The need for OPEC oil?

OPEC AND THE WORLD OIL OUTLOOK: REBOUND OF THE EXPORTERS?

B. Mossavar-Rahmani and F. Fesharaki

ElU Special Report No 140, Economist Intelligence Unit, London, 1983, 68pp, £75.

This short, but very expensive report is half polemic, and half an assemblage of data on individual OPEC members' ability and willingness to produce oil, given high enough levels of global demand, in the 1980s. The latter element in the study is useful, as it clearly shows the now very slowly evolving growth of the producing capacity of the world's major exporting countries compared with the earlier very rapid expansion of their upstream activities. In this new context the 66% of the world's 'total reserves' of oil which, the authors claim, lie in the OPEC countries will take the next 40 plus years to deplete. The authors do not comment on the uneconomic rate of depletion of the reserves which such an outlook involves-even if one simply assumes (as do the authors) that there is a guaranteed long-term market for OPEC oil.

The polemic is concerned with their attempt to demonstrate the world's need for OPEC oil, and the dangers of ignoring this 'inescapable' conclusion as a result of short-term oil price and demand signals which have had the effects of reducing the price (in real terms) by almost 20% since 1980, and OPEC's production by almost 50% in the same period. The polemic is under- standable, however, given the infor- mation about the authors provided in the Report. 'They have both', we learn, 'attended OPEC Ministerial Conferences as delegates'! The report, in its polemical aspects, appears to owe more to these earlier functions of the authors than it does to their present academic affiliations at Harvard

University and the University of Hawaii, respectively. In that they thus declare their interests and so raise a justifiable element of scepticism con- cerning the objectivity of their analysis and conclusions, one cannot complain. What is objectionable, however, is their severe attack on those whose analysis of the international oil outlook brings them to conclusions different from those of Mossavar-Rahmani and Fesharaki. 'Such observers', we learn (p 5) 'are making serious errors of judgement and analysis'. More serious- ly, the authors of this report conclude, 'Others are seeking to validate their own studies by generating results that fall within the scope of prevailing opinion. Still others are drawing long term conclusions from short term conditions. All are allowing the wish to father the thought (viz that OPEC's current economic plight . . . will become a permanent feature of the world oil market). '

This is not the language of academic debate (or of reasoned comment from authors temporarily attached to prestigious academic institutions), and it undermines the credibility that one can attach to the views expressed in the report on important issues such as the causes of the world's declining use of energy in general and of oil in particu- lar, or the degree to which any possible future increases in the demand for oil

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will have to be met very largely from the OPEC countries. Ironically, the authors' feeling that they are defending views which are held by no one else (in a world, that is, in which the demise of OPEC and the collapse of the oil price is universally seen to be a good thing) is not even true! On the contrary the views of Mossavar-Rahmani and Fesharaki are very close to those of the International Energy Agency 1, of the EEC and of most, if not all, govern- ments in Western Europe. It is, indeed, those of us who argue that the divergence of the oil price in the market place from the long-term supply price has reached such proportions as to pro- duce fundamentally changed global oil supply/demand conditions who find an unbelieving world.

The authors of this report do not need to worry - they are merely confirming the pessimism of conventional wisdom, exacerbating the fears concerning the future ofoil and so helping to create a climate in which the international oil industry, of which OPEC now forms the most important part, will continue to decline. Now there is a problem about which 'delegates to OPEC Ministerial Conferences' ought to be worrying!

Peter R. Odell Director, Rotterdam Centre

for International Energy Studies Erasmus University, Rotterdam

~The World Energy Outlook, Intemational Energy Agency, OECD, Pads, November 1982.

Conference reports Long-term prospects for energy ICC Symposium on Business Strategies to Meet Future Energy Uncertainties, Wolfsberg, Switzerland, 2-4 February 1983

Making a determined effort not to be swayed by current oil market uncer- tainties, business experts meeting at the conference took a hard look at the long-term prospects for energy. They concluded that oil prices, while subject to short-term fluctuations, were likely

to rise steadily from the mid-1980s, continuing during the 1990s. Most of the 120 participants at this two-day conference organized by the Inter- national Chamber of Commerce (ICC) were inclined to agree with the assess- ment offered by International Energy

ENERGY POUCY September 1983 281

Conference reports

Agency Executive Director Dr Ulf Lantzke that from the mid-1980s onwards, the oil market is likely to move gradually towards a basic dis- equilibrium as growing world oil demand matches stagnating produc- tion. In particular, oil output in North America, the North Sea and the Soviet Union is projected to level off or decline. He added that OPEC produc- tion could well be constrained by declining reserves in some countries and by political decisions in others.

Time to invest Summarizing the views of participants, conference Chairman Michael Kohn said that world business should use the breathing space offered by the present softness in the energy market to step up capital investment directed towards energy saving. He believed that the world energy equilibrium remains fragile and vulnerable to shocks, and that the underlying long-term situation has not basically changed. He suggested that businessmen and governments alike should adopt a long- term view and not give undue weight to very recent events, since it is likely that oil prices will increase in the long run, whatever the shorter term price fluctuations.

Dr Herbert Giersch, President of the Kiel World Economic Institute, des- cribed his 'personal hunch' that there would be a slight upward trend in oil prices, with superimposed cycles. These price cycles would follow the short and weak economic upswings and the pronounced recessions that the world was likely to experience in a phase of slow growth or stagnation.

Inventory cycle Professor Colin Robinson of Surrey University said he expected no repeti- tion of the huge real increases in oil prices experienced in the 1970s, but thought that even if we are able to exclude big jumps, in the prices of oil, we cannot expect that the market will be smooth. Professor Robinson added that there would probably be sharp market changes both upwards and downwards, according to what he called an 'inventory cycle'. These

changes might be triggered by scarcity, induced either by a revolution in an oil exporting country, a spurt in economic growth, a cold winter or, perhaps, a combination of all three. In the result- ing scramble for supplies, consumers would try to increase inventories, thus building up demand. However, rising prices and revenues for the oil producing countries would have the effect of depressing industrial output in consumer countries, particularly if revenues went into savings. Consumers would therefore draw down inven- tories, demand would fall, and with it prices as producers worried by falling revenues started to compete for market shares.

Professor Robinson suggested that, under the assumption that the present recession ends before long, we can expect some gradual increase in oil prices over the following 10 years, of perhaps 1%, 2% or 3% per annum in real terms, which will be apparent in retrospect, but will not be particularly noticeable at the time due to fluctu- ations in the market.

Discussing the immediate market situation after OPEC's failure to reach agreement on a plan to prop up oil prices by curbing production, Dr Lantzke said he expected no imminent collapse in the price of oil, since this was not in the interest of the major

producers. He thought that in the cur- rent situation a modest reduction in oil prices would seem reasonable, with some assurance of a substantial period of price stability in nominal terms.

This was perhaps an optimistic view. Certainly, most participants endorsed the hope that such a situation would accrue, but the conference spent a long time discussing the implications for long-term investment planning of energy uncertainties.

Flexible planning Professor Robinson said that, although it seemed probable that the biggest oil price increases and the major supply upsets were now behind us, it was likely that business would face yet more uncertainties emanating from fuel markets. He believed that old-style business planning, using single number forecasts and rigid strategies, would be abandoned, and thought that no one now needed any convincing that planning should be much more flexible than it had been in many companies in the 1960s and early 1970s.

Lionel Walsh Director of Public Information

International Chamber of Commerce Paris

Renewables becalmed British Association for the Advancement of Science Symposium, 'Renewable energy resources', London, 18 May 1983

The programme for this symposium proclaimed the intention to arrive at a consensus on the contribution that can be anticipated from renewable energy resources over the next 30 years. This did seem a little ambitious for a one- day conference. In his general intro- duction, Professor Ian Fells highlighted the difficulties by examining recent projections giving the renewables a share of betwen 5% and 60% of UK energy supply 50 years hence. He then addressed what we all knew to be the central concern nowadays- money.

What additional useful results would be obtained, he asked the assembled

researchers, if the 1982 UK renewables research budget of £15 million were to be say, trebled? The next seven hours produced no answer, possibly because it is difficult to imagine yourself speed- ing along a motorway when you have just become accustomed to sitting in a traffic jam.

Ftmding The Department of Energy's chief scientist, Dr Challis, revealed how sharply the brakes have been applied. Government funding for renewables development increased by over 50% in

282 ENERGY POLICY September 1983