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Jaargangll November 1986 Nununer5

Magazine voor Internationale Vraagstukken

GOOD NEWS? CHEAP OIL

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110 dV3HO LSM3N CVB LOSSE NUMMERS / 4,95


Jason Magazine is een tweemaandelijkse uitgave van de Stichting Jason, gericht op jongeren die zich interesseren voor internationale politiek. In elk nummer wordt aan de hand van een aantal artikelen getracht een evenwichtig en gevarieerd beeld te geven van een internationaal politiek vraagstuk. De redactie behoudt zich hierbij van iedere politieke stellingname, met uitzondering van op persoonlijke titel geschreven artikelen. Wie wil reageren op in Jason verschenen artikelen, of denkt zelf een bijdrage te kunnen leveren, wordt verzocht te schrijven naar: Redactie/ secretariaat Jason, Alexanderstraat 2, 2514 JL Den Haag. Telefoon: 070-605658. Postgiro: 3561025. Bank: 456855548.

Overname van in Jason Magazine verschenen artikelen kan slechts geschieden in overleg m et de redactie. REDACTIE JASON-MAGAZINE Hoofdredacteur: Alexander Alting von Geusau. Redactieleden: Chiel de Leeuw, Huib van Olden, Eugèn van de Pas, Gert-Jan Stempher, Sam Muller. DAGELIJKS BESTUUR Voorzitter: Frank Car is. Vice-voorzitter: Véronique Frinking. Secretaris: Willemijn van Sandick. Penningmeester: Frank Marcus. Fundraiser: Frank van den Heuvel. Public Affairs: Raymond van der Meer. Algemene Zaken: Marty Huisman. ALGEMEEN BESTUUR A. Alting von Geusau. Mr. H. M. P . van Campenhout Mr. P. H. Goedhart Mr. M. C. de Groene. Drs. M. T. van der Meulen. Drs. Th. M. A. Verhagen. Drs. J . C. de Vries. J. P. Westhoff. Drs. F. Z. R. Wijchers. Drs. D. H. Zandee.

Leden van het Dagelijks Bestuur zijn tevens leden van het Algemeen Bestuur. RAAD VAN ADVIES H . J. M. Aben.

Dr. A. M. C. Th. van Heel-Kasteel. C. C. van den Heuvel. Dr. L. G. M. Jaquet. R. C. Spinosa Cattela. Drs. E. J . van Vloten. Mr. J . Vos. Drs. M. A. van Drunen Littel.

INHOUDSOPGAVE

Redactioneel Pag.l OPEC and the crash of the oil prices. By mr. Mahmoud S. Rabbani. Pag.2 THE STRATEGie ROLE OF PETROLEUM FOR THE WEST. By mr. Denekamp Pag.6 THEGULF ANDTHESEARCHFORSTRATEGICSTABILITY. Extract from Saudi Arabia, the Military Balance in the Gulf, and Trends in the Arab-Israeli Military Balance, by Anthony H. Cordesman. Pag.B A "FUTURE" FOR THE PHYSICAL OILMARKET AND OIL FUTURES? By Pieter J. Kuisen. Pag.14 Interview with professor Peter Odell. Pag. 17 IS THE WORLD-OIL-MARKET CONTROLLED BY A CARTEL? By drs. G.H.B. Verberg. Pag.22 POSITIE VAN SHELL IN ZUID-AFRIKA Brief van ir.L.C.van Wachem. Pag. 28


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OIL-PRODUCTION EN OIL-POWER After two energy crises in '73 and '79 the prices of crude oil tripled. But in the beginning of the 80's they started todrop and they have sharply dropped further this year. Injune/july of this year crude oil was sold for less than $10 a barrel. About one third the price that was paid after the second oil-crisis. There are several causes forthese fluctuations of oil-prices. Most of them are discussed in this Jason Magazine. No doubt the fluctuations of oil-prices have been disastrous for the stability of the economie order of OPEC and non-OPEC countries. However, not only the interestsof oil-producing countries are served by stabie oil-prices. The stability of oil-prices is in the interest of the whole world community. Lack of stability makes econmic planning a hardious job. Stability on the oil-market has a direct influence on the politica! climate. Hence, oil-supply and oil-prices are of enormous strategie importance. These issues are discused in Jason Magazine. Oil will also be the subject of a Jason Conference to be held later this month. All Jason memhers will soon receive further information a bout this meeting. EUGENVANDERPAS

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OIL-SEMINAR 21 and 22 november in Rotterdam

SPEAKERS: R. de Korte; Minister of Economie Affairs. J. G. N. de Hoop &heffer; Dutch Ambassador tot the NATO,

Brussels. Bjorn Nilsen; producer television-series "OIL". Mr. Renauld; Director Economics Directorate. Roosengaarde Bischop; "Oil Spot Market". For more information and participation contact secretariatof Jason: 070-60.56.58.


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OPEC and the crash of the oil prices In bis hook ,,Arab oil policies in the seventies"Professor Yusif

A. Sayighremarked that "thespeed with which themedia took up the subjeetof oil pricing and production policies, and thatof OPEC, was far greater than the speed with which real onderstanding of these policies was acquired". The Arab oil exporters and their oil policies have received much criticism, and have been the central target of a massive campaign of condemnation, although they are by no means the soleowners and suppliers of oil. The singling out of the Arab exporters for criticism has been in fact the product of a complex of factorscultural, historica!, politica! and economie - which combined and interacted and finally led to the oversimplification that all the blame for the rise in oil prices was to he heaped on the Arab producers. This does not mean, however, that the OPEC policy and that of the Arab Gulf memhers in particular, are beyond any criticism. It is also quite understandable that the industrial countries in their panic reaction to the sudden price-rises of 1973-74 did take defensive measures to guarantee supplies of such an essential commodity as crude oil in the maintenance of their economie systems. On the one hand they intensified their efforts to search for oil outside the OPEC areas and on the other hand they took important measures to bring down consumption. The former was strongly stimulated by the high price level itself, that made exploration and exploitation profitable, while the later was partly aresult of the economie slump of the early 80ties, and partly a politica! reaction against a too strong dependance on the Middle East supply centers. ,,Enjoyment"

Now that the oil prices have come down again substantially there exists insome Western circles a sort of stealthy enjoyment of present OPEC misfortunes as if they now got the punishment they deserve fortheir price policies in the seventies. I do notintend totrace the history of

events preceding the seventies, but I want to point out that a proper appreciation of the policies of theseventies calls forsome acknowledgement of the development of relevanee in that period behind the watershed of the early seventies which led to the sudden price rises. It is vital for the understanding of these developments to realize that significant economie advancements were made possible in one decade. These advancements were only possible aftera much longer process of frustrating powerlessness and total dependance on the willof Western consumer-countries and the big international oil companies. On the other hand, the period of high oil prices did not exclusively bring disadvantages to the industrial world. It gavethema solid financial basis to in vest billions of dollars in oil exploration and exploitation in areas where the production costs are much higher than in the Middle East oil exporting countires. Furthermore, it dit the West realize that oil is a non-renewable commodity, and that economizing its use is therefor necessary; and finally it learned a lesson that our present world is becoming more and more interdependant.

Raw materials It is in fact the main feature of a shrinking world. The solution of the problem of distri bution of essential raw materials over this world's states cannot he a general chaotic fight of all against all or a fight in which only the most powerful statescan dictate their will at the expense of thea weaker nations. This means that the only

By mr. Mahmoud S. Rabbani, Managing Director of the Middle East Burea of the Promotion of Economie Relations in The Hague. He is a well-known Arab businessman in The Netherlands and en specialized lecturer on Middle Eastern topics. Mr. Rabbani is honorary Consul General of Jordan in The Netherlands.

way out is negotiation. The fortunes of the oil sector have changed drastically since 1980. One of the many reasons has to he found in an intrinsic weakness of OPEC itself. A real "kartel" of classica! structure must have two basic features; the one is a common price setting policy, the other is a complete control of output in order to maintain the set prices. The OPEC succeeded to control the prices thanks to the particular circumstances of 1973 and following years. The fact that OPEC produced more than 60% of world oil demand made it relatively easy to maintain the high price level, although even in that period the biggest oil producer, Saudi Arabia, constantly pleaded for restraint in the price setting. As soon, however, as the supply of oil by non-OPEC countries and areas got under way it became more and more difficult for OPEC to maintain its prices and to act as a price leader. In theory this could have been done he a drastic reduction of OPEC oil production. But lack of unanimity between the OPEC memhers made this beyond reach. The volume of oil


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Saudi Arabia s farmer oil-minister Yamani was always surrounded by journalists, eager to hear the latest news.

production appeared to be a matter of sovereign decision byeach memher state. Every OPEC government gave preeedenee to its national interests and those were conflicting, with the result that no unanimous outputpolicy was possible. Oil-policy appeared too closely bound with national policies to be able to come toa real common policy. Gradually the OPEC, in particular its Arab Gulf members, lost its grip on the mark et. It lost its position of a price-leader and came in a completely reversed situation of growing dependency of the international market forces, which OPEC had tried to control in the seventies. lraq-Iran I cannot go into all the details of the story of failure by the OPEC policy makers. I only want tomention two obvious reasons: the one being the

Iraq-Iran war and the case of Nigeria. Th is country became the victim of internal politica! disorderand conflicts and this situation made it necessary for the prevailing power to maintain itself by exporting as much oil as it was able to sell, regardless the price. Lack of internal choesion weakened OPEC. It was at the mercy of the chaotic market forces. This state of affairs had of course serious implications for national and regional development in the Arab world, and in many other oil-producing countries inside and outside OPEC, even insome industrial countries like the United Kingdom, Norway and The Netherlands. Since the Arab oil-exportign countries spent huge amounts of oH-dollars to finance development in third world countries these we re among the worst victims. Also many industrial nations and international bankers, whoare

creditors to many third world governments, some oil-exporting countries included, may loose billions of dollars since the oil revenues are too low to enable them to pay their debts. Apart from the damages inflicted to the industrial world and the stagnation of credit supply to international trade, the whole industriasl business related to oil- like e.g. the offshore industry -suffers serious drawbacks. Besides these immediate damages it has to be noted that the search for new non-oil sourees of energy is seriously affected. Cheap oil does not create sufficient investment money for research in this field , the more so since nuclear energy, after the Tsjernobyl-disaster will become more and more expensive in view of the growing safety demands. It would also be wrong to exult at the price inflation of oil for politica! rea-


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A petrol drum village in southern Saudi Arabia.

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sons. It causes instability in many regions of the world. The economie woes of the Gulf oil producers will have social repercussions in the whoIe Arab world. Millions of immigrant workers are forced to repatriate and becomejobless intheir countries of origin, apart from the fact that the gulf countries thernselves are heavily dependant from immigrant workers to keep their economies going. The external accounts of the Gulf coun-

tries of last year show the extent of the mess caused by the oil price inflation, with perhaps much worse to be expected. Between 1980 and 1985 their combined current accounts went from a surplus of 70 billion dollars to a deficit of 20 billion. Since the oil provides nearly all the tax revenues of these states, any prescription to reduce public borrowing boils down totheneed to cut public spending. Gulf economists agree that

such spending was too high and ought to be cut.

Cutimports All OPEC memhers will have to cut their imports. They can defer the pain by drawing oin their reserves or by borrowing abroad. Most of them have already tried this. Sooner or later they will have to reduce their imports either directly by way of controls or indirectly by devaluation.


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But in both cases these countries will suffer, and increased economie pressure may betheresult not only in the Gulf area but in all OPEC memher states. In the situation of nearby collapse of the crude oil marketsome OPEC memhers seem to foster a policy which can be considered as an escalation of the clash between producers outside OPEC and these inside it. By increasing production far above

the de mand level, the price may reach the point that a number of producers outside OPEC cannot continue without heavy losses. They, by then, will havetostop production and OPEC will again control the market, at least these OPEC mernbers which have the lowest production costs. This strategy may not be without risks. It may provoke protectionistic measures by a group of big consumer countries, like the U.S. or the EEC in the form of import duties on OPEC or Arabion oil. This would, of course, be blatantly in conflict with the GATT rules. But so would be a deliberate policy of price control according to the above mentioned strategy. On the other hand, the crash of the oil prices has caused unbearable pain toa number of OPEC memhers and other countries dependant from their oil revenues, like for instanee Egypt, Jordan and Syria. Egypt in particular is suffering heavily by the low oil price level of this moment. According to reliable figures Egypts' foreign currency income from remittances by Egyptian workers in the Gulf area to their families at home went down from almost 4 billion dollars in 1981 to 1,2 hiliion in 1985 and is expected to go down to less than 1 billion in 1986. Jordan is facing a similar problem. The decision by OPEC's ministerial conference of early August 1986 to bring the production down from 20 to 16 millkon barrels a day is incomplete in itself and therefor ineffective. The experience with OPEC output decisions of previous years makers it doubtful whether this decision will be carried out. Furthermore, it was a measure for only two months. It may cause some instant price increase on the international market but it does not reach the heart of the problem facing OPEC and the oil industrie in general. The main question arising from the present state of affairs on the oil market is how to bring producers and consumers together, in order to guarantee a reasonable and orderly price level. It is obvious that this cannot he done by the commercial market forces alone. The most logical way would be negotiations between the International Energy Agency of

O.E.C.D. OPEC and oil exporters outside OPEC. Some experts say that a price around 15 dollars per barrel would he acceptable toplease producers as well as consumers, provided this level wold he flexible and adaptable f.i. to the rate of intlation in industrial countries. Crude oil remains a souree of energy uptil now and in the foreseeable future unequalled by other energy sources.

Dialogue But, more fundamentally a dialogue is needed qeca贸se the current prevalanee of a buyers' market has led to the slackening of research into alternative energy sourees for the coming century. This in itself could quicken the approach of another supply crisis, leading to panic buying and another steep rise of prices - in brief to another cycle like the one we saw in the seventies. According tosome experts this may not happen in the coming ten years or so. But that is no reason to refuse negotiations now. And even if the availability of oil were to be assured for the foreseeable future, there are still a lot of questions which call for an indepth discussion. These include the leveland mechanisms of oil pricing, the anxiety of the exporters to assure themselves of a minimum volume of demand parallel to the anxiety of their consumers to guarantee themselves a minimum of supply volume, and finally the marketing of OPEC refined and petrochemical products on the industrial mar kets. The Gulf countries in particular say they want to carve for themselves a portion of the market forthese products. The supply of crude oil may well be called one of the "basic needs" of developed and developing countries alike. In view of its polidal implications it seems necessary to make this essential commodity subject to orderly international cooperation in the spirit of global solidarity.


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THE STRATEGie ROLE OF PETROLEUM FOR THE WFST During the last years, oil consumption in Western countries bas stagnated or even dropped. Despite this development, and tosome extent even due to this development, the vulnerabilities of the oil supplies to the Westhave increased or will be increasing. n没s artiele focuses on the role of oil in NATO countries and on the vulterability of oil supplies in times of crisis. Energy conswnption (i.e. conswnption of primary energy sourees such as oil, coal, gas, nuclear, hydro) in North America and Westrn Europe has been relatively stable since 1973. In that year we saw the beginning of the first oil (price) crisis. The next 2 years energy conswnption dropped a total of 5%. Thereafter energy consuroption peaked once again in 1979 at a level 7% above 1973 conswnption. In the period 1979-1983 energy conswnption dropped once more to below 1973level. In the most recent period ('84 and '85) the demand for energy rose once again but only barely surpassing 1973level. This remarkably stabie picture over the last 12 years is identical for North Alnerica and Western Europe. However, it quite deviates from developments elsewhere. The Centrally Planned Economies (CPEs) sawa continious rise in conswnption between 1973 and 1985, totalling 55%. In LDCs this growth percentage is even 78%.

Demand and supply

pe this percentage has increased from only a few percent in 1975 to over 30%. Th is is, from a security point of view, an encouraging development. There is only one drawback: the trend will be reversed. Reserve/ Production ratiosin the West are considerably lower than the Reserve/ Production ratios for OPEC countries (especially the Gulf states). Current produ ction in the West could only he maintained foranother 10 to 20 years, assuming there will be no new discoveries. For OPEC this is closer to 100 years. These nwnbers do nottake into account that OPEC production is generally inexpensive compared to, for example, North Sea production. The first oil crisis (1973174) led to the establishment of the International Energy Agency (IEA) in Paris on 18th November 1974. One of the main elementsof the Agreements is the joint effort of memher states to take common measures to meet oil supply emergencies. In principle the effort falls in three categories:

Within the overall energy picture, oil demand in the West has dropped. This is shown in the following table, expressed in million tonnes.

- builcl-up of emergency stocks; - preparation of demand-restraint m easures; Oil Conswnption

Western Europe North Europe Eastern Europe

73 736 902 425

The diminishing oil quantities consumed in the West are to an increasing extent produced indigenously. North America covers more than 70% of its oil conswnption. For Western Euro-

75 651 849 486

80 665 882 570

85 576 792 572

- readiness toshare (in a crisis) the available oil supplies

European steps The European Communities have

By E. J. Denekamp, Directorale Energy Planning, NATO, Brussels.

also taken steps to enhance the Common Market's oil crisis procedurs. lts measures are similar to those of the IEA. In certain aspects they are more detailed (stock level targets are specified by product category; improved calculations of demand restraint percentage). An advantage of the EC measures is the involvement of France, which is the major missing memberofiEA. Apart from IEA and EC, the North Atlantic Treaty Organization (NATO) has its own oil crisis management arrangements. A description can be found in the "NATO Review" of October 1984. NATO cannot allow itself to be dependent on oil crisis plans in other international fora. It is feasible that these plans- primarily made in preparation of a realtively straightforward oil supply distruption - would not function in an East-West political-military crisis. In such a crisis NATO countries would have very specific fuel demands which require the implementation of distinct plans. Apart from this different demand pattem- a bout which more below -NATO might have to face major additional problems such as: - threatened sea lanes; - lossof Soviet-Union energy exports; - ciosure of North Sea fields; - damage to refineries; - loss of oil stocks; - interruptionsin inlands product transport. The challenges will have to be faced by the NATO body responsible in thisarea: the NATO Wartime Oil Organization (NWOO). lts task is toensure the continued availability and equitable distribution of essential supplies of crude oil and petrolewn products.

Crisis demand When we talkabout crisis in the following lines, we have in mind a period of serious East-West tensions, possibly escalating into hostilities. In


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normal tirnes direct military oil consuroption averages a bout 2-3% of a nation's total dernand. In a crisis military dernand would (due to rnobilisation, reinforcement of Europe, increased readiness and - possibily hostilities) increase considerably. The total volumes involved rnight still he rnanageable. However, the dernand would he concentrated in only a few products, in the first place jet fuel and rniddle distillate. Especially the military jet fuel de mand would be immense. Military fuel demand could also he characterised by: - short notice (changes in) requirernents; - very specific timingIlocation of delivery; - non-commercial fuel specifications. In a crisis situation available oil supplies would he reduced, while military de mand would he up. Consequently eivil dernand would have to be cut, probably drastically. Such a dernand restraint would certaily not irnply one unique overall restraint percentage. Certain essential industries and transport sectors would need their normal quantities of oil, or even more. The reduction would therefore have to fall on the non-essential use. And this is increasingly difficult, for two reasons: - Many oil consumption sectors

which in crisis time would he considered non-essential (home heating, sorne power generation) have switched to other fuels. - Certain savings (e.g. motor gasoline) would nothelp tomeet crucial shortfalls in kerosine. Forthese reasons the supply and distribution of oil in a crisis will be difficult and complex. Nevertheless, the success thereof will he essential for the defence (preparations) of the Alliance. No guarantees can be given, but chances for an adequate supply will increase when: - national crisis plans are in place; - sufficient product stocks (eivil and military) are held in well choses storagesites; - eivil-military co-operation is ensured; - nations will work together in the frarnework of the NWOO.

Recent developments 1986 will he known in the petroleum history as the year of the price collapse. For conternporary observers it is difficult to forecast the duration and to estirnate long-term impact of this price-fall. The economie advantage of below 20 dollar oil to consuming countries is evident. In terros of energy security the verdict will he lirnited. Energy dernand elasticity is notoriously low. The benefits of past energy conservation and fuel switch will not easily he lost. But sorne extra de mand will occur. On the supply

A worker in the pipe-storage yard near Fairbanks in Alaska.

side the impact will - very likely -he more drastic. Most oil cornpanies have already cut their exploration / developrnent budgets by 30 or more percent. New high cost offshore production has becorne unappealing. The existing fields- where the investrnents already have been made - will he depleted. But thereafter extra imports will be more attractive financially than high cost, high risk fields west of Norway. The most serious consequence of continuing low oil prices would he that an increased dependenee on OPEC oil will corne earlier and will he more drastic. A positive side of low prices is that the expectation will generally he one of rising prices. In such a market situation it is attractive to build up sizeable stocks. This is true both for cornpanies and for govemrnental stockholding organizations. It would he a happy developrnents if the low price period would he used to build up stock levels, especially ernergency stocks. Oil is a very important cornrnodity. lts role in a East-West conflict would be crucial. In view of the West's supply position - lirnited production, even lower reserves - it is essential that (ernergency) stocks are built up and that crisis plans are developed. Only that will rninimize the risks of our oil supply vulnerability.


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The Gulf and the search for strategie stability Since the fall of the shah of Iran in January 1979, the United States bas struggled to find a new set of relationships in the GuH andMiddle East. Itbassought to reestablishareasonable degree of strategie stability, toproteet its allies in the area, and to safeguard the West's supplies of imported oil. In practice, this search bas proved to bedependenton four elements: U.S. ability to strengthen Saudi Arabia as a nation capable of defendingitself aga.inst most regional threats and of guarding the other conservative GuH states: U.S. ability to strengthen Egypt both militarily and economically; U.S. ability to find some solution to the Arab-Israeli conflict that will both meet Arab needs and offer Israel security; and U.S. ability to improve its power projection capabilities in the GuH. While the U.S. has other interestsin the Near East, its primary objective is to secure access to the oil exports and reserves of the Gulf states. These states have 55% of the world's proved oil reserves. Regardless of fluctuations in the demand for imported oil, U.S. relations with the Gulf states have become pivotalto Western security. Oil also gives U.S. policy a claer set of priori ties. All of the Gulf states are important, but Saudi Arabia is the key to securing the West's energy supplies. Saudi Arabia alone bas 25% of the world's proved oil reserves and roughly 30% of the sustained production capacity of the Organization of Petroleum Exporting Countries (OPEC). The fall of the shah has left Saudi Arabia the only major Gulf oil producer that is aligned with the West. Equally important, Saudi Arabia's geography, its influence within OPEC, and its wealth have made it the only regional power that can catalyze an effective collective security effort to proteet all the conservative Gulf states and the West's primary souree of oil imports. The other conservative Gulf states are individually less important and cannot survive unless Saudi Arabia remains friendly and stable. They too, however, are of vital importance to the West. Collectively, they have roughly 50% of Saudi Arabia's oil

This artiele is an extract of a chapter from the book Saudi Arabia, the Military Balance in the Culi, and Trends in the Arab-Israeli Military Balance, by Anthony H Cordesman. Westview Press, Boulder, Colorado. Manseli Publishing Limited, London, England

An oil-tanker Joads crude oil at Kharg Island, the main Iranian oil-terminal in the Persian Gulf


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production capacity and about 16% of world oil reserves. They are generally friendly to Westerninterests and have rarely been hostile to major U.S. policy initiatives, except in the case of Israel. In spite of their small size, several have large populations relative to that of Saudi Arabia. In hostile hands, each could greatly increase the politica! and military threat to the other conservative states and perhaps make effective defense of the southern Gulf impossible. Finally, the West has a major strategie interest in preserving the independenee or hostile of radical Gulf states like Iraq and Iran. While there is little real prospect of stabie strategie relations witheither state, Iran has another 8% of the world's oil reserves and Iraq has 6%. Friendly or not, it is vitalto the West that both states retain their independenee and ability to make their own oil export

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decisions. Their independenee can be assured, however, only if the West and the other Gulf statescan pose a strong counterbalance to Soviet pressure and influence.

Tension and conflict These strategie priorities are not easy "facts of life" for the U.S. to deal with. The U.S. must build ties to Gulf states that have different cultures and a different religion. While it has many areasof common interest with the southern Gulf states, there are also many areasof tension and conflict. The Gulf states are internally divided, and even the most friendly conservative Gulf states have different interests from the U.S. in pricing their oil and setting regional security policy. The U.S. must try to build a strategie partnership with the conservalive Gulf states on the basis of a far more limited commonality of in-

terest than it shareswithits NATO allies. This U.S. effort is further complicated by pressures from outside the region. Europe and Japan have an equal, if not greater, interest in securing the flow of Gulf oil, but they are unlikely to provide anything more than the most limited military support. They arealso as likely to criticize U.S. action as support it. The U.S. must cope with both the dornestic and international impact of the Arab-Israeli conflict and the fact that even the most friendly Gulf states are hostile to Israel. It cannot achieve its goals quickly or by reacting in a crisis. It can improve regional security only by slowand consistent action in a world in which fluctuations in global economie growth, the demand for oil imports, and the conflicts within the oil-exporting statescan suddenly shift the situation from oil "glut" to oil crisis. All these factors make it difficult for the U.S. to build a policy consensus around the need fora strategie partnership with the Gulf states, and even more difficult for the U.S. to deal with hostile or less friendly states like Iraq, Iran, and the Yemens. Nevertheless, the U.S. has little other op tion. It has assumed the de facto responsibility for the West's military security, and oil willlink the West's strategie interests to those of the Gulf states for at least the next quarter century, regardless of shifts in the volume of the West's imports.

Oil power and security These politica! and economie realities are so important that they deserve examination in detail. While the stalistics involved in estimating "oil power" are contraversial and complex, they are critica! to understanding Western options in the Gulf and the pivotal role of Saudi Arabia. It is particularly important to understand just how deeply the West's dependenee on the Gulfis embedded in its dependenee on energy, and that the loss of Gulf oil can come only at the costof massive global economie and politica! instability. Table 1.1 illustrates this point. It shows Saudi Arabia's ranking as a world oil producerand exporterin 1980. Saudi Arabia then ranked second in world oil production, first in


10 Damaged oil-refinery in Abadan, caused by the lran-lraq war.

world oil expocts, and first in world oil reserves. This ranking has remained constant in spite of the shifts in the volume of expocts caused by conditions ranging from war and revolution to global recession. In 1980 Saudi Arabia was producing 2-3 milion barrels per day (MMBD) more than its development plans required in order to meet the losses in Iranian and Iraqi oil expocts resulting from the Iran-Iraq War. Although the world was already beginning a major recession, oil prices and the demand for oil expocts were at near-panic levels because of the impact of the shah's fall and the war. Only Saudi Arabia's willingness to produce at its maximum capacity kept prices and supply in any kind of equilibrium. In 1981, a year of declining world economie activity but one in which the war prevented Iraq and Iran from being major exporters, Saudi Arabia produced 18% of total world oil production, 23% of all noncommunist oil production, 40% of oil Organization of Arab Petroleum Exporting Countries (OAPEC) production, 60% of all Gulf production, and 67% of all production by pro-Western Near Eastern states. In 1982, in the midst of a severe world recession and with Iranian production coming back on stream, Saudi production dropped to 12% of the world total, 16% of the noncommunist total, and 34% of the OPEC total. In the first half of 1983, which seems likely to be the worst point in the current world recession, Saudi Arabia produced 7% of the world total, 10% of the noncommunist total, and 23% of the OPEC total. Id did so even though its oil production had sunk to monthly averages roughly one-third of its 1980 production level, the world recessionhad created a major "oil glut," and OPEC was involved in a serious price war.

Large amounts In spite of these reductions, Saudi Arabia played a critica! role in allowing oil prices to drop to more economie levels and in creating the conditions for global economie recovery. Only the Saudi interest in sustaining high production levels kept the other memhers of OPEC from maintaining high prices by cutting production. Only Saudi Arabia's ability to produ-

ce large amounts of additional oil helped checkmate such efforts by radical memher states like Libya en Iran. It is impossible to predict which, if any, of these widely differing conditions will be typieal of the future. Predietions vary widely from rapid recovery to prolonged recession, and the U.S. can hardly base its strategie priorities on the assumption of continued global recession or even sustained reductions in the economie growth of the industrialized Western states. lts priorities must be basedon the volume of oil expocts necessary for global economie growth and political stability. It seems likely, however, that the high Saudi production levels of 1978-1981 may be more ty-

picalof the average production levers of the 1980s and 1990s than the low production levels of early 1983. This condusion is illustrated by the projectionsof the U.S. Department of Energy (DOE) and a wide range of other sources. The 1983 projectionsof DOE's Energy Information Administration (EIA) indicate that OPEC production will rise from 19.9 MMBD in 1982 to 25.8 MMBD in 1985 and 27.7 MMBD in 1990- roughly equal to OPEC production in 1980. This samereport prediets that OPEC will experience a steep recovery in demand no later than early 1984 and that noncommunist importing nations will returnto their 1980 level of impocts by 1985. It also prediets that noncommunist oil-importing nations will then begin a slow but steady rise


11

TABLE 1.1

World Petroleum Suppli• in 1980: tha " Top Ten.. Baf ora tha l ran-l rMt War Oil Production

Rank 1 2 3 4 5 6 7 8 9 10

Country USSR Saudi Arabis

u.s. l raq Venezuela Ch ina Nigeria Mexico Libya Kuwait

MMBDa 11.7 9 .9 8 .6 2.6 2.2 2.1 2.1 1.9 1.8 1.7

Oil Exports MMBDa

Country Saudi A rabiab USSR l raq Nigeria Venezuela Libya Abu Dhabi Kuwaitb l ndonesia Iran

9.4 3.0 2.3 1.9 1.8 1.7 1.6 1.5 1.2 1.1

Oil Reserves Country Saudi Arabiab Kuwait USSR Iran Mexico lraq Abu Dhabi

u.s. Libya China

Billions of Barrels 168.0 67 .9 63.0 57 .5 44.0 30.0 29.0 26.4 23.0 20.5

Gas Reserves Country USSR Iran

u.s. Algeria Saudi Arabis Canada Mexico Netherlands Oatar Norw!IY

Billions of Cubic Feet 920,000 485 ,000 191,000 131,000 112.400 8 7,300

64,500 62,000 60,000 42,700

a lncludes half of Neutral Zone . bARAMCO estimated daily average production of 9.82 MMBD, proven oil reserves of 167.85 billion barrels, NGL exportsof 448,169 barrels daily, and gas reserves of 130 .900 BCF in 1981. Sources: Oil production and oil exports data are trom ARAMCO; oil and gas reserves data are taken trom Oiland Gas Journal, which uses a different estimative base trom the CIA and ARAMCO.

in oil imports through 1990, regardless of conservation and the development of alternative energy supplies.

Independent projections These conclusions are generally supported by the independent projeetions of oil companies like Gulf, Standard Oil of California (SOCAL), CONOCO, and TENNECO and by the International Energy Agency (IEA). Although the world recession has brought total OPEC production to monthly levels as low as 14.4 MMBD, the lowest major independent projection of demand in 1985 is 21 MMBD (CONOCO), and the average projection of demand is 24.5 MMBD. The lowest demand projection for 1990 is 22 MMBD (SOCAL), and the average projection of demand is 27 MMBD - again roughly equal to the OPEC production levels in 1980. Most important, all these projections are based on very lirnited levels of world economie growth compared to the average levels of the 1950s, 1960s, and 1970s. Whether or not the are correct in predicting the future, they provide a good picture of the level of oil production necessary to ensure a moderately healthy global economy. Although such projections do not explicitly estimate Saudi exports, atleast the DOE and IEA projections use input data that imply that Sau di production levels will increase to 7-8 MMBD by the mid-1980s, or to twice the production levels of the first few

months of 1983. They also assume that oil prices (in 1982 dollars) will be a bout $28 per barrel in 1985 en $37 in 1990 versus $30 in 1983. This means that DOE and the IEA are assuming that Saudi oil production will return to its 1978level by the mid-1980s, that real Saudi oil revenues will then begin to rise above their 1980 levels, and that sufficient Saudi production capacity will be available to the world market to keep the overall rise in oil prices to levels far lower than those demanded by the more radical memhers of OPEC. This set of assumptions a bout the use of Saudi production capacity illustrates te fact that production and export levels are only one indicator of Saudi Arabia's strategie importance. Saudi Arabia's installed production capacity of 12.5 MMBD and sustained production capacity of 10 MMBD give it great influence in determining OPEC's price and production levels. No feasible combination of other OPECstatescan raise prices beyond the level Saudi Arabia desires if it is willing to produce at near-maximum levels - something that Saudi Arabia has demonstrated in past confrontations with statesas diverse as Libya, Nigeria and Iran.

Saudi control To put Sau di production capabilities in perspective, Saudi Arabia had 40% of the Gulf's total installed capacity before the start of the Iran-Iraq War and 64% of the capacity of friendly

pro-Western Near Eastern states. These percentages almost certainly rose in 1980-1982 as aresult of the damage the Iran-Iraq War did to Iranian and Iraqi oil facilities and the steady decline in maintenance and investment in Iran that has resulted from revolutionary turmoil. Saudi Arabia's importanceis further reinforeed by the fact that it has the world's largest proved and probable oil reserves. lts probable reserves of 177.2 billion barrels are nearly 100 billion barrels larger than the next largest country, and at least 116.7 billion barrels of these reserves are proved. Not only do they represent 25% of world reserves, they represent 65% of total Gulf reserves, wellover 100% of the reserves of all Third World exporting nations outside the Gulf, and nearly one-third of the reserves of all Third World exporting nations including the Gulf. In spite of a massive worldwide oil exploration and development effort since 1973, Saudi reserves retained virtually the same statistica! importance in 1983 that they had at the time of the 1973 oil embargo, and Saudi Arabia still controls the bulk of the free world petroleum reserves that are not committed to the dornestic needs of nations holding such reserves. Saudi Arabia is also important because its present economie development strategy ensures close ties to the West, high oil-production levels, and the "recycling" of the bulk of Saudi


12

Jedda, the capiW of Saudi Arabia, OPEC's

most important member-st:lte.

Arabia's petrodollars. Unlike many other exporting states, Saudi Arabia lacks dornestic economie and political pressures that force it to try to maximize short-term revenue at the costof long-term stability in oil income and profits. This situation makes Saudi Arabia a natural economie and strategie partner of the West, although such a partnership dependsas much on Saudi economie policy as on internal economie pressures. The capital flows involved are immense. In mid-1981, a period that seems typical of the export levels implied in the previous demand projections, Saudi Arabia received almost $ 350 million per day in oil income. Even given the drop in production levels and prices that has occurred as the result of the present recession, Saudi oil and gas revenues seem unlikely todrop below $ 120 million per day, or $ 45 hiliion annually. The resulting surplus in oil revenues had given Saudi Arabia immense capital holdings. In mid-1983, Saudi Arabia had between $ 110 billion and $ 180 billion invested in the West, approximately one-third of which was invested in the U.S., and was earning between$ 15 and $ 20 hiliion annually from its investments. The value of Saudi Arabia's "recycling" of its oil income through purchases from the West is illustrated by the fact that between 1979 and 1982

U.S. exports to Saudi Arabia grew from $ 4.9 hiliion to $ 9.1 biliion. Ja{>anese exports grew from $ 3.8 to $ 6.8 billion, and German exports grew from $ 2.4 to $ 3.5 biliion. All of theseven largest Western industrialized nations increased their exports to Saudi Arabia each year during 1979 to 1982 in spite of the world recession and drop in oil exports. In contrast, the U.S. imported $8-15 billion annually from Saudi Arabia during this period, Japan imported $ 1221 billion, Germany imported $2.36.4 billion, and France imported $612 billion.

the U.S. over many aspectsof the Arab-Israeli conflict and the details of policy toward other Arab states, it has generally used its politicaland economie power, and its influence within Islam and the Arab world, in ways that have helped the West.

Strategie importance

Such efforts have included supporting President Sadat in breaking with the USSR, supporting the more moderate leaders of the Palestine Liberation Organization (PLO), helping to limit the conflict in Lebanon, funding the Afghan rebels, funding Pakistan's military purchaces, and influencing Syria to limit the Soviet presence.

The control of such trade and capital resources is of considerable strategie importance. Fortunately, Saudi Arabia has pursued efforts to stabilize the dollar and Western currencies. Unlike many other OPEC states, Saudi Arabia has generally supported U.S. and Western monetary policy. At the sarne time until the recessioncut its oil flowsin 1982, it spent roughly 4-6% of its national income on economie and military aid, most of it targeted toward assistance to statesof major strategie importance to the U.S.. Major recipients included Egypt, North Yemen, Jordan, Lebanon, Turkey, the Afghan rebels, Pakistan, Sudan, Somalia, Oman, and other states where Saudi aid directly countered Soviet pressures or redueed treats to pro-Western regimes. While Saudi Arabia has differed with

Equally important, Saudi Arabia is criticalto the stability and survival of the conservative regimes in Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates (UAE)- states that earn up to $ 50 hiliion in annual oil income, that have roughly 8 MMBD of sustanable production capacity, and that control over 90 hiliion barrels of additional proved oil reserves. Saudi Arabia's support of the ereation of a Gulf Security Council, and of efforts to forge collective security arrangements with the other conservative Gulf states, provide the smaller conservative Gulf states with their only credible hope of preserving their internal security and creating a collective military deterrent that can secure them from their largerand more radical neighbors.


13 September Saudi Arabia agam resists OPEC call lor major pnce nses. lncrease is limited to 3.5% per barrel.

1975: March and summer At both the first OPEC summit in Algiers on 4-5 March and during the summer, Saudi Arabia resists pnce indecation and OPEC production limits.

October

1'ABLE 1.8 Chronology of Major Saudi Oil Price and Productlons Pollcies, 1973-1981 1973: June I , July 4, and August I Saudi officials, including King Faisal, warn that oil production will be limited or !rozen if progress is not made o n an Arab-lsraeli settlement.

October 6 October War begins.

October 12 Saudi Arab1a warns the U.S. it cannot show moderation if U.S. provides arms aid to Israel.

October 12-13 U.S. airlift to Israel begins.

October 16

OPEC meets in Vienna and increases price by 10%, a campromise between the 5% r ise sought by the Saudis and the 15% lavored by Iran.

1976: June Saud i Arabia serves notice at OPEC ministerial meeting that it is in favor of a standstill in prices. Other ministers call lor up to 20% rises.

Septem ber 24 Shah demands 35% price rise at OPEC meeting. African stales call lo r 20%. Iraq calls lor 26%. Saudls and Arab allies publicly push for 5% r ise and pnvately lor a maximum of 10%. Saudis threaten max1mum produclion.

December 16 OPECmeets in Doha. Saudis and UAE agree only to a 5% price increase; the other stales increase prices by 10%.

Posled prices rise f rom $3.0 I to $5.11 per barrel. Six OPEC memhers meet in Kuwait and increase posled prices t rom $3.01 to $5.12 during October 1973 Arab-lsraeli war. Ministers of OAPEC countries plus Iran meet in Kuwait. The majority support an immediate embargo. Saudi Arabia presses lor more time lor the U.S . and gets agreement on a 5% production cut per month.

1977: Jan uary

October 17

July 12-13

Preside nt Nixon sends request to Congress for $2.2 hiliion in emergency aid to lsrael.

October 18 UAE, Libya, and Qatar announce oil boycolt against the U.S. Saudi Arabia resists and announces only a 10% cut in o utput.

October 20 Saudi Arabia joins boycolt and cuts production fro m 8.3 to 6.5 MMBD. but allows ARAMCO to continue oil shipments to U.S. refineries in the Caribbean.

October 22 A cease-fire is declared, but fails to hold on the Sinai fron t as lsrael drives to cut off Egyptian Third Army.

October 21 Second cease-fire, but final Israeli attacks halt only o n the 28th.

October 26-28 Arab summit calls lo r hard line on e mbargo.

December 14 King F aisal tells Kissinger there can be no easing of e mbargo until progress is made on occupied territories.

December 23-24 The shah a nd most of OPEC press for a new posled price of $13.33. Saudi Arabia lorces a compromise on $11.65.

December 24-25 OAPEC oil ministers agree to reduce their 25% production c ut to 15%.

Prince Fahd privately indicates Saudi Arabia will assist U.S. to erea te a strategie petrole um reserve equal to six months' consumption.

June Reunification of OPEC prices. Saudis increase by 5%. others drop demands lor additional planned July increases. At OPEC conference, Saudi Arabia and K uwait agree to raise prices 5% only if other stales lorego add1tional 5% price rise. Saudi Arabia agr ees to limit production to 8 ,5 MMBD in exchange lor price freeze to end of year.

1978: May 6-7 Saudi Arabia calls extraordinary an OPEC conference on lang-term pricing and production strategy in Ta1f. Presses to avoid further price rises. Saudi production drops from 8,5 MMBD ceiling to slightly over 7 MMBD.

June 17-18 OPEC leaves prices constant. Saudi Arabia successfully resists effort to index dollar against other foreign currencies in face of oil glut and recession.

November-December The s hah's imminent fall causes a world price panic. Saudi Arabia increases production from 8,5 MMBD ceiling to over 10 MMBD.

Saudi Arabia resists call lor immediate 15% further price rise. Gets OPEC agreement to four 5% quarterly price r ises in 1979.

1979: January 23 Shah leaves Iran

Arab foreign ministers delay meeting on grounds insufficient progress has been made in peace talks, but Saudi Arabia, Egypt, Syr ia, and Algeria meet in a restr icted summ it and agree oil boycolt should be dropped if U.S. makes constructive progress.

OPEC meeting coincides with signing of Arab-Israeli peace treaty. Memhers agree to disagree. Saudi Arabia holds to base price of$ 14.54 a barrel but limits production to 8.5 MMBD. North African producers raise to over $ 18 per barrel.

Kissinger presents d isengagement proposals to Egypt and Syria.

March 13 Arab oil ministers meet. Saudi Arabia and Egypt agree to lift embargo. Syr ia and Libya lifling and Algena makes removal conditional.

May 28-31 Syria agrees to d isengagement. and oil embargo ends.

June OPEC economie exper ts press lor an increase in the basic (national revenue) price per barrel from $4 to $7- 11 to cut o il company profits. Saudi Arabia calls for a $2 cut in posled prices and lorces a comprom1se that limits the price increase per bar re l to 1.5%.

1981: June OPEC mimsters meet in Geneva and decide on price freeze . Surplus production is major problem. w1th spot prices falling sharply. Saudi Arabia continues high level of production to narrow price spread within OPEC.

Sep tem ber-Novem ber Saudi Arabia initially resists pressure to cut back production to 6 MMBD or less. It cuts production to 9.2 MMBD in September and to 8.6 MMBD in November.

Decem ber Saudi Arabia agrees at the OPEC meeting to raise its price to $ 34 per barrel and to cut produelion to 8.5 MMBD if other memhers of OPEC will cut their premiums on high-quality oil. This fails to stabilize average o il prices at a level low enough to maintain demand.

1982: February Saudi Arabia allows liftings to .,float" at market demand levels, but refuses to support OPEC elforts to cut production as prices drop below $ 34.

March The spnng mmisterial meeting of OPEC reveals growing tensions within OPEC. Saudi Arabia accepts a temporary OPEC ceiling of 17.5 MMBD, but insists o n a high ceiling on Saudi production of 7.5 MMBD in March and 7 MMBD in May. This blocks OPEC efforts to freeze or raise prices above $ 34. Saudi production dips below 6.5 MMBD as spot market prices drop to $ 29.

July 9-10 Saudi Arabia rejects long-term product ion ceilings and efforts to raise prices at the OPEC o il m inisters meet ing, and calls for stabie pr ices and increased production to allow world economie recovery. Iran calls fo r a cut in the Saudi quota to 5 MMBD.

December

TABLE 1.8 (continued ) Decem ber 16

1974 February 14

March 1

Septem ber-December OPEC ministers meet in Vienna in September: Saudi Arabia increases to $ 30, retroactive to I August. Iraq-l ran War begins late Septem ber 1980. OPEC meets in Bali in December: Saudis increase to $ 32, retroactive to I November, but deciare intention to keep production high to bring other OPEC prices down to Saudi level.

March 26-27

June OPEC meeting sets general ceiling of $ 23.50 per barrel, plus $ 2 surcharge. Saudi Arabia raises to only $ 18. Raises produelion ceiling back to 9.5 MMBD.

Decem ber OPEC in Caracas fails to reach unilied price structure. Saudi Arabia increases to $ 24, retroactive to 1 November 1979.

1980: January

Saudi Arabia and the conservative Gulf states split with Iran, Algeria, and Libya at the December OPEC ministerial meeting. Saudi Arabia agam res1sts production that would limit world oil availabllity and raise prices.

1983: January Saudi Arabia consults with the U.S., IEA , Britain, France, FRG . and Japan on the problems that given oil production and price levels present to the world economy. It adjusts its plans to the prospect of a prolonged recession.

January 5 ARAMCO partners refuse to increase liftings.

January 16 Saudi Arabia, the GCC nations, and o ther OPEC moderates meet in Bahrain and agree to cut prices rather than accept major cuts in production.

January 23-24 A spec1al meeting of OPEC oil ministers collapses because of irreconcilable di flerences between Iran and Saudi Arabia.

Februrary 10 Saudi Arabia announces it will no Jonger maintain fixed oil pr ices, and plants to compete o n the world market

Saudis unilaterally raise price to $ 26, retroactive to I January 1980, to align prices closer to OPEC level m e ffort to restore common price front. Elfort fa1ls.

May

June8

OPEC ministers meet at Taif m May: Saudi price i nc reased f rom $ 26 to $ 28, retroacti ve to I A pril.

Saudi Arabia and U.S. establish J oint Commission o n Economie Coopera tion to ease impact of oil price rises and help recycle petro-dollars.

OPEC m eeting in Algiers in June: OPEC j)r ices increased from $ 32 to $ 37. Saudis stay at $ 28.

June

Source: This chronology is extracted from a wide range of articles in The New York Times, Wal/ St reet Journ,1J, Midd/e East Economie Digest, Economist. and 8 Days.


14

A "future" for the physical oiln1arket and oil futures? A tanker loaded with gasoil from one of the Mediterranean refineries is on its way to the United States. The owner of the gasoil, an American marketingcompany with a "downstream" organization, however, bas been able topurebase the requiredgasoilon the U8-marketatalowerprice. Hetherefore decides to do a "time-swap" with a trader (independent oiltradingcompany ), who intends to sell the gasoil into the Ruhr-area/Germany, where he expects spec端ic demand for that type of gasoil. A few days before the tankers arrival at Rotterdam, the potential demandiscovered because refineries in the ARA-range (Amsterdam-Rotterdam-Antwerp area) are selling gasoil at lower prices. The trader, because of the over-supply situation in the ARA-range, not taking anymore risk is able to sell his tanker with gasoil, although with a smallloss, CIF-Eastcoast UK. The sales in America, Rotterdam and in the UK are reported in PLATT's (Platt's Oilgram Price Service). Companies active in the international/ national oiltrade a ware of the Platt's quotations, request suppliers to adjust their prices accordingly. End-consumer prices, dertimed by a complex formulae in which Platt's quotations figure prominently, are adjusted. The outlined above situation is a continious process worldwide, in other forms and circumstances of supply anddemand. Let us concentrate on North-West Europe (NWE) and specifically on th e "Rotterdam Market". When thinking of the "Rotterdam Market'' we do not mean a market where people match supply and demand but an area covering countries like Sweden , Norway, Denmark, Western-Germany, Switserland, England, NorthWest France and Benelux.

Twotypes In fact, the term "Rotterdam" covers two different but interrelated types oftrade: a. the international cargotrade (tankers of abt. 20.000 mton and larger) from and to the areas mentioned above

b. the bargetrade (shipments of abt. 800-3000 mton) covering the trade from the ARA-range into Benelux, BRD, France and Switserland. The trade in oil products originates in th e beginning of the fifties, as companies active in the coaltrade saw an opportunityin the huge growth in oil consumption especially in central heatingoil (gasoil). The development in Rotterdam, because of the expansion of refineries and their production capacity, the facilities of the independent storage companies like Paktank and Nieuwe Matex, provided the trade a basis for further expansion. The trader was born and was developping. Not one refinery, oil company or country is ever in balance as far as supply and demand concerned and an interchange to balance up surpluses and dificits is constantly taking place. The bulk of this "balancing" take place between integrated marketing systems, but the independent trader has a role to play: - in taking speculative positions either on spot- or on contractbasis - in supplying majors (oil companies), integrated I non-integratedsystems, endconsumers - in buying from majors and trading companies - in processing products (processing = refining crude oil at own expenses/ risk at a refinery and subsequent selling of the refined products)

By Pieter J. Kuisen, Managing-Directorof PJ.K. International B. V at Oosterhout, The Netherlands. Mr. Kulsen has over 20 years of experien ce in the international oil-trade. The term "Rotterdam spot-mark et/ prices" h as no concrete meaning. Primarily it con cerns those prices when business has been conducted between companies. Naturally companies active in this mark et know their own prices and one gains a lot of knowledge a bout the market, business concluded and interests from daily contacts.

lnformation But there is always a need getting more information. This information is collected by specialized news agencies. Platt's is the most accepted report inthetrade and is published, read and used daily. In addition, other reports and published, Petroleum Argus (daily), Petroleum Intelligence Weekly, Oilbuyers Guide. Nowadays "real on time" information systems such as Reuters and Tel erate are used. All share certain properties. They are based on systematic and regular gathering of information of th e market and such not free from subjective elements. It is not, nor


15 IPE-floor London.

SchernatJe D•agram of Sectors in wh1ch the Trader is active, situation

SI nee

1973.

Oil export. countries +majors

1'

u~am ~

1'

downstream

...V

Crude (01! exporting countries)

x

Rcfining Products Majors + Marketing

x x x

International Trade import/ export Local Trade UI ti mate Consumer

x x x

does it claim to be, a statistica! registration of the number of transactions. The gatbering of information and piecing tagether the market as a wholeis exactly what any trader, active in that market, does himself. However, a journalist, because of his independency and non-direct involvement inthemarket, may have a better change of putting tagether a better picture. Before 1973 the price of energy was fairly low and stable. The oilcompanies had a monopoly. Even after 1973, once the storm had settled, businesscontinuedas usual. The Western world continued to persue its policy of expansion, the oil industry adjusted to the new situation and prospered. The price of crude had increased five-fold but the increase was not crippling and was to a certain extend migitated by the devaluation of the dollar. There were embargoes and production cutbacks, but they did not effect the market. Basically, the free market system remained in tact and anybody could buy crude and/ or product for any destination, could resell it or swap it or process it. Under those circumstances there wasnoneed for any form of "hedging" via a futures market. However, at the end of 1978, the

traders

x processing

x sales

x x x

year of the Iranian Revolution, the oil companies lost control over crude production, pricing and the profitability on transportation and refining. There were restrictions on destinations of crude and products, the losses on company-owned tanker fleets and the necessity to carry large inventory in order to continue to guarantee supplies to the end-consumer. Consumer resistance and government interferenee increased.

Foundation "And last but not least" OPEC's interest already present in the market, became more and more important in this game of the "big one's". The complexity of the market became more complicated, the risks because of fluctuating market prices became even more larger- the foundation was led fora futures market. New-Yorkstarted with the NYMEX (New-York, Mercantile Exchange). In November 1978 futures were traded for "heating-oil" (nr. 2 or gasoil). By the end of 1979 33804 contracts were traded on an annual basis. Presently one is trading on the NYMEX in: heating oil, gasolines and crude. Figures for comparison: NYMEXJan/ May 1985 3.076.131 contracts. Jan/ May 1986 5.248.812 contracts

(contract 1000 bbl). An increase of 70,6%. In London one started trading on the IPE (International Petroleum Exchange) as from April!, 1981 with gasoil- of which the "prices" were related to the "Rotterdam market". Presentlyoneis trading on the IPE in: gasoil and crude, from October 7th 1986 one will commence trading in gasoline and fuel oil. Figures from comparison: IPE-Jan/ May 1985 208.373 contracts, Jan/ may 1986 423.528 contracts. (contract 100 mton). An increase of 103,36%. These figures reflect the growing importance of this "mechnism" in het oil industry. The present IPE-contract (we shall restriet ourselves to this explanation) is in lotsof 100 mton with a standard specification and the possibility of physical delivery FOB-tankstorage in the ARA-range, even only a small percentage results in physical delivery. The price is quoted in US-dollars per mton, for gasoil related to Specific-Gravity 150 C/ 0,845 and for the other productsin "weight". Transactions are done by "floormembers". Companies active in this market order the broker(s)= floormember to buy or sell a quantity of X lots (=contracts) against a, in advance, fixed price in a specific month.

Credit-limit Before actual trading on hehalf of the "prospective dient" takes place, the broker-according the rules of the IPE-request fora deposit or setties a credit-limit, furthermore the broker will request the elient to remit "lossmargins", calculated at the closing of the IPE of the preceding day. A "lossmargin" is the difference between the price at which the market doses and the price at which the contract is bought or sold. These regulations see to it that, at all times, the contract(s) being dealt with is covered and that credit risks are as much as possible limited. The floormembers arealso a memher of the ICCH (International Cammodities Clearing House), which acts as a kind of banker for the futures market and is guaranteeing all contracts of all its memhers in accordance with its "genera! conditions/ rules". Each floormember (broker) is obliged to fulfil his financial obligations, stipulated by the IPE.


16 A tanker entering Rotterdam/ Europoort oil-harbour.

- Registration system ICCH- see supplement. Changes in the oiltrade have led to shifts in the market - the oil producing countries went more into the downstream. - the oilcompanies (majors) created as much flexibility as possible intheir upstream and downstream activities. - national and/ or international traders, indeed a "special breed", adjusted themselves, this despite a growing and more complex marketsituation. Resulting in a more deliberate micro-economie and marketing related policy different to the previous so called "FingerspitzenGef端hl" policy, smalland weak companies disappeared. At the momentcrudeis traded within a range of USD. 14-16 per barrel, depending on the quality. The physical market is thin with trading on the futures market at fairly low volwnes. Nevertheless, during the middle/ end of July 1986, crude was being traded at prices below USD 10. per barrel and the NYMEX reaped record volumes. The OPEC agreement and a few hours "hectic trading" on 4th and 5th August 1986 resulted in a huge price rise, the equivalent of which took weeks to materialise during theseventies. Observers are at a loss to explain why this price rise occured.

Fundamentals The fundamentals, such as production, stocks and conswnption did not seem to be particularly promising at the time of the OPEC meeting. There is on both sides of the ocean demand for gasoline, the embattled situation in the Middle East threatens further consequences and there is a shortage of "heavy crudes" in the USA as a result of the production of heating oil for the winter. However it does seem that consumers have already bought the bulk of the heating oil needed for the winter, during the second quarter of 1986 and there is a large quantity of crude on its way to various refining eentres. By the time the OPEC meets on October 6th, 1986 the crude stocks will be high enough todrop the idea in rising the production-ceiling(s). Paradoxically the avoidanee of a reclassification of the OPEC production quotas will help OPEC to maintain a semblance of unity throughout the winter. But most people doubt the fe-

asibility of a system of roduction quotas, unless Saudi-Arabia is prepared, as it did between 1981 and December 1985, to act as "swing-producer". Other observers point to the futures market as the reason for the sharp rise in prices during the night of 4th August 1986. Products which were not directly influenced by the futures lagged behind in the general increase in oil prices. On Tuesday, the day after the OPEC meeting, the market in the Far-East reacted very reluctant, despite the very active market on the NYMEX on Monday. It needed another day of active trading in Europe and America to move the Far-East market. Even in Europe the prices of, for instanee fuel oil lagged behind the price increases of those products linked to the futures market. But even the futures brokers themselves were surprised by the speed with which the "resistance point" of USD. 12.- per barrel was broken. It completely flouted technica! analyses. The reason for this unusually sharp rise in prices appeared to be the shorts (=sales contracts) in both the physical and futures market which had to be covered. Not surprisingly companies with long-positions ( =purchase contracts) did notwant to sell, aceerelating the price rise. The oil industry has always been looking for elements to define its trading activities. In the sixties these were the "postings" of the majors, in theseventies it was the OPEC and more recently it has been Saudi Arabia supporting OPEC by regulating its production in relation to the overall de mand for crude within the OPEC.

Newelement At the moment one could suggest that the futures market is the new element in fixing oil prices. In America NYMEX is already viewed in this context. But NYMEX and IPE do notjust provide a mechanism for rapid ironing out irregularities in the market, they also translate "sentiments" in a market and on 5th August there were many people wanting higher prices on the back of the OPEC agreement, adding the "shorts" which had to be covered and buying interest was the logica! result ofthis. The correlation between the physical and the futures market cannot, nor never will, be optima!. However each month will offer plenty of trading opportunities between the physical and the futures market. Started with the description of the fundamentals of the international oil trade- the artiele being based and related to the "Rotterdam market" - the elements coming "on stream" influencing the market besides supply and demand the start of the futures market- and concluding with a very recent "study case" including all to-days' worldwide influences - brings me to the condusion that the trade will always adapt itself to and will always anticipate on changed market circumstances. And as usual when a deal has been concluded, I finish by saying: "We are pleased to have concluded this transaction with you, for which we thank you and looking forward in doing further business with you".


17

Cheap oil good news? Cheap oil bad news? Professor Peter Odell, of the institutefor international energystudies in Rotterdam, is a specialist on oil. Sam Mullerand Chiel de Leeuw talked with him in bis room at the economie faculty of theErasmus University about the part oil plays in the international relations. Their first question: In the nineteenseventies the emphasis in the capitalflow shifted from the West to the OPEC countries. Can you describe the results of this shift? Odell: This is related to the development of the oilprice; it is connected with the demand for more goods, and a higher development of the oilcountries. Therefore, it was a kind of reaction to more opportunities for these countries. Countries with more money can order more than countries with less money. The Western countries have enlarged their power through this development, because of their vast financial means. You might say that now there is a large dependance between the industrialized countries and the OPEC-countries, but that is not just a result of the capital-flow. lt is also a matter of connections, notjust money, and also a matter of polities. However, that is a much wider field than the flow of capital. The politica! matters are more important: for instanee the relations between the US and Saudi Arabia, between the Middle East and Western Europe, The OPEC presented themselves as an important group of countries after 1973. Before 1973 the OPEC were in existence then for more than 13 years - there were hardley any relations of importance to us. Nobody ever wrote a bout their meetings and decisions, none ever thought a bout them. It was only after 1973 that they presented themselves as a very important group of countries". Which precautionary m easures did these countries take in case the revenue trom oil would !all off? Odell: "They have less money now to use fortheir development and there-

fore they have less control over our industry, and less money for products from the industrialized countries. Also their problems with the instalments for repaying their debts to Nigeria, Venezuela, lndonesia en Gabon. For countries like Saudi Arabia it is not a matter of debts, because they have built up a large credit over the years. Densely populated countries used more money than they earned by oil-sales, and that is why they have huge debts. Mexico is an example of this. These countries could not foresee that the price would decrease that much, which was an error of the western countries. The International Energy Agency in Paris officially predicted that the price of oil would remain high, and would even get higher. The oilcountries believed they were ensured of a good market for at least the next twenty years. But this was a big miscalculation of the supply and demand-situation in all western countries. There was no notion of the fact that the eleasticity of oil would be that low. There should nothave been elasticity of the supply of energy, but this turned out to be wrong". Less influence Do you think that these countries will be economically and politically sustained in future, or shall their posi tion crumble away quickly?

Odell: "Their influence has diminished strongly. However, it is very important that the chief countries of the world, the industrialized countries, will keep up their good relations

with the OPEC, especially in view of the international economie order. We have to try to include these kind of countries into our system of determination. As an example I give the debts of Mexico and Venezuela, a problem which has to be solved by mutual arrangement. Another example are the countries of the Middle East, in conneetion with the problems concerning the state of Israel and concerning the Soviet Union whoarealso very interested in influencing these countries. These are all difficulties within our politica! and economical order for which a good relationship with the OPEC can be of importance. It need not be that now that the oilprices are no longer very high, and now that the shortage has decreased, the West has to believe that they no longer need the OPEC anymore". Up to now you have described the policy which the West has to pursue with respect to the OPEC-countries. Could you reverse this, could you describe the policy which the OPEC pursue with regard to the West? Odell: "In many oil-countries people


18

have achieved a higher standard of living, and if the West would now behave unfavourably towards these countries, they can expect revolutions or other difficulties. This may cause an enormous instability. This does not only apply to the Middle East, but also to Venezuela and Mexico and Indonesia. This instability is also bad for our Western system. The policy of the OPEC- and especially of the West has to he directed at cooperation and not at confrontation. The current policy of the western countries is certainly notdirectedat cooperation. The reaction of Reagan and of other western leaders is: "The OPEC is divided, the prices are very low, we have oil of our own, and the OPEC has thus no importance anymore". They think that we can return to the system of 13, 14 years back, when the OPEC did not really exist. But we cannot. The West must make the first ad vances, because now it is easier for us to take this step; however, it is not necessary. On the short term, we can sustain that the OPEC has no importance anymore, but on the long term we cannot. In relation to this policy of cooperation, oil can he an important factorinstarting the NorthSouth dialogue (most OPEC countries are southern countries). The

question is, if oil is unable tostart this dialogue, what will? There is an enormous solidarity between the developing countries and the OPEC. This in spite of the difficulties the poor countries encountered with the high oilprice. If you consider the amount of capital support which the OPEC gave and which the industrialized countries gave, you will see that the OPEC' support was much greater. It is not as though the OPEC did little, we just did less. Countries round the Middle East - like Syria, Pakistan, and Islamic countries in general - usually have a little cheaper oil. But in the Caribbean area too, there is the socalied San JosĂŠ-agreement between Mexico and Venezuela in order to supply small countries in the area with cheap oil. Positive effects Does the current low oilproce have any effect on the developing countries? Odell: "Yes, these effects are positive in two ways: First, the decrease of the oilprice might he an impulse for the international economy. The demand of the industrialized countries for new industrial products from the developing countries might increase,

and this is propitious to the developing countries. Second, the low oilprice makes it easier to buy investment goods in industrialized countries. This impulse is possible, butnotall certain".

Can you give a short description of the current problems between the OPEC and the NOPEC (i.e. nonOPEC) countries? Odell: "You have to look u pon this in several ways. First of all, you have the NOPEC-developing countries, third world countries like Mexico and Malaysia. In the case of these countries the decisions in 1973, '74, '79, and '80, to raise the oilprice, were a stimulus to the export of oil. Egypt and Mexico have largely developed their oilproduction and only now a discussion begins to start between the OPEC and the NOPEC. Second, you have the industrialized countries such as Norway, Canada, Australia, Great Britain, and centarly, the U.S., who is the largestof this group apart from the Soviet Union. In view of the raised price of oil the US has forced up her own production. Now, she produces approximately 55% of her own energy, as opposed to only ca. 40% in 1973. For the whole group of the industrialized countries you can


19

say that they have speeded up their own productionsof energy. This does not only apply to oil, but also to coal, gas, and nuclear energy. On the short term this development will not progress so strongly anymore, but on the long term it will. The production of, for example, oil from the North Sea will not cease very easily because there is a lot invested in it. Only when these investments are stopped, other kinds of energy will get more emphasis".

Which m ethods did the OPEC use to keep the NOPEC countries in harness? Odell: "There is no fixed strategy for this. Of course there is much discussion and deliberation, because both groups of countries are in the same position, eventually. lt is in the interest of both that the oilprices will rise

again and that is only possible if the production declines. When the North Sea all-production will be kept somewhat lower now, the proceeds will be higher on the long term". Saudi Arabia Which part doesSaudi Arabia play within the OPEC?Itis verydifferent from those of the other countries? Odell: "This roleis not very different. Saudi Arabia has a relatively small popwation of 6 million people plus another 6 million foreigners and an amount of oil of approximately 150 billion barrels, enough for 150250 years. She can afford it to be very relaxed a bout the future of her sources. She can direct herself at the long term. Because Saudi Arabia herself does not need so much oil, she could easily decrease her production. In the past few years Saudi Arabia has built

up a financial reserve, that can absorb the decreasein production. Since 1979, Saudi Arabia has gradually diminished her production from 10 miltion barrels a day tot 3 million. Their production cannot go down much more because of two reasons. First because with less than 3 million barrels the cash-flow will be too low to make the production remunerative. Secondly, because Saudi Arabia needs the oilproceeds for the gas which she uses to generate electricity. Therefore, it was very difficult for her to produce below 3 million barrels a day. Eventually she sagged tiU a little above 2 million barrels a day (in the middle of 1985). However, after that the production rase again to 4 million barrels a day, which intensified the tension between the OPEC Energy crisis: no oil available.


20

and Saudi Arabia (Kuwait, Iran, Iraq, and the Gulfstates have the same problem as Saudi Arabia)".

We shallleave the OPEC now, and turn to an entirely different topic, viz. theSoviet Union. How important is oil to the S. U as a means ofpressure on the other countries of the WarsawPact? Odell: "The relation between the S.U. and the other countries of the WarsawPact is a bout the same as the relation between Saudi Arabia and the rest of the OPEC countries. The

other countries of the WarsawPact have hardly any oil, some gas at the most. The S.U. has oil as wellas gas and this is of great importance to their own economy as wellas the export production, 80% of the entire export of the S. U. consistsof gas, coal, and oil. Part of this export goes to the satellite countries and part goes to Western Europe. The part that goes to the satellite countries is of major importance to the development of the WarsawPact as a group. Therefore does this export not only have economie significance, but also strategie. East Germany and Chechoslovakia

receive their oil trom the S.U. for almost 80%. Oil is a great means of power for the S.U. But the export of oil is very important to the S.U. for the development of their own economy. This implies that the politica! power of this oil is only restricted. Western Europenever took more than 15% of its oil from the S.U. Of much greater importance on the long term is our import of gas from the Soviet Union, because the S.U. has much more gas than oil. The production of oil is restricted to its present level, which is just above 600 million tons a year. This productions will not


21 A pipeline-screet.

large. The competition concerning gas between the Netherlands, Norway, and the S.U. will grow very much in the nineteennineties". Seven Sisters

The next question is on theSe ven Sisters, the largest oil-companies. How large is their politica] influence?

become much higher in future. On the other hand, there is no limit to te production of gas. Our dependenee on the Soviet Union will never become very large, if we see to it that our offtake of oil from the S.U. will not become more than 15%. Our offtake of gas is now even less than 15%, but I expect that the import of gas shall increase. As a reaction to the increasing offtake of Norwegian gas, I expect that the S.U. will manifest itself more aggressively and, for instance, lower its price a little. America, on the other hand, tries tostop our offtake of Russian gas from becoming too

Odell: "Their power used to be very great. Strictly speaking, these companies controlled the world industry. They could decide where the oil would be produced, where it would be processed, and in the nine-teenthirties and -fifties they even controlled the price. But in the course of the nineteen-fifties and -sixties their power diminished strongly. Their share on the oilmarket gradually decreased. In 1973 and 1974 much of the production of the Seven Sisters was nationalized (Indonesia, Venezuela). Nowadays the power of the Seven Sisters is much more sophisticated, much less direct. But their influence with their knowledge, experience and overall understanding of the oilmarkets, is most definitely still present. Their power in the sense of properties has declined. The recent fall of the oilprice has made their influence somehwat bigger once more. They can give hope again to Saudi Arabia by buying her oil, and they can decide from which country they'll preferably buy oil. Because of

this, their influence on the price has increased again".

What do you think of the use ofan oil-boycott as a political means of pressure? Odell: "There is little result to be expected of it. Some people always manage to make money out of an oilboycot. South Africa does notsuffer from it. Despite the boycottof the Arabic countries, the largest part of her oil still comes from the Persian Gulf. There are many ways to get the oil to South Africa illegally. The only possibility is by supportinga kind of military blockade by means of having warships patrol for the Southafrican harbours, but that is not realisticnow".

Could the oil-problems promote the international cooperation? Odell: "That is possible, but Western Europe has to take charge of affairs then. The U.S. are predominantly self-supplying and therefore they do not recognize the necessity of cooperation so much. Besides, Western Europe has betterand more central relations with the Soviet Union and the Middle East. Up to now, however, Western Europe had undertaken very little stepstoreach a better understanding".


22

Is the world-oil-market controlled by a cartel? The last 15 years the oilmarket bas shown some violent motions, which have had rad.ical con.sequences for the development of the world-economy. The OPEC, which was foundedalready in the early nineteensixties, manifested itself from 1973on as astrongprice-cartel In ashortspaceof time the oilprices triplicated. The industrialized countries which are especially oil-consumers, united in the International Energy Agency in order to reduce together the dependenee on OPECoil. However, the increasesin priceshadnotreachedanend As aresult of the altered situation in Iran, the prices increased once more with over one hundred per cent. The reason for the latter increase in price was the fall of a large part of the productive capacity of both countries as aresult of the war. Because of this a high appeal had to be made to the other OPEC-countries with an extensive inflation as a result. This second oilcrisis was foliowed by a deep recession in the worldeconomy, more serious than the economie relapse caused by the first oH-crisis. Unemployment reached high attitudes in the industrialized world. The developing countries also had a hard time of it. On the one hand export dropped as aresult of the recession in the industrialized world, and on the other hand the oil-bill rose high and there was an imminent danger that the position of debt of many countries would get out of control, because of the high interest. The IEA-countries forged ahead with their policy, aided by the now even higher oilprices. By means of the energy-economization a considerable reduction of energy (and therefore also of oil) was realized. The diversification-policy was certainly succesful in the electricitysector where oil was replaced by particularly coal and nuclear energy. Besides, the development of own production saw to it that for the fulfilment of the demand for oil they had to appeal to the OPEC in a lesser degree. After the second oilcrisis the combined effects of this energy-poli-

cy, the economie recession, and the high oilprices became obvious very quickly. The demand for OPEC-oil reduced strongly, through which the overcapacity of the group rose quickly. Besides, the OPEC-share in the world-oilproduction decreased. The OPEC tried to keep the oilprice up to the mark by quantity restrictions. Till the end of 1985 they largely succeeded in this, particularly because Saoedi-Arabia manifested itself as swing-supplier within the OPECconnection. At the turning of the year 1985-1986 the OPEC set "free" the oilprice and turned to the defence and the recapture of the marketshare. Especially Saoedi-Arabia speerled up their production within a shortspace of time, because of which a dramatic price-reduction took place in the first six months of 1986. Roughly, the prices were divided into halves. In august, the OPEC showed indications of orderly life again and a new quotum-distribution for September and October was agreed upon. In this artiele I shall try to indicate along which lines the oilmarket can develop in future years and which part the energypolicy can play. Before I shall turn to this, I shall first give a further analysis of the last period.

Structure The last 15 years the oil-market has shown some salient developments. In

Bydrs. G.HB. Verberg, DirectorGeneral Energy Departmen~ Dutch Ministry ofEconomie Affairs. the first instance, three price-shocks stand out. These price-shocks could take place because the economie and politica! prerequisites were present. Until1973 the oilprices were low, in real terms the prices even had declined in the preceding decennia. This had some important consequences. The oil-intensity of the industrialized countries increased in the ten years until1973 with 30%, whilst the energy-intensity remained constant, roughly. Exploration efforts were only executed in areas whre the oil could be taken out of the ground in a cheap way and in areas where the economization in transportationcosts compensated the higher exploitation costs. As aresult of these developments the OPEC-oil started to play a more crucial roleon the oilmarket. Inseven years time (1967-1973) the OPEC-production had doubled to more than 30 mbd and the productive capacity was almost fully filled. The production of the rest of the world rose in the same period, with only a third to 27 mbd, of which 14 mbd in the OESO area. The share of OPEC-oil in the internationally marketed oil had risen


, '

from approximately 2/ 3 in 1960 to over 3/ 4 in 1973. See here the most important ingredients fora succesful seizure of power at the oilmarket. From 1973 on there has been a decline in the oil- and energy-intensity. In ten years time the energy-intensity dropped with 20% and the oil-intensity with over 30%. Combined with the small economie growth this even resulted in an absolute decline in the demand for oil in the period 19791983. The above-mentioned development of the expenditure of energy was strongly influenced by the internationally pursued energy-policy, the oilcrisis of 1973 and the second priceshock in 1979/ 1980. The second oUcrisis led to more than a doubling of the prices. The cause was the stilllarge share of OPEC in the total oilproduction and th e high filling-rate of the productive capacity. When a part of the capacity in Iran fell of, a new price-explosion was soon realized. However, after the second oilcrisis the marketrelations changed rapidly. The decline in the oil-intensity pusbed on strongly. Energy-economization, stimulated by government policy, bore its economie fruits. The aspiration for diversification also saw its effects. The stakes of coal and nucle-

r

ar energy increased strongly; the equivalent of this growth is appr. 6 mbd since the first oilcrisis. The complete bulk of the stakes of oil in the electricitysector was halved in ten years time. The supply of oil from the IEA-area itself rose, especially because of the production on the North Sea (Great-Britain, Norway). It is of major importance to realize that the lead-times of investment projects at energyproduction and the generation of electricity take up some years. Therefore, it is not surprising that the effects of price-changes only have their major effect on the supply and demand of oil in due time. As aresult of these changes in supply and demand, the OPEC-production declined with 15 mbd., in six years time; in 1985 the level was appr. 16 mbd. Not only did the share of OPEC in the world-oilproduction decline but also the filling-rate of the productive capacity came into a dangerous zone. The cartel made desperate attempts to keep the oilprice up toa measure by establishing productionquota fortheir members. Nevertheless, the oilprice before the reduction of 1986 had already declined with a few dollars per barrel. The cooperation in the cartel carne under high

23 Good communications are necessary in todays oil-refineries.

pressure because of the large overcapacity and the necessity for several memhers to have sufficient solvencies in oilproduction left. The result was that Saoedi-Arabia had to shoulder a large part of the burden of productive reduction and thus becarne even more emphatically the swingsupplier within the OPEC. So actually Saoedi-Arabia had to take the rap for the deficiency in discipline of the other members. Eventually the situation threatened to become untenable. Saoedi-Arabia got close to its minimal requisite technica! production-bulk and sawa rash rise in the shortage on the running account of the balance of payment as aresult of the decreased size. In autumn 1985 OPEC decided to Ieave price-protection and in future to accomplish a fair marketshare for the OPEC. Within a short time the production was speeded up and the market was flooded. The result was that all prices tumbled, partly because there were no substantial changes in supply and demand. The dernand is at short notice highly inelastic so that on account of the reduction an insufficient additional demand was evolved to prevent a high fall in price. The other producers (United States, Mexico, the CPE's and the North Sea-countries) did not respond with extensive limitations of volume. As a result the fall in prices were uncheckable. Looking back upon the past 15 years we see that the strengthof the OPEC-cartel was especially determined by the relations between supply and demand and the internal consistency. In theseventies the circumstances we re good for the OPEC. The result wasastrong rise in prices and a large surplus of producers. Oilconsumers and potential producers did respond, but because of the long period that is needed to convert these reactions into a change in the supply- and demandpattern, the circumstances for the OPEC appeared to be sunny duringa number of years. It has now become more than obvious that appearances are better than reality. The high prices have evolved marketreactions and an international energy-policy which have pecked away the power of the cartel bit by bit. The question we have to answer now is how the oilmarket can develop in fu-


24 The assembling of a deep-water foundation lor a seabed-fixed oil-platform.

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ture years and which part the OPEC wil play herein.

The development of the oilmarket Sufficient examples prove that to predict the prices for oil is not the easiest thing to do. This doesnot imply, however, that the oilmarket is absolutely unfathomable. On the contrary, the underlying motionscan very well he analysed. The narrow market in theseventies and the wide market of this moment did not appear from nowhere. However, the analysis of the oilmarket doesnotstop at the determination of the development in supply and demand. It is also important for the realisation of the

oilprice- on account of the supply I demand-relationships- what are the possibilities for the formation of a price-cartel and which economie and politica! factors play a part in the possibie realisation of such a price-cartel. The past years have taught us that the preservation of a price-cartel was actually only possible, when the memhers of the carte!- with the exception of Saoedi-Arabia and some very rich Golf-countries- make extensive use of their productive capacity. This is not very surprising, consiclering the usually not so rosy financial situation of the other cartelmemhers and consequently the high

pressure to collect sufficient solvencies withintheir borders. In future years, too, it will not be easy to motivate these countries to reduce their production permanently in order to raise the price at a relatively low sale. A realistic estimate of the "call on OPEC" which will enable the recovery of a strong price-cartel seems to he appr. 22 mbd. I hereby assume that Iran and Iraque do notreeover their original productive capacity, that Saoedi-Arabia has a "reasonable" production of appr. 4 mbd., and that the other countries produce at almost top-capacity. Underneath will be indicated what will be the expected "call on OPEC" at several price-


25 Mana Saeed Otaiba (right), oil-minister of the Uniled Arab Emirates, at a press conference alter an OPEC-meeting in Vienna.

\\ suppositions and thus what will be the possibilities of cartel-formation at several suppositions. At price-suppositions of$ 25which were nationally and internationally considered as a reasonable expectation before the pricereduction - the OPEC would in the course of the nineties gradually fill out its jacket again. On the one hand, an increase in the demand induced by economie growth would be responsibie for that, on the other hand it was expected that a decrease of the IEAproduction would lead to a greater appeal to the OPEC. Against this background I shall indicate what the reactions can beat price-levels star-

ted at$ 10 and $ 15 per barrel resp. The supposition that with an OPECproduction of appr. 22 mbd the carte! will have sufficient power again to structurally regulate the price, had been put central in the analysis. Concerning the demand, an extra demand can develop along three ways in the main, viz. through extra economie growth, through substitution of coal by oil, and through the price-effects in the transportationsector and with heating. Because of the pricereduction some extra economie growth can develop, viewed mondially. The estimates of the size of this additional growth differ, but this is not seriously concerning the demand for oil, because it does notconcern a decisive volume-effect bere. A conservative estimate leads to an extra demand of0.5 mbd ad $10(1% extra growth) and 0.3 mbd at$ 15 (0.5% extra growth). The technica! possibilities to substitute coal by oil are reasonably extensive. In view of offtake-obligations and a certain government responsibility concerning coalwinning, only a slight actual substitution is expected at$ 15. With a supposition of$ 10 the effect can be estimated at appr. 1.5 mbd. By the way, in both cases it has been assumed that the price-reduction in oil is partially foliowed by coal. As a result of the lower prices the kilometrage in the transportationsector can rise and with heating the heating-demeanor might become

less sparing. The estimated effect at $ 10 is less than 1.0 mbd, at$ 15less than 0.5 mbd. Concerning the supply, a decrease will take place at short notice when the operating costs of the fields get below the outputprice. At a price of$ 10 the productionlimitation could rise in 1990 to 4.5 mbd. At a price of$ 15 this would be a bout half of it. This also includes part of the effect that arises because some fields are no longer taken into development. This effect becomes stronger in the course of time. On medium long-term (5 to 10 years) the results of the diminuation of exploration-activities are added to this. Out of these calculations it follows that a price of$ 10 already before 1988 a situation will arise in which Saoedi-Arabia (and the OPEC) can control the market. In this situation the demand for OPEC-oil has risen to 25 mbd already. At the $ 15-offtake the tension at the market will get bigger from 1988 onwards. In 1990 a situation will have been achieved comparable to the $ 10 case in 1988. At a supposition of$ 20, for that matter, the price pressure zone of the OPEC would only come in sight after 1990. From the above we may conclude that it is probable that at a "free mark et-operation" in the nineties at the latest a situation will arise in which the OPEC will once more be able to


26 Searching for oil is hard, but well-paid work.

exercise a considerable upward influence on the determination of prices. It is not self-evident that the OPEC-cartel will take up its old price-politics again if the supply I demand-relationships lend themselves to it, but the risks of very considerable rises in prices are evident. The economy of a large number of OPEC-countries can certainly use some extra oU-dollars and the Saoedi's could also decide to raise the prices again for a longer period on account of the reeavered marketposition. We must not forget that the producers-surplus resulting from this can simply be collected duringa few years, because adaptation of the energy-structure in the oil-consuming countries once again can take many years. Besides, there are a few uncertain politica! elements that can see to it that high oilprices return when the economie bases are present for this. Altogether, certainly nota perspective with which the policy ought to be content.

The oilprice and govemmentpolicy After the first oilcrisis the energypolicy of the IEA-countries has been directed at the diminuation of the dependence on oil bij energy-economization, diversification, and the increase of their own production. The current situation teaches us that this goal has been reasonably realised at this moment. It would go to far to conclude that this is the sheer result of the pursued energy-policy. The low oilprices and the low economie growth of the past few years have also considerably contributed to the development of the wide market as we knowit now. In the previous paragraph it was observed that this wide oilmarket is only of short duration. Dependent on the prices already in the late eighties or else in the nineties, a situation will arise in which the demand for OPEC-oil is such, that astrong pricecartel can appear once more. A sensible policy will of course aim at mitigating such a development. I realise that the circumstances in which this policy has to be pursued have changed drastically. The most important factor in that, are the low energy-prices. For the last price-shock the energy-policy and the energy-prices wor-


27

ked in the same direction; now there is an imminent danger that they will counteract We have to realize- as I have analyzed before- that a new strong price-cartel is heading towards us faster as the oilprices are now lower and as they will remain lowlonger. The energy-policy has to direct itself especially towards the long term, consiclering this underlying structure of the oilmarket, without neglecting traversing short-term effects. Besides, it would he much more effective, if we would succeed in establishing that we are assured of an acceptable marketsituation at (medium) long term, in which the price lies at areasonable leveland the pricefluctuations are notsosharp that they substantially affect the investment elimate. This is only conceivable- and as yet only on patient paper- in an international context. Essential to this is at least an understanding between (the most important countries of) the OPEC and a number of important non-OPEC oilproducers. Therefore the main object remains to diminish the vulnerability of this energy-structure. This may he by diminishing and spreading the supply-, but especially also the price-risks. The result is among others an energy-supply in which oil from outside the IEA-area plays an authoritive part. It is necessary, therefore, that own production-possibilities remain up to the measure, that the diversification will he proceeded with, and that economization of energy will he continued wherever it is remunerative. However, the investment-decisions that will he taken on this account depend to a high degree on the height of the energy-prices, that the invester expects. Therefore it is nog conceivable that the- to my expectation- temporary low oilprices will snub the long term objective. Consiclering other policy-desiderata, such as budgetary, I nevertheless do not think it possible and desirabie that the government at large should take compensating measures. What is under discussion is the promotion of k ey-investments, such as diversification in th e electricity-sector and not letting break off the developmental lines of good looking alternative energy-options, such as windenergy.


28

Shell en Zuid-Afrika: van binnenuit hervormen Het is moeilijk de situatie in Zuid-Afrika met andere dan bangevoorgevoelens te bezien en nietsomber gestemd teraken door de menselijke tragedie die zich daar lijkt te ontvouwen Hetland bevindtzichduidelijk in een crisis. De apartheidzal er geen stand houden: wat we alleen nog niet weten is hoe zij zal aflopen en hoe ver het einde nog van ons af ligt. Door de reeds enorme sociaal-economische problemen in Zuid-Afrika moet ieder er wel bij gebaat zijn dat de overgang niet alleen snel maar ook zo vreedzaam mogelijk verloopt In het Zuid-Afrika van na de apartheid zal voor het bedrijfsleven een belangrijke rol zijn weggelegd. Het speelt, naar mijn overtuiging, ook nu al een belangrijke rol bij het bevorderen van veranderingen. Toch worden buitenlandse maatschappijen ervan beschuldigd de apartheid te steunen door in Zuid-Mrika te blijven en zo het maken van winst boven ethische of morele beginselen te stellen. V oor mij, als V oorzitter van het Comité van Directeuren van de Koninklijke/Shell Groep, is apartheid niet slechts een probleem in ZuidMrika. Het heeft een internationale dimensie omdat sommigen van hen die de apartheid bestrijden, besloten hebben als onderdeel van hun campagne Shell-maatschappijen overal ter wereld aan te vallen. Daarbij bedienen zij zich herhaaldelijk van valse of misleidende informatie en doen zij ongegronde beweringen. Om slechts één bijzonder kwalijke zaak als voorbeeld te geven: wijd en zijd wordt de indruk gewekt dat politie en leger van Zuid-Mrika voor de . aanvoer van hun olieproducten afhankelijk zijn van Shell, en dat Shell daarom voor hun daden verantwoordelijk is. Dit is niet waar. Wij hebben reeds vele malen gezegd dat geen enkele Shell-maatschappij buiten ZuidMrika ruwe olie levert aan wie dan ook in Zuid-Mrika en dat er, wat de levering van olieprodukten betreft, naast Shell South Mrica (Pty) Ltd. nog zeven andere maatschappijen in dat land actief zijn. Voorts voorzien de fabrieken van het Zuidafrikaanse bedrijf Sasol, waar olie uit lokaal ge-

dolven steenkool wordt gewonnen, in een belangrijk deel van de totale nationale vraag. Het is een karikatuur van de logica te trachten één leverancier van een algemeen verkrijgbaar produkt de schuld te geven van de daden van één mogelijke afnemer, daden die trouwens niet met dat produkt in verband kunnen worden gebracht.

Beledigd Onze klanten, medewerkers en aandeelhouders hebben over de apartheid grote zorgen, maar voelen zich tevens beledigd door de aanvallen op Shell. Wegens de valse voorstellingen van zaken en de opzettelijke onjuistheid van veel van de beschuldigingen wens ik de positie van Shell aan u duidelijk te maken. De beide moedermaatschappijen van de KoninklijkeiSheil Groep en ook Shell South Mrica zelf hebben vele malen in het openbaar hun veroordeling van de apartheid uitgesproken. Shell South Mrica h eeft steeds een vooruitstrevend personeels- en sociaal beleid gevoerd en geniet daarbij de volle steun van haar aandeelhouders. Haar standpunt ten aanzien van de vakbonden is ondubbelzinnig. Mits een vakbond kan aantonen dat hij een als zodanig herkenbare groep werknemers vertegenwoordigt, zal de Maatschappij die vakbond voor onderhandelingsdoeleinden erkennen. Dit beleid is uitvoerig gedocumenteerd in de sociale jaarverslagen van de Maatschappij. Ook de heer John Wilson, presidentdirecteur van Shell South Mrica en

By Ir. L.C. van Wachum, Chairman of NV Koninklijke Nederlandsche Petroleum Maatschappij. Bijgaand artikel is een brief van ir. L. C van Wachem, Voorzitter van het Comité van Directeuren van de Koninklijkei Sheli Groep, over de crisis in Zuid-Afrika, die gezonden is aan de president-directeuren van de Groepsmaatschapp1jen. Aangezien de tekst van de brief de redactie pas op een laat tijdstip bereikte, was vertaling in het Engels niet meer mogelijk. Daarvoor onze excuses.

voorzitter van de Federated Chamber of Industries, is bijzonder duidelijk geweest in zijn openbare veroordeling van de noodtoestand en het opsluiten vangemeenschaps-en vakbondsleiders. Iedereen in Zuid-Mrika, en met name de eigen werknemers van Shell South Mrica, dient te weten dat mijn collega's en ik volledig onderschrijven wat John Wilson heeft gezegd, en dat wij hem, Shell South Mrica en anderen steunen in


29 The Solaris, one of Shells supertankers

hun inspanningen politieke veranderingen teweeg te brengen. Politieke verandering - daar draait immers alles om. Er bestaat tussen ons en onze critici geen enkel verschil van mening over het feit dat er een einde dient te komen aan de apartheid: alleen zijn wij het met elkaar oneens over de te gebruiken middelen.

Invloed Diegenen die kritiek op ons uitoefenen, wekken soms de indruk dat het

bedrijfsleven, en met name de buitenlandse bedrijven, Zuid-Afrika's toekomst kunnen bepalen. Als het aan ons lag, zou de apartheid reeds lang dood en begraven zijn. De werkelijkheid is dat het bedrijfsleven weliswaar enige invloed op de Zuidafrikaanse regering kan uitoefenen, maar dat het zelf nooit de vereiste grote politieke ommezwaai door Pretoria kan bewerkstelligen. De Zuidafrikaanse regering zegt dat zij zich inzet voor verandering. Zeker, er zijn enige belangrijke veran-

deringen verwezenlijkt; maar de bezorgde toeschouwer kan geen andere indruk krijgen dan dat de opvatting van de Zuidafrikaanse regering ten aanzien van verandering nog ver verwijderd is van zowel het meerderheidsstreven in Zuid-Afrika als van de wereldopinie. Dus wat kunnen commerciĂŞle organisaties met belangen in Zuid-Afrika nu doen? Voor onze critici ligt het antwoord voor de hand - terugtrekken! Zelf sommigen van degenen die erkennen wat de buitenland-


30 Road-tanker being Ioaded at a She/1-station.

se bedrijven in het verleden hebben bereikt, beweren nu dat wij daarmee niet verder komen en ons dienen terug te trekken. Wij zijn het daarmee niet eens. Anderen, die buiten het bedrijfsleven staan, evenmin. Zij willen dat de bedrijven in Zuid-Afrika blijven, daadwerkelijk naar verandering toewerken en helpen alle Zuidafrikanen voor te bereiden op het moment dat de apartheid eindigt. Shell South Africa is een volledig ontwikkeld bedrijf dat wordt geleid en bemand door Zuidafrikanen, en dat geen beroep op de middelen van de aandeelhouders doet. Haar vaste activa kunnen niet worden weggehaald. Terugtrekking of desinvestering zou daarom in de praktijk slechts neerkomen op verkoop van het eigendomsrecht van de activa. De activiteiten van de maatschappij zouden niet stil komen te liggen, noch zou de aanvoer van ruwe olie naar Zuid-Afrika worden getroffen omdat daar geen enkele Shell-maatschappij buiten Zuid-Afrika bij betrokken is. En als de Zuidafrikaanse regering zelf de nieuwe eigenares van Shell South Africa wordt? Zou dat helpen een einde aan de apartheid te maken? Ik geloof dat verkoop om politieke redenen van Shell-activa in Zuid-Afrika niet meer dan een symbolische daad zou zijn. Wat de aangevoerde morele beweegredenen v贸贸r terugtrekking betreft: de sociale problemen in ZuidAfrika zijn enorm- onvoldoende en ongelijke gezondheidszorg en scholingsmogelijkheden, armoede, werkloosheid, tekort aan behuizing enz. Ik moet mij afvragen wat terugtrekking door Shell zou bijdragen tot het verhelpen van deze problemen. Mijn oprechte mening is: helemaal niets. Een terugtrekken zonder positief, en met waarschijnlijk enig negatief effect op de gemeenschap zou geen demonstratie van morele oprechtheid maar van morele zwakheid zijn. Het komt neer op de handen aftrekken van alle verdere sociale verantwoordelijkheid en het ontkennen van onze verantwoordelijkheid ten aanzien van onze medewerkers in Zuid-Afrika.

Voorgevoel Ik ben begonnen met te verwijzen naar het bange voorgevoel waarmee men op dit ogenblik Zuid-Afrika's

toekomst beziet. Toch houdt mijn geloof dat er voor het bedrijfsleven een constructieve rol is weggelegd, tevens in, dat er hoop op vreedzame verandering is. Ook vind ik dat diegenen die buiten Zuid-Afrika wo-

nen, moreel niet gerechtigd zijn die hoop te laten varen en zo als het ware alle verdere zorg van zich af te schudden. De Zuidafrikaaanse regering is zich er zeer goed van bewust dat de eco-


31

den hun investeringen in Zuid-Afrika niet uitbreiden. Dat is geen dreigement om een verandering af te dwingen , maar de dagelijkse zakelijk e realiteit. Er klinkt echter een duidelijke politieke boodschap dat politieke verandering de sleutel is tot economische vooruitgang in ZuidAfrika en dat beide de sleutel vormen tot het sociaal en economisch welzijn van de hele gemeenschap. Een helegeringseconomie is een mogelijkheid waarmee men het misschien één of twee jaar zou uithouden, maar op langere termijn zal zij het levenspeil onvermijdelijk doen afkalven. Evenmin geloof ik dat de Zuidafrikaanse regering ervan kan uitgaan dat een tijdelijke kalmte de investeringsstroom weer op gang zal brengen. Ik denk dat die tijd voorbij is en dat er nu alleen nog van nieuwe investeringen sprake zal zijn als een echte politieke verandering op handen is.

nomie jaarlijks met 5 à 6 procent moet groeien om te voorkomen dat de werkloosheid, met name onder de zwarte bevolking, stijgt. Vooral een onder jongeren groeiende werkloosheid is immers een vruchtbare voe-

dingsbodem voor sociale onrust. V oor die economische groei is een toevloed van zowel kapitaal als technologie nodig. Buitenlandse beleggers, met inbegrip van de banken, zullen onder de huidige onstandighe-

Embargo's Zakenlieden betreden- terecht de pollitieke arena gewoonlijk niet, zeker niet in een tijd waarin politieke leiders over de hele wereld trachten het zelf eens te worden over hoe de druk op de Zuidafrikaanse regering moet worden opgevoerd, een zaak waarover velen van hen al jaren onderling van mening verschillen. Door sommige landen zijn handelsembargo's en andere maatregelen ingesteld en worden verdere stappen opnieuw bestudeerd. De debatten rond deze hele zaak tonen echter aan dat het hier een zeer ingwikkeld probleem betreft en dat er geen eensgezindheid bestaat ten aanzien van de gevolgen en de uitwerking van verdere sancties tegen Zuid-Afrika. Wél is er groeiende erkenning van het feit dat om de sancties effect te laten hebben een groot aantal landen, waaronder Zuid-Afrika's voornaamste handelspartners, hun acties moeten bundelen. Het is duidelijk een zeer moeilijk politiek probleem, zowel nationaal als internationaal gezien. Als rechtspersoon in hun land moeten maatschappijen het resultaat afwachten en zich vanzelfsprekend houden aan de wettelijke maatregelen die hun regeringen misschen zullen instellen. Intussen behoren die-


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INDEXJASON 1985-1986

Drs. G. Wa/raven: Uitgangspunten buitenlands beleid PvdA, CDA en VVD lopen weinig uiteen.

85/6. Jongeren en buitenlandse politiek.

J. M. Wiersma en B. J. van den Boomen: PvdA wil grotere rol voor Europa op gebied van vrede en veiligheid.

Drs. J.C. P.M. Vis: Robin Linschoten:

Wat is er met "de" jeugd aan de hand. "Mensen moeten ZJCh niet blindstaren op ervaring". (Interview). Ernesto H. Braam: Een Europese defensie is nog geen realiteit. Eric Janse de Jonge: Terugkeer naar consensus in de buitenlandse politiek. Véronique Frinking: Eindeloos onderhandelen in VN-simulatiespel. Annelies Meybaum: Nederland en het streven naar Europese veiligheid.

86/1. Het Nederlandse voorzitterschap: Externe uitbreiding, interne stagnatie. Mr. H. van den Broek; Nederlands voorzitterschap vol uitdagingen en kansen. (Belan$rijkste passages uit een toespraak tot het Europees Parlement op 16 Januan 1986.)

Ed Nijpels (interview): Nederland moet niet langer buitenbeentje in NAVO zijn. Hans van Mierlo (interview): D66 geeft ook aanzet tot nieuwe ideeen in buitenlandse politiek. R. A. Koole: "Visitekaartjes" grote partijen anders dan politieke werkelijkheid.

86/ 3. Raketten op tafel: Wapenbeheersingsoverleg tussen Oost en West. Dr. A. van Staden:

Ontwapening na '45: lang lijst van verwachtingen en tefeurstellingen.

Dr. P. B. R. de Geus: West-Europa praat indirect mee bij onderhandelingen in Genève. Paul Nitze:

START-taJks waiting for Soviet attitude change.

P.Dankert: Toekomst Europees Parlement niet bepaald gunstig.

Mr. P. J. Wolthers:

Bij MBFR-besprekingen in Wenen is nu het Warschau Pact aan zet.

Dr. W. F. Van Eekelen: Technologie stokpaardje van Nederlands voorzitterschap. (Interview)

Drs. D. Zandee:

Europese Ontwapeningsconferentie "litanie zonder eind"?

P.G. Hoekstra: Eureka: Europese samenwerking voor concurrentie op wereldmarkt. Mr. F. H. J. J. Andriessen: Zwaartepunt van EG verschuift naar het zuiden. (Interview) J. F. Hinrichs: Spanje en Portugal rekenen op voordelen van EG-lidmaatschap.

86/2. Verkiezingen en veiligheidsbeleid:

86/4. Internationaal terrorisme. Drs. A.J. Jongman: Terrorisme onderdeel van gewelddadig menselijk gedrag. Mohammed Abuleil (interview): "Weet u, wij PaJestijnen hebben niets te verliezen". Dr. H. Sondaal en mr. H. van Poorten: Europa en het terrorisme: Geen compromissen mogelijk. Ronnie Naftanilil (interview): "Israi!l richt vergeldingsacties op zenuwcentra terrorisme. Robert Oakly (samenvatting toespraak): Amerikanen zijn belangrijkste doelwitten voor terroristen.

------------------------------------·--------------------------------------, Kan ongefr. verzonden worden.

Jason Antwoordnummer 2187 2500 ZT Den Haag


Jason magazine (1986), jaargang 11 nummer 5