Northampton, MA (Area of “the five colleges,” UMass Amhers, etc.)
On Thursday, the lead headline story in the WSJ asserted “New Cracks in Oil Cartel: OPEC Fails to Agree on Production Boost Amid Rising Saudi-Iran Tensions.” The “cracks” may have widened at this meeting, but they are hardly “new.”
The split is between the “price moderates” led by Saudi Arabia – this group includes its smaller neighbors around the Persian Gulf: Kuwait, Bahrain, Quatar, etc. The other group are the “price hawks” whcih includes Iran, Algeria, Libya, Venezela, Ecuador, etc. In this group Iran took the lead.
The point I want to make today is that, over the long run, this split of OPEC into two factions is not merely due to the political persuasions of the two different groups of states. Rather, their different policies, whether it be in politics or in the market and economics generally are driven by two very different economic states of affairs domestically for the two OPEC factions. I’ll illustrate from a talk I just gave at Ohio State …
One group used to be called the “low absorber” faction” (more usually now called “price moderates”) and the other was often called the “high absorber” faction (today’s “price hawks”). These terms go back to earlier days of OPEC. Here is what they mean. Here are my slides showing the per capita export revenue of OPEC states through 2006:
Note that the countries on the top row-Venezuela, Algeria, Iran and Iraq – have their export revenue displayed on a scale that goes up to $4500, while the lower graph, with Saudi Arabia, Kuwait and the UAE, goes up to $50,000 per capita. These are real revenue in year-2000 dollars. Also note, that in recent years, on the right-hand side of the graph, evenues per capita had pretty much fallen to where they were begore the OPEC nationalizations of the 1970’s and the first and second oil crises of cerca 1973 and 1979.
But, the main point here is that the magnitudes of export revenues are very different for these two sets of OPEC states. There are clearly clustered into two different groups. Let’s take a look at one single year by itself; here is 2006.
But, note how they clearly fall into two groups . In the slide below, I have labelled them as “Low Absorbers” and the “High Absorbers.”
NOTE: the high export revenue per capita are the low absorber – (that is absorbers of oil reents), and the low export revenue per capita are the high absorbers. This reflects the reality where the countries with a lot of income per capita have ended up being very wealthy societies. And so these states can afford to take a longer-term, business-like attitude to the marketing of their oil. So, for example, when they feel the price of oil has gone “too high,” they want to moderate the price, to preserve their long-term market share. They also want to prevent high prices from becoming too great an incentive for highly technological states of the global north (their main customers) from being driven to invest in either alternative energy technologies that might one day ruin their oil business, and they want to prevent any intense searches for new sources of oil in the global north, or in non-OPEC states of the global south which also have at times in the past ruined their market share for many years at a time.
On the other hand, the high absorber states also have lots of oil, but they have large populations and so only something like one-seventh to one-tenth as much oil export revenues per capita, and their populations have remained relatively quite poor. The leaderships of these OPEC states almost NEVER think the price of oil is “too high”! They always need more money to keep impoverished people from taking to the streets, to prop up failing clientalist, populist governments. (Neither group, in the Middle East and North Africa [MENA] includes any really democratic state. The Latin American OPEC states, for all their populist and clientilist distortions, and their anti-democratic presidential-dominated states, are still much more democratic than any MENA OPEC state in that they had their initial liberation about 130 years before the MENA states, and they emerged from dictatorships and autocratic rule in the ealry post-WWII years …although the growth of presidential autocracy has again intensified.)
So, it should be no wonder that two groups of oil states, with such different levels of oil income per capita and such different attitudes towards how to price and market their oil, would have very different geo-political relations with their main customers in the global north, and especially with the hyperpower, the USA.
To illustrate how the difference in high absorber or low absorber directly correlates with differences in geo-political strategies and relations, in the next slide I have added some of the ways each group has been described in the press in recent years, whether in the US, EU, Japan or elsewhere:
The Saudi et al group are seen as “business-like market players” and “price moderates”. So, they end up being “allies” of the US, as are Kuwait, UAE, Qatar, etc. Fundamentally, this is because this group has such great iincome per capita that it does not alway have to insist on the maximum price possible. As the present king once said, when he was still a prince: “The stone age did not end for a lack of stone.!” ( In other words, it is possible that demand for their one and only serious source of national income could dry up and they’d be left with a lot of oil sitting in the ground without any significant buyers.)
On the other hand, the group on the right, the high absorbers have the countries that have been called “failed states”, “rogues”, “enemies”, have ahd sanctions placed on them (Iran, Libya and Venezuela), and in some cases (Iraq) were subjected to “regime change”.
This group has very large, impoverished populations. These government generally cannot afford a lower price of oil no matter what . They crave and need the revenue to keep their populations happy, and there is a lot less to go around in these countries (Venezuela, Ecuador, Iraq, Iran, Algeria, …) so they have much less leeway to make errors in trying to economically develop their coutries as compared to the Saudi state. So, one gets two factions, and here is a picture of leaders of the two factions:
This factional fight came out a bit stronger during this past week than anyone expected at the OPEC meeting in Vienna, where no agreement could be reached on the increase in quotas and production that the Saudi faction wanted to have adopted in order to moderate the price of oil.
The main confrontation was between Iran, which took a role as leader of the High Absorbers and Price Hawks, as v. Saudi Arabia, leader of the other group, the Low Absorbers of oil rents and Price Moderates. The latter can afford such a policy because they have many fewer citizens, and so many less hungry mouths to feed.
This time domestic and geostrategic concerns hardened the confrontation between the two, old, longstanding OPEC factions. This includes the ongoing Arab revolts, the US-Iran crisis – with sanctions against Iran’s nuclear program and its oil and gas sector, and the decline of Saudi influence in the region with the fall of like-minded repressive regimes. But, more on this anothr time.
Really great summary and analysis of the historical and current pricing factions between the low and high absorbers. Both approaches, given the political economical angles the protagonists are coming from, are “rational”. The Iran nuclear issue; the Arab Spring; and of course the perennial Palestinian/Israeli dynamic color the rational economic approaches of both sides. Chinese investment in Africa as well as Latin America now adds a new wrinkle of complexity.
I am happy to see this analysis here. Venezuela, my country, is an extreme example of unsustainable development and this provides for unusual volatibility. It is amazing we discuss this so little in Venezuela.
But in general I have been puzzled by the lack of attention to the whole geoeconomic developments in all these countries you mentioned.
Very often the English media focuses too much on the “rogue” character – just as long as that character is or seems not to be in friendly terms with them. But that rogue character did not come out of the blue.
Chávez did not fall from Heaven or Hell. As I have often said, he is our – Venezuelans’ – golem (even if he is much older than I am). Things won’t improve until we make a lot of people aware of what produced Chávez.
One needs to take into accout the demographics – what’s going on with education, with pure population growth, what’s the general perception there about external factors among average citizens -.
It seems that today we have more tree watchers tha ever but forest specialists are rather few.
Just another thing: on the other side, I recently listened to an interesting discussion on the IEA move to dump oil in the market. The analyst (sorry, I forgot who he was, I was listening to BBC while doing something else) said the IEA was particularly moved, among other things, by the fact Saudia Arabia was not acting “as usual”, “as expected”. It seems, he said, that although Saudi Arabia was increasing production on one side, it was making more difficult contracts – I did not hear the details, but it was about special prices for contracts on special terms -, so world oil prices were going up all the same.
Perhaps it was, they said, because Saudi Arabia is very nervous about the current events in the Arab world and it wants to be sure it can have enough money for any event. So: Saudi Arabia is not the “trusted” oil provider US Americans and Europeans once thought.