The Myth of the Oil Cartel (review)

BOOK REVIEWS 217 There are serious inadequacies in all these proposals. Chiefly, it should be noted that the U.S. has profited enormously from the Atlantic Alliance; its role in NATO has assured the U.S. ofaccess to Western Europe's industrial, economic and cultural wealth on favorable terms. Secondly, the West Europeans have been coaxed by the U.S. to do more "burden-sharing" within NATO in the past. President Carter's "three percent solution" went largely unimplemented and the present economic situation of Western Europe makes increased defense spending more unlikely than perhaps at anytime in the past. Finally, while it is true that both the U.S. and Western Europe share a common security interest in Middle East oil, there has rarely been agreement between the two on Middle East policies. The two most spectacular instances of U.S.-West European fractionalism have been the 1956 Suez War and 1973 ArabIsraeli War. In the latter case, the Europeans actually forbade the Americans to use NATO facilities for the resupplying of Israel. Keeping this history in mind, plans that call for the expansion of NATO's jurisdiction do not seem destined for success. The Alliance's death knell has been rung many times in the last 30 years, and is being rung still louder by some this year. Maurice Couve de Murville, France's Foreign Minister from 1958-68 writes in the London Times of 18 February 1982: "That the Alliance is in a state of crisis is something that I have been hearing throughout the 30 years of its existence," however, Couve de Murville continues, "I have no hesitation in saying that this (Alliance) future is not in question ... I believe this association will last forever." In the midst of all the eulogies for the Alliance, perhaps Couve de Murville's view is the most enlightened. After all, when it comes to serious threats to Western cohesion and NATO, the French have been there before. —Thomas G. Bombelles The Myth ofthe Oil Cartel. By Ali D. Johany. New York: J. Wiley and Sons, 1981. 96 pp. $36. Dr. Johany is a Saudi Arabian professor. One reads his book with great anticipation. The title is provocative—one hopes that within the one hundred pages the author will reveal that the opec nightmare really has been only a dream. Dr. Johany does prove that OPECs might as a cartel is a myth in that simple economic and historical factors played more of a role in escalating oil prices than the cartel itself did, and to the extent that OPECs behavior does not conform to conventional economic definitions of the the term "cartel." In chapter 4, entitled "The Economics ofExhaustible Resources," the author presents his main argument. The path of interest rates, he says, not OPECs specific policies, explains the pattern of price and supply in the world oil market. Until 1973 the oil companies dominated oil production, but they were always apprehensive about the possibility of nationalization or at least higher future costs in terms of royalties or taxes. This uncertainty led to higher interest rates than those prevailing on world markets (by as much as a factor offour, calculates 218 SAIS REVIEW the author), and higher discount rates meant higher production. Fear of the future led to greater output in the present and this caused the general decline of prices from 1947 up until 1970. In chapter five, entitled "OPEC is not a Cartel: an Alternative Explanation," the myth is destroyed. De facto nationalization of the oil in 1973, with OPEC posting prices unilaterally for the first time, caused a divergence in the interest rates of the companies and producing countries. This led to different rates of output and thus to different prices. However, the higher prices and therefore revenues that the producing countries were now receiving led to further decreases in their interest rates because of the limited opportunities for investment within most of the OPEC countries and the risks of investing abroad. This explains the lowered output or at least lower rate of production growth through the rest of the decade. The author concludes: The sharp increase in the price of oil since 1973 and the...