Sacrificial leadership by OPEC adds to market uncertainties

Rochdale PioneersI listed over twenty descriptions of leadership last year. One that slipped through unnoticed was sacrificial leadership which has been applied to OPEC’s approach to the oil market. What’s all that about?

Economist Douglas Frazer used the term sacrificial leadership to describe OPEC’s deliberations at a high-level meeting of the Oil Producers which took place in Vienna on January 1 2016. A holiday for some, toil for the indefatigable leaders of OPEC. No rest for the masters of the petroleum industry.

At OPEC’s last meeting in 2014, the North Sea price benchmark per barrel was $115. It had reached $80 and falling before the last OPEC meeting. A few months later and it is struggling to retain a level of $40. Most economists seem to accept global macro-economic forces are contributing to the production and price decline of oil. Chief of these seems to be the relative slowdown of growth in China and additional sources of supply from the rapidly developing American shale oil industry.

The political forces are dominated by the intentions and actions of the OPEC group of producers, from the Persian Gulf plus Libya, Algeria, Nigeria, Venezuela, Ecuador and Indonesia. Together the 13 States are considered to control over 80% of the world’s known oil reserves. Among them the wealthiest nations of all are from the Gulf States. Kuwait and Saudi-Arabia are calculated (in a report in The Economist, January 9 2016) to have the lowest breakeven point for oil production at less than $20.

Frazer noted that

At that point, [November 2015] its leading and dominant producer, Saudi Arabia, made clear that it had no intention of propping up the price by cutting production, only to let upstart American shale-frackers grab a piece of OPEC’s market share. The Americans were to be pushed out of business. END

Writing for BBC Scotland, Frazer outlined how the meeting had decided to act by ‘closely monitoring developments’

What developments?

These are the forces contributing to the instability in the price of crude oil. They are laid out as neatly as those in a Business School Assignment. If the structural strengths and weaknesses are the economic, the threats and opportunities seem to be particularly political.

Saudi Arabia in particular has become even more embroiled in the turbulent Middle East politics of the Syrian conflict, opposition to Iran’s rapprochement with the United States, and internal pressures for reform.

Sacrificial Leadership

Frazer labelled the lack of strategic action by OPEC to be sacrificial leadership. He explains

On the supply side of the oil market, OPEC has found its sacrificial leadership is being undermined by non-members and by a lack of discipline in the ranks.

I take this to mean that OPEC has followed a shared strategy which sacrifices the benefits of greater revenues for non-economic reasons. The ‘non-members’ are those pesky American Entrepreneurs fracking away in the service of the American economy. The lack of discipline would presumably the members with greater interest in strengthening their economic position. Saudi Arabia was fingered in the Economist analysis with reform pressures, and pressures to retain financial backing for its increasing military commitments.

An earlier academic paper attempted to clarify the concept of sacrificial leadership. Authors Jeffrey Matteson of Regent University and Justin Irving of Bethel University explained:

The proposition of a broad influence of leader self-sacrifice led Choi and Mai-Dalton to define self-sacrificial leadership as “the total/partial abandonment, and/or permanent/temporary postponement of personal interests, privileges, and welfare in the (a) division of labor, (b) distribution of rewards, and/or (c) exercise of power” … Self-sacrifice in the exercise of power is described in their research as “voluntarily giving up or refraining from exercising or using the position power, privileges, and/or personal resources one already has in his/her hand” END

The attractive idea of OPEC acting in sacrificial leadership fashion is somewhat counter-intuitive. It is a pity that Frazer has not explored more clearly his own interpretation of the neologism. Until he does so it remains open season for academic exploration.

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