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Revisiting OPEC’s Democratic Roots in the Age of Climate Emergency

14 1 0
17.01.2020

On 14 September 1960, representatives from Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, gathered in Baghdad and signed their names to a treaty that created the Organization for Petroleum Exporting Countries (OPEC). It stated that: “The principal aim of the Organization shall be the unification of petroleum policies for the Member Countries and the determination of the best means for safeguarding the interests of Member Countries individually and collectively.” The current generation of OPEC leadership appears to consider the best means of so safeguarding its members’ interests is to perpetuate, for as long as possible, a global economy dependent on oil. OPEC’s third and most recent Solemn Declaration, made at Riyadh in 2007, notes members’ “commitments to conserve, efficiently manage and prolong the exploitation of their exhaustible petroleum resources.” Its current Long-Term Strategy, adopted at Vienna on September 14, 2010, states that oil “has a continuing and important role in the global economy”. And on December 12, 2018, H.E. Mohammad Sanusi Barkindo, OPEC’s current Secretary General, informed the 24th Conference of the Parties to the United Nations Framework Convention on Climate Change that OPEC members were helping to fund “Appropriate technologies that would… ensure that the over 1.2 trillion barrels of proven oil reserves are not stranded.” He went on to note “The energy transition is therefore not a transition from one energy source to another.” A commitment to preserving the global oil industry can also be observed in OPEC’s history of delay and disruption at international climate negotiations (Depledge, 2008; Chemnick, 2018).

Contrary to Barkindo’s statement, however, avoiding dangerous climate change will likely require ‘stranding’ significant amounts of recoverable oil. Analysis by McGlade and Edkins (2015) indicates that (alongside similar restraints on coal and natural gas) a third of current oil reserves must remain unburned by 2050 in order to hold average global temperature rise to 2 degrees above pre-industrial levels. Because OPEC’s reserves are so substantial – over 70% of global reserves – it is likely that substantial amounts of the oil that must remain underground in such a scenario will be in OPEC countries (Denning, 2018). A possible response to this fact, suggested in BP’s 2019 Energy Outlook, is for low cost oil producers Saudi Arabia, UAE, Kuwait, Iraq, and Russia to pursue a “higher production, lower price” strategy that would “use their comparative advantage to expand their market share in order to help ensure their resources are produced” (BP, 2019, p 89; see also Dale and Fattouh, 2018). BP projects that the lower price of oil in this more competitive scenario would reduce stranding by increasing global demand by 2040 by approximately 3 million barrels a day (mbd) above its baseline projection (BP, 2019, p 88). The possibility of this type of behavior has been identified by Sinn (2012) as the ‘green paradox,’ in which mere statements of intent to enact policies that reduce demand for fossil fuels over the medium-to-long term incentivize increased production, lower prices, and increased consumption in the short term.

Economic modeling by Scheitrum, Jaffe and Fulton (2016) that takes account of competition from non-OPEC sources of oil indicates that such concerns are warranted. The authors state that:

The incentive for OPEC to strategically defer production is diminished in a world of declining oil demand. Both an increase in non-OPEC reserves and a decrease in oil demand outlook shift the optimal OPEC extraction path in favor of elevated near-term production… Even when faced with large budget shortfalls due to depressed oil prices, our research suggests that perhaps abandoning oil production restraint is the best course of action for OPEC members who may seek to prevent an eventual depreciation or even stranding of large resources.

In theory, therefore, an international supply manager can maintain oil revenues in the face of policy-induced declines in demand growth – and, following a peak of global demand, secular demand decline – by imposing reductions in supply that offset any losses in sales volume through increases in price. In practice, however, by continuing to stabilize prices above the marginal cost of production, OPEC will hasten the arrival of this peak, as well as the speeding the decline that follows. Ultimately, therefore, the green paradox will present OPEC with three options:

The vulnerability of OPEC’s members to climate change (see generally IPCC, 2014; for temperature projections in southwest Asia exceeding human adaptability, see Pal and Eltahir, 2015) strongly suggests that if OPEC is to continue, the third strategy would be in the individual and collective best interest of its members (at least if we take those interests to be those of the population-at-large of member states, rather than of its ruling elites). Such a strategy would represent a significant departure from its current approach. But it would not be quite correct to call it unprecedented.

Unlike OPEC’s current Secretary General, the primary architects of the 1960 treaty had no intention of using OPEC to permanently defend their economies’ dependence on oil. To the contrary: the preamble of the agreement implicitly regrets the extent to which Members “must rely on petroleum income to a large degree in order to balance their annual national budgets,” noting that such dependence leaves them vulnerable to “dislocation[s] detrimental” to their economies from fluctuations in the oil price. It further notes that “Petroleum is a wasting asset and to the extent that it is depleted must be replaced by other assets”. OPEC’s founding treaty thus not only recognized the dangers of oil dependence, but also the necessity of transitioning its members’ economies towards different and sustainable sources of wealth generation. For OPEC to become a responsible international organization, therefore, committed to managing a swift and equitable transition away from a global economy dependent on oil, would not only safeguard its members interests; it would mark a return to, not a departure from, its founding principles. The balance of this article provides a brief overview of the half-century of political, intellectual and scientific antecedents to OPEC’s creation that demonstrates this to be true.

Juan Pablo Perez Alfonzo and Anticolonial Oil Conservation

Juan Pablo Perez Alfonzo was 25 years old when he joined the 1928 student uprising in Caracas against Venezuela’s leader Juan Vincente Gomez and, by implication, the Anglo-Dutch and American oil companies who worked closely with the dictator and benefited from the stable investment environment his brutality facilitated. It was the start of a lifetime of struggle against authoritarianism, imperialism, and the very same oil companies........

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