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Article Excerpt
I. INTRODUCTION--THE IMPORTANCE OF ENERGY
SECURITY, RESOURCE DIPLOMACY, AND THE MAIN CHANGES IN NEARLY HALF A CENTURY OF OPEC'S FORMATION A. Energy Dependency, Foreign Policy, and the U.S. Example B. Some of the Major Changes in the Oil and Gas Industry Since OPEC's Formation C. Oil and Gas Will Be the Dominant Energy Sources for at Least Two More Generations D. A New OPEC in an International Environment in Which the End of the Hydrocarbon Era Is in Sight. II. ARE OPEC's GOALS AND STRUCTURE OUTDATED IN VIEW OF THE EMERGENT TRENDS IN THE INTERNATIONAL ENERGY INDUSTRY? A. OPEC's Formation and Goals B. Significant International Developments Since OPEC's Formation 1. Permanent Sovereignty Over Natural Resources and a New International Economic Order 2. Environmental Obligations and Climate Change 3. International Integration Models Such as the European Union Experience 4. Transparency and the Fight Against Corruption 5. Resource Wars 6. International Law 7. Fuel Poverty and Hydrocarbon Development in Countries Affected by Trade Sanctions 8. United States Based Litigation Against OPEC 9. Consolidation of Saudi Arabia as Most Important Producer and Country with the Most Reserves and Its Foreign Policy Challenges 10. Russia's Energy Power III. CHALLENGES OF AMENDING OPEC AND ITS STATUTE A. Should OPEC's Objectives and Scope Go Beyond Playing a Role in Determining the International Price of Oil? B. Is OPEC Still Relevant in Determining the Price of Oil and Will this Continue in the Future? C. Some of the Challenges of Reforming OPEC D. Energy Security and a Potential OPEC Role IV. To WHAT EXTENT DO THE PROPOSED AMENDMENTS TO THE U.N. SYSTEM AND THE ECONOMIC REALITIES OF THE 21ST CENTURY JUSTIFY A RETHINKING OF OPEC, ITS NATURE, OBJECTIVES AND ROLE? A. The U.N. Example B. The Millennium Summit and the Millennium Development Goals C. OPEC's Formation, Structure, and Statute D. Amendments to the OPEC Statute V. THE COMPARATIVE APPROACH A. The Texas Railroad Commission B. OECD and IEA C. The Nuclear Energy Agency (NEA) D. Committee on Energy in the U.N. Economic and Social Commission E. International Energy Forum (IEF) F. World Energy Council G. Latin America Energy Organization (OLADE) H. International Association of Oil and Gas Producers (OGP) I. Organization of Arab Pertoleum Exporting Countries (OAPEC) J. Latin American Reciprocal State Petroleum Assistance Association (ARPEL) VI. HOW CAN OPEC'S SECRETARIAT MEET THE CHALLENGES OF THE INTERNATIONAL OIL INDUSTRY IN THE 21ST CENTURY? A. OPEC's Secretariat, Its Mandate and Limitations B. Some Areas in Which a New OPEC Could Strengthen Its International Role C. Specific Recommendations Regarding Amendments to the OPEC Statute VII. CONCLUSION
"When the rules of law and the rules of equity are in conflict, the rules of equity must prevail." (1)
"[W]e are Arab Muslims, and our religion and civilization enjoin us to cooperate with other peoples and to meet good with good. The world today is divided into one part with the soul, that is the Arabs, and one with the body, the West. We have the energy and you have the industries, and without a meeting of the soul and the body there is no life. Any separation of the two will only result in death. We want to give to the West and to take from it, and there is no taking without giving." (2)
I. INTRODUCTION--THE IMPORTANCE OF ENERGY SECURITY, RESOURCE DIPLOMACY, AND THE MAIN CHANGES IN NEARLY HALF A CENTURY OF OPEC'S FORMATION
The expression "mid-life" crisis is associated with that time when individuals reach their forties and ask themselves many questions about what they have done with their lives and what they want to do with whatever existence they think they may have left. (3) It is a time of crisis, reflection, and sometimes, profound change. Although institutions do not necessarily suffer from these same symptoms, OPEC is now forty-six years old (4) and may be going through such process in its institutional history. This document analyzes the main challenges of transforming OPEC so that it may successfully live through the end of the hydrocarbon era.
Forty-six years after the creation of the Organization of Petroleum Exporting Countries (OPEC), in Baghdad in 1960, while petroleum crude is still a strategic and critical commodity for the world economy, (5) the international petroleum industry has changed substantially and many of the challenges that lie ahead are complex and may require different and creative international institutions and effective cooperation. Borrowing the words of Robert Schumann in 1950, when proposing the creation of the European Coal and Steel Community, "[w]orld peace cannot be safeguarded without the making of creative efforts proportionate to the dangers which threaten it." (6)
The price of oil and hydrocarbon reserves are not the only important economic issues. Crude oil prices and inflation, the impact of the Chinese and Indian economic growth, and excessive liquidity in the international capital markets partially caused by higher oil prices are some of the "risk factors for the international economy." (7)
Crude oil prices and production distribution have also become foreign policy and energy security issues and sensitive matters directly related with war and peace. (8) Those prices will determine the futures of many single commodity producing countries, and of an entire region, the Middle East. The economic growth and stability of the main energy consumers--the United States, Japan, China, and the European Union--depend on reliable and stable oil and gas sources. (9) Control of energy sources by the United States through military action has challenged the legitimacy of the United Nations, international law, and international institutions. Undoubtedly, energy security is a major concern for all countries and many have designed and are pursuing true "resource diplomacy."
So far, competition for limited resources has not prompted a major confrontation between the largest consuming nations. The U.S.-led invasion of Iraq, a founding member of OPEC, has substantially deteriorated international relations and international law. (10) Others have questioned U.S. legitimacy to act as a leader of international relations and the world's lack of effective instruments to prevent breaches of the peace and of the U.N. charter. (11) It would seem that the United Nations is not capable of thinking or acting when the world leader does not think or act. The very purpose of "united nations"--to prevent war (12)--failed in Iraq and offers an opportunity to question whether international organizations like OPEC should reconsider their mandate and role. The invasion has also shown the many limitations and weaknesses of the "mighty power" and its system. The Chinese attempt to purchase Unocal, (13) the Sudan-Darfur debate, (14) potential different interpretations of Iran's nuclear program, (15) and Russia's decision to supply gas to Europe as opposed to the United States indicate that the difference between competition and confrontation could be very small.
Politically, the loss of faith in most institutions prevails in many countries and "nationalism," understood as a struggle to control resources or prevent imperial impositions from the North, is growing. (16) Movements from the left that understand the concerns of the working man, the problems of the poor and which more than anything else provide hope, are extending their influence. Thus, many of the issues that challenged the international economy when a New International Economic Order was proposed in the 1970s maintain their validity, and once more we realize that resources are scarce and endless economic growth is not possible.
At the sunset of the hydrocarbon era, countries dependent on oil and gas resources have a last opportunity to use their competitive advantage to prepare for the time when their resources will no longer be desired nor valued. This critical moment could also be perceived as the opportunity for oil revenues to benefit not regimes and politicians but individuals, the people of the resource rich nations.
Environmental degradation, military interventions, disruptions created by natural disasters, terrorist threats to key industry facilities, poverty, and massive immigration problems are some of the most important issues that must be addressed by the international community.
The United Nations has revealed its limitations and its very life may depend on whether the United States believes that it may profit from using its membership in said organization as a more effective tool to pursue its foreign policy interests. (17)
Although September 11, 2001, initially created the world's sympathy for the United States and a sense of international solidarity, the U.S. invasion of Iraq and Bush's foreign policy drastically transformed such perception. (18) The United States is viewed as an arrogant, hypocritical power that has a narrow interest and money driven conduct that uses moral discourse and international mechanisms as tools to accomplish selfish means. The most important consequence of the events of the last five years has been the loss of legitimacy of U.S. leadership and foreign policy, which may signal the decline of the "superpower." September 11 and Hurricane Katrina revealed dramatic internal U.S. weaknesses comparable to the Perestroika revelations in the former Soviet Union. (19) These last years have shown that not everything is perfect and shiny in Fantasy Land.
One of the challenges that lie ahead consists of building hope. Universally accepted values must guide individuals in redesigning many relationships for the sake of mankind's sustainable future. An international organization designed primarily to maintain minimum prices of crude oil in the international markets and which may behave under the traditional role of "holding conferences," "issuing declarations," and "resolutions" is not apt to perform a significant role in shaping a new international framework and economic environment. The many limitations of the U.N. system confirm this theory. Creative efforts are required to design modern organizations that may overcome the narrow mindsets of "sovereign states," improve the international system of checks and balances, and contribute to the well being of populations with only nominal or paper-like representation both at the national and the international levels.
Production, distribution, and marketing of oil and gas resources to satisfy consumer needs could be treated primarily as technical issues to be addressed by experts. Adequate and stable supply of petroleum resources could become a matter of international treaty law that would provide a smooth passage to a new energy era for both producers and consumers. If initially, energy resource issues were dealt with between a western entrepreneur and a monarch, and then shifted to a multinational company-sovereign approach, energy security now demands more than a sovereign-to-sovereign agreement, thus requiring a true global international solution in which an organization like OPEC may lead the way.
Thirty years from now many of the consuming nations may drastically change their energy needs. If so, the day under the sun for oil producing nations will be gone. A new OPEC may be the only forum at which, in addition to country-based issues, global issues are also analyzed and considered. The strategy of consumer nations of diversifying their suppliers may mean that nonOPEC oil exporting countries may profit while the transition is implemented. However, that strategy would again miss the multiple global effects of such approach, while it is still uncertain whether the level of nonOPEC oil reserves may suffice.
In the midst of overwhelming volumes of information, market participants lack adequate data to make objective decisions and subjective factors fuel speculation. (20) A first class multidisciplinary, professional, highly technical, and transformed international organization may provide the answers to many of the challenges that lie ahead.
This paper addresses some of the main challenges and issues to be discussed if OPEC's transformation is desired. The nature and scope of this document is limited and many issues may only be raised. However, the importance of the issues involved justifies a thorough process through which OPEC's reform is launched and discussed.
A potential OPEC-academic effort could be instrumental in creating, from an independent serious research analysis foundation, a process that would enable a profound review of such reform and serve to prepare the draft instruments for consideration by OPEC member countries and the Organization's Conference. One of the advantages of such approach would be to enable some creative formulas that while embedded on profound knowledge of the oil and gas industry, could only come from an academic as opposed to a politically biased and interested environment.
A. Energy Dependency, Foreign Policy, and the U.S. Example
Undoubtedly, oil and gas and energy supply issues are no longer a matter reserved to a few petroleum industry businessmen. Control of limited resources and access to a diverse supply of oil are essential to the United States, China, Europe, and Japan, and therefore, for the rest of the world. (21) Understanding that petroleum and energy policies are now a critical component of foreign policy is particularly important when considering the main issues that should focus the attention of an organization devoted to coordinating the petroleum policies of its members. The United States as the largest oil consumer offers a good example. (22)
For over forty years, access to Persian Gulf oil and the security of oil supply has been "vital" to U.S. national security to the extent that oil dependency has been compared to "the Achilles heel of the most powerful country on Earth." (23) References to an imminent energy crisis abound. (24)
Energy security is also an issue for China, (25) the world's second largest consumer, (26) as well as for Japan (27) and Western Europe. (28) Further, energy security is now a global defense security concern. For example, one of the many issues to be considered when assessing global defense security regards nuclear energy and the promotion of nuclear power generation without creating nuclear waste and enhancing many countries' bomb capabilities.(29)
Profitability of the oil producing countries may no longer be an issue that exclusively interests such nations. The economic growth of countries such as China, Japan, the United States, and Europe depend on a sustained flow of crude oil at stable prices. (30) In order to maintain a minimum level of production for oil supply to meet a stronger demand, producing countries require capital and an incentive to increase their upstream industries. (31) Thus, international dependence prevails not only in terms of producer-consumer relations, but also in terms of capital investment and resource exploitation to meet the needs of many different populations. (32) Therefore, more than ever global dialogue between energy-supplying countries and energy-consuming countries is needed, and has become a basic component of many countries' energy strategies. (33)
The United States role as the "father" of the oil and gas industry, substantive oil producer, and current largest consumer has determined international petroleum transactions. (34) Thus, understanding the most important issues for the world's greatest oil and gas consumer is essential. The world, international relations, U.S. foreign policy and international petroleum transactions were very different in 1960 than now. This is revealed by comparing the State of the Union delivered to Congress by the U.S. President on the year when OPEC was formed and most recently in 2006. (35) The differences are profound and range from a policy of noninterference in the internal affairs of other nation-states to the military invasion of Iraq; from a concern for developing countries to a disregard for poor people wherever they may be found; from restraint of consumption to arm twisting if necessary to satisfy consumption; from peace and the effort to maintain peace to war and being "on the offensive"; from a "Free World" to a world where no one may be truly free. (36)
In 1960, U.S. foreign policy was conceived in terms of the "Soviet Union against the Free World," (37) Alaska and Hawaii had recently joined the American union, (38) and the signature of a treaty for the peaceful and scientific research of Antarctica was viewed as a model multilateral international agreement for cooperation. (39) Concern for a better life for "emerging nations" was considered not only an issue for the United States but also for every other nation who shared its "Free World" values. (40) Eisenhower believed that the "industrial countries [were] ready to participate actively in supplementing the efforts of the developing countries to achieve progress." (41) He also believed in the importance of living within your own means, which required "restraint in expenditure, constant reassessment of priorities and maintenance of stable prices to prevent inflation. (42)
In 2006, when thousands in New Orleans had not yet recovered from the huge damages caused by Hurricane Katrina, and the world noticed that poverty also exists in the United States, the President proudly conveyed the message that the American economy was healthy, vigorous, and growing faster than other industrialized nations, despite being "addicted to oil." (43) He reported on its "war on terrorism" and against radical Islam, as "being on the offensive" in Afghanistan and Iraq (44) and made a pledge to replace more than 75% of U.S. oil imports from the Middle East by 2025. (45) It is very difficult to reconcile this image of America with the Wilsonian approach of the "city upon a hill," opposed to all forms of colonialism and under which "[t]here is only one possible standard by which to determine controversies between the United States and other nations, and that is compounded of these two elements: Our own honor and our obligations to the peace of the world" (46) or to Carter's pledge that "our power will never be used to initiate a threat to the security of any nation or to the rights of any human being." (47)
Since "Project Independence" was launched in 1973 with the promise of ending energy dependency on foreign countries, (48) an energy crisis has been a matter of concern for all U.S. presidents. (49) On December 22, 1975, the United States enacted the Energy Policy and Conservation Act which created a one billion barrel Strategic Petroleum Reserve. (50)
In 1975, Gerald Ford declared that "the state of the Union [was] not good" because prices were too high, millions of Americans had no work, the deficit was of about $30 billion, the national debt $500 billion, and for years nothing had been done to end U.S. dependency on others for essential energy. (51) The immediate reaction was imposing import quotas and using presidential powers to establish higher fees on imported oil. (52)
Possible courses of action for the United States were described at the time as policy choices between self sufficiency, (53) unilateral international oil policy, and a multilateral international oil policy. (54) The unilateral oil policy was described in 1974 as having four components:
1. [S]pecial oil supply arrangements with selected oil-exporting countries,
2. [E]fforts to improve bargaining relationships with the exporting countries,
3. [M]easures to prepare for interruptions in oil imports, and
4. [E]fforts to defuse the Arab oil weapon. (55)
All these policies were tailored toward preventing the formation of a strong and solid block of petroleum exporting countries, particularly from the Middle East. More than thirty years later energy independence is still a "goal." (56)
The U.S. oil policy is based on a geographically diversified supply provided essentially by Canada, Saudi Arabia, Venezuela, and Nigeria without creating an excessive dependence on any single one of them to the extent it may trigger the "oil weapon"; having an available emergency reserve to meet potential disruptions through the Strategic Petroleum Reserve; and promoting a transition to cleaner and nonfossil fuel sources of energy. (57) The other most important consumers have similar dependence, emergency supply, and supply diversification issues.
B. Some of the Major Changes in the Oil and Gas Industry Since OPEC's Formation.
When OPEC came to life, production, marketing, and prices were controlled unilaterally by the multinational companies and there was really no concern for the environmental and social impacts of the extractive industry such as global warming and ozone depletion. (58) Today many things have changed. The price of oil is established primarily through the New York Mercantile Exchange and the London International Petroleum Exchange (59) and substantially influenced by speculation and perceptions regarding "geopolitical tensions." (60) Crude oil production is determined by multiple operators, many of which are national oil companies. (61) Further and most meaningfully, the industry involved in the exploration, exploitation, and marketing of oil and gas resources must deal with issues such as resource wars, international military interventions, the threat of international terrorism, sustainable development, energy poverty, environmental protection, nation building, and transparency.
When OPEC was formed, "sovereignty" was used to protect the national bounty, and the main concern was preserving the member countries' immediate and most important source of income. (62) Now, the seven sisters no longer even introduce themselves exclusively as petroleum production companies. (63) In the 21st century sovereignty may be associated with a state's capability to successfully afford a peaceful, stable, sustainable, and rule-abiding environment to the population living within its borders in which hope and the pursuit of happiness are possible for all. (64) These concepts involve such issues as energy security, economic independence and financial viability of many nations, man's capability to stop the continued deterioration of the environment, establishing mechanisms through which the people may benefit from their land's natural resources, and determining rationally and peacefully access and control over scarce nonrenewable resources.
The petroleum industry in the 21st century will focus on production of oil and gas from unconventional sources such as heavy oils, tar sands, oil shale, renewables, nuclear power, biomass, and clean coal technologies such as coal liquefaction in a potential transition into a hydrogen based economy. (65) In addition to technological developments, population growth and economic activity, international politics and carbon pricing will play a crucial role in the closing years of the hydrocarbon age. (66) Securing a stable oil and gas supply and preventing drastic price fluctuations will be very important while alternate sources of energy are developed.
Peace in the Middle East, a future for the underprivileged of the world, effective actions to prevent multiple forms of environmental contamination, and the economic feasibility of the oil producing countries when oil is no longer relevant are all issues that require serious attention by the international community of states. Unfortunately, the selfish interests of individual nations and their short term objectives have limited effective cooperation. Nation-states' individual foreign policies are not capable of providing solutions to goals that go beyond a presidential term, and concern humanity as a whole.
C. Oil and Gas Will Be the Dominant Energy Sources for at Least Two More Generations.
In the year 2000, the European Union acknowledged that if nothing was done fossil fuels would continue dominating its energy needs. (67) Oil prices, availability, and adequacy of oil supplies continue to play today, as it was the case in 1973, a critical role in formulating foreign policy. (68) Economic growth in the next twenty-five years is expected to continue at a rate of 2.7% per year, with the fastest growth in China, India, Indonesia, and Malaysia countries which are expected to grow at a rate of more than 5% per year. (69) Demand for energy is thus expected to increase by almost 50% from 205 million barrels per day of oil equivalent to 335, and according to ExxonMobil this means that the world will need 60% more energy in 2030 than in 2000. (70) Greatest energy demand growth will most likely come from Asia (3.2% increase) and Latin America (2.2% increase). (71) Currently 45% of the European Union's oil imports come from the Middle East. (72) At the same time, in 2005, the Arab countries became the most important source of Chinese oil imports. (73) The vehicle fleet in Asia will quadruple in twenty-five years. (74) Fuel demand is expected to grow particularly to satisfy electric generation and transportation needs. (75)
Therefore, we may conclude with ExxonMobil that "[t]hrough the year 2030, traditional fossil fuels will continue to supply the vast majority of energy needs" and that the largest fuel share today and in 2030 is and will be oil. (76)
Total oil reserves have been estimated around 3.2 trillion barrels while total production may have reached one trillion. (77) If accurate, this means that two trillion barrels would remain. (78) In 2005, the world's top oil consuming nations included the United States, China, Japan, Russia, and Germany. (79)
These figures confirm OPEC's importance in satisfying the world's thirst for oil. OPEC's oil is cheap and easy to develop. (80) Most technical analyses agree that with increased demand OPEC's production should grow from its current 30 million barrels a day (b/d) to 47 million b/d by 2030. (8l) Carbon dioxide emissions are also expected to grow with 85% of such increase attributed to developing countries. (82)
The United Kingdom has recognized its challenge of becoming a "net energy importer"(83) as oil, gas, and coal production have decreased and made energy diversification a matter of its national energy policy, through many sources of energy and many suppliers. (84) However, unlike the United States, the United Kingdom acknowledged "mutual dependence" and a trade off of supply for income. (85)
D. A New OPEC in an International Environment in Which the End of the Hydrocarbon Era Is in Sight
So far, the balance of most international organizations is quite poor. (86) International bureaucracy and meaningless resolutions prevail over effective practical answers to man's daily needs. (87) Yet, more than ever, an international order that may control the selfish aspirations of individual nation-states is required. International good governance solutions may be required when traditional state sovereignty powers fail. Many important international issues such as energy security and the stability of the world economy may not be seriously and effectively discussed at the U.N. General Assembly (88) and the Security Council is per se an exclusive forum. (89) Smaller, effective, professional, and specialized international organizations are required to adequately address many issues that while producing global effects lack an efficient international forum. (90) The time is ripe for technical international organizations that may have power over nation-states regarding issues that may not be left to world politics for the sake of mankind's peace and security. Thus, true supranational entities must be completely reshaped to overcome provincial national prejudices, discrimination, and inequality. Only strong international organizations may strive for the effectiveness of universally accepted values preventing their distortion by military and economic power.
A truly supranational organization with powers to bind its members and capacity to play an important role in shaping the international relations of the 21st century is required to face many challenges, including the prevention of international wars for resources; securing the efficient exploitation of nonrenewable resources and preventing the unsustainable depletion of fossil fuel reserves; implementing mechanisms for more efficient energy consumption; addressing global environmental impact concerns; and promoting the stability of the world economy while protecting the wellbeing of its population.
OPEC has been vilified as responsible for petroleum price hikes and supply shortages. (91) Some refer to the Organization as a clumsy and "shortsighted cartel." (92) However, OPEC is far from being solely responsible for such price increases and has been a convenient scapegoat when someone must be blamed politically for inflationary trends. (93) Determining what really drives oil prices is not easy: "Big Oil is pointing fingers at hedge fund managers, who blame commodity index funds, who in turn cite surging demand in China, production losses in Nigeria and Iraq, and hostile regimes in Iran and Venezuela." (94) Japan's 2006 White Paper on International Trade and Economy concludes that the current level of crude oil prices, unlike the previous oil shocks, is not supply driven and is caused by the expansion of the U.S. and Asian economies (95) which creates an expansion of demand, anxiety about reduced surplus supply capacity of petroleum products, (96) reduced upstream investments in oil producing countries, (97) heavier crude oil trading to secure profits by purchasing crude oil in advance, (98) and poor energy saving investments by consumer countries. (99)
OPEC's history has a poor record of true organizational achievements. (100) Price increases may be attributed to speculation and OPEC's Conference has played a role in fueling speculators' predictions. (101)
Today, as in 1980, hydrocarbon reserves primarily in the Middle East are still a "vital interest[] of the United States."(102) Military intervention has already taken place to protect such interests. (103)
In the United Kingdom, energy demand and consumption has also grown steadily in the past decade confirming the importance of a stable oil supply. (104) The country's energy policy is based on "pursuing closer international relationships to promote region stability and economic reform in key energy producing areas." (105) At the same time "energy efficiency," ultimately meaning using less energy, is also the goal of the most important consumer countries. (106)
However, the end of the hydrocarbon era is in sight. The United States Geological Survey predicts that conventional oil will peak in 2037. (107) Determining objectively the world's undeveloped reserves, protecting and making available production surplus to adjust for contingencies, controlling consumption, improving energy efficiency, developing new technologies, reducing greenhouse emissions, and preventing resource wars are all issues that should be treated technically and through a multinational effort.
Among others, Lester Brown has noted that "the western economic model--the fossil fuel-based, auto-centered, throwaway economy--is not going to work for China and if it does not work for China it will not work for India which by 2031 is projected to have a population even larger than China's, nor will it work for the 3 billion other people in developing countries who are also dreaming the "America dream." (108)
OPEC's member resources, the Organization's history and experience, and foremost its potential, call it will play a decisive role. (109) OPEC may be the only realistic means through which countries that otherwise would have no voice in the international community of nations may be seriously taken into account.
The complexity of the many issues involved is well beyond the limited scope of this work, the main purpose of which is to stimulate and open the dialogue for the restructuring of the Organization and its conversion into a more powerful and effective international player. Obviously, any OPEC amendment is conditioned by the effective political will of its members. (110) Only if current members reach the necessary consensus to transform the Organization and have a basic agreement on its proposed new goals, would an amendment have any practical sense. This document addresses some of the most important topics of a proposed road map to be discussed among OPEC members to determine if such political will is possible. In reviewing this matter the following issues will be addressed.
1. Are OPEC's goals and structure outdated in view of the emergent trends in the international energy industry?
2. Do proposed amendments to the United Nations system and the economic realities of the twenty first century justify a rethinking of OPEC, its nature, objectives and role?
3. How can OPEC's Secretariat meet the challenges of the international oil industry in the 21st Century?
The many challenges of a truly global environment and issues that will affect every person living in the planet may not be adequately handled with a 1960's mindset. New effective institutions are required to deal with competing interests and complex issues. If the use of limited resources requires a world regulator, we need to empower it soon.
Ultimately, history and institutions are shaped by the character or lack thereof of individuals. True honest leadership and dedication may make the difference between an organization that plays a role in the lives of individuals or fades away as the burning flares of an extinguishing lamp. The stage is set for true honest leadership to make a difference in a world hungry for depth and values. Time will tell whether we were up to the task. The challenge is to transform the current OPEC into a coalition for change, both inside the Organization and most importantly for the benefit of the world's economy and as an effective instrument for peace. This may require creativity and the ability to use "loose and temporary global policy networks." (111)
II. ARE OPEC's GOALS AND STRUCTURE OUTDATED IN VIEW OF THE EMERGENT TRENDS IN THE INTERNATIONAL ENERGY INDUSTRY?
A. OPEC's Formation and Goals
When the OPEC was established in 1960 the petroleum industry was dominated by the Seven Sisters (112) and the producing countries were merely trying to avoid further reductions of their internal revenues through lowered posted prices established unilaterally by the multinationals. (113) The first OPEC Conference was far from being an act of war. Oil producing countries were only asking that the oil companies consult with them before unilaterally reducing posted prices. (114) At this time member states were primarily concerned with reductions of their national budgets, lacked the necessary petroleum exploration and exploitation technical know how (115) and were thus not fully aware of the nature and value of their resources. Many things have changed since then. Today, member countries own and control their hydrocarbon resources, operate national oil companies that develop them, (116) and prices are established by complex international market petroleum exchanges. (117) When OPEC was formed issues such as the scarcity of the oil wealth, rights of indigenous peoples, the environmental consequences of petroleum production and energy security were not contemplated. (118)
After more than forty-five years of searching for its identity the time has come for OPEC to affirm its role as a truly supranational power that may effectively enhance the sovereignty of its people and allow true economic development toward a post-hydrocarbon based economy.
Considering its important purposes, potential influence and goals, the public knows little about OPEC and its role. However, OPEC is vilified in the United States as responsible for the 1973 oil embargo, lines and no fuel at gasoline stations and even for not lighting that year's national Christmas tree. (119) In reality, OPEC may not be to blame for high oil prices. (120) Further, few are aware that using oil as a political weapon was "never discussed in OPEC Conferences or by other organs of the Organization." (121)
OPEC controls 902 billion barrels of oil or 75% of the world's proved reserves and 61% of the world's proved reserves are located in the Middle East. (122) According to OPEC's data, 78% of the total world's oil reserves (897 billion barrels) are located in OPEC countries, with 57% of those reserves concentrated in Iran, Iraq, and Saudi Arabia. (123) In 2005, OPEC produced an average of 30.7 million barrels a day while nonOPEC production averaged 41 million barrels a day. (124)
OPEC was formed as an instrument for its member countries not to "remain indifferent" to the unilateral conduct by the oil companies, to demand stable prices from them, (125) and to provide a forum for regular consultation among its members to unify and coordinate their policies. (126)
Article 2 of OPEC's Statute describes the Organization's principal aim as "co-ordination and unification of the petroleum policies of member countries and the determination of the best means for safeguarding their interests, individually and collectively." (127)
Today, OPEC's Statute includes as organizational goals the following:
a. Stabilization of prices in international oil markets. (128)
b. Securing steady income for producing countries. (129)
c. Securing an "efficient, economic and regular supply of petroleum to consuming nations." (130)
d. Securing a fair return on capital investments in the petroleum industry. (131)
In 1968, the Sixteenth OPEC Conference issued its "Declaratory Statement of Petroleum Policy in Member Countries" establishing basic petroleum policy principles. (132) It must be noted that according to Resolution XVI.90, these principles were simply "recommended" and ultimately depended on the implementation by the government of each member country. (133) Such petroleum policy principles included:
a. Direct resource development by member countries. If countries are unable to undertake direct development they may implement granting instruments that retain the "greatest measure possible [of Government] participation in and control over all aspects of operations." (134)
b. Contract terms open to review based on change of circumstances, which essentially meant revising existing concession contracts. (135)
c. Progressive and more accelerated area relinquishment of existing contract areas.
d. Operator's income based on posted or tax reference prices to be determined by the Government.
e. Guarantee of fiscal stability by Governments to operators over reasonable periods of time.
f. No right of "excessively high net earnings" by operators, and excessive earnings deemed as a valid cause for renegotiation. (136)
g. Requiring operators to keep clear and accurate accounts and records according to the Government's instructions.(137)
h. Requiring operators to work pursuant to the "best conservation practices" considering "the long-term interests of the country." (138)
i. Dispute resolution according to national laws and before local courts. (139)
In 1971, OPEC members agreed to "establish 55 per cent as the minimum rate of taxation on the net income of the oil companies operating in the Member Countries." (140)
In 1973, OPEC adopted Resolution XXXIV.55 issuing a Policy Statement on the world energy market. (141) Under Resolution XXXIV:
a. The exploitation and trade of hydrocarbons from member countries should be linked to their economic growth process.
b. OPEC countries should undertake any actions to gain access to the technology and markets of the developed countries.
c. OPEC members should cooperate with import developing countries. (142)
OPEC's goals have been reiterated by OPEC officials. For example, in July 2003 OPEC's Secretary General confirmed OPEC's mandate of coordinating member countries' oil policies to ensure price stability in the world oil market, stable revenue for oil producing nations, a "regular, reliable, efficient and economic supply to consuming countries and a fair return to investors in the oil industry." (143) OPEC's most important goals may be understood as true "petroleum industry goals" since both consumers and producers agree on the importance of four basic issues:
a. Stable prices, or "a fair and stable price range," (144) which includes fair return to investors and secure petroleum revenue for member countries.
b. Security of supply, or an "efficient, economic and regular supply of petroleum to consuming countries." (145) This includes replacement of exhausted reserves and ensuring spare capacity. (146)
c. Security of demand or a predictable demand, which is the only instrument to determine the level of required investments. (147) This implies coordination with consumers and nonOPEC producers.
d. Sufficient investment. Increasing production and replacing reserves requires important investments. OPEC members may lack the necessary resources to fund such investments. (148)
OPEC has repeatedly made a call for dialogue and cooperation. (149) In 1960, it sought dialogue before posted prices were fixed. (150) Now it envisions dialogue as the instrument that may guarantee a stable and reliable supply, but also a predictable and stable demand, and most importantly a setting that may enable the vast investments necessary to make this happen. (151)
Understanding that OPEC's mandate is a truly global mandate that is above the limited interests and aspirations of nation-states and involves the well being of humanity and of the petroleum industry is key to determining the Organization's future role.
B. Significant International Developments Since OPEC's Formation
The oil and gas industry has changed substantially since OPEC's formation. The Organization was created to protect its members' interests when on a worldwide scale their governments were becoming aware of the value and importance of petroleum resources. (152) However, during OPEC's initial years issues such as resource depletion, global warming, energy security, corruption and transparent markets were simply not considered. (153)
The granting instruments pursuant to which the multinational companies obtained mineral rights to the vast oil wealth were modeled after the standard U.S. oil and gas lease, and the first OPEC years may be compared to the landlord's process of understanding the contract he entered into, getting to know his lessee, the lessee making substantial fixture invests and finding a treasure and the landlord discovering only later the great value of his property. (154) A second OPEC phase corresponded to the first renegotiation of the basic international petroleum agreements with the landlord being fully aware of the value of his property and seeking substantially improved economic terms and conditions and his share of the treasure. (155) The most important changes in international petroleum contracts reflect the transition between these two phases. Now we are starting the third and last phase in which the lessee left and the landlord knowing that his property may only be leased for a limited term needs the necessary funds to transform it into a new different source of income. (156) While the lessee still needs the treasure and is willing to pay and even kill for it, both landlord and lessee know that the treasure's value is slowly vanishing. (157)
When OPEC was organized, differences between the multinational companies and one exporting country were not relevant as production could be easily replaced by increasing the output from another producer's source. (158) Today, while new energy sources are developing, all available resources are necessary to meet higher energy demand from multiple consuming nations. (159)
Whether fossil fuels dominate a country's energy foundation also becomes an issue that transcends that specific nation as greenhouse gases and global warming impact the entire globe. (160)
International oil prices are important not only for the producing nations but also for the consumer countries both of whom benefit from a stable economy. (161) Prices also determine whether there may be a smooth transition to a next energy generation era or whether international conflict to control limited resources will prevail. (162)
Some of the most significant changes include the issues of permanent sovereignty over natural resources, awareness of climate change and humankind obligations to reduce greenhouse effects, international examples of successful integration models based on industrial integration, generalized demand for transparency and multiple international instruments to fight corruption, and resource wars.
1. Permanent Sovereignty Over Natural Resources and a New International Economic Order
OPEC's creation and development corresponded to a specific mindset and reflected the frustrations of an unfair international economic system and the valid aspirations of millions of people in less developed countries. (163) The notion of "permanent sovereignty over national resources" symbolized empowerment. (164) Grasping power away from those who controlled it (a few multinational companies) and transferring it to the people. The people's interests in the middle of the 20th century were represented by the nation-state through its government.
Thus, in 1963, the United Nations General Assembly adopted Resolution 1803 (XVII) recognizing the right of permanent sovereignty over natural resources. (165) Resolution 1803 specifically called for international cooperation (166) and considered a violation of permanent sovereignty over a country's natural resources a violation of the U.N. Charter. (167) Permanent sovereignty over national resources meant shifting control over exploration, development and disposition of those resources from the multinational companies to the countries; governing all disputes between foreign investors and indigenous owners of resources by a combination of local legislation and international law; and confirming the state's power of nationalization or expropriation under specific terms and conditions. (168)
In 1967, the U.N. General Assembly adopted Resolution 2158 (XXI), which specifically provided that international organizations, formed by developing countries to develop and market their resources, play a significant role in ensuring the right of permanent sovereignty over natural resources. (169) The U.N. General Assembly adopted in 1974 the Charter of Economic Rights and Duties of States. (170) That same year, the General Assembly adopted a declaration on the establishment of a New International Economic Order (171) which specifically called for producer associations, improved terms of trade and better incomes for developing countries. (172) The Stockholm Declaration (173) in 1972 and the Rio Declaration (174) in 1992 confirmed the sovereign right to exploit natural resources. Article 18 of the Energy Charter Treaty and article III-256 of the Constitution of Europe confirm the principle of energy sovereignty by providing each State's right to determine the conditions for exploiting its energy resources, choosing between different energy sources and determining the general structure of its energy supply. (175)
As late as 1914, states joining to seek international solutions to prevent war agreed in the Inter-Allied Declaration that the "'only true basis of enduring peace is the willing cooperation of free peoples in a world in which, relieved from the menace of aggression, all may enjoy economic and social security.'" (176) Those economic and social issues led to the creation of the United Nations Economic and Social Council (ECOSOC) in 1945. (177) The need for economic and social security was addressed again through the notion of a New International Economic Order, which some have criticized. (178) However, this concept highlighted the many injustices of the international system of economic relations. Under this approach, success of the industrialized countries would have been possible through the uninterrupted supply of cheap petroleum, which until 1970 was priced at $1.25 a barrel, at the expense of poor suppliers. (179) Injustice was created by unfair international trade practices. International commodity agreements were a tool to stabilize prices for the benefit of exporting developing countries. (180) Under this notion, industrialized countries would lack or have exhausted their own natural resources and would depend on resources of "third world," "undeveloped," or "developing" countries. This would strengthen the bargaining economic power of resource-exporting countries with OPEC members as natural and obligatory leaders of the Third World as the owners of a powerful tool to introduce a new economic order. (181)
The possibility that countries rich in hydrocarbon resources could choose to destroy their oil wealth to deprive western economies of a resource that would destabilize the world economy and the notion of mutual dependence may justify reexamining this concept both from its economic and political implications.
The idea of a New International Economic Order is still alive in the Millennium Declaration (182) and the Millennium Development Goals as the world deals with the many challenges of globalization. Equality ("[n]o individual and no nation must be denied the opportunity to benefit from development"), (183) solidarity ("[g]lobal challenges must be managed in a way that distributes the costs and burdens fairly in accordance with basic principles of equity and social justice"), (184) respect for nature ("management of [] natural resources, in accordance with the precepts of sustainable development"), (185) and shared responsibility ("[r]esponsibility for managing worldwide economic and social development, as well as threats to international peace and security, must be shared among the nations of the world and should be exercised multilaterally") (186) are some of the fundamental values considered essential to international relations.
The notions of "sovereignty" and "permanent sovereignty over national resources" are challenged by issues that are beyond control of state jurisdictions such as threats to global security like international terrorism, climate change, poverty, and immigration.
Whether cutting oil supplies is a valid extension of a state's right of permanent sovereignty over natural resources is a political issue worth thorough analysis. Is oil supply a purely commercial issue or are there state and international community public interests involved that may supersede private agreements? OPEC's Secretary General in 1968 referred to the petroleum producer countries international responsibility to supply oil to the world. (187) The answer to this question determines the very nature of OPEC as an organization and the terms and provisions that regulate petroleum investments and control over petroleum revenue, two of the issues in which the Organization should play a significant role.
Some authors have noted that when OPEC was formed Kuwait, one of its founding members, was not recognized as an independent state by the international community. (188) They add that when Qatar became an OPEC member in 1961, and Abu Dhabi in 1967, they were not independent members of the United Nations (189) and thus may have lacked the condition of "sovereign states." Remembering that the Swiss government did not consider OPEC a political international organization, but rather a group of commodity exporters, and denying it for that reason the recognition of international status and immunity benefits contributes to the analysis of OPEC's nature. (190) OPEC's charter lacks the characteristics of a modern international organization foundational document, although it clearly refers to the sovereign equality of its members. (191) Whether or not being a sovereign state was critical to OPEC membership became an issue when the OPEC Conference denied Iraq its right to attend the OPEC Conference while it was under the control of the Coalition forces. (192)
An analysis of the arbitrary divisions based on "citizenship" and the true meaning of "sovereignty" may be enhanced by appealing to the Islamic doctrine of the umma, or "community of the faithful," the umma is "one and indivisible," transcending Sunni-Schi'a divisions (193) and making the division into national states "absurd, false and evil." (194) Thus, from this perspective good actions are pursued for a broader community than the one arbitrarily limited by state border lines.
With many of its members sharing a history of international protectorate, with Iraq's present situation of being under "control" of foreign military forces, (195) a thorough analysis of "sovereignty" and its development over control and development of natural resources is certainly fascinating. The possibility of OPEC reaching beyond "sovereignty" to create a supranational organization that aims at benefiting peoples is particularly attractive. Certainly, some may prefer limiting OPEC's scope to a commodity group of traders. The analysis of this matter, however, is well beyond the limited scope of this document. Its very origins and history may well justify the recreation of a unique international organization that would overcome "sovereign formalities" to make a difference in international relations and set a standard for the 21st century.
Petroleum revenues for exporting countries have increased dramatically since OPEC's inception. (196) However, in many countries higher revenues are not reflected in better conditions for most of the population. (197) Again, this triggers questions of what sovereignty is all about. With globalization, the gap between rich and poor has widened. (198) The Millennium goals of solidarity--which include equity, social justice, and shared responsibility--justify revisiting these issues. Are these vain words void of any real meaning and impact? Are these voices of a "United Nations" system that no longer makes any sense? Or are they the new terms that still raise valid issues that must be addressed to maintain peace and security in the world?
The scarce nature of hydrocarbon resources and the sunset of the hydrocarbon age are inconsistent with the notion of "permanency." Awareness of depletion creates challenges that should include the analysis of the many hidden costs associated with oil production and determination of the "fair price" of a scarce resource. The price of such resource, among many other considerations, should promote conservation. (199) Energy security presents additional challenges to the concept of sovereignty. A supranational organization like OPEC may be the only mechanism that provides a credible voice to nations that otherwise lack any international weight, and the forum where many of these issues may be addressed to accomplish specific tangible results.
2. Environmental Obligations and Climate Change
The Energy White Paper in 2003 described the United Kingdom's energy policy, mentioning as its first challenge an environmental one because "[c]limate change is real" and levels of carbon dioxide in the atmosphere have risen by more than one third since the industrial revolution. (200) The paper declared reducing carbon dioxide emissions by 60% by 2050 as the first objective of the U.K.'s foreign policy. (201)
Following the 1972 U.N. Conference on Human Environment, the U.N. Environment Programme was established "[t]o provide leadership and encourage partnership in caring for the environment by inspiring, informing, and enabling nations and peoples to improve their quality of life without compromising that of future generations." (202) This environmental conscience initiative led to the approval of the United Nations Framework Convention on Climate Change on May 9, 1992. (203) The Convention acknowledged that the earth's climate is a common concern of mankind, expressed its alarm for greenhouse gas concentration and greenhouse effects and tried to reconcile development and sovereignty to exploit a country's resources with environmental protection recognizing the need for immediate action. (204) The Convention's objective is to stabilize greenhouse gas concentrations in the atmosphere and still enable economic development in a sustainable manner. (205) Parties to the Convention agree to promote a "supportive and open international economic system that would lead to a sustainable economic growth and development." (206) The European Economic Community approved the Convention on December 21, 1993. The parties to the Convention, with the sole exception of the United States and Australia, executed the Kyoto Protocol (207) on December 11, 1997 with specific targets to reduce or limit their emissions of greenhouse gases and agreed to not exceed their assigned carbon dioxide emissions. (208)
There is no doubt that the main energy consumers are committed to diversifying their energy sources and improving energy efficiency, allocating important resources to renewable energy. (209) It is also clear that very high energy prices stimulate energy efficiency and contribute to the reduction of carbon emissions, while also affecting nations with lower incomes. (210)
China's increased energy demand and high coal dependency with high levels of atmospheric pollution creates multiple environmental challenges. (211) Today it is clear that an agreement involving the United States, Europe, China, and India would be necessary to effectively reduce global warming trends. (212)
The passage to a new energy era has been called by some the "Environmental Revolution" as man's need to come to peace with nature by transforming its energy needs, consumption and energy sources. (213)
In a similar fashion as the United Nations has recently favored international interventions to enforce gross human rights violations, a specialized supranational energy organization should play a role when oil and gas exploration and development takes place in areas of special environmental interest for all mankind. (214) The planet's environmental well being should supersede selfish national interests when the potential harm to the environment is greater than the benefits of exploiting and developing nonrenewable resources. To date there is no international organization that may effectively review these issues, and most importantly, play a role in protecting the world's environment. (215) OPEC's oil and gas expertise and its mandate to protect the collective interests of its members place it in a privileged position to make a contribution in these fields.
Paradoxically, OPEC's quota system and price control mechanisms are an effective control of hydrocarbon production, which has been one of the objectives of environmental groups. (216) Thus, OPEC's very own mandate could enable it to effectively play an environmental protection role.
3. International Integration Models Such as the European Union Experience
Ensuring the "uninterrupted physical availability of energy products on the market" is essential to the European Union's long term energy supply security. (217) At the same time the European Union recognized that despite its importance, there has not been a "real debate on the choice of energy sources [nor] on energy policy regarding security of supply." (218) Europe's 2000 Green Paper asked whether the Union could "afford to ignore [its] dependence of more than 40% on oil imported from OPEC countries?" (219) Europe's integration model offers an example of successful international union based on the integration of key energy industries. (220)
Since 1951, Europe's coal and steel industries were integrated into the European Coal and Steel Community (ECSC). (221) The ECSC reflected both an economic and political decision because, as it is the case with oil for OPEC members, the coal and steel industries were essential for ECSC member countries. (222) French foreign minister Robert Schuman referred to the "pooling of coal and steel production [to set up] common foundations for economic development." (223) The objectives sought by the European countries could well apply today to the OPEC
members: "to strengthen ... solidarity, banish the spectre of war and open the way to ... integration." (224) A supranational entity, the "high authority," with binding powers was established to adopt all decisions regarding the coal and steel industry for the member countries, (225) which led to the formation of the European Atomic Energy Community and European Economic Community in 1957. (226) On February 7, 1992 at Maastricht the relationship between members was broadened to include issues such as defense, energy and the environment and the European Union was established. (227) Some of the objectives sought through the ECSC could well apply to OPEC today:
* securing in the shortest possible time the modernization of production and improvement of its quality;
* the supply of coal and steel on identical terms to the French and German markets, ... [and access to the sources of production and production forecasts to be made by the highest authority];
* the development in common of exports to other countries;
* the equalization and improvement of living conditions of workers in these industries. (228)
On January 1, 2004 the European Union was amended to include a total of twenty-five countries. (229) On March 10, 2001, with the adhesion of new members the Treaty of Nice was entered into and on December 16, 2004 the treaty establishing the Constitution of Europe (230) was executed. The members of the European Union agreed constitutionally to maintain price stability and achieve close economic policy coordination between them. (231)
The European Union specifically agreed to establish trans-European networks particularly in the area of energy infrastructure. (232) Europe's Constitution specifically provides a mandate to "ensure security of energy supply" and to promote energy saving and efficiency. (233) The European Constitution provides that European framework laws shall establish an environmental policy and "choice[s] between different energy sources and the general structure of its energy supply." (234) Interestingly, the European Constitution confirms the principle of sovereignty to exploit a country's energy resources by providing that although European laws on energy may be established they shall respect each "Member State's right to determine the conditions for exploiting its energy resources, its choices between different energy sources and the general structure of its energy supply." (235)
On December 17, 1991, members of the European Community approved the European Energy Charter to promote long term energy cooperation. (236) Europe tried to get Russia to join the Energy Charter without success. (237)
Europe represents the most successful example of integration based on an energy integration initiative. OPEC may provide important assistance to its member countries toward cooperation and integration founded on common energy interests.
4. Transparency and the Fight Against Corruption
Every western international world leader refers to the importance of promoting transparent energy markets. The market is perceived as the most efficient way of allocating resources, as long as such market follows clear, enforceable rules. The fight against corruption is a critical component to achieve transparency. (238)
An international voluntary initiative known as the "Global Compact" was presented by Kofi Annan on January 31, 1999, to promote corporate responsibility. (239) The Global Compact is described as a network that brings together U.N. agencies, private sector such as civil society,...
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