WTO and OPEC

["ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

Oil is not included in the WTO because it is not a commodity that can be
produced at will by any nation, regardless of efficiency.

OPEC is a cartel.  As such, it will eventually conflict with competition
policy thrust of the WTO.
A major key to understanding OPEC is the battle for market share within
OPEC.  Discontinuities in the production of Iraq, Iran was caused by the
Iraq - Iran conflicts in 1979 and 1980. A third discontinuity, in 1990,
was caused by Iraq's invasion of Kuwait and the ensuing Gulf War.

OPEC came into existence following Arab Oil embargo which started
October 19-20, 1973 and ended March 18, 1974.
During that period the price for benchmark Saudi Light increased from
$2.59 in September 1973 to $11.65 in March. OPEC was setting benchmark
prices for its various crudes.

By 1981 the effects of seven years of increased prices had had taken its
toll on demand in the form of more energy efficient homes, industrial
process, and in substantial increases in automobile gasoline mileage. At
the same time crude oil production was increasing in the rest of the
world, simulated by higher prices. OPEC's total production stayed
relatively constant during this period around 30 million barrels per
day. However, OPEC's market share was decreased from over 50 percent in
1974 to 47 percent in 1979. The loss of market share was caused by
production increases in the rest of the world. Higher crude prices had
made exploration more profitable for everyone not just OPEC and many
rushed to take advantage of it.

The rapid price increases of 1979 and 1980 served to accelerate
consumer's moves toward efficiency.  They also fueled an increased non
OPEC production. This was compounded by the deregulation of domestic
crude oil prices in the United States. U.S. producers experienced the
effects of increases in world prices plus the additional increase
brought on by price deregulation.

Demand had peaked in 1979 and it became clear that the only way to for
OPEC to maintain prices was by reducing OPEC production. OPEC reduced
its total production by a third during the first half of the 1980s. As a
result OPEC's share in world oil production dropped below 30 percent.

Looking at OPEC member's share within OPEC and not their share of total
world production, Saudi Arabia acted as swing producer for OPEC during
the first half of the 1980s in an attempt to shore up declining prices.
By 1986 the Saudis tired of this role.  Other OPEC member countries were
cheating on their quotas. In response Saudi Arabia rapidly increased
production causing a major price collapse.

It was almost three years before prices began to recover. The lower
prices did have a positive result for OPEC. It encouraged increased
consumption and halted production increases in much of the rest of the
world, causing among other things, the oil depression in Texas. By the
end of the decade of the 1980s OPEC and prices seemed to have
stabilized.

OPEC, or any other cartel, faces a problem of optimization in their
attempts to control prices.  The problem is to determine the level of
production which meets their collective goals of highest price with the
biggest volume. For OPEC, this means maintaining production levels which
insure the highest prices possible without encouraging competition
outside of OPEC or significant conservation measures on the part of
consumers.

In January of 1990 Saudi Arabia and Kuwait had 24 and 9 percent of
OPEC's total production. Iraq and Iran had 13 percent and 12 percent
respectively. Iraq was involved at this time in a territorial dispute
with Kuwait. Negotiations between the two countries were not successful.
A meeting on July 25, 1990 between Saddam Hussein and April Glaspie,
United States Ambassador to Iraq, was a major factor in Iraq's decision
to invade its neighbor. In that meeting Hussein was assured that the
United States would not become involved in the dispute. A week later on
August 2, 1990 Iraq invaded and occupied Kuwait.

The United States reversed itself and became the major player in
restoring Kuwait's sovereignty and early in 1991.
At this point Iraq could no longer export and Kuwait's oil fields were
devastated. Iraq and Kuwait had virtually no production and the slack
was taken up by other OPEC members, primarily Saudi Arabia. In February
1991 Saudi Arabia's production accounted for over 35 percent of OPEC
output. The Saudis had increased production sufficiently to compensate
for the loss of Kuwait's production as well as some of that of Iraq.

We now come to the current situation. In December 1998 Saudi Arabia's
market share was 29.7%, Kuwait 7.4%, Iran 13.0%, Iraq 8.4% and Venezuela
11.0%.  Saudi Arabia has the greatest increase in market share compared
to the pre Gulf War period. Venezuela is next. In addition the Saudis
have always had the largest volume of production.  At most times the
Saudis produced at least twice as much as the second largest OPEC
producer. Those who have followed OPEC will recall that, especially in
the 1980s,  many of the negotiations over production quotas included
discussions of what was equitable for the member countries.  Among the
factors considered were population, per capita income and the dependence
upon crude oil exports.

By the end of the 1980s most of the problems about who received what
share of the pie had been solved. All of the explicit and implicit
agreements in place at that time were disrupted by Iraq's invasion of
Kuwait and the ensuing Gulf War. It is probable that OPEC will move in
the direction pre Gulf War agreements in splitting up the pie and will
return to the old method of doing business. Some consideration will have
to be given to the economic needs of OPEC members as well as non OPEC
members such as Mexico.

Venezuela is a case in point. The country is on its economic knees or
worse. In spite of the fact that Venezuela increased its share of OPEC
production significantly over the last decade. It is unlikely in any
OPEC agreement that Venezuela would be asked to give up it's gains.

When OPEC agrees on another cutback in production to boost price, it is
not unlikely that Venezuela will not have to share proportionately in
that cut. Even if they do they will not be required to give up their
gains in market share.  There will be a lot of pressure on Saudi Arabia
to shoulder a disproportionate share of the cuts.

The current oil price is an inventory problem rather than a long term
pricing issue.  When Clinton threatens to release US strategic reserves,
OPEC signaled its decision to increase production immediately. Many
economists think that U$35 dollar oil in the long run, instead the
current US$20 price, is good for the global economy.  At any rate, oil
is no longer is critical factor for the US economy which is incresingly
less dependent on oil for growth.

The drop in oil prices since 1997 was mostly a cyclical effect of the
drastic reduction of demand from the Asian financial crisis.  There wass
zero pressure even in the U.S. to raise oil prices at that time, because
of the effect its has on keeping inflation low.  Even oil companies were
not really upset by this condition because, until oil prices drop below
$7 per barrel, it is not a big deal because that is the production cost
at the North Sea.  The well-head cost is less than $4/barrel, the rest
are market induced leasehold cost. North Sea oil is higher because of
off shore drilling investments.  Oil can stay at anywhere above $7 for
quite a few year without doing any harm to the U.S. or Europe.  It will
go back the $35 oil by about 2005, and a lot people will get rich alog
with it.
OPEC is touting this line of argument,(threats on new exploration) to
get the non-opec economies to get behind higer oil prices.  In the long
run, less new exploration is good for OPEC.  Before 1973, the whole
world was happy with $3 oil.  As for America, cheap oil keep inflation
low, the dollar high and interest rate low.  These benefits out-weight
the sectorial problems created by a collapse in oil prices.
In oil, no one has told the truth for over 80 years.
There are all kinds of reasons why Clinton bombed Iraq, oil prices is
very low on the list.
If Iraq oil re-enters the world market, OPEC will reduce production
quota, so the real impact on prices would be minimum, most market
analysts estimated the price movement to be less that one dollar.  Many
of the Arab producers will curb production and make up the loss of
revenue from a reduction of current under-the-table aid to Iraq.

So at the post 1997 price of $10+/barrel, only the profit margin was
reduced and some idiot oil brokers in Chicago holding high future
contracts, or high-rolling investors in oil rigs in Texas got wiped
out.  But the good news for the oil industry was that it gave a big
boost to oil mergers to consolidate markets and reserves and downsize
employment which in better times the governments would have never
approved.  If and when Asia recovers, the oil industry will be in the
position to command $35 oil in the next cycle, and enjoy the inflated
value of their global reserves which they bought up at low cost.  The
low prices of the past years have also puts the OPEC countries (mostly
arabs) in their places, including the bonus of Indonesia and
Russia which are living exclusively on oil exports (not really living,
because all of the revenue goes to service foreign debts).
With globalization, America, the center, is enjoying the rotting of the
outer limbs of the global economy, but it has yet to realize the
gangrene kills the whole organism.
Iraq is not an oil problem as far as Washington is concerned.  In fact,
the low oil price worked against Saddam in the black market.  Saddam is
only currently America's worst enemy.  He has not always and will not
always be wearing that honor, given the unpredictability to Iran.  The
reason America fails to kill Saddam is not because of incompetence, but
because Saddam may not be the worst
alternative. He is just a bad boy.  What Washington wants is for Saddam
to be its bad boy.  Saddam has a major advantage over Clinton, as he did
over Bush. Saddam has a focused purpose whereas Clinton, and American
policy, is diffused with complex incentives that are at times
contradictory.
Oil political economy is no intellectual tea party.
There is no price economics in oil.  It all politics.


The WTO is the only international body dealing with the rules of trade
between nations. WTO agreements form the legal ground-rules for
international commerce and for trade policy. The agreements have three
general objectives: to help trade flow as freely as possible, to achieve
further rule-based liberalization gradually through negotiation, and to
set up an impartial means of settling disputes.

Ricardo coined the term comparative advantage which has been the
foundation for international trade.
When country A is better than country B at making automobiles, and
country B is better than country A at making bread. It is obvious (the
academics would say "trivial") that both would benefit if A specialized
in automobiles, B specialized in bread and they traded their products.
That is a case of absolute advantage.
But what if a country is bad at making everything?  Will trade drive all
producers out of business? The answer, according to Ricardo, is no. The
reason is the principle of comparative advantage, arguably the single
most powerful insight in trade economics.

According to the principle of comparative advantage, countries A and B
still stand to benefit from trading with each other even if A is better
than B at making everything, both automobiles and bread. If A is much
more superior at making automobiles and only slightly superior at making
bread, then A should still invest resources in what it does best -
producing automobiles - and export the product to B. B should still
invest in what it does best - making bread - and export that product to
A, even if it is not as efficient as A. Both would still benefit from
the trade. A country does not have to be best at anything to gain from
trade. That is comparative advantage.

The theory is one of the most widely accepted among trade economists. It
is also one of the most misunderstood among non-economists because it is
confused with absolute advantage. It is often claimed, for example, that
some countries have no comparative advantage in anything. That is
virtually impossible. So argues pro-traders.  Both US labor and Third
World economic nationalists dismiss the theory of comparative advantage
by pointing out that the benefits flow toward polarization rather than
equalization.

A number of simple, fundamental principles run throughout all the WTO
agreements. They are the foundation of the multilateral trading system.
They include: non-discrimination ("most-favoured-nation" treatment and
"national" treatment), freer trade, predictable policies, encouraging
competition, and extra provisions for less developed countries.

The economic case for an open trading system based upon multilaterally
agreed rules is simple enough. Protectionism leads to bloated
inefficient companies and can in the end lead to factory closures and
job losses. One of the WTO?s objectives is to reduce protectionism.  Yet
economic efficiency is only one component of national interest.

The WTO's creation in 1995 marked the biggest reform of international
trade since 1948. During those 47 years, international commerce had come
under GATT which helped establish a prosperous multilateral trading
system. But by the 1980s an overhaul was due.  Until the end of the Cold
War, trade was an exclusively Western block activity.

The Uruguay Round brought about that overhaul. It was the largest trade
negotiation ever.
GATT (the institution) was small and provisional, and not even
recognized in law as international organization. It has now been
replaced by the World Trade Organization. GATT (the agreement) has been
amended and incorporated into the new WTO Agreements. GATT deals only
with trade in goods. The WTO Agreements now cover services and
intellectual property as well.

Under the WTO Agreements, countries cannot normally discriminate
between their trading partners. Grant someone a special favour (such as
a lower customs duty rate for one of their products) and you have to do
the same for all other WTO members.

MFN is also a priority in the General Agreement on Trade in Services
(GATS) (Article 2) and the Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS) (Article 4), although in each
agreement the principle is handled slightly differently. Together, those
three agreements cover all three main areas of trade handled by the WTO.

National treatment: treating foreigners and locals equally. Imported and
locally-produced goods should be treated equally - at least after the
foreign goods have entered the market. The same should apply to foreign
and domestic services, and to foreign and local trademarks, copyrights
and patents. This principle of "national treatment" (giving others the
same treatment as one's own nationals) is also found in all the three
main WTO agreements (Article 3 of GATT, Article 17 of GATS and Article 3
of TRIPS), although once again the principle is handled slightly
differently in each of these.
National treatment only applies once a product, service or item of
intellectual property has entered the market. Therefore, charging
customs duty on an import is not a violation of national treatment even
if locally-produced products are not charged an equivalent tax.

Freer trade: gradually, through negotiation
Lowering trade barriers is one of the most obvious means of encouraging
trade. The barriers concerned include customs duties (or tariffs) and
measures such as import bans or quotas that restrict quantities
selectively. From time to time other issues such as red tape and
exchange rate policies have also been discussed.

Since GATT's creation in 1947-48 there have been eight rounds of
trade negotiations. At first these focused on lowering tariffs (customs
duties) on imported goods. As a result of the negotiations, by the late
1980s industrial countries' tariff rates on industrial goods had fallen
steadily to about 6.3%.

But by the 1980s, the negotiations had expanded to cover non-tariff
barriers on goods, and to the new areas such as services and
intellectual property.

Opening markets can be beneficial, but it also requires adjustment.
The WTO agreements allow countries to introduce changes gradually,
through "progressive liberalization". Developing countries are usually
given longer to fulfil their obligations.

Sometimes, promising not to raise a trade barrier can be as important
as lowering one, because the promise gives businesses a clearer view
of their future opportunities. With stability and predictability,
investment is encouraged, jobs are created and consumers can fully
enjoy the benefits of competition - choice and lower prices. The
multilateral trading system is an attempt by governments to make the
business environment stable and predictable.

In the WTO, when countries agree to open their markets for goods or
services, they "bind" their commitments. For goods, these bindings
amount to ceilings on customs tariff rates.
Sometimes countries tax imports at rates that are lower than the bound
rates. Frequently this is the case in developing countries. In developed
countries the rates actually charged and the bound rates tend to be the
same.
 A country can change its bindings, but only after negotiating with its
trading partners, which could mean compensating them for loss of
trade. One of the achievements of the Uruguay Round of multilateral
trade talks was to increase the amount of trade under binding
commitments. In agriculture, 100% of products now have bound tariffs.
The result of all this: a substantially higher degree of market security
for traders and investors.

              The system tries to improve predictability and stability
in other ways as well. One way is to discourage the use of quotas and
other measures used to set limits on quantities of imports -
administering quotas can lead to more red-tape and accusations of unfair
play.
Another is to make countries' trade rules as clear and public
("transparent") as possible. Many WTO agreements require governments to
disclose their policies and practices publicly within the
country or by notifying the WTO. The regular surveillance of national
trade policies through the Trade Policy Review Mechanism provides a
further means of encouraging transparency both domestically and    the
multilateral level.

The WTO is sometimes described as a "free trade" institution, but that
is not entirely accurate. The system does allow tariffs and, in limited
circumstances, other forms of protection. More accurately, it is a
system of rules dedicated to open, fair and undistorted competition.
The rules on non-discrimination - MFN and national treatment - are
designed to secure fair conditions of trade. So too are those on
dumping (exporting at below cost to gain market share) and subsidies.
The issues are complex, and the rules try to establish what is fair or
unfair, and how governments can respond, in particular by charging
additional import duties calculated to compensate for damage caused
by unfair trade.

Many of the other WTO agreements aim to support fair competition:
in agriculture, intellectual property, services, for example. The
agreement on government procurement (a "plurilateral" agreement
because it is signed by only a few WTO members) extends
competition rules to purchases by thousands of "government" entities
in many countries.

It is claimed by some economists and trade experts that the WTO
system contributes to development. It is also recognized that the
least-developed countries need flexibility in the time they take to
implement the agreements. And the agreements themselves inherit the
earlier provisions of GATT that allow for special assistance and trade
concessions for developing countries.

Over three-quarters of WTO members are developing countries and
countries in transition to market economies. During the seven and a
half years of the Uruguay Round, over 60 of these countries
implemented trade liberalization programmes autonomously. At the
same time, developing countries and transition economies were
more active and influential in the Uruguay Round negotiations than in
any previous round.

Henry C.K. Liu

"Rafael Márquez Arias" wrote:

> Hi Xena!
> Look I'm no expert, but I think the reason why WTO
> doesn't do anything about oil prices is that it isn't
> its concern since no world agreement (under wto rules)
> has been reached ever.
> As for the sudden importance of oil (once again), well
> I think that the US government wants to have all
> possible outcomes foreseen and thus it is concerned
> with controlling oil prices because it doesn't want
> any inflation problems due to petrol. At least, they
> might be thinking, that's one less problem to solve.
> It is surely dissapointing, all this economic problems
> having a political reason...
> See ya.
> rafael
>
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