<THE DRIP PORTFOLIO>
The Future of OPEC
Farewell to the cartel?
by Brian Graney (TMFPanic@aol.com)
NORTHVILLE, MI (Dec. 3, 1998) -- OPEC. It's one of those organizations that everyone has heard of, but many people misunderstand.
In this sense, OPEC is not unlike ASPLUNDH, which is the strange name painted on the side of those orange trucks that patrol neighborhoods looking for fallen tree branches to feed into those cool but noisy wood-chipper devices. Do the orange trucks belong to a company, or to some top-secret "big brother" group that covers up its spying by appearing to do public works? Does ASPLUNDH stand for something? And if it doesn't, then what the heck does it mean? Is it Norwegian for "wood chipper?"
Unfortunately, we can't answer any of these questions. If these mysteries bug you as much as they bug us, then we suggest checking out the ASPLUNDH website and seeking solace there. As for OPEC, today we'll try to answer as many questions as possible about what it is, what it does, and why it's important. All in 1,000 words or less.
OPEC actually does stand for something -- the Organization of Petroleum Exporting Countries. According to OPEC's minimalist-style yet helpful website, the organization was founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Over the next 15 years, eight other countries (Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador, and Gabon) came on board. Ecuador and Gabon both left OPEC in the early 1990s, resulting in the 11-member group we know today.
The organization states its mission this way: "OPEC's objective is to coordinate and unify petroleum prices among member countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic, and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry."
Putting aside the diplomatic and noble-sounding mission statement, OPEC can be viewed simply as an example of that favorite microeconomic Black Bart of college theory professors everywhere -- the cartel. However, OPEC is a cartel with a twist. Instead of a grouping of associated companies like the U.S. trusts of the late 19th century, OPEC is an alliance of nation-states. However, the economic basis for the organization is similar to that of its corporate half-brother, the trust.
Oil ministers from the OPEC member countries meet semi-annually in Vienna to decide how much oil and gas each member should be permitted to throw out into the world market in the months to come. The idea is to serve all of the members' domestic interests equally while at the same time making sure that none of the members cheat on the production agreements to the rest of the group's detriment. This is not an easy task, as each member country has its own political and economic agenda. Ensuring collaboration among all of the members can be about as frustrating as herding cats. Or coaching your typical NBA team.
Over the past year, questions about OPEC's future role in the global oil markets have surfaced. It was only 25 years ago that the organization's acronym was splashed on everything from newspapers' front pages to bumper stickers amid the first real energy crisis the U.S. had ever faced. (For a great Energy Information Administration look at the effects of the 1973 oil embargo 25 years later, click here.) Today, OPEC is being heralded by some as ineffective and out-dated, with the oil world's power center shifting from the organization's meeting chambers in Vienna to the commodity markets of London and New York.
Will OPEC still be around in 20 years, at the tail end of this portfolio's investment timeframe? We believe there's a good chance that it will be, although it may look very different. Institutions have a way of hanging around in our world long after they're beyond their prime, existing at a reduced level of their former grandeur for extended periods of time. Examples of this phenomenon include France, Saturday Night Live, and Dick Clark. OPEC will probably exist in some shape or form during our investment time span, if only to provide the press with the occasional group photo-op of the world's top dictators.
However, the tide is turning on the organization, which still controls about 40% of the world's annual oil supply and 78% of the world's total proven remaining oil reserves. Former state-owned oil companies in non-OPEC countries are privatizing, a trend highlighted most recently by Argentina's decision to sell most of its remaining 20% stake in formerly state-owned YPF S.A. Other state-owned companies in countries such as India, Russia, Finland, Turkey, and Greece are expected to sell off at least part of their oil assets in the months ahead.
Similar moves by OPEC member nations may not be far behind. In fact, Nigeria announced plans to sell a 60% stake in state-owned Nigerian National Petroleum Co. in September. There is speculation that Venezuela, which is quickly privatizing its utilities industry, may soon follow Nigeria's lead and sell at least a portion of state-owned PDVSA, the parent of U.S. oil marketer Citgo. Another very real possibility is that Saudi Arabia may allow U.S. oil producers back into the country for the first time since nationalizing the assets of the original Aramco partners (Exxon, Mobil, Chevron, and Texaco) in 1976.
In 1980, around 80% to 90% of OPEC's production capacity was in the hands of state-owned oil enterprises, which either bought the existing assets of foreign producers over the years or seized them outright. Based on recent trends, however, those figures are falling and will be much lower in the years ahead. As veteran oil patch observer Daniel Yergin noted in an insightful article in Time earlier this year, OPEC member nations will be more concerned with oil revenue issues, rather than sovereignty issues, in the years ahead. We tend to agree and plan to factor that trend into our investment analysis.
If you happen to hold personal views on the future of OPEC, let us know by posting them on the Drip Companies message board.
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