March 19, 2004

Editor's Note:

GulfWire would like to thank the Middle East Economic Survey for permission to share this article with our readers.  This article originally appeared in the March 8, 2004 issue of the Middle East Economic Survey. 

OPEC and the WTO: Petroleum as a Fuel for Cooperation in International Relations

By Melaku Geboye Desta

The following article, by Dr Melaku Geboye Desta of the University of Dundee, is based on a larger article entitled “OPEC, the WTO, Regionalism and Unilateralism,” published by the Journal of World Trade, Vol 37 (2003). Published with permission.

The successful conclusion of the bilateral deal between the EU and Saudi Arabia in September 2003 as well as news of progress in Russia’s WTO accession negotiations has rekindled the hope that more and more of international trade in petroleum will come under the rules-based multilateral trading system. As more and more petroleum exporting countries join the WTO club, the question arises as to whether, and how, this development could affect the role of OPEC as the principal inter-governmental forum for the regulation of petroleum supplies and prices on the world market.

OPEC and the WTO are two of the most visible international economic organizations today. But they are often associated with two diametrically opposed players in the global economy: the WTO with the sometimes savage rules of the market and OPEC with the often demonized intergovernmental manipulation of prices. Given OPEC's pivotal role as the forum for the negotiation and regulation of petroleum supplies – and ultimately prices – and the role of the WTO as the foremost forum of negotiations and consequent regulation of trade in virtually all tradable items at large, there is ample room for a series of complex issues of international law and policy to arise, such as: does the WTO have any role to play in the petroleum sector? Can OPEC co-exist with the WTO? Can one and the same country satisfy the membership requirements of both organizations at the same time? etc. This brief note provides some general perspectives on these issues.

OPEC and the WTO: The Institutions

At first sight, it appears that no two institutions could be further apart from each other than OPEC and the WTO. To start with their very nature, while the WTO is a truly multilateral organization with a membership of about 148 countries (with about 30 others negotiating their accession) and free to any country that is willing to negotiate terms of accession acceptable to members, OPEC is an international organization of just 11 petroleum exporting countries and open for the accession of only net-petroleum-exporting countries with "fundamentally similar interests to those of Member Countries." From this perspective, while the WTO could well be described as a multi-sectoral organization with the potential to become truly global, OPEC is simply a uni-sectoral grouping whose potential for growth is inherently limited by its product-specific nature. Indeed, the WTO and OPEC diverge in virtually every respect: the policy rationale underlying their existence, (free trade vs intergovernmental manipulation of prices) the goals they claim to pursue, as well as the means and enforcement mechanisms (rules-based adjudication vs collective peer pressure) they adopt to reach them.

The WTO generally promotes competition by discouraging governmental impediments to the free flow of trade across borders through, inter alia, the prohibition of trade-distorting governmental measures, quantitative restrictions on both imports and exports and the encouragement of reciprocal reduction/elimination of import tariffs. OPEC, on the other hand, discourages competition between its members for market share and, instead, sets (target) prices which are implemented through, inter alia, coordinated supply control measures. This has resulted in OPEC being taken as a byword for a hydrocarbon “cartel” – a cliché in the field of international energy policy with “pejorative connotations”, which triggered several attempts, particularly in the US, to use national legal processes to force OPEC and its member countries to abandon their oil price/supply management practices. These attempts have generally taken two forms – judicial and legislative. At the judicial level, two cases have been brought so far before the US courts, one in 1978 [International Association of Machinists and Aerospace Workers v. OPEC and Member Countries] and another in 2000 [Prewitt Enterprises, Inc. v. Organization of the Petroleum Exporting Countries]. Both reached appellate levels, but were finally rejected on technical grounds related to service of process. About a year ago, a legislative effort was also launched in the US Congress by two Senators who introduced a bill seeking to enable the government “to bring action against foreign states, such as OPEC countries, for collusive practices in setting the price or production of petroleum products.” Interestingly, this unilateral challenge comes from a country whose domestic petroleum resource management system in the form of the Inter-State Oil Compact served as both an inspiration as well as operational model for OPEC itself.

OPEC and the WTO: Their Roles in the Petroleum Sector

Petroleum is the largest primary commodity of international trade in terms of both volume and value. There is also the obvious national security element involved in it for both producing/exporting and consuming/importing countries. The political stability and economic survival of both groups of countries – and hence of the entire international community – depends to a large extent on the availability and affordability of oil in the international marketplace. Indeed, it is widely believed that high oil prices have been responsible for several world-wide economic recessions in the past.

Maintaining this delicate balance has never been easy. While petroleum importers have historically used different means, including bilateral/multilateral treaties and military and economic occupations to control their sources, exporters have combined forces under the umbrella of OPEC to protect and promote their common interests. The state of international relations over the last several decades has significantly been dictated by the balance of power between these two contending interests. Indeed there are many who believe that destruction of OPEC was an important objective of the invasion of Iraq by US and UK forces – a belief strengthened by the fact that many have later been heard advocating Iraqi withdrawal from OPEC.

The relationship between these divergent petroleum interests is complex and the role of the multilateral trading system on international trade in petroleum products has not always been clear. Due to the strategic importance of petroleum to the world economy, it has often been treated “in a largely political context” and outside the GATT system of multilateral trade rules. However, there is no GATT provision which exempts petroleum trade from its coverage. In principle, therefore, trade in petroleum products among GATT/WTO members is governed by the rules of the trading system. Yet, a combination of factors has, de facto, brought the virtual exclusion of international trade in petroleum products from the rules of the trading system. The most important ones in this respect include absence of petroleum export interests from GATT’s origins, the consequent lack of specific trade/import liberalization commitments by GATT/WTO members, and the system’s inherent market access bias. These factors will be discussed in turn.

Absence of Petroleum Export Interests from GATT Origins and Non-Membership of Many Today:  None of the major oil exporters of today was involved in the negotiations for the creation of the International Trade Organization (ITO), and its de facto substitute – GATT – in the 1940s. Indeed, when OPEC was founded on 14 September 1960 in Baghdad, none of its five founding members (Kuwait, Iraq, Iran, Saudi Arabia, and Venezuela) was a contracting party to the GATT. This picture has of course changed with expansion in OPEC membership, and six of the 11 OPEC countries are members of the WTO (Indonesia, Nigeria, Kuwait, Venezuela, Qatar and the UAE). This means that, of the OPEC average crude oil production of 30.18mn b/d for 2001, over 15.9mn b/d – or about 53% – is accounted for by the five OPEC countries that are not yet members of the WTO. In terms of share of global crude oil exports, while OPEC itself accounts for about 55%, the five OPEC countries not members of the WTO account for about 60% of this OPEC share, or nearly 33% of world’s total. In terms of proven reserves, while OPEC accounts for 77.8% of the world’s total, the five countries account for over 61% of this OPEC share, or about 48.1% of the world’s total. This, coupled with the non-membership in the WTO of Russia – the second largest oil exporting country – lead to the conclusion that a substantial majority of petroleum production and trade today takes place outside the reach of the multilateral trading system.

Lack of Specific Commitments by GATT Contracting Parties:  The multilateral trading system works largely through the negotiation of reciprocal tariff (and at times non-tariff) reduction commitments. The primary concern of most of the participants in the GATT process – and its driving force – was access to markets for their surplus products, which generally meant manufactures. None had such surplus in petroleum – indeed, virtually all of them were net petroleum importers even then. Coincidentally, the US turned from a net petroleum exporter into a net importer in 1948 – the year in which GATT entered into force (on 1 January 1948) on a provisional basis – and remained so until its replacement by the WTO in 1995. Indeed, although the now relatively petroleum-rich countries of Western Europe, such as Norway and the UK, were also founders of GATT, their North Sea oil wealth was discovered only after the late 1960s. GATT was thus a market opening weapon for the products of its industrialized proponents – hence almost by definition predominantly concerned with the manufacturing sector. This means that while each contracting party had a vested interest in the opening of markets for its products in other Contracting Parties, none had an interest in market access for petroleum products. Consequently, the tariff schedules of GATT Contracting Parties typically contained hardly any tariff reduction and binding commitments in the petroleum sector. Although applied tariffs on petroleum imports are generally low, many WTO member countries are thus free to raise them to any desired levels – in as long as they remained unbound (which is the case to this day for such countries as Japan and the US) – while they would not be allowed to erect quantitative import restrictions.

GATT’s Inherent Market Access Bias Over Access to Supplies:  The trading system’s market access objective is clearly discernible in the balance of obligations created between import restrictions (exporters’ concerns), on the one hand, and export restrictions (importers’ concerns), on the other. Trade measures which would restrict the quantity of allowable imports – generally called quantitative import restrictions – are subject to a flat prohibition under GATT Article XI. This rule is rigorously applied to manufactures, while a host of exceptions has been carved out to allow countries to impose quantitative restrictions on the importation of primary – mainly agricultural – products. Moreover, this principle against the use of quantitative import restrictions has also been supplemented by the unstated obligation to enter into periodic negotiations for the reduction and consequent capping of non-quantitative restrictions, which take the form of tariff bindings.

In principle, the same rule applies in respect of quantitative restrictions against access to supplies, ie they are prohibited. But, unlike for example the symmetrical approach of the EC Treaty between import and export restrictions, GATT rules on export restrictions are different from those on import restrictions in two ways: the prohibition of quantitative export restrictions is subject to a number of important exceptions that make the obligations “meaningless;” and GATT simply lacks rules on the use of export duties as means of restricting exports. This reinforces the argument about GATT’s biased approach towards market access, an approach which proved itself to be inadequate for the protection of the energy security interests of its creators, particularly since the success of OPEC in using supply restrictions as means of raising oil prices and consequent government revenue and the use of oil as a war weapon by the Arab members of OPEC during the 1973 Arab-Israeli war. The result was a concerted effort on the part of consuming nations at the national, regional and international levels to, inter alia, maintain and share reserves, raise energy efficiency, diversify its sources, and promote non-oil energy sources. A plethora of regional initiatives were also launched with strong energy content. For example, the 1988 Free Trade Agreement between the US and Canada and, to a certain extent, its larger successor NAFTA (including Mexico) were both partly driven by a US effort to assure more secure energy sources. The European Energy Charter of 1991 and its broader and more legalistic successor the Energy Charter Treaty (ECT) are also based on the same strategy and objective. A similar feature could also be discerned in the IEA, which was set up in 1974 in response to the oil crisis of the time, and intended to create “a concerted program for reducing dependence on OPEC oil.”

OPEC and the WTO: Their Relations – From Where to Where?

Historically, the relationship between these two institutions, discernible through the relations between their leading players, has been one of mutual distrust if not open hostility. Indeed, their respective proponents have been traditional opponents: OPEC was founded at a Baghdad meeting in 1960 at Iraq’s invitation of Iran, Kuwait, Saudi Arabia and Venezuela, while the creation of the WTO system is essentially credited to the single-handed effort of the US administration, supported by the UK, in the immediate post-war period. The relationship between these two organizations therefore appears to be the embodiment of a deep-rooted international power struggle between an oil-dependent economic giant, on the one hand, and the power of oil, on the other. This situation has led many US politicians to argue that wars fought for the protection of oil supplies should be considered as legitimate wars on the same level as wars fought defending against an aggressor.

Of the 11 current members of OPEC, six (Indonesia, Kuwait, Nigeria, Qatar, the UAE and Venezuela) have already become members of the WTO, and two (Algeria and Saudi Arabia) are negotiating their terms of accession. Indeed, arguably the most important WTO Ministerial Conference since its birth in 1995, was hosted by Qatar – a member of both OPEC and the WTO – and the new round of trade negotiations launched at Doha has been named after the Conference host city – hence the Doha Development Agenda. These developments seem to indicate that the acute divergence between these two influential inter-governmental organizations does not make it impossible for one and the same country to satisfy the membership conditions of both at one and the same time. To cap it all, OPEC itself has applied for observership at various organs of the WTO, such as the Committee on Trade and the Environment (CTE), and the Committee on Trade and Development (COMTD).

However, the relationship between these two organizations is far from cordial. To begin with, the WTO has yet to decide on OPEC’s application for observership, arguably a result equivalent to a silent rejection. Secondly, three important OPEC members (Iraq, Iran and Libya) – which account for about 22.2% of the world’s proven oil reserves and 10.8% of the world’s production in 2000 despite all of them being under one or another form of sanctions – still remain totally outside the system. Saudi Arabia, the most influential OPEC member, could not conclude its accession negotiations for such a long time allegedly because of its leading role in OPEC. Iran applied for accession to the WTO in 1996, but, thanks to the consensus tradition which the WTO has inherited from GATT, its application remains blocked by the US to this day. Libya also submitted its application for accession to the WTO in 2001 but only to face the same fate as Iran’s. The only other OPEC country that has never applied for accession to the WTO – Iraq – is expected to take that step as soon as a new and legitimate government is in place.

But the crucial question remains to be one of compatibility of membership – ie whether or not one and the same country could satisfy the membership requirements of these two organizations at the same time. To start with a pertinent example, the WTO prohibits its members from using export restrictions, whether individually or through a concerted arrangement with others, while OPEC often demands it. OPEC-cum-WTO member countries imposing export restrictions (such as supply cuts) could be fully concordant with OPEC decisions while violating WTO rules at the same time. It is tempting to conclude from this that no country could be a member of both organizations at the same time. However, it is notable that the WTO system allows several important exceptions that could arguably accommodate OPEC and OPEC-like behavior by its members. GATT Article XX(g) on trade-restrictive measures intended for the conservation of exhaustible natural resources is the most potent force here. But, given the acute divergence between these two organizations in almost every respect, a definitive conclusion has to await ‘judicial’ decisions in the future.

Conclusion

From the discussion so far, it is tempting to conclude that economic philosophy, history, geo-politics and international relations dictate that OPEC and the WTO are too opposed to each other to build any mutually beneficial co-existence. However, that would only lead, at best, to a continuation of the status quo – in which both the import and export interests of oil stand to lose. Since the early 1970s, the economic and political well-being of the international community has suffered several times from the absence of cooperation between producers and consumers of oil. On many occasions, while some producers have gone as far as using their oil resources as weapons of war, oil-importing industrialized countries have also employed or considered several options, ranging from the creation of consumer country cartels to attempts at the destruction of OPEC. Unfortunately, the prevailing state of international relations does not allow even the most optimistic to conclude that these same weapons will not be put to use again. GATT rarely figured as part of the solution throughout; but the WTO should. In one of his latest writings, Professor John Jackson recalls that, of the two main objectives of the trading system at the time of its creation, “[t]he first, and the more important at that time, sometimes overlooked, was the prevention of another war.” The role of the multilateral trading system as a vital instrument of international peace and stability could be hardly complete in the absence of a large portion of perhaps the most contentious and pivotal of commodities from its coverage. If there is such a thing as a single product of international trade prone to causing yet “another war”, oil could probably come on top. WTO accommodation of OPEC countries’ special concerns is not only desirable and possible, but also necessary. To meet its oft-repeated role not just as a force for wealth but also for international peace, the long-established reputation of the trading system as a pragmatist has to demonstrate itself in the oil field.

But, of course, this needs a positive effort from both sides to look for some common ground, of which there is plenty. At the rhetorical level at least, both groups of countries accept this approach as the only solution. OPEC has repeatedly expressed its willingness to enter into what it calls “a fair agreement” that recognizes, on the one hand, owners’ rights to a just price for their exhaustible and non-renewable resources, and, on the other, consumers’ rights to a guaranteed oil supply at reasonable prices. Likewise, leading powers on the consumer end, including the US and the EU, often talk in identical terminology about their determination to strengthen trade alliances and establish dialogue with oil producers. Whatever the rhetoric, for any collaborative arrangement between these two groups of countries to succeed, their major concerns must be addressed in a mutually satisfactory manner. At the risk of oversimplification, these primary concerns may be simply stated as follows: consumers want regular and adequate supplies of oil at reasonable prices, and producers want reassurance of their sovereign right to their natural resources, secure access to export markets, and reasonable returns from those exports to support their overall development. The WTO, if allowed, has the potential to adequately address both groups of concerns. The details could be difficult; but, as they say it, if there is the will, there is always the way.