Saturday's
Interview
with a grandson on the late, great OPEC
A conversation that I'll be ready for.
Frederick P. Leuffer
NRO Contributor
PETROLEUMWORLD
Caracas, July 20
"Hi granddad. Daddy said you could help me with a school project."
My grandson, nine years of age, sure is cute. He reminds me of my son — his dad — when he was a little boy.
"We are studying world history and I have to write a report on something called OPEC. My teacher said it used to be a group of countries that had something to do with oil. Daddy said you would know about it because you were an oil man, or something like that."
"Well, son, I worked as a securities analyst, specializing in the oil industry. And, years ago, OPEC was a big deal."
"You were a security guard?" he asks.
"Not a security guard. I was a Wall Street securities analyst. I studied the oil industry and the companies in the industry in order to advise people on buying and selling stocks. In those days — that is, the 1980s, 1990s, and the first decade of this century — OPEC controlled about a third of the world's oil supply."
"That was a long time ago, granddad. A lot has changed."
"You are right," I say. It is hard for me to believe I am retired 15 years now.
"Tell me more about OPEC," he says.
"The Organization of Petroleum Exporting Countries, or OPEC, was started in 1960. It was made up of 13 countries that controlled more than 80% of the world's oil reserves. As OPEC got stronger and better organized in the 1970s, it used its power to raise oil prices and increase member-country revenues. The 'oil shocks' of the '70s led to high prices for everything from gasoline to cars and houses. It caused economies to weaken; people lost their jobs and had less money to spend. Then it happened again in 2000 and 2001, when OPEC cut oil production and oil prices soared once more."
"So, if OPEC was such a big deal, how come we never hear about it now? And what is that stuff you mentioned, uh, gaso-something?"
"Gasoline. It was a product that came from oil that was used to run car, boat, and some truck engines," I explain.
"Granddad, you mean you didn't have fuel cells to run cars? And didn't you use the monorail?"
"Fuel cells weren't around in any meaningful way until the year 2014. We stopped using gasoline around the time you were born. And the U.S. monorail system wasn't built until 2019. You see, by pushing oil prices so high, OPEC encouraged other oil producers to spend more on exploration and production, which increased output outside of OPEC. In 2000, OPEC produced 42% of the world's oil. By 2010, it produced less than 20%, and in 2015 it produced less than 10%. As OPEC tried to hold oil prices up, it asked its members to withhold oil production. The organization gradually broke apart, as its members saw little benefit to being part of the cartel.
"In the 1990s two countries — Ecuador and Gabon — quit. Then, around 2006, Venezuela, Algeria, and Nigeria resigned. Indonesia left in 2007. But the biggest blow to OPEC came with a new government in Iraq. The government successfully re-built the country's oil industry and more than doubled oil production to over six-million barrels per day. Iraq withdrew from OPEC in 2007 and expanded its oil production by another 50% in the following six years."
"Slow down, granddad. I can't dictate to the computer that fast."
"Then, from 2006-2008, oil production in Russia and the Caspian region took off. The governments of those countries eliminated tax and export restrictions on their oil. They signed joint-venture arrangements with oil and transportation companies, which resulted in large oil discoveries being developed and the oil being delivered to markets. Advanced seismic and production technology made it possible to explore offshore Alaska, the Bering and Beaufort Seas, the South Atlantic, and also Antarctica. The cost of producing oil fell to the point where oil companies could produce profitably at less than $8 per barrel. Then advances in technology brought substitutes for oil, such as fuel cells."
"Like the solar panels that heat our house and run my super-18-triga-bit computer?" asks my grandson.
"Yes," I said, "and the wind and nuclear stations that generate our electricity and that of most of the world. We don't use gasoline, jet fuel, or heating oil anymore. You see, OPEC got greedy. It tried to hold oil prices too high, too long. That mistake destroyed the organization and caused great change for its member countries."
"What do you mean?" asks the little tot.
"At one time, Middle Eastern countries held the world's largest reserves of oil. They still do, but the reserves sit in the ground and are worthless now. Up until 2015, these were great countries, with large, modern cities and tall buildings. But, as oil usage fell, the producers' economies fell with it. Now the area is mostly an expansive desert, and many of its people have returned to Bedouin life."
"Oh yes, we learned about Bedouins last month," my grandson says. "But why didn't OPEC just hold the price of oil low enough so that people would keep using it?"
"OPEC focused on revenues instead of market share for too long. They tried to hold oil prices around $25 per barrel," I say. "OPEC was short term in its thinking and did not consider its long-term future. It ignored the economics of the oil business."
"Granddad, you've lost me. But I think I understand some of what you said. It's like if the price of a stick of gum goes from $2 to $5, then I might stop chewing gum and eat some other candy, or I would buy gum from somebody else that sells it cheaper. Right?"
"Right," I say. The boy is not only cute. He's smart, too.
Frederick P. Leuffer
National Review Online-NRO Contributor
July 11, 2002, 8:45 a.m.