence is an important factor in their current thinking. They see themselves producing enormous quantities of oil well into the middle of the next century and very likely substantially beyond. Thus their appreciation of the impact of present policies and prices on the real value of their oil 25, 50, and 100 years hence has considerable weight.

In any event, OPEC will soon have to face its first cartel decision—perhaps as early as the meeting set for mid-March. We estimate that supply is already slightly in excess of demand and that planned increases in OPEC output will make the present price structure unsustainable. Within the next few months, either production or prices must fall. Any OPEC decision to hold prices at present levels would require active Saudi cooperation to be successful because of the size of the cuts required. According to our estimates, price resistance and conservation measures in consuming countries and projected production increases would create a potential surplus of at least 4 million b/d and perhaps as much as 7 million b/d by the end of the year if prices remain at current levels.

We doubt that the Saudis have carefully sorted out the implications of the forces already set in train by the embargo, the cutbacks last September, and the record price hikes in January. It is clear, however, that they feel uncomfortable on both counts. Beyond these constraints the Saudis have an additional reason not to join in an OPEC cutback scheme to maintain present price levels. The expected Saudi response to the successful conclusion of Secretary Kissinger’s current diplomatic effort is an end to the embargo and some increase in output. We believe that it would be exceedingly difficult and probably impossible for King Faysal to appear to go back on these implied promises by cutting output not too long after having increased it.

There is a point, however, below which the Saudis would not like to see prices fall. This price could be based on the $5 a barrel government revenue figure that Shaykh Yamani proposed in the December OPEC meeting. It could also be a compromise price somewhere between that price and the current price. In such a situation, we believe that most OPEC countries would be willing to make at least token production cuts in order to maintain prices. However, only Saudi Arabia, Kuwait, the United Arab Emirates, Libya, Venezuela, and possibly Iraq would be willing to make cuts of the required size.

[Omitted here are a table and an Annex: Positions and Attitudes of OPEC Members.]

  1. Source: Central Intelligence Agency, Office of Economic Research, Job 80–T01315A, Box 38. Secret. Prepared as a report for the Working Group of the International Energy Review Group (IERG), and distributed at its March 8 meeting. The minutes of the meeting are ibid., National Intelligence Council Files, Job 80–B01495R, Box 5.
  2. The members of the Organization of Petroleum Exporting Countries are Algeria, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. [Footnote in the original.]