FEATURE ARTICLE

Friday, August 2, 2002

Malcolm E. Fabiyi, PhD
mef22@yahoo.com
Johannesburg, South Africa


The wisdom in Remaining with OPEC:
A rejoinder to David Iheanacho's Commentary

n his article on the subject of the much publicized pressures on the Nigerian Government by the Bush led US Government to leave OPEC, in return for some yet unspecified economic gains, Iheanacho seemed absolutely convinced of the inherent wisdom in Nigeria’s withdrawal from the oil cartel, and the total lack of wisdom (even idiocy) of anyone who failed to see the same visions of economic growth, jobs, technological advancement and progress that such a withdrawal would engender.

In Iheanacho’s commentary, there was not a single competent economic argument, not one fact-based analysis of the presumed gains of such a venture to Nigeria. There was not a single pointer to historical parallels (in the absence of solid analysis) of the benefits of such a move, and not a single objective appraisal of the so-called benefits that could accrue to Nigeria from a concession to the purported desire of the USA for Nigeria to withdraw from OPEC.

Like Iheanacho, I had found the article that set the entire debate rolling on the Nigeriaworld website truly fascinating. On the surface the issues seemed simple enough. Some think thank called the African Oil Policy Initiative Group (AOPIG) had done some research that aimed at appraising America’s strategic oil interests, and the conclusion of the group was that given the current situation in the Middle East with regards to the continuing Palestine-Israeli conflict and the increasingly touted possibility of a renewed onslaught by the Bush administration on the Saddam regime, America needed to urgently review its oil policy.

The essentials of the current American oil policy are straightforward. Supply is diversified, so that there is not a single supplier to the American market that can single handedly cripple industry by withdrawing supplies. The policy also allows for geographically dispersed strategic suppliers, and America’s northern neighbor, Canada (with about 1.8 million barrels per day), is the strategic supplier for the North Americas, Saudi Arabia (with 1.4 million barrels per day) is the strategic supplier from the middle east, while Nigeria, and Venezuela are the strategic suppliers from Africa and Latin America respectively. It is no secret that in recent times, the policy romance between the Saudis and the Americans has been sorely strained, driven largely by a fall-out of the September 11 terrorist attacks, as well as serious disagreements over America’s Middle East policy. The Saudis have also made it clear that they will not support any military actions by the Bush regime against the current Iraqi government. Clearly, the romance of the late 80’s and early 90’s that saw Saudi Arabia being used as a strategic partner in the Middle East (as well as serving as a launch pad for the 1991 Gulf war) is nearing an end. In the clash of civilizations that has ensued since 9/11, Saudi Arabia, like most other Arab states have chosen, it seems, to pitch their tents with their Arab civilization.

Devoid of any significant military or economic strength, the Arab civilization has always used the one thing that it has, that is of any strategic importance to good use – petroleum. With the opposition of the Arab world to America’s Middle East policy, it is not far fetched to expect that the only way the Arab world can express its displeasure at American activities in their region is to use oil as a weapon, and the only way that America can shield itself from undue exposure to the Arab bloc is by re-aligning its strategic oil policy outlook. The Middle Eastern leg needs to be cut off, and that leaves three geographic options for making up the balance – North America, Africa and Latin America. The Canadians with a daily output of only 2.7 million barrels (about 70% of which they already supply to America anyway) and reserves that will last for only 9 years are of little value as long-term strategic partners. The Latin American option is of course Venezuela, and given the Bush regime’s utter disdain for the leftist politics of President Hugo Chavez, and his reciprocal disdain for "American hegemony", the Latin American option for increased strategic oil relevance falls flat. That leaves the African option. Naturally, all of the Maghreb and Arab states in the North of Africa fall within the complicated Arab/Middle Eastern axis; therefore the only real African options are the oil rich states of the Gulf of Guinea – Nigeria, Gabon, and Angola. The recent view of Africa’s Gulf of Guinea belt as a strategic petroleum belt by the Americans is therefore no surprise.

To rest any arguments regarding other large petroleum producing countries like Russia, Norway and Britain to serve as strategic partners to the United States, consider the following: Russia consumes 35% of the petroleum it produces locally and has 19 years of reserves left; Norway consumes a paltry 6% of what it produces, but has only 8 years of reserves left; while Britain consumes 66% of its production, and has 6 years of reserves left. Of all these, only Russia is clearly of any strategic importance, albeit with a limited life of reserves compared to the Gulf of Guinea states (Nigeria has 31 years of reserves left, and Angola has 20 years). The question as to whether the Americans will decide to make the Russians strategic suppliers is even absurd to contemplate. The cold war may be over, but there is still a gulf of trust that needs to be bridged between the two nations.

Therefore, our recent "strategic importance" has nothing to do with any sudden feelings of good will towards impoverished African states by the US government. Pragmatism and economics more than any benign sentiments is what is dictating this new outlook towards Africa and our response must also be borne on the back of hard face strategic thinking, and planning.

Before delving into details, I wish to share my findings on AOPIG, the think-thank whose study has generated all of this debate. The group is an extension of the Institute for Advanced Strategic and Political Studies (IASPS), a Jerusalem based think-thank, with a declared policy focus on the Israeli economy. The group is largely US funded, and it does not take any remarkable stretch of the imagination to posit that the AOPIG is a think-thank that has a clear policy bias against the Middle Eastern states. The group has no formal links with the American Government, but their report has generated a lot of interest on Capitol Hill, and appears to have been received warmly by a Bush government that does not seem to have exhaustively reviewed the impact of American Middle East policy on the strategic oil balance. Top American politicians such as Billy Tauzin, the US House of congress Energy and Commerce Committee chairman have referred to the AOPIG report extensively. It is therefore fair to speculate that this report could very well metamorphose into US policy in the near future.

That this group has enjoyed the kind of exposure to top leadership that it has experienced in Nigeria is remarkable. However, considering the fact that at this stage, the report is nothing more than the views of a few researchers in an Israeli-US think thank, with no policy formulation roles, I am amazed that Iheanacho, and the Nigerian press have thrown so much energy into a pre-emptive and pre-mature debate on the findings of the report. However, given the fact that the report appears to have resonated well with very high placed US political officers, I shall proceed to tackle the issues that the report, and its advocate, Iheanacho raise.

In support of the call for Nigeria’s withdrawal from OPEC, Iheanacho asserts the following

I will proceed to address the points raised in the remainder of this treatise.

1. Any Gains from OPEC membership?

Like any other cartel, OPEC aims to control and influence petroleum prices by limiting supplies to the market. Prior to the emergence of OPEC, multinational oil companies held the balance of power in the global petroleum power play. Ownership of the petroleum output was in the hands of the multinational companies and not the oil producing nations. The oil producing countries had absolutely no control on the prices or quantities of petroleum that was being produced from their territories. Venezuela pioneered the move by oil producing countries to get better deals from their oil reserves by devising the first 50-50 (lump sum royalty plus a 50-50 split of profits) agreement with the multinational companies in 1943. In the late 1940’s, Venezuela revised the tax burden on the multinational companies to capture a greater share of the profits, and the oil companies responded by shifting oil purchases to Arab countries with cheaper contracts. Venezuela responded to this move by contacting the Arab countries and encouraging them to devise similar 50-50 profit sharing agreements as it had done.

However, by the 1950’s the oil producing countries were faced with another set of problems. Because the 50-50 deals were based on fixed "posted prices" rather than market based prices, they were constantly under pressure to expand concessions as a way to expand their revenue base. As a consequence, the 1950’s witnessed a higher growth in production than demand. Subsequently, the over supply situation drove market prices down and the "posted prices" became far removed from the real market prices, which had been driven down, leading to significant losses for the oil companies. In an attempt to recapture profits, the multinational companies made attempts at reducing the "poster prices". Between 1959 and 1960, a number of international oil companies unilaterally cut "poster prices" setting the economies of the oil producing countries into a spiral. In response to the damaging price cuts, the five major oil producing countries at the time – Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, formed OPEC at the Baghdad conference on September 14, 1960. Other members of the cartel include/have included, Qatar (1961), Indonesia (1962), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973-1992) and Gabon (1975-1994).

The impact of OPEC on the global oil scene was immediate. At the time Nigeria joined OPEC in 1961, crude oil prices averaged $2.50 per barrel. By 1981, prices had peaked at $35 per barrel, driven largely by OPEC initiatives. Recently, the effectiveness of OPEC has been curtailed somewhat by the discovery of several Russian and European fields like the North Sea reserves and some Norwegian fields. From a production perspective, countries like Russia produce as much oil as the leading producer in OPEC – Saudi Arabia. But viewed from the perspective of oil reserves, Russia has only 19 years of remaining reserves, while Saudi Arabia has about 85 years of reserve capacity still. Therefore, OPEC has been, and will continue to be the pre-dominant determinant of crude oil prices for decades to come.

The answer to the question of Nigeria’s benefits (or lack thereof) from membership of OPEC has been done somewhat circuitously. In summary, I believe two clear benefits stand to mind

  1. Had it not been for the OPEC oil cartel, Nigeria might have been earning much less than the 1961 price of $2.50 per barrel given what would have clearly been a situation of unbridled and uncontrolled over-supply situation – and the loss therefore of total crude oil accruals since 1961 of over $300 billion

  2. Nigeria’s membership of OPEC affords it a strategic avenue to influence global affairs in a significant way. Nigeria remains the most "moderate" and "neutral" member of OPEC, and is thus courted by western governments as the voice of reason within OPEC. Nigeria has not exploited this remarkable position of strength sufficiently.

2. Nigeria’s withdrawal could open the door to congressional-driven negotiations for debt relief (subject to specific fiscal/economic criteria)

Iheanacho makes the assumption in his commentary that Nigeria stands to make remarkable gains from "congressional-driven negotiations for debt relief". True, Nigeria’s heavy debt burden have hindered, and will continue to hinder the ability of our government to deliver much needed developmental programs, but at what price should we purchase, not debt relief, but negotiations for debt relief that will be subject to some yet-to-be specified fiscal/economic criteria? Two factors make this seemingly attractive offer of limited value to Nigeria

  1. Nigeria’s total US debts are relatively small – coming to a principal loan total of about $300m, compared to what is owed large creditor groups like the Paris club ($1.4 b principal balance), the ADB group ($ 2.8 b principal balance), and the London club ($ 2 b principal balance). If Nigeria were to acquiesce to American demands to quit OPEC as a pre-condition to opening negotiations on debt relief, then what should we expect the Paris and London clubs to demand? That we quit the African Union?

  2. Perhaps more pressing is the fact that the debts owed to the US are mainly to commercial institutions like the Exim bank and Citi-Corp, and not to the US government. Is the American government really in a position to give assurances on behalf of these publicly listed commercial institutions, who have shares held by shareholders, who quite frankly do not care one way or the other, whether Nigeria and the USA are hell bent on becoming buddies? Shareholders are in business to make money, not to run debt relief charity organizations. Save a repayment of the debts owed by Nigeria to these institutions by the US government, I do not see how debt negotiations and ultimately, forgiveness will be achieved.

Given Nigeria’s massive debt burden, every effort that lessens the yoke of indebtedness should not be spurned, and my position on this issue should not be taken as the "insistence on choice by the beggar". I believe that the undue importance being accorded by people like Iheanacho to the notion of debt relief by the USA stems from the erroneous assumptions that the USA is one of our largest creditor nations. Nigeria must remain open to genuine offers for help in alleviating our debt burden, but we must also remain vigilant in order to ensure that the cost of the help offered is not as costly, or even costlier than the primary problem that was being addressed.

3. The flood gate will be opened to US private and institutional capital to move to Nigerian projects in telecommunications, transportation, mining and agro-allied businesses

This is the most absurd point that Iheanacho raised. Governments do not invest – individuals and institutions do. Are we to believe that once Nigeria pulls out of OPEC the US government will announce that the nation is now open to institutional and private investment, and an immediate avalanche of investment dollars will follow? There is no Government on earth that has the power to force investors to nations or territories that they feel do not offer minimum risk – political, economic, and regulatory. In making investment decisions, investors, whether they are in Europe or Russia or the Middle East or the USA do not look to their governments for prompting or advice. Instead, it is to the country reports and risk ratings of institutions like the economist intelligence unit (EIU), and other macroeconomic watchdogs that the investment community looks to for signals that certain nations are now safe havens for a capital influx. Unless Iheanacho and his AOPIG friends convince me that the Bush government will decree that the EIU should summarily reduce Nigeria’s risk ratings, as well as order Transparency international to fraudulently declare Nigeria to be one of the least corrupt nations in the world; Nigeria quitting OPEC will not yield an extra incremental cent in investment capital inflows.

And to pre-emptively stave off the argument that the American government could use governmental aid to drive growth in Nigeria, we must remember that Aid money must be returned ultimately. Research by debt relief organizations like Jubilee plus has shown that African nations pay back about $3 for every $1 received in developmental aid.

4. Increased oil and gas share of the American market

I fail to understand how anyone would consider as attractive, a proposal that suggests that Nigeria should increase its supplies to the USA to 1.8 million barrels a day, that is well over 80% of its total production. There are three factors that make this proposal not only unattractive, but a clear case of strategic sabotage against the Nigerian nation

  1. The strategic idiocy in having one country as your principal source of demand is patently obvious, just as it is strategically suicidal to have a single nation as a primary source of supply. While America is trying to ensure that it does not fall foul of the latter scenario, Iheanacho and his AOPIG pals are advocating that we fall foul of the former. I will propose a simple thought experiment – suppose Nigeria were to supply 100% of its crude oil to the USA, and suppose for some reason, Nigeria draws the ire of its sole source of demand, and finds itself, like Saudi Arabia, suddenly fallen from the good graces of America, where would we turn to sell our crude? It must be noted that the oil market is incredibly complex. It is not a simple cases of moving supplies elsewhere. There are agreements to be made, and contracts to be negotiated with buyers and producers, as well as deals to be struck with shipping agencies that provide the tankers that move oil around the world. There are also complex global trade laws and excise and duties that need to be taken cognizance of. In the case that such a situation would arise, it would take no less than six months – maybe more, for Nigeria to re-align supplies with demand. Six months or more, where our production will accumulate wastefully and because of limited storage capacity could be forced to cease. Six months when there will be little or no foreign exchange earnings accruing to the country from crude sales, or in the case where quick outlets can be negotiated, deals will be entered into in desperation, and will most likely be disadvantageous to the Nigerian nation. No sir, there are no advantages to having a single buyer for a base commodity like petroleum, when it is possible to have a less risky, diverse, but fairly concentrated buyer pool.

  2. If the USA consumers will pay more for Nigerian crude than would other buyers, then there is clear economic logic in taking the risk to have a single source of demand. The reality however, is that no one will buy Nigerian crude at anything higher than market value. First, it must be understood that the bulk of Nigerian crude supplies to the USA is not to the government, but to private holdings and commercial interests. As I stated in an earlier part of this discourse, these people are not in the business of charity. I challenge AOPIG and Iheanacho to point me towards one example – just one, where there was a sustained purchase by a government or institution, of crude oil at rates that were significantly above the market price.

5. US capital and technology for additional Nigerian refining capacity

One of the arguments made in Iheanacho’s commentary is that one of the rewards for Nigeria’s withdrawal from OPEC would be an increase in American involvement in the Nigerian refining sector. However, I find a logical disconnect between the case for the total supply of Nigerian production to the USA, and the supposed development of Nigerian refining capacity. Refining needs crude oil as a raw material. If AOPIG and Iheanacho are advocating that Nigeria increase supplies to the USA, where then will the crude oil that will be used as stock for the "expanded" refining capacity come from? Obviously, in their analysis, AOPIG have not considered the possibility that someday, Nigeria will move out of its doldrums, will diversify its economy, and will begin to consume significant amounts of crude oil locally – in thermal power plants, in industry and in refineries.

6. North American capital and technology and participation in marginal fields

Nigeria remains the second largest destination for foreign direct investment (FDI) after South Africa, in sub-Saharan Africa. These investments, which totaled some $1.4 b dollars in 2000 (and is expected to have grown since), was and still remains driven largely by investments in the oil and gas sector. The bulk of these investments have been by North American companies like ExxonMobil, Chevron, Texaco, Conoco, etc. Apart from Shell, all the other major players in the Nigerian oil industry are North American. Are we to believe that there are some yet unknown "big oil industry players" that will start to invest in Nigeria once Nigeria withdraws from OPEC? Clearly not. Nigeria’s membership of OPEC has not stalled investment in the oil sector by these players, and it is not likely to do so in the near or distant future!

Conclusion

Given our reputation as chronic government bashers, Iheanacho’s stance of outright condemnation for the stance of Government officials is understandable. But for a public commentator of his stature, it is not excusable. A little bit of thought, research and analysis would have revealed the inherent wisdom in the position of the Nigerian government. OPEC has served the Nigerian nation well, and there is no reason to believe it will stop serving the interests of the Nigerian nation. Perhaps, Iheanacho does not know it, but Nigeria has the dubious reputation of being a chronic flouter of prescribed OPEC quotas. Even so, it continues to benefit immensely from its membership of OPEC. If America did not demand the withdrawal of Saudi Arabia from OPEC before making it a strategic ally, why should Nigeria be required to relinquish OPEC membership to qualify to come to the same tea party?

Through OPEC, Nigeria has its strongest voice in global politics. Through OPEC, Nigeria can make the world listen. Of all the nations in OPEC, the Nigerian nation remains the one most resolutely committed to liberal democracy, and therefore the one nation most likely to be courted by the western bloc. It is time the Nigerian government put together a think-thank of its own to determine just how much the bargaining power it holds through OPEC is worth. I doubt that the government realizes just how important our position and role in OPEC is.

For a commodity dependent economy like Nigeria, price stabilization is key to economic growth. 95% of Nigeria’s foreign exchange earnings come from crude oil. About 95% of the annual budget is based on assumed earnings from crude oil sales. Clearly, the Nigerian government officials were wise in declaring that the stability of oil prices is the primary objective of the Government – and OPEC is the primary determinant of global oil prices today. If the price of petroleum were to fall by as little as 10%, the Nigerian Government will find itself in deficit to the tune of a commensurate 10%. The government will therefore not be able to meet a lot of its developmental commitments to the Nigerian nation. In or out of OPEC, Nigeria’s economic fortunes will still be determined by oil prices set by OPEC. The illusion that OPEC cannot affect the production regimes of countries outside its fold should also be put to bed. In 2001, OPEC compelled Russia, a non-OPEC nation, to cut production by up to 150,000 barrels per day. Is any further evidence needed as regards the strategic importance and relevance of such an organisation?

Iheanacho raised a number of emotive issues related to the "Islamic dominance" of OPEC, and the seemingly perpetual status of Dr Rilwan Lukman as Nigeria’s representative in OPEC. Until Iheanacho can convince me that Nigeria’s interests have been mortgaged by Dr Lukman, then he should hold his peace. The other issues he raises, about a so-called OPEC Islamic agenda are patent falsehoods. Venezuela, the primary founding nation of OPEC, and a current leader of the OPEC family is 98% Christian. That the world’s largest oil producers happen to be Islamic nations is nothing but an accident of geography. However, if Iheanacho believes, as he purports to, in a God of creation (I took the liberty to look up his biography), then the good Lord must have had a reason for citing the world’s largest petroleum reserves under Arabian and African soil. Perhaps God in his infinite wisdom purposed that the world’s greatest nations should every now, and then be taught a lesson in humility, by the not-so-great nations.