Why OPEC is Not as Powerful as You Think

When you think of OPEC, be sure to remember Jim Hogg. Jim Hogg (yes, his daughter was Ima), was the Texas governor who established the Texas Railroad commission in 1891. With farmers complaining about how the railroads were overcharging them, the Texas governor wanted a commission that would have jurisdiction over rates charged by railroads, terminals, express companies and wharves.

Texas Governor Jim Stephen Hogg:

Where are we going? To tomorrow’s OPEC meeting.

But first…

Compressing a good story, we can fast forward to the 1930s. After the federal government had pretty much taken over the Commission’s transportation oversight, its authority shifted to oil. Still called the Texas Railroad Commission, the group began to oversee “proration,” the process through which oil producers are told “allowable” production days on a field-by-field basis. You can see where this is heading. By keeping production low enough, they could elevate prices.

OPEC’s Power Problem

The Texas Railroad Commission was supposed to have been the model for OPEC when it formed in 1960.

I can remember OPEC’s 1973 oil embargo. Even though odd and even license plates alternated days, gas station lines still endlessly snaked from block to block. Since then, just mention OPEC and don’t you think of a cartel that can control the price of oil?

One Brown University scholar, though, says we have been misled. While it might appear that OPEC has the power to manipulate world oil prices, a look at each member’s behavior reveals a different story. Members have the incentive to “cheat” because compliance requires costly production changes and it is tough to do more than correlate OPEC policy with oil price fluctuations when many other variables could be the reason. Most amazing though is that OPEC members do not produce less on average than non-members even though OPEC has quotas.

Then why do most of us believe in OPEC’s power? Sort of like the “Emperor’s New Clothes,” maybe OPEC likes to perpetuate the myth and politicians like to have a reason for high oil prices.

Our Bottom Line: Enforcement

The Texas Railroad Commission could enforce its decisions. OPEC cannot.