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Commodities

Factbox: OPEC still standing among the ruins of former cartels

(Reuters) - OPEC’s sway over the global oil price has diminished in the last few years, but analysts say it is a long way off suffering the same fate as commodity cartels that fell victim to anything from technological advances to macroeconomic shifts.

On Thursday, the Organization of the Petroleum Exporting Countries failed to reach an agreement on output policy at its meeting in Vienna.

OPEC is not the first cartel that has sought to manage the global price of a commodity and serve the interest of its members, but at 56 years old and still going, it has outlived all of them.

The twentieth century is riddled with examples of other commodity cartels, from tin to natural rubber and coffee, that tried their hand at managing global prices only to be overtaken by market forces and the advent of new technologies.

“At the beginning, it was easy to achieve their objectives, but then, as time went by, those organizations were going against the wind,” senior economist at the World Bank John Baffes said.

“They were trying to fight the market and you cannot really fight the market,” Baffes added.

But after nearly two years of letting the market determine global prices, and of members failing to agree on any production targets or cuts, the future of OPEC has come into question, leading some of its own members to pronounce it dead by turning it into a talking forum.

“Managing in a traditional way as we did in past may not come back again,” Saudi Arabia’s Energy Minister Khalid al-Falih said in Vienna.

Analysts argue that it is too early to suggest the group is irrelevant. After all, OPEC says its members hold 80 percent of the world’s proven oil reserves, and the de facto group leader Saudi Arabia hold’s the world’s only significant spare capacity.

Below are examples of other commodity cartels in recent history which have lost their price-setting powers.

TEXAS RAILROAD COMMISION (TRC)

* Established in 1891, the TRC effectively set global oil prices in the forty years to 1971 after the U.S. government put it in charge of the country’s spare capacity.

* But as U.S. crude production declined and spare capacity dwindled, the TRC abandoned its quota system and allowed U.S. producers to pump at full capacity in 1971.

* OPEC, set up in 1960, effectively inherited the role of the TRC because of the group’s spare capacity, and would apply the same production controls to influence oil prices.

* “I’ll continue to assess its [OPEC] value and stop attending if and when I see that it has gone the way of the Texas Railroad Commission (TRC) –in existence, but an irrelevant group for the global oil market,” Jaime Webster, senior energy director for IHS, recently wrote.

COFFEE

* The London-based International Coffee Organization (ICO) was set up in 1963 and sought to influence global prices through an export-quota system for its producing members.

* The system collapsed in 1973 due to “changes in the pattern of supply and demand,” according to the ICO, but was reintroduced in 1980s.

* By the early 1990s, members of the organization failed to agree on enforcing a new quota system and the ICA turned into “a forum for international cooperation on coffee matters”.

* The ICO still hosts a series of events every year in London, but pricing policy is not on the agenda. Instead, they hold sessions that “aim to drive interest in coffee quality, to improve standards and to shorten the distance between farmer, roaster, barista and consumer.”

TIN

* The International Tin Council (ITC), established in the mid-1950s, regulated tin prices through maintaining a buffer stock: buying inventories when prices rose and selling when prices fell.

* But a sustained period of stable and favorable prices allowed non-signatory countries, particularly Brazil, to ramp up their tin production and flood the market. The development of a substitute product, aluminum, which captured market share by becoming more appealing to the beverage can producers, Baffes said.

* The ITC maintained its buffer policy until it could no longer afford it, and went bankrupt in 1985.

NATURAL RUBBER

* The International Natural Rubber Agreement, which also operated through maintaining a buffer stock, collapsed in 1999 in light of the Asian financial crisis as currency woes undermined the role of its top Asian producers.

* Thailand, Malaysia and Indonesia then set up the International Tripartite Rubber Council in 2001, to implement measures supporting rubber farmers in the three countries mainly by restricting exports to shore up prices.

* Last Feb., the council announced export cuts equivalent to 6 percent of global natural rubber output for a six-month period beginning in March.

* The cuts helped lift benchmark Asian prices STFC1JRUc6 but, like previous measures, the boost was only fleeting.

Compiled by Ahmad Ghaddar in London, additional reporting by Amanda Cooper in London and Manolo Serapio Jr. in Singapore, editing by William Hardy

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