S.D. Krasner, "Oil is the Exception," Foreign Policy, No. 14, Spring 1974

The Main Point

Krasner describes how oil may be the only major raw material in the world that could be regulated through independent actions of Third World states under a system of "durable collusion." He provides a detailed analysis of conditions that could allow for such collusion to be possible and then describes practical American responses to such an action. Ultimately, Krasner states that the Third World is not in a position to implement oil regulation upon industrialized nations.

Summary

The possibility to regulate trade by some producers, in any market, seems destined for failure from the beginning. All members of such a "cartel" must act as one and carry the burden to control the market equally. There must be confidence among one another to keep all commitments through trust and open communication. To date, any attempt for such a cooperative agreement has failed. Suspicion of cheating and distrust of partners have led members to abandon any cooperation. For example, in 1962, the cocoa-exporting states of Ghana, the Ivory Coast, the Cameroons, Nigeria, Brazil, and Togo formed the Cocoa Producers Alliance (COPAL) to limit sales in order to keep prices above 20 cents per pound. The Ivory Coast and the Cameroons did not abide by the agreement from the outset; therefore, they failed. Cocoa plummeted to 11 per pound.

Oil, unlike other natural commodities, has been the only major raw material limited in supply by a group of oil-exporting Third World states. "The attributes that distinguish these countries from other materials producers are their enormous foreign exchange holdings, a common external enemy, and tacit assistance from multinational companies. No other group of exporting states is likely to find itself in an analogous situation." Libya, Kuwait, Abu Dhabi, and Saudi Arabia through independent action have been able to sustain market control on oil, something OPEC could not attain. This type of collusion is unpredictable even when conditions favoring collusion are present. The conditions that favor collusion are:

§ Demand unresponsive to price: the demand structure facing oil exporters makes it possible to increase foreign exchange earnings if they effectively cooperate. Demand for oil will not erode if prices increase.

§ Supply unresponsive to price: effective economic or technical barriers to entry of new producers must be present in order keep supply limited if there are higher prices. New producers will cause an increase in supply causing prices to decrease.

§ Shared experience among producers: "the greater the level of shared experience, the more aware they will be of the mutual interdependence." Collusion members are well aware that an action by one will affect all.

§ Lack of consumer resistance: "if buyers do not cooperate with each other, play one producer off against another, or retaliate by, for instance raising the price of their exports" then collusion is possible. Governments of consumer nations have yet to resist higher oil prices.

§ Ability to take a long-term perspective: "collusion maximizes returns only over the long term."

§ Shared values: "If a group of producers share salient noneconomic values, the probability for successful cooperation is increased."

The Third World producers of oil have advantages that no other Third World producers of other natural, raw materials posses. This collusion has been able to curtail production and increase prices with little resistance.

Krasner then offers two possible American responses to this type of collusion, especially in the oil market. First, the U.S. can secure leverage against a collusion of Third World producers by "nurturing specific relationships." Debt rescheduling and tariff adjustments could be used as an approach to economic equality for the Third World states and the U.S. This provides an "aura of cooperation" but it too can lead to some leverage for bargaining on specific issues. Ultimately, the American government can offer the Third World states a measure of dignity and equality through cooperation rather than resist through monetary policies. Second, the U.S. could use a policy of "negative preemption" to use against any collusion. It could manipulate some of the variables that lead to collusion by refusing to join international commodity agreements, undermining agreements that are already in effect, encouraging competitive behavior by it own companies, and developing its own domestic sources for materials to reduce imports.

The Third World states who limit the supply of oil to create higher prices are ultimately negated due to the fact that the industrialized states could still comfortably live with the higher prices. This scenario essentially nullifies collusion on oil supplies and leaves the Third World states without the equality they so thoroughly seek.

Mark Cardenas