CUERVO FINAL 4/23/2008 12:19:35 PM OPEC FROM MYTH TO REALITY Luis E. Cuervo* I. INTRODUCTION—THE IMPORTANCE OF ENERGY SECURITY, RESOURCE DIPLOMACY, AND THE MAIN CHANGES IN NEARLY HALF A CENTURY OF OPEC’S FORMATION ....................................................................... 436 A. Energy Dependency, Foreign Policy,and the U.S. Example ....................................................... 442 B. Some of the Major Changes in the Oil and Gas Industry Since OPEC’s Formation............................ 452 C. Oil and Gas Will Be the Dominant Energy Sources for at Least Two More Generations........................... 455 D. A New OPEC in an International Environment in Which the End of the Hydrocarbon Era Is in Sight . 458 II. ARE OPEC’S GOALS AND STRUCTURE OUTDATED IN VIEW OF THE EMERGENT TRENDS IN THE INTERNATIONAL ENERGY INDUSTRY?............................... 464 A. OPEC’s Formation and Goals................................... 464 B. Significant International Developments Since OPEC’s Formation..................................................... 471 1. Permanent Sovereignty Over Natural Resources and a New International Economic Order .......... 473 * Professor Cuervo is a member of the Texas, Louisiana, and Colombian Bar Associations. He is a Fulbright Scholar and Tulane Law School graduate. Mr. Cuervo has taught Oil and Gas Law and International Petroleum Transactions as an adjunct professor at Tulane Law School and the University of Houston Law Center. He served as an advisor to the Colombian Ministry of Justice and to OPEC. Mr. Cuervo practices law in Houston, Texas as a partner with Fowler, Rodriguez. This paper was prepared for and delivered to OPEC in December 2006. Its contents represent only the Author’s views and not those of OPEC. 433 CUERVO FINAL 4/23/2008 12:19:35 PM 434 HOUSTON JOURNAL OF INTERNATIONAL LAW [Vol. 30:2 2. Environmental Obligations and Climate Change .................................................... 481 3. International Integration Models Such as the European Union Experience................................. 485 4. Transparency and the Fight Against Corruption............................................................. 488 5. Resource Wars....................................................... 492 6. International Law................................................. 498 7. Fuel Poverty and Hydrocarbon Development in Countries Affected by Trade Sanctions................ 500 8. United States Based Litigation Against OPEC... 503 9. Consolidation of Saudi Arabia as Most Important Producer and Country with the Most Reserves and Its Foreign Policy Challenges ........ 507 10. Russia’s Energy Power ......................................... 513 III. CHALLENGES OF AMENDING OPEC AND ITS STATUTE .... 519 A. Should OPEC’s Objectives and Scope Go Beyond Playing a Role in Determining the International Price of Oil?................................................................ 519 B. Is OPEC Still Relevant in Determining the Price of Oil and Will this Continue in the Future?................ 527 C. Some of the Challenges of Reforming OPEC ............. 531 D. Energy Security and a Potential OPEC Role ............ 537 IV. TO WHAT EXTENT DO THE PROPOSED AMENDMENTS TO THE U.N. SYSTEM AND THE ECONOMIC REALITIES OF THE 21ST CENTURY JUSTIFY A RETHINKING OF OPEC, ITS NATURE, OBJECTIVES AND ROLE? .............................. 541 A. The U.N. Example ...................................................... 541 B. The Millennium Summit and the Millennium Development Goals .................................................... 550 C. OPEC’s Formation, Structure, and Statute............... 552 D. Amendments to the OPEC Statute............................. 569 V. THE COMPARATIVE APPROACH ......................................... 572 A. The Texas Railroad Commission .............................. 573 B. OECD and IEA ........................................................... 581 CUERVO FINAL 4/23/2008 12:19:35 PM 2008] OPEC FROM MYTH TO REALITY 435 C. The Nuclear Energy Agency (NEA)............................ 586 D. Committee on Energy in the U.N. Economic and Social Commission. ............................................ 588 E. International Energy Forum (IEF) ............................ 589 F. World Energy Council................................................. 589 G. Latin America Energy Organization (OLADE)......... 590 H. International Association of Oil and Gas Producers (OGP)................................................. 592 I. Organization of Arab Pertoleum Exporting Countries (OAPEC).................................................... 593 J. Latin American Reciprocal State Petroleum Assistance Association (ARPEL) ............................... 595 VI. HOW CAN OPEC’S SECRETARIAT MEET THE CHALLENGES OF THE INTERNATIONAL OIL INDUSTRY IN THE 21ST CENTURY? ......................................................... 596 A. OPEC’s Secretariat, Its Mandate and Limitations. 596 B. Some Areas in Which a New OPEC Could Strengthen Its International Role ............................. 603 C. Specific Recommendations Regarding Amendments to the OPEC Statute................................................... 604 VII. CONCLUSION ..................................................................... 609 “When the rules of law and the rules of equity are in conflict, the rules of equity must prevail.”1 “[W]e are Arab Muslims, and our religion and civilization enjoin us to cooperate with other peoples and to meet good with good. The world today is divided into one part with the soul, that is the Arabs, and one with the body, the West. We have the energy and you have the industries, and without a meeting of the soul 1.ABDUL AMIR Q. KUBBAH, OPEC: PAST AND PRESENT 132 (1974) (quoting Abdul Rahman al-Bazzaz in an address to the Iraq Petroleum Company negotiators on Mar. 11, 1964). CUERVO FINAL 4/23/2008 12:19:35 PM 436 HOUSTON JOURNAL OF INTERNATIONAL LAW [Vol. 30:2 and the body there is no life. Any separation of the two will only result in death. We want to give to the West and to take from it, and there is no taking without giving.”2 I. INTRODUCTION—THE IMPORTANCE OF ENERGY SECURITY, RESOURCE DIPLOMACY, AND THE MAIN CHANGES IN NEARLY HALF A CENTURY OF OPEC’S FORMATION The expression “mid-life” crisis is associated with that time when individuals reach their forties and ask themselves many questions about what they have done with their lives and what they want to do with whatever existence they think they may have left.3 It is a time of crisis, reflection, and sometimes, profound change. Although institutions do not necessarily suffer from these same symptoms, OPEC is now forty-six years old4 and may be going through such process in its institutional history. This document analyzes the main challenges of transforming OPEC so that it may successfully live through the end of the hydrocarbon era. Forty-six years after the creation of the Organization of Petroleum Exporting Countries (OPEC), in Baghdad in 1960, while petroleum crude is still a strategic and critical commodity for the world economy,5 the international petroleum industry 2. Use of Oil as a Political Weapon, AL-HAWADITH, Aug. 24, 1973, reprinted in KUBBAH, supra note 1, at 122–23 (quoting H. R. H. The Ruler of Abu Dhabi, Shaikh Zayed bin Sultan Al Nahyan). 3. Psychology Today’s Diagnosis Dictionary: Mid-Life, http://psychologytoday.com/ conditions/mid-life.html (last visited Feb. 8, 2008). 4.WILLIAM OCHSENWALD & SYDNEY NETTLETON FISHER, THE MIDDLE EAST: A HISTORY 704 (McGraw Hill 2004) (1959). 5.DANIEL YERGIN, THE PRIZE: THE EPIC QUEST FOR OIL, MONEY, AND POWER 14 (Simon & Schuster 1992) (1991). Crude oil futures trading started in 1983 in the New York Mercantile Exchange and “is the most heavily traded commodity.” Crude Oil Futures Prices—NYMEX, http://www.wtrg.com/daily/crudeoilprice.html (last visited Feb. 8, 2008). Crude oil futures trade in units of 1,000 barrels and are quoted in U.S. dollars. Id. The world oil market is a $2 trillion market. Nelson D. Schwartz & Jon Birger, Slick Operators: How Hedge Funds, Traders, and Big Oil are Really Driving Gas Prices, FORTUNE, May 29, 2006, at 72, 74; see also Oil Dependence and Economic Risk: Hearing Before the S. Comm. on Foreign Relations, 109th Cong. (2006) (statement of CUERVO FINAL 4/23/2008 12:19:35 PM 2008] OPEC FROM MYTH TO REALITY 437 has changed substantially and many of the challenges that lie ahead are complex and may require different and creative international institutions and effective cooperation. Borrowing the words of Robert Schumann in 1950, when proposing the creation of the European Coal and Steel Community, “[w]orld peace cannot be safeguarded without the making of creative efforts proportionate to the dangers which threaten it.”6 The price of oil and hydrocarbon reserves are not the only important economic issues. Crude oil prices and inflation, the impact of the Chinese and Indian economic growth, and excessive liquidity in the international capital markets partially caused by higher oil prices are some of the “risk factors for the international economy.”7 Crude oil prices and production distribution have also become foreign policy and energy security issues and sensitive matters directly related with war and peace.8 Those prices will determine the futures of many single commodity producing countries, and of an entire region, the Middle East. The economic growth and stability of the main energy consumers— the United States, Japan, China, and the European Union— Alan Greenspan, President,