TheInternationalEnergyForum Twentyyearsofproducer-consumer dialogueinachangingworld BassamFattouhandCobyvanderLinde 1 2 InternationalEnergyForum FromitshumblebeginningsinParisin1991theglobalproducer–consumerdialogueon energyhasdevelopedthroughtheInternationalEnergyForum(IEF)sothatitisnowthe world’slargestgatheringofEnergyMinisters.IEFCountriesaccountformorethan90%of globaloilandgassupplyanddemand.InadditiontoIEAandOPECcountries,transitstates andkeyenergyplayers,includingBrazil,China,India,Mexico,RussiaandSouthAfrica, participateintheForum. ThemagnitudeanddiversityofthisengagementisatestamenttotheIEF’spositionasa neutralfacilitator.ThroughtheForumanditsassociatedevents,IEFMinisters,theirof�icials, energyindustryexecutives,andotherexpertsengageinadialogueofincreasingimportance toglobalenergysecurity.Thetwists,turnsanddevelopmentsofthe20yearhistoryofthe dialoguearedocumentedhereinthiscommemorativepublicationco-authoredbyBassam FattouhandCobyvanderLinde. Thecontentofthisbookisthefullresponsibilityoftheauthors.Theydonotnecessarily re�lecttheviewsoftheInternationalEnergyForum,theOxfordInstituteforEnergyStudies, theClingendaelInternationalEnergyProgrammeoranyoftheirmembers. Title: TheInternationalEnergyForum, Twentyyearsofproducer-consumerdialogueinachangingworld Copyright: IEF Authors: Year: BassamFattouh,OxfordInstituteforEnergyStudies(OIES) CobyvanderLinde,ClingendaelInternationalEnergyProgramme(CIEP) 2011 Publishedby: IEF,Riyadh,SaudiArabia Editing: Layout: DeborahSherwood JumanaHouse,Riyadh,SaudiArabia 3 Contents Chapter1: TheFrameworkoftheProducer-ConsumerDialogue .......................................................7 Introduction ................................................................................................................................................................ 7 TheConditionsfortheProducer-ConsumerDialogue ............................................................................. 8 AsymmetriesinDependencyonaStrategicCommodity ........................................................................ 9 TheEnergyProblem..............................................................................................................................................10 SupplyDisruptionsandSupplySecurityConcerns..................................................................................11 TheInvestmentProblemandSecurityofDemand ..................................................................................12 PriceInstability .......................................................................................................................................................13 EnergyTaxationandSubsidies.........................................................................................................................15 TheClimateChangeAgenda ..............................................................................................................................16 Interdependency....................................................................................................................................................17 TheOilMarket..........................................................................................................................................................18 TheProducer-ConsumerDialogue................................................................................................................19 Introduction ..............................................................................................................................................................21 CountriesAlwaysBalanceandRe-balance ..................................................................................................22 Perception..................................................................................................................................................................23 TheBrettonWoodsGovernanceSystemandOil.......................................................................................24 TheStructureoftheOilMarketinthe1950sand1960s ......................................................................25 ThePre-1973Not-So-HomogeneousWorldandOil................................................................................28 InternationalSysteminFlux..............................................................................................................................30 AYearofConfrontation........................................................................................................................................32 HardTransition .......................................................................................................................................................34 ManagingOilMarketsandMoneyIncome ..................................................................................................37 TheRestructuredOilValueChainAfter1978 ............................................................................................39 OPECProductionPolicyinaDepressedOilMarket.................................................................................40 Conclusion .................................................................................................................................................................41 Introduction ..............................................................................................................................................................43 Non-OECDCountries’Perspective...................................................................................................................44 ConfusioninOECDConsumerCountryRelations ....................................................................................45 MaintainingProducerUnity...............................................................................................................................50 NationalversusInternationalGovernance..................................................................................................51 MaintainingCohesion ...........................................................................................................................................53 Conclusion .................................................................................................................................................................55 Introduction ..............................................................................................................................................................57 The1990-1991GulfWarandtheResponsetotheSupplyDisruption ...........................................57 TheIsfahanOilConference.................................................................................................................................60 TheParisEnergySeminar...................................................................................................................................61 OilMarketDevelopmentsandtheDialogueinthe1990s.....................................................................63 TheProducer-ConsumerDialogueandthe1998AsianFinancialCrisis........................................65 Conclusion .................................................................................................................................................................68 Chapter2: Chapter3: Chapter4: ShiftingWorlds ............................................................................................................................. 21 ShiftingRelations......................................................................................................................... 43 FromConfrontationtoCooperation ...................................................................................... 57 ColourPlates............................................................................................................................................................ 69 4 Chapter5: The2000s-ShiftsinInterestsandtheInstitutionalisationoftheIEF ..................... 85 Introduction ..............................................................................................................................................................85 ShiftinInterests ......................................................................................................................................................86 TheInstitutionalEvolutionoftheIEF ..........................................................................................................88 TheInstitutionalisationandFormalityoftheDialogue.........................................................................95 Chapter6: OilMarketDevelopmentsinthe2000sandtheContentoftheDialogue ................. 97 ShiftsinGlobalOilDemandDynamics .........................................................................................................97 FutureOilSuppliesandtheInvestmentChallenge ..................................................................................99 TheInvestmentIssueandtheProducer-ConsumerDialogueinthe2000s............................... 103 Investment-RelatedTopics .............................................................................................................................. 105 ChangingIndustryStructures:TheNOC-IOCRelationship ............................................................... 106 TheIOC-NOCandProducer-ConsumerDialogue ................................................................................. 108 TechnologyandtheClimateChangeChallenge ..................................................................................... 109 EnergyPoverty ..................................................................................................................................................... 112 NaturalGasandtheProducer-ConsumerDialogue.............................................................................. 113 Conclusion .............................................................................................................................................................. 116 Introduction ........................................................................................................................................................... 119 TheJeddahEnergyMeeting ............................................................................................................................ 120 TheFinancialCrisis,theOilPriceCollapseandtheLondonEnergyMeeting ........................... 122 FinancialCrisisandtheContentoftheProducer-ConsumerDialogue........................................ 124 FinancialMarketsandOilPriceBehaviour .............................................................................................. 124 TheInvestmentIssue......................................................................................................................................... 127 TheYears2009-2010:RecoveryandStabilisation ............................................................................... 127 The2008-2009OilPriceCycleandtheProducer-ConsumerDialogue ....................................... 129 Conclusion .............................................................................................................................................................. 131 Chapter7: Chapter8: OilMarketDevelopmentsin2008,TheYearofTwoHalves........................................119 TheRoadAheadfortheProducer-ConsumerDialogue................................................133 Acknowledgments Inthecourseoftheresearch,wehavebeenabletodiscusswithcertainpeopleinvolvedin theproducer-consumerdialogue.Someofthesepeoplewereinvolvedintheearlybeginnings ofthedialogue;otherswereinvolvedinthelateryears.Weareverygratefulthattheywere willingtosharetheirinsightswithus,helpingustoputthisstoryofoilconsumerandproducer relationstogether.Theymadethepaperaccountsofmeetingscomealiveandleftuswiththe impressionofgreatpersonalinvolvementinmakingthedialogueasuccess.Althoughwedo not refer to these people by name, it is clear that the producer-consumer dialogue, or the InternationalEnergyForumasitisnowcalled,hasreliedheavilyonthecon�idenceofthese peopletomakeitworkandbringtheIEFtowhereitistoday. 5 CHRONOLOGY YEAR EVENT 2012 2010 2008 2006 2004 2002 6 IEF13-13thInternationalEnergyForum &5thInternationalEnergyBusinessForum IEF12-12thInternationalEnergyForum &4thInternationalEnergyBusinessForum IEF11-11thInternationalEnergyForum &3rdInternationalEnergyBusinessForum IEF10-10thInternationalEnergyForum &2ndInternationalEnergyBusinessForum IEF9-9thInternationalEnergyForum &1stInternationalEnergyBusinessForum IEF8-8thInternationalEnergyForum 2000 IEF7-7thInternationalEnergyForum 1996 IEF5-5thInternationalEnergyConference 1994 IEF3-3rdInternationalEnergyConference 1991 IEF1-MinisterialSeminar 1998 IEF6-6thInternationalEnergyConference 1995 IEF4-4thInternationalEnergyConference 1992 IEF2-MinisterialWorkshop HOST CO-HOST Kuwait Algeria&Netherlands Mexico Germany&Kuwait Italy India&Mexico Qatar China&Italy Netherlands Iran&Norway SaudiArabia Japan&Netherlands Japan SouthAfrica India Venezuela Spain Norway France Italy&UAE Qatar&UK Brazil&Norway EC&Russia Algeria&Mexico Egypt&Italy Venezuela Chapter1:TheFrameworkofthe Producer-ConsumerDialogue Introduction The story of oil is many-faceted: from the political to the socio-economic and the cultural. Oil has been an essential element of post-World War II global economic expansion. The growthoftradeandthewiderdistributionofwelfareamongnations,aswellasthegrowth ofinternationalcompaniesintermsofturnoverandnumberofcountriesinwhichtheyhave beenactive,arerootedintheoiltrade.Oilcreateslargeeconomicrents,whicharecontested betweenproducingandconsumingcountries,andamongthevariousotherplayersactivein parts of the value chain, each wanting to capture a share. The sizable economic rents have been a prize deemed worth �ighting for, far beyond the normal competition among market players. They have guaranteed persistent involvement by governments everywhere, either as producers or tax collectors. As such, they have made political power formation a steady featureoftheinternationaloilbusiness.Themixtureofinternationaleconomicsandpoliticsis whatmakestheoilstorysuchaninterestingone.Itrequiresmarketplayersandgovernments tomanagevariousdynamicprocessestakingplaceatthesametime.Althoughattimesthere is con�lict, various forms of cooperation have characterised the oil industry from its early beginnings. During the period from 2002 to 2008, the oil market underwent its longest period to date ofsustainedpriceincreases,reachingpeaksnot seenbefore.Thisboom, whichendedwith aspectacularcollapseoftheoilpricetowardstheendof2008,capturedpublicandpolitical attentionandraisedconcernswithinbothmajorconsumingandproducingcountriesabout theadverseeconomic,politicalandsocialconsequencesofsuchviolentpriceshifts.Ithasalso revivedtheinterestintheproducer-consumerdialogueasoneofthechannelstomitigatethe adverseconsequencesandcostsofoilpriceinstability. Theideaofasystematicproducer-consumerdialogueisnotnew,however.Itemergedinthe 1970saspartofageneralreorganisationintheglobalpoliticalandeconomicorderandenergy markets,transformingthepoliticalandeconomicstructurewithinindividualcountriesaswell aspowerbalancesandrelationsbetweencountries.Thedialogueemergedagaininthewake ofthe�irstGulfWarintheearly1990s,whenconsumersandproducersrecognisedtheirjoint interest in the stability of the oil market and gained greater awareness of - and sensitivity towards-eachothers’interests.Sincethenthedialoguebetweenconsumersandproducers hasevolvedtobemoreall-encompassingandmoreinstitutionalisedthaninitsbeginnings. Thearrivalofnewconsumersfromdevelopingandemergingeconomies,mainlyfromAsia, hasunleashednewdynamicswhichhavehadprofoundimplicationsforoilmarketdynamics, 7 trade �lows, energy policies and consumer-consumer, consumer-producer and producerproducerrelations.Rapidurbanisationanddramaticimprovementsinincomelevelsinthese countrieshaveresultedinlargesectionsoftheirpopulationsclimbinguptheenergyladder andincreasingtheirconsumptionofmodernfuels.Theriseofnationaloilcompanies(NOCs) within both producing and consuming countries, and particularly their investment policies andassetacquisitionstrategies,hasaddedanewdimensiontoproducer-consumerrelations. The existing international organisations such as the Organization of Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA), whose roots can be traced todevelopmentsandeventsinthe1960sand’70s,havenotbeenabletoaccommodatethe increasingimportanceoftheenergyinterestsofthesenewcomers.Forthelatter,theproducerconsumerdialogue,nowknownastheInternationalEnergyForum(IEF),hasbecomethemain placetoaddressinternationalenergyissues. Inthisintroductorychapterwewishtoplacetheproducer-consumerdialogueinageneral frameworkinrelationtotheenergyproblem.Thisframeworkhelpsustoexplainwhy,despite thevastchangesthathavetakenplaceinthewaytheenergyindustryisorganised,cooperation betweencountriesremainsanimportantfeatureofmoderninternationalenergymarkets. TheConditionsfortheProducer-ConsumerDialogue The underlying basis for any dialogue between producers and consumers rests on the following conditions. First, the commodity in question must be of a ‘strategic’ nature, with bothproducersandconsumersbeingdependentonit,thoughthedegreeofdependencydoes notalwayshavetobesymmetrical.Second,bothproducersandconsumersmustrecognise thatanenergyproblemexistsandthattheproblemaffectsbothparties,ifnotinthesameway. Third,allpartiesneedtorecognisethattheenergyproblemiscausedbytheirownactionsand policiesaswellasthoseoftheotherpartyandthatnoneofthepartiescansolvetheenergy problemonitsown.Inotherwords,anysolutiontotheenergyproblemmustemphasisethe important element of interdependency. Fourth, the belief must exist that because market forcescannotalwayssolvetheenergyproblemand/ordealwithallofitsconsequencesinan effectivemanner,marketforcesshouldbesupplementedbynon-marketmechanisms.These shouldre�lectbothproducerandconsumerinterestsandshouldthereforebediscussedand, ifpossible,implementedjointlyorincoordination.Thesemechanismscanimprovemarket outcomesandyieldbene�itstobothparties. Iftheaboveconditionsaresatis�ied,bothpartiesmayhavetheincentivetoseekcooperation. Thiscooperationmaytakeoneofmanyforms,rangingfromformalandbindingmultilateral agreementstosofterformsofcooperation.Theproducer-consumerdialoguefallsunderthe lattercategory.Thedialogueisnotstaticbuttendstoevolveovertimedependingonmany factors,includingtheperceptionsoftheseverityoftheenergyproblem,themarketconditions atthetimeandtheparties’successinbuildingtrustandenhancingtheirunderstandingofthe otherparty’spositionthroughouttheprocessofthedialogue. 8 AsymmetriesinDependencyonaStrategicCommodity Despite its relative retreat in the energy mix in the past decade, oil remains the world’s mainsourceofprimaryenergysupplies,followedbycoalandnaturalgas(Figure1.1).This pre-eminent position follows from crude oil’s physical characteristics.1 As a liquid fuel, oil attractslargetechnicaleconomiesofscaleinthevariousstagesofproduction,transportand marketing.Intermsofweightand/orvolume,oilhasthehighestenergycontentofallfuels, including gas and coal. Crude oil is also a global commodity par excellence. Crude oil and re�inedproductsarethemostwidelytradedphysicalcommodities,intermsofbothvolume andvalue.2Thetransportandaviationsectors,thelifelinesofanymoderneconomy,arestill almosttotallyreliantonre�inedproductsfromcrudeoil;nootherfuelshavebeenabletomake anysigni�icantprogress. Figure1.1:FuelSharesoftheWorld’sTotalPrimaryEnergySupply(2008) Givenitsdominantpositionintheglobaleconomy,consumersconsideroiltobeastrategic commodity. This is clearly re�lected in the various policies and initiatives implemented aroundtheworld.Consumingcountriesaimtosecureoilsuppliesataffordablepriceswhile atthesametimereducingtheiroildependencythroughenergyconservationmeasures,the promotionofrenewablesourcesofenergyandalternativefuels,andthebuildingofstrategic stocks to counteract supply disruptions. From a producers’ perspective, the oil sector is at theheartofdomesticeconomic,politicalandsocialdevelopments,aswellasofinternational Frankel,P.(1946).TheEssentialsofPetroleum.Chapman&Hall,London. Stevens,P.(2005).“OilMarkets”.OxfordReviewofEconomicPolicy,Vol.21,No.1,pp.19-42. 1 2 9 economic and political relations. Despite efforts to diversify their economies away from hydrocarbons,theoilsectorremainstheengineofeconomicgrowthanddevelopmentinmost producing countries. Oil exports generate the bulk of the foreign revenue needed to meet producers’ import requirements. They also generate the bulk of the government revenues neededtoimplementkeydevelopmentalandsocialprojectsandtodiversifyandindustrialise theireconomiestoachievesustainableandstableeconomicgrowthandtocreateemployment opportunitiesforthehundredsofthousandsofworkersenteringtheirlabourmarketseach year. Given the dominance of the oil sector in their economies, producers are much more vulnerabletoepisodesofoilpriceinstabilityandtoprotracteddeclinesinoilprices,especially ascomparedwiththemorediversi�iedeconomiesintheOECD. TheEnergyProblem Thestartingpointforanydialogueistherecognitionthatenergyrelationsbetweenproducers andconsumersand/orunregulatedcompetitiveenergymarketsmayraisecertainconcerns andissuesthataffectandareofinteresttobothparties.Whiletheseenergyissueshavemany facets, the historical and current evolution of the producer-consumer dialogue has been driveninlargepartbyeventsintheoilmarketsuchassupplydisruptions,andpriceshocks and counter-shocks. Thus, to a large extent, the energy issues that have pushed producers andconsumerstopursuecooperationare,inessence,‘oilissues’or‘oilproblems’,although lately,naturalgashasbeenaddedtotheagenda.Sothequestionthenbecomes:Whatarethe nature and the main features of the oil problem? Alternatively, what type of challenges do energyrelationsandthecurrentfunctioningoftheoilmarketposeforbothproducersand consumers? Oilcreateslargeeconomicrents.Thedistributionofrentsbetweenproducersandconsumers isasourceoftension,aseachofthepartiestriestomaximiseitsshareoftherentsthrough adjusting crude oil prices and taxes on petroleum products or capturing rents in a certain part ofthevalue chainthroughregulation. Seenfromthat perspective,theproblem ofrent distributionbecomesazero-sumgame,whichleaveslittleroomforcooperationordialogue betweenoilproducersandconsumers. However,bothpartiesrecognisethatthedialogueshouldnotbeaboutbargainingaboutprice levelsandwhoshouldgetwhatfromanoilbarrel.Thereisanimplicitagreementthatthese contentiousissuesarebestaddressedbytheoilmarketthroughtheusualforcesofsupply and demand and the market pricing mechanism. Thus, the producer-consumer dialogue is not centred on setting an oil price which is fair and appropriate for both parties or on devisinginstitutionalmechanismstomanagetheoilpricewithinanarrowband.Instead,the focusofthedialoguehasbeenonexploringwaysandmechanismstoenhanceandensurea smoothoperationoftheoilmarketthroughavarietyofmeans.Theseincludeimprovingoil supplyanddemandresponses,ensuringsmoothinvestment�lowsintothesector,reducing uncertainty by enhancing transparency both in consuming countries’ and producers’ policies,byenhancingdatatransparency,andbyexchanginginformationonaregularbasis and making sure that through appropriate regulations the oil market is not destabilised throughmanipulationorspeculative�inancial�lows.Asdiscussedbelow,theoilmarkethas special features which do not always ensure a smooth adjustment process in response to shockswhichmayimposerealcostsonbothproducersandconsumers.Sincethedialogue 10 is not centred on bargaining about price levels and rent distribution, producer-consumer cooperationshouldnotbeviewedasazero-sumgamebutagameinwhichbothpartiescan achieve potential bene�its through cooperation, and in some instances through joint and coordinatedinitiatives. Producersandconsumers’oilconcernshavemanyinter-relateddimensionsandhavebeen shaped by some spectacular events in the oil market such as the 1973 and 1979 oil price shocks, the 1986 counter-price shocks, the Gulf crisis of 1990-1991, the collapse of the oil pricein1998-1999intheaftermathoftheAsian�inancialcrisisand,mostrecently,the20022009pricecycle.Whileeachoftheseeventshasitsunderlyingcausesandcharacteristics,it ispossibletoidentifytheoilproblemorchallengeintermsofthefollowingfeatures:supply disruptions and security of supply, the cyclicality of investment and security of demand, episodesofpriceinstability,end-consumersubsidiesandthetaxationofpetroleumproducts. Theclimatechangechallengeaddsafurtherdimensiontotheoilproblem. SupplyDisruptionsandSupplySecurityConcerns Onedimensionoftheoilproblemrelatestoconsumingcountries’concernsaboutthesecurity ofoilsupplies.Attherootofsecurityconcernsistheconceptof‘oildependency’.Crudeoil reserves are found and extracted in regions other than those in which they are primarily consumed.Asmallgroupofcountries,predominatelyintheMiddleEastandNorthAfrica,are endowedwiththebulkoftheworld’sprovenconventionaloilreservesandareresponsible for a large share of global production and international trade in oil. Yet oil consumption is dominated by just a few countries/regions: in 2009 the United States (US), the European Union(EU),Japan,IndiaandChinawereresponsibleforaround60%oftheworld’stotaloil consumption,withtheUSaloneaccountingfor22%ofglobaloilconsumption.Althoughsome consuming countries such as the US are also important oil producers,domestic production accountsforpartoftheirconsumptionand,consequently,thesecountrieshavetorelyonoil importsto�illthegap.Theunevendistributionofcrudeoilreservesandthefactthatdelivering re�ined products to end consumers involves a long supply chain give rise to an industrial structureandinfrastructurewhichextendsacrosstheglobeandtostronginterdependency inenergytrade. Oil dependency, however, is not a suf�icient condition as to elicit energy security concerns, particularlynotinaworldthatstrivesforfreetrade.Relyingonoilimportswouldnotconstitute asourceofconcernifoilweretobeguaranteedto�lowsmoothlyfromsurplustode�icitareas. Thus, in addition to oil dependency, an underlying concern is that oil �lows from exporting to importing nations may be subject to disruptions. Such disruptions and dislocations can occuratanysegmentoftheverylongoilsupplychain,whichincludesre�ining,international andlocaltransport,storageanddeliveryfacilities.Disruptionscanalsobecausedbyalarge numberoffactors,includingtechnicalfailures,weather-relatedeventssuchashurricanesand storms,labourstrikes,terroristattacksonoilfacilities,civilstrifeinproducingcountries,wars involvingoilexporters,internationalcon�lictsbetweenproducersandconsumers,revolutions and regime changes that restrict the export capability of some producers, and a deliberate action by one or a group of exporters to restrict their oil supplies to certain consuming countries.Disruptionscanalsoariseiflackofinvestmentincertainsegmentsoftheoilsupply chainresultsinglobaloilsupplyfallingshortofoildemand. 11 Althoughdisruptionstendtoreceivewidemediacoverage,theimpactofdisruptionsonprices andshort-andlong-termproductivecapacityisnotuniform.Somedisruptions,suchasthose causedbytechnicalfailures,occuroftenbuthavelimitedimpactonglobaloilsuppliesandon long-term productive capacity. Disruptions such as those caused by natural disasters occur infrequently, but their impact on oil supplies and prices can be signi�icant in the short- to mediumterm.Somedisruptionscausedbyeventssuchascivilunrestinproducingcountries orinternationalcon�lictoccurlessregularly,buttheymayhavebothshort-termandlong-term effectsthroughtheirimmediateimpactonoilsuppliesandhenceonoilpricesandproductive capacity.Itistheselatterformsofdisruptionthatraisemajorsecurityconcernsinconsuming countriesandconstitutethemaindriverbehindsomeoftheirenergypolicies. TheInvestmentProblemandSecurityofDemand Thedynamicsofsupplyanddemandintheoilmarketmayalsoresultinmarketdislocations, withconsiderableimpactonoilsuppliesandprices.Intheworstpossiblescenario,globaloil supplymayfallshortofglobaloildemandduetoinsuf�icientinvestmentinnewproductive capacity.Giventhelonggestationlagsininvestmentsintheoilsector,mostoftheadjustment occurs through price increases. New oil supplies, the entry of competing fuels, and/or the developmentofef�iciencymeasurescannotactasimmediateadjustmentmechanisms. Adjustmentthroughsharppricechanges,however,canimposehighcostsonbothproducers and consumers. Declines in oil demand associated with economic slowdowns can resolve investment bottlenecks and may even create spare capacity in the system. Spare capacity andanenvironmentoflowoilpricescan,inturn,discourageinvestmentintheoilsector.The disincentivetoinvestthencreatestherootsofthenextoilpriceshockonceoildemandrecovers. Inotherwords,theadjustmentmechanismintheoilmarketisfarfromsmooth:theoilmarket can witness long periods of surplus capacity followed by periods of shortages of capacity relativetodemand.Furthermore,thesealternatingstatesoftheoilmarketaffectinvestment decisionsand,hence,futuresupplyavailabilityandlong-termproductivecapacity. Thisfeatureofcyclicalityiscommontootherindustriesaswell,buttherearethreespecial features that distinguish the oil industry from other industries. First, the fact that reserves are unevenly distributed creates an important asymmetry in the oil market. In countries thatcontainthebulkofprovenoilreserves,thedecisiontoextractanddevelopreservesis in the hands of governments or state actors. This has important implications, as decisions aboutwhetherandhowmuchtoinvestareaffectedbyeconomicandpoliticalfactorsandby eventsbothinsideandoutsidetheoilmarket.Theoilpriceisoneofthevariousdeterminants of investment. Others include uncertainty about trends in long-term oil demand, political impedimentssuchassanctions,civilstrifeorinternalcon�licts,therelationshipbetweenthe owneroftheresourceandthenationaloilcompanyresponsibleforexploitingthesereserves, thetechnicalandmanagerialcapabilityofthenationaloilcompany,thedegreeofaccessto reservestoforeigninvestors,andthepetroleumregimeandthe�iscalsystemthatgovernthe relationshipbetweennationalandinternationaloilcompanies.Ofthesefactors,uncertainty aboutlong-termoildemandreceivesspecialimportanceintheproducer-consumerdialogue. It is often argued that the policies of consuming governments, both implemented and announced,andeitherdrivenbyenergysecurityconcernsortheclimatechangeagenda,play animportantroleininducinguncertaintyaboutlong-termtrendsinoildemand.Thus,inthe 12 faceofcallsfor‘securityofsupply’,producershavecoinedtheconceptof‘securityofdemand’. Fromaconsumers’perspective,theissuesofaccesstoreservesandthecapabilityofNOCsin producingcountriestoef�icientlydeveloptheirreserves,andtodosoinatimelymannerto meetfuturedemand,remainparamount. Inrecentyears,manyoilimporters,suchasChina,KoreaandIndia,havealsobeenkeento developtheirownNOCs.TheseNOCsareeagertoincreasetheirinternationalinvestmentand acquire overseas assets to secure new sources of oil supply, although a similar attempt by Japaninearlierdecadeswasnotsosuccessful.Sincetheyarenotdrivenonlybytheobjective ofmaximisingshareholders’value,asprivateinternationaloilcompanies(IOCs)are,theyare likely to be �lexible in negotiating contracts with NOCs in oil-exporting countries and their governments.Furthermore,theseNOCsmaybene�itfrominterstateconnectionsandthusgain betteraccessonthebasisofamoregeneralagreementbetweenthetwostates.Forinstance,it isoftenarguedthattheChinesegovernment’sresourcediplomacyenabledthecountry’sNOCs toacquireassetsallovertheglobe,particularlyinAfrica.Partofitssuccessinacquiringassets abroad has been the willingness of Chinese NOCs to undertake large-scale infrastructure projects such as roads, schools and hospitals to facilitate foreign involvement and energy investments. The entry of consumer NOCs adds a new dimension to energy relations, not only between these NOCs and their counterparts in producing countries, but also between consumingcountries. Second,oilprojectshavelonggestationperiodsandcanbesubjecttodelays.Thesedelaysdo notonlyoccurbecauseofthesizeoftheprojectsandthelargecapitaloutlaysinvolvedbut canalsobeduetoissuessuchasaccesstoreservesandthecomplexityofthenegotiations betweeninternationaloilcompanies,nationaloilcompaniesandtheownerofreservesinboth thepre-andpost-investmentstages.Therelationshipbetweentheinvestorandtheownerof thereservesisaffectedbyoilpricedevelopments,butequallyimportantly,itaffectsoilprice behaviourthroughtheinvestmentchannel. Finally,producers’investmentdecisionsaffectthemarketstructureinafundamentalway.High oilpricesdon’tnecessarilyinducegovernmentsofproducingcountriestoincreaseinvestment andproductivecapacity,asthereareotherfactorsthatenterintotheirinvestmentdecisions. Incontrast,acombinationofhighoilpricesandlimitedaccesstoreserveshaspushedmany oilcompaniesinconsumingcountriestoexplorenewfrontiers,suchastheexploitationofoil reservesindeepandultra-deepwaters,aswellasoptionsforthelarge-scaledevelopmentof unconventionalresourcessuchasoilsands,bitumen,shaleoil,CoaltoLiquid(CTL)andGasto Liquid(GTL),extraheavyoilandbio-fuels.Theeffectofsuchinvestmentdecisionsisthatin theoilmarket,thecheapestoilreservesarenotnecessarilydeveloped�irst,allowingforthe co-existenceofbothhigh-costandlow-costproducers,withimportantconsequencesforthe processofoilpriceformation. PriceInstability Anotherrelateddimensionoftheenergyproblemispriceinstability.Withthis,itisimportant todistinguishbetweenvarioustypesofpricemovements.Producersandconsumersarenot usuallyconcernedwithinter-dayorintra-dayvolatilitypersebutratherwithsharpoilprice swings.Thetwoconceptsaredifferent.Forinstance,theoilpricecanoscillatewithinanarrow 13 range, but within that range the oil price could exhibit high inter-day or intra-day volatility. Theimpactsandcausesofthevariousformsofpricemovementsarealsodifferent.National andinternationaloilcompaniesdon’toftengivemuchconsiderationtointra-dayorinter-day pricevolatilitywhenmakingtheirdecisionsonwhethertoinvest.Thisisincontrastwithsharp price cycles in which peak and trough prices attained during price swings often impact the behaviourofkeymarketplayers,oildemand,andlong-terminvestmentplansbyincreasingthe degreeofuncertainty.Oneshouldalsodistinguishbetweenthecausesofvolatilityandthoseof sharppriceswings.Oilpriceswingsoftenre�lectchangesinfundamentalfactorssuchassupply and demand shocks, periods of underinvestment or major transformations in the oil supply chain. Such fundamental factors, however, cannot fully explain short-term price volatility, whichisoftencausedbythearrivalofnewinformationordatareleases,someofwhicharenot necessarilydirectlyrelatedtotheoilmarket. The price instability is linked to a fundamental feature of the oil market, namely the wide rangewithinwhichtheoilpricecanclear.Thelowerboundaryoftherangeissetbythecost �loor of oil production in key OPEC member countries, while the upper boundary is set by theentryofoilsubstitutesand,morerecently,bythebehaviourofmarketparticipantsinthe �inancialmarkets.Whenthemarketischaracterisedbyexcesssupplies,asitwasin1998,the oilpricetendstomovetowardsthelowerboundary.Atlowoilprices,productioncapacityis notimmediatelyshutdown,andconcernsaboutsecurityofsuppliesdon’temergeintheshort term. However, in the medium- to long term, sustained periods of low oil prices undermine securityofsuppliesinatleastthreeways.First,asustainedperiodoflowoilpricesinduces a cycle of underinvestment in the oil sector, affecting the availability of future oil supplies. Second,sinceoilrevenuesstillconstitutethemainsourceofproducers’exportrevenuesand governmentexpenditure,asustaineddeclineinoilrevenuescausedbylowoilpricesrepresents amajorthreattoproducers’political,economicandsocialstabilityandhencetheirlong-term capabilitytosupplyoilandundertakethenecessaryinvestmentintheoilsector.Finally,lowoil pricescaninducedemandgrowthbothinproducingandconsumingcountries,undermining theconservationandclimatechangeagenda.Inaddition,theycanunderminethepromotion of renewable sources of energy and alternative fuels, which become uneconomical at low oil prices. These effects can be counteracted by increases in domestic taxation of petroleum productsandsubsidies,butsuchactionsraiseseriousissuesconcerningthedistributionofoil rentsbetweenproducersandconsumers,asdiscussedbelow. Whenthemarketischaracterisedbyexcessdemand(ex-ante),substitutesandadjustmentsin demandpatternscannotplaceacapontheoilpriceintheshortterm.Instead,intheabsenceof sparecapacity,mostofthemarketadjustmentislikelytooccurthroughsharpincreasesinoil prices.Whilethisleadstoanimmediateriseinproducers’revenues,sustainedperiodsofhigh oilpricescanunderminesecurityofoildemandbyencouragingsubstitutesandunconventional supply sources to enter the market en masse and by inducing a permanent reduction in oil demandthroughpriceeffects,anti-oilpoliciesorstructuralchangesinconsumerbehaviour. Thus,bothproducersandconsumershaveaninterestinkeepingoilpricesstablewithinarange whose lower boundary is not ‘too low’ or the upper bound is not ‘too high’. However, views differonwhat‘toohigh’and‘toolow’meanandwhetherthisstabilisationshouldbelefttothe marketorwhetherthemarketshouldbesupplementedbymechanismstostabilisetheoilprice withinapreferredpricerange. 14 EnergyTaxationandSubsidies Another dimension to the energy problem relates to the distribution of rents between producers and consumers and the subsidies and taxes on energy. Taxes and subsidies can divertdemandandsupplyindirectionsthataredesiredatthenationallevelofproducingand consumingcountries,butbecauseenergyistradedinternationallycanalsohaverepercussions ontheenergypoliciesandsectorsofothercountries.Inthe1980s,IEAmemberstatepolicies’ diverteddemandawayfromoilinthepowersectorandstimulateddemandforotherfuels,such ascoal,whileoildemandinmostOECDcountries,particularlyinthetransportationsectorwas restrainedbyarelativelyhighexcisetaxontheconsumptionofpetroleumproducts.Demand forpetroleumproductsishighlyinelasticduetolimitedsubstitutes,whileitsconsumptionis associatedwithnegativeexternalitiessuchasairpollutionandadversehealtheffects.Thus, taxesonpetroleumproductsarealsoperceivedtobeanef�icientwaytoraiserevenuesfor consumingcountriesandtocorrectfornegativeexternalities.3Sincetaxesrepresentalarge portionofthepriceofpetroleumproductsatthepump,aonedollarriseininternationalcrude oilpricesisassociatedwithlessthanonedollarincreaseinthepriceofpetroleumproducts, and thus, like subsidies, taxation weakens the demand response of petroleum products to changesincrudeoilpricesininternationalmarkets. In more recent times, many OECD countries are stimulating renewable energies as part of theirclimatechangepolicies,oftenthroughacombinationofsubsidiesandtaxes,tochange thecompositionoftheirenergymixtoonewithalowercarboncontent.Thesepolicymeasures changethedistributionofrentsinthevaluechain,forinstanceofoil,whilealsoredistributing these rents among the various fuels. Such policy measures impact demand and supply for certainfuels,andobviouslycanalsohaveimplicationsfortherelationsamongproducersand consumers. OilsubstitutionpoliciesarenotonlylimitedtoOECDcountries.Forinstance,whileChinahas fallen behind in the combustion engine technology, it is determined to become a leader in electric vehicle technology with the objective of creating a world-leading industry. China is promotingtheelectricvehiclethroughintroducingplanstograntconsumerstaxcreditson theirpurchaseofelectricvehicles,offeringsubsidiestotaxi�leets,andencouragingcitiesto setupelectriccarchargingstations.Thegovernmenthasalsodispersedresearchsubsidiesfor electriccardesigns.Sincemostoftheseelectricvehicleswillbepoweredbycoal-�iredpower plants,theentryoftheelectricvehicleatalargescalemeansanindirectpenetrationofcoal into the transport sector. Similarly, the wider adoption of CNG cars also means an indirect penetrationofnaturalgasintothetransportsector. Security of supply concerns in OECD were the main driver of these policies but resulted in securityofdemandconcernsforproducingcountries.Fromaproducers’perspective,taxeson TaxationofpetroleumproductsandoilsubstitutionpoliciesarenotonlylimitedtotheOECD.For manynetimportersindevelopingcountries,taxesonpetroleumproductsconstituteamainsource ofgovernmentrevenue,rangingfrom7%to30%oftotalgovernmentrevenues.Furthermore,many emergingeconomiesarepursuingpoliciesaimedatimprovingtheef�iciencyinthetransportsector. Gupta,S.andW.Mahler(1995).“TaxationofPetroleumProducts:TheoryandEmpiricalEvidence”. EnergyEconomics,Vol.17,No.2,pp.101-116. 3 15 petroleumproductsarediscriminatoryandtendtodampenoildemandgrowth,reducingits shareintheenergymixinthelongterm.Equallyimportantly,theyraiseadistributionalissue, asthroughtaxation,consumingcountriescancapturepartoftherent–inmostcaseslarger than the share extracted by producers themselves. Furthermore, oil substitution policies through regulations, incentives, subsidies, taxation, moral suasion, and/or combination of theseinstrumentsinducealargedegreeofuncertaintyandthreatenlong-termoildemand. Although in the short-run the impact of such government policies will be marginal, from a producers’perspective,theireffectsonoildemandarebothcumulativeandirreversibleand hencecannotbeignoredinthelongterm. Thecounterpartofproducers’complaintsabouttaxationofpetroleumproductsisconcerns aboutenergysubsidies.Subsidiesofferprotectionagainsttheimpactofhighenergyprices, andasaresultconsumershavenoincentivetoadjusttheirconsumptionpatterns.Thus,such subsidies encourage the consumption of energy including petroleum products, natural gas andelectricityabovethelevelsdictatedbyunregulatedprices.4Overtimethismaystrainthe exportcapabilitiesofproducers,whendemandcontinuestorisefasterthansupply.Subsidies may also undermine the climate change agenda and sustainable development. Therefore, manycallshavebeenmadefortheabolishmentofenergysubsidiesinordertoreduceworld greenhousegasemissionsandtoachievesustainabledevelopment.InthePittsburghSummit ofSeptember2009,theG20leadersagreed: Tophaseoutandrationaliseoverthemediumterminef�icientfossilfuelsubsidieswhile providing targeted support for the poorest. Inef�icient fossil fuel subsidies encourage wastefulconsumption,reduceourenergysecurity,impedeinvestmentincleanenergy sourcesandundermineeffortstodealwiththethreatofclimatechange. Thisisa largetask formanycountries-producingandconsumingcountriesalike-aswas shownintheWorldEnergyOutlook2010,whichofferedanestimateoffossilfuelconsumer subsidies. In the top ten subsidising countries, both producers and consumers were represented,whilethelattergroupconsistedmainlyofemergingeconomies. TheClimateChangeAgenda Recentconcernsabouttheimpactoffossilfuelsontheenvironmentaddfurtherdimensions totheoilproblem.Nowadays,manymajorconsumingcountriesconsiderclimatechangeto be a security issue similar to that of energy security. Environmental concerns dominate all stagesoftheoilchain,fromproductiontoconsumption.Intheproductionphase,thereare environmentalconcernsaboutissuessuchastheaccesstowildernessareas,thearctic,deep offshorereserves,the�laringofassociatedgas,andaccidentsandspills.Inthetransportphase, there are worries about pipeline leakages and tanker accidents. In the consumption phase, there are concerns about pollution and health effects of burning petroleum products. As in otherpartsoftheworld,producersarebecomingincreasinglyconcernedaboutthepotential economicandsocialimpactsofclimatechangesuchaswatershortages,landdegradationand risingsealevels.Butforproducers,climatechangehasanadditionaldimension,asitaffectsthe marketforfossilfuels,whichconstitutesthemainsourceoftheirincome.Producersfearthat IEA,WEO2010. 4 16 taxationpoliciesandsubsidesforalternativesourcesofenergysuchasrenewables,nuclear andethanolcanlimitthegrowthorevenreducethesizeoftheoilmarketinthelongterm. Interdependency Therecognitionthatanenergyproblemexistsdoesnotnecessarilyimplythatproducersand consumerswillseekcooperation.Animportantconditionforcooperationisthattheinterests of both parties are interdependent in at least three respects: �irst, that both parties face a commonenergyproblem;second,thattheactionsofonepartytoaddresstheenergyproblem can underminethe interests ofthe otherparty; and third, that none ofthe parties believes thatitispossibletosolvetheenergyproblemoratleastalleviatesomeofitsconsequencesby pursuingpoliciesindependentlyoftheother. The interdependency between the players in the oil market cannot be overemphasised. All partieshaveaninterestinensuringthatoilcontinuesto�lowsmoothlyfromde�icittosurplus areas.Furthermore,thesupplychainfromtheproducertotheultimateconsumerisquitelong, anddisruptionsandbottleneckscanoccuratanypartofthesupplychainwithrepercussions for the global crude oil market. Disruptions can occur both in importing and exporting countries.Whileoilproducerscontrolthebulkoftheupstreammarketsegment,important partsoftheindustry,suchasthere�iningandmarketingofpetroleumproducts,areunderthe controlofplayersinconsumingcountries.Finally,oilpriceinstabilityaffectsbothparties,with producersbeingmorepronetoperiodsofpriceinstability. Anotheraspectofinterdependencyisre�lectedinthefactthatconsumers’concernsalways have a counterpart in producers’ concerns. For instance, consuming countries’ policies regarding enhancing energy security and the climate change agenda, such as promoting renewablesorraisingtaxes,increaseproducers’concernsaboutthefuturesizeofthemarket fortheirmainproduct.Consumingcountries’continuouscallstoincreaseinvestmentintheoil sectoroftentranslatesintoproducers’fearsthattheincreaseinadditionalcapacitywillnotbe metbyanincreaseindemand,placingdownwardpressureonoilpricesanddivertingfunds away from social and economic projects. Consuming countries’ policies to substitute away from oil increases uncertainty about demand and increases the reluctance of producers to investintheircapacity.Inturn,decisionsbyproducingcountriesnottoinvestintheoilsector duetodemanduncertaintyorotherdomesticandinternationalconstraintsincreaseconcerns inconsumingcountriesaboutthefuturesecurityofoil�lows.5 The �inal aspect of interdependencyrelates to the idea that none of the parties can believe thatitcanaddresstheoilproblemonitsownthroughpursuingindividualpolicies.Ifanyof thepartiesthinkthatnationalpoliciesareeffectiveintacklingtheenergychallenge,thenthis party will not seek cooperation. Thus, the producer-consumer dialogue is premised on the beliefthatsomeproblems,suchasclimatechangeortheinvestmentchallenge,requiresome formofcommon-oratleastcoordinated-policyresponses. Harks,Enno(2010).“TheInternationalEnergyForumandtheMitigationofOilMarketRisks”,in: GlobalEnergyGovernance,TheNewRulesoftheGame.Golthau,A.andJ.M.Witte(eds.),pp.247267.BrookingsPress,Washington,DC. 5 17 TheOilMarket Even if producers and consumers do not automatically seek cooperation to address the energy problem, it can be addressed by other mechanisms. The most obvious and in fact theonlyexistingmechanismnowadaysisthemarket.Overtheyears,theinternationaloil markethasdevelopedintoacomplexsetofphysicaland�inancialmarketsinwhichvarious participantsinproducingandconsumingcountriesareabletotransact.Throughtheforces ofsupplyanddemandandthroughpriceadjustments,theoilmarketcansurviveepisodes of ex-ante excess demand and provide the signals necessary to induce investment in the oilsector.Episodesofoilpriceinstabilitycanoccur,butthehighlyliquid�inancialmarkets provideparticipantswiththemeanstowithstandthevariouspriceshocks. Anunderlyingpremisebehindtheproducer-consumerdialogueisthattheoilmarketneeds tobesupplementedbyothermechanismsandthatthesecanimprovemarketoutcomes.This raisesthefollowingquestion:Whataresomeoftheaspectsoftheoilproblemthatcannot beaddressedbytheusualadjustmentmechanismsofthemarket?Theanswerseemstobe that while the market adjusts to various events, price adjustments can be sharp at times imposinganunnecessarycostonproducersandconsumers.Furthermore,thereisabelief thatthemarketcannotgeneratethenecessarysignalstosmooththeinvestmentcycleinthe oilsector.SomearguethatOPECandconsumingcountries’policiesdonotallowthemarket tooperatefreely,givingrisetosomesortof‘marketfailure’whichneedstobeaddressedby energypoliciesand/orproducer-consumercooperation. Oneaspectoftheoilproblemrelatestodisruptionscausedbypoliticalevents.Themarket adjuststosuchdisruptionsthroughsharppriceincreasesandsometimesthroughachange in contractual agreements. In such events, buyers who are concerned about securing oil suppliestendtoincreasetheirprecautionarydemand,causingpricestojumphigherthan what is justi�ied by the reduction in supplies. Sharp adjustments in the oil price are not desirable,andsoconsumersandproducerstrytoavoidsuchshocks.Sincethesedisruptions are driven by political events, the producer-consumer dialogue cannot resolve such problems.Governmentpolicy,however,canmitigatesomeoftheeffectsofdisruptions,either throughmaintainingcertainlevelsofsparecapacityinproducercountries,holdingstrategic reservesinconsumingcountries,orboth.Itisverydif�iculttohaveinternationalagreements on the level of spare capacity that should be maintained by producing countries and the volumeofstrategicreservesthatshouldbeheldbyindividualgovernments.Nevertheless, the producer-consumer dialogue could help in some areas, such as coordinating efforts regarding the timing of the �illing and releasing of strategic stocks, the composition of strategicreserves,anddesigningrulesthatgoverntheuseofsparecapacityandoilstocks incaseofdisruptions. Another area in which the producer-consumer dialogue may improve market outcomes is smoothing the cycle of investment. Oil prices have often been highly volatile, blurring the distinction between transitory and permanent price movements. As suggested in the literatureofinvestmentunderuncertainty,giventhelargeinvestmentoutlaysinoilprojects andtheirreversiblenatureoftheseinvestments,theoptiontowaitisquitevaluable.This is complicated by the fact that policies in consuming countries can contribute further to the degree of uncertainty. On the other hand, in consuming countries there are concerns 18 aboutissuessuchasaccesstoreserves,thecapabilityofnationaloilcompaniestodevelop thesereservesandinternalpoliticalfactorsthatmaypreventinvestmentintheoilsector. Suchfactorsrestrictthecapabilityofsomeproducingcountriestoexploititsreservesand increaseitoilexportsinatimelymanner.Theproducer-consumerdialoguemayimprove market outcomes by improving the investment climate in the oil industry and facilitating the �low of information between parties. For instance, exchanging information on issues such as future investment plans in producing countries and oil substitution policies in consumingcountriesmayhavetheeffectofreducingthedegreeofuncertainty,creatinga moreconduciveenvironmentforinvestmentintheenergysector. Theoilmarketstructureinwhichbothlowmarginal-costproducersandhigh-costproducers coexistimpliesthatpricescanclearwithinawidepricerange.Marketforcesrarelypushthe oilpricetowardsthelowestboundary,asOPECproductioncutsmaysucceedinplacinga �loorontheoilprice.Marketforcescanpushpricestowardstheupperboundary,butactions frombothproducersandconsumersandsupply/demandadjustmentoftenpreventtheoil pricefromstayingattheupperlimitforalongperiodoftime.Inamarketstructureinwhich theoilpriceoftenlieswithinanimplicitrange,theproducer-consumerdialoguecanprovide asignallingmechanismwhichcanmovethemarkettowardsapreferredpricerangethatis conducivetoinvestment. TheProducer-ConsumerDialogue Doestheproducer-consumerdialogueconstituteaneffectivemechanismtoaddresssomeof theaspectsoftheenergyproblem?Atoneextreme,thereistheviewthatinthepresenceof averywell-developedoilmarketthereisnoneedfortheproducer-consumerdialogue.The oilmarketcanaggregatetheinterestsandexpectationsofallmarketplayersandis�lexible enoughtoself-adjusttothevarioustypesofshocksandgeneratethenecessarysignalsto ensuresmoothinvestment�lowsintheoilindustry.Attheotherextreme,thereistheview thatthevariousoilpriceshocksandcounter-shockssincethe1970sandthesharpcyclesof investmentareclearevidencethatthemarketadjustmentmechanismsarenoteffectivein dealingwithmanyaspectsoftheoilproblemandthatrelyingsolelyonmarketmechanisms canbecostlyanddisruptive.Mostconsiderthetruthtoliesomewherebetweenthesetwo extremes: the producer-consumer dialogue and the market do not need to exclude each other.Theproducer-consumerdialogueisnotintendedtoreplacethemarket,butratherto supplementitsrole.Thedialoguecanprovideaplatforminwhicheachpartybecomesmore awareoftheotherparty’sconcerns.Italsoprovideseachofthepartieswiththeknowledge oftheimpactoftheirpoliciesonthepoliciesanddecisionsoftheotherparty.Adialogue cancreatetrustandcon�idenceinthegeneraldirectionofinternationaleconomicrelations, whichhelptosmooththeexpectationsaboutinvestmentdecisions. Whiletheproducer-consumerdialoguecan,inprinciple,supplementandimprovemarket outcomes,thisisnotaforegoneconclusion.Thisdependsamongotherthingsonthecontent ofthedialogue,theinterestsoftheparties,andtheinitiativesthatproducersandconsumers proposeandimplement.Itispossibletohaveaproductiveandpurposefuldialoguewitha clearagendaandobjectives.Butitisalsopossibletohaveadialoguewhichisneitheruseful norfocusedontherealissues:dialogueforthesakeofdialoguejustbecausebothorone ofthepartiesthinkitisdesirable.AsMabro(1991)notes,thedialogueis“nothingbutan 19 exerciseinexplorationwhichcanleadtodifferenttypesofdiscoveriesortonone”.6So,hasthe producer-consumerdialogueoverthepasttwentyyearsresultedinany‘discoveries’?Weleave theanswertothisquestiontolaterchapters.But�irst,itisimportanttoplacetheframework provided in this chapter in its historical context and to analyze the political and economic circumstancesthathaveledpartieswithverydiverseintereststopursuecooperation. Mabro,R.(1991).ADialogueBetweenOilProducersandConsumers:TheWhyandtheHow. OxfordInstituteforEnergyStudies,SpecialPaper2,p.23.OIES,Oxford. 6 20 Chapter2:ShiftingWorlds Introduction Veryoftenweperceivedevelopmentsintheworldthroughalensthatnarrowsratherthan widens our perception. Narrating the oil story often leads to highly politicised reports about the clash between producing and consuming countries over price and production levels, access to reserves and markets, and the fear of using oil as a political weapon. In institutionalterms,thisconfrontationwasepitomisedbythecreationoftwoorganisations which represent the two sides of the oil concerns: the IEA, which pooled the interests of theindustrialisedoil-consumingcountriesafter1973,andOPEC,whichhassoughtstable incomefromoilsincethe1960sfortheoil-producingcountries.Forasubstantialnumber ofyears,thesetwoorganisationsnotonlyrepresentedtheproducingorconsumingcountry interests,buttheyalsoembodiedthemistrustamongcountrieswhichwasrampantinthose years.Thedramaticchangeingovernanceoftheinternationaloilmarketcameamidstheated debates about the so-called North-South relations and mounting international economic imbalances. 7 These imbalances caused many geopolitical and geo-economic tensions and preventedaswiftcooperativesolutionfromcomingabout.Itisclearthatthesharingofrisks andbene�itsintheinternationaleconomywasasmuchadebatethenasitisnow.Wider internationaleconomicissues,bothtradeandmonetaryrelated,easilyintertwinedwiththe internationaldiscussionsaboutenergyingeneral,andoilinparticular,nowandinthepast. Theevolutionoftheproducer-consumerdialogue,asthediscussionspriortothenamingof theInternationalEnergyForum(IEF)werecalled,showsthevastchangesininternational relations – particularly economic relations – that have taken place since 1973. These changes concern not only the relations between oil-producing and -consuming countries butalsototherelationsamongthesecountriesandthewayinwhichtheoilcompanies-new andold,privateandpublic-interact.Moreover,itisinthisperiodofregulatorytransition thatthefoundationswerelaidforthefurtherglobalisationoftheworldeconomy,including theinternationaloilmarket,butalsofornewstructuresofinternationalcooperation,such astheG-7/8and,later,theInternationalEnergyForum. Scott,Richard(1994).TheHistoryoftheInternationalEnergyAgency1974-1994,IEATheFirst20 years,Vol.1,OriginsandStructure.OECD/IEA,Paris,pp.32,http://www.iea.org/textbase/nppdf/ free/1990/1-ieahistory.pdf. 7 21 CountriesAlwaysBalanceandRe-balance The often political orientation of the oil story’s narration prevents a closer look at the con�licting views and interests within certain groupings of players, whether the group of IOCs, consuming countries or producing countries. These discussions are not limited to oil alone but are often seen by the various players in the context of their geopolitical or internationaleconomicpositionsorambitions,oftenre�lectingideologicaldifferencesabout organisationanddistribution.TheIEAcountries,forexample,areneitherhomogeneousin their political systems nor in their domestic socio-economic organisation, despite their groupingasmarketeconomies.Inmanycountries,thestatehasplayedandcontinuestoplay animportantpartintheeconomyasaproducer.Thedomesticorganisationoftheeconomy doesnotpreventgroupingsfromfunctioningalongcertain(geo-)politicallines. Countries often function in alliances because they are too weak in certain areas to exert power on their own and because cooperation can increase the bene�its. The strength of thesealliancescanvaryaccordingtosubject,dependingontheextenttowhichthenational interests are served. Sometimes we see leader-follower types of cooperation, but more oftenthannotleadershipiscontestedwithinthegroup.Forexample,sometimestheleader is forced to allocate suf�icient bene�its to all participants in the cooperation to make an alliancework.Yetwhenthedistributioncostsbecometoolargefortheleaderorleadersand partnersareunwillingtosharethesecosts,theymightloseinterestinsatisfyingtheneeds of smaller coalition partners. The dynamics of satisfying the perceived national interests within a certain grouping of countries is important for the consistency of the group over time. Very often, countries participate in inter-governmental organisations in which they canoperateinaccordancewiththeirnationalinterestsandbowoutofdecision-makingthat runscountertotheirinterests.Yetwhenasuf�icientnumberofcountriesdecideonacertain approach,theoptiontobowoutcanbecostly. AnargumentsimilartothatoftheIEAcountriesalsoholdsforOPECcountries.TheOPEC memberstates,too,varyinpoliticalsystem,socio-economicorganisationandimportance ofoilintheirdomesticeconomies.Inseekinganationaloptimaloutcome,thesedifferences must lead to compromises in negotiating a coordinated production policy for OPEC as a whole.Theabilityofthestrongestcountriesinagrouptosharethebene�itsofcooperationis importantinordertoremainconsistentinimplementation.However,forstrongercountries orleaderstoremaininterestedincooperation,theweakercountriesinagroupmustalsobe accountableforthecostofcoordination.Theeffectivenessofcooperationcanvaryovertime. InthecaseofOPEC,con�lictsbetweenindividualmemberstatestemporarilyweakenedthe organisationbutdidnotleadtoitsdemise.Likeinotherinternationalorganisations,when the need among the member arose to cooperate increased, these differences could be set asideorovercome. Coordination, competition and collusion can play an important role among companies as well as nations, depending on the phase of market development.8 The international companies operated oil consortia in the Middle East, which required them to manage production among themselves. Under the Red Line Agreement, these international DeJong,H.W.(1996).DynamischeMarkttheorie.StenfertKroese,Leiden. 8 22 companies had actually formed a cartel.9 In other instances, companies operate in joint ventures, implying competition in one market and cooperation in others. The stability of thevariousformsofcooperationvaries,dependinginpartonmarketsharetheyrepresent andgovernmentactiontobreakupcooperation.Itisimportanttonotethatineachofthe periodsofcoordinationorcollusion,thecompetitivefringemanagedtoreducethemarket powerofthecompanies.10 Perception Inournarrativesaboutoil,perceptionplaysaveryimportantrole.ForaverylongtimeOPEC meetingswererelated,inmanyWesternpeople’seyes,tothequestionsofifandwhenthey wouldagainuseoilasapoliticalweapon,whileitwastheOrganizationofArabOilProducing Countries (OAPEC), which had been responsible for the embargo. Even though insidersare fullyawareofsubtledifferences,othersarenot.Whenfearsofapoliticalactonthepartof OPEChad�inallysubsidedinthelate1990s,theseWesternfearswereeasilytransposedonto Russiawhenitembarkedonarenationalisationofitsenergysectors. Apparently,therearemanyshadesofgreywhenitcomestogroupingthevariousinterests together. Very often, the history of oil relations has appeared to be framed in a certain, sometimesundisclosed,fashion,whichhasledtoonlythemainstreamideasofthemainactors ordominantgeopoliticalgroupingbeingrepresented.Seenfromanotherplayer’sperspective, thenarrativeoftenchanges.Perceptionalsoplaysanimportantroleingeopoliticalpositioning becausecountriescanperceivetheirsecurityornationalinterestsinacertainway,whileother actorsseetheirroleandpositioninservingthenationalinterestsinanotherway.11Intheoil narrative,theColdWarandthesupport–orlackthereof–oftheliberaldemocraticmarket approachhaveplayedanimportantroleintheinternationalpoliticalexchangesbetweenthe parties,eachframingeachotherinacertainmannerandactingontheseperceptions. Inthischapter,“ShiftingWorlds”,whichcoverstherun-uptotheproducer-consumerdialogue, it is important to understand the circumstances which led to the �irst and second oil price crisesinthe1970sinordertocomprehendtheaftermathintermsofcon�lictandcooperation. Thesecircumstanceswerenotlimitedtochangingoilrelationsalonebutalsoinclude,among other things, decolonisation and the vast changes taking place in the monetary relations amongcountries.Theemergenceofagroupofnewlyindependentcountriesthatquestioned the economic system of distribution of economic wealth in the world slowly changed the internationalpoliticallandscape.Atthesametime,newstrategiestodevelopexportorientation asopposedtoimportsubstitutionhelpedsomecountriesintheearly1970stoimprovetheir economicpositions.Lastbutnotleast,alsothetransatlanticrelationshipbetweentheUSand theEuropeancountrieswaschanging. UnitedStatesSenate,TheInternationalPetroleumCartel,StaffreporttotheFederalTrade CommissionsubmittedtothesubcommitteeonMonopolyoftheSelectCommitteeonSmallBusiness, WashingtonD.C.,22August1952. 10 VanderLinde,Coby(1991).“DynamicInternationalOilMarkets:OilMarketDevelopmentsand Structure,1860-1990”.StudiesinIndustrialOrganization,Vol.15.Kluwer,Dordrecht/Boston. 11 Wendt,A.(1992).“AnarchyisWhatStatesMakesofIt:theSocialConstructionofPowerPolitics”. InternationalOrganization,Vol.46,pp.391-425. 9 23 TheBrettonWoodsGovernanceSystemandOil ThepoliticalandeconomicimportanceoftheUSasaworldpowerwasexempli�iedbyitsstrong sayintheinternationaleconomicgovernanceofthattime.Exchangeratesbecamestablebut adjustable and were pegged to a gold-dollar standard, administered by the International MonetaryFund(IMF).ItcreatedaworldeconomyfocusedontradewiththeUStomaintain the external balance, while US companies increasingly gained access to markets (mainly in Europe)throughdirectinvestments.Thedollarbecameakeycurrencyintheworld,at�irst becauseothercurrencieswerenotyetconvertible,andlaterbecauseofitsassumedsystemic stability.Muchoftherawmaterialsandenergytradewasconductedindollars. The wider international economic governance was organised through the Bretton Woods institutions,theIMF,theWorldBankandtheGeneralAgreementonTariffsandTrade(GATT), a forerunner of a world trade organisation (WTO) that only materialised in the late 1980s. TheBrettonWoodsinstitutionsandGATTwerethemainproponentsofthepost-WorldWar IIgovernancesystemtopromotefreetradeandstableexchangerates.Atthesametime,the UnitedNations(UN)promotedself-determination,acceleratingthede-colonisationprocess. Fortheoldcolonialpowers,thisprocesswaspainfulandreducedtheircontrolovercertain crucialeconomicsectorsandtrade�lows.Inthe1960stheprocessofpoliticalemancipation wasfollowedbytheambitiontoachievemoreeconomicindependenceandnationalcapital formation.InLatinAmerica,andlaterfollowedbydevelopingcountriesinotherregions,this ledtoimportsubstitutionpoliciesinanattempttodevelopfrombeingrawmaterialexporters into�inishedproductproducers.Multinationalorinternationalcompanies,withtheirpractises oftransferpricingandtaxadvantagesintheirhomecountries,wereincreasinglyfrownedupon indevelopingcountries.Inmanycountriesgovernmentsattemptedtoreplacethesecompanies withnationalcompanies.SomeAsiancountries,endowedwithcheaplabourratherthanraw materials and/or energy, instead began to industrialise through export promotion policies. In Europe, the European Economic Community (EEC) was founded, in part with the aim to improvetradeandwealth.Rapidgrowthofworldtradeandeconomicgrowthaccommodated themanychangestakingplaceintheorganisationstructureoftheworldeconomy. The structure of the world economy was asymmetrical, however, and despite the rapid growthoftrade,itsbene�itsweremostlyconsumedinafew,mostlyindustrialised,countries. Moreover, the progress of countries developing from an agriculturally-based economy into anindustrialisedcountrywasmoregradualthanbe�ittedtheambitionsoftheinternational community. Particularly the newly independent, mostly developing, countries had dif�iculty translating their new political standing into an economic takeoff.12 This created frustration RaulPrebischwasDirectoroftheEconomicCommissionforLatinAmerica.In1950,hepublished astudycalledTheEconomicDevelopmentofLatinAmericaanditsPrincipalProblems,alsoknown astheSinger-Prebischthesis.Inthisstudy,heexplainedthedeclineinthetermsoftradebetween industrialisedandnon-industrialisedcountries.Developingnationshadtoexportmoretogetthe samevalueofindustrialexports,implyingthatallofthebene�itsoftechnologyandinternational tradewouldaccruetothecentreratherthantheperiphery.Heclaimedthatfreetradewouldnot beabletoclosethedevelopmentgapbetweendevelopedanddevelopingcountries,inspiringthe import-substitutionpoliciesofmanyoftheGroupof77countries. 12 24 withtheUNgovernancesystemandcriticismoftheskewedeconomicorderintheworld.The discussion about the international economic order is also re�lected in the discussion about governanceintheinternationaloilmarketofthattime.IntheUNGeneralAssemblyandin UnitedNationsConferenceonTradeandDevelopment(UNCTAD),developingcountrieswere becomingmoreandmorevocalindemandingachangeintheinternationaleconomicorder wheneventheinward-lookingeconomicstrategiesdidnotbringsuf�icientdevelopment. TheStructureoftheOilMarketinthe1950sand1960s While international sectors and markets were undergoing rapid change everywhere, the structureoftheoilindustryinthe1950sand1960sremainedlargelyaremnantoftheold world order. The international oil companies had obtained their large concessions in the 1930sbutonlystartedtoexploittheseconcessionsafter1945.Theconcessionsweredivided among a small group of oil companies of both European and American origin, creating a network of consortia. The consortia were interested in supplying both the European and Americanmarketswiththeirnewoil,butvestedinterestskepttheAmericanmarketdif�icult toaccess.TheimmenseoilreservesoftheMiddleEastdid,however,greatlyaddtothestrategic importanceoftheregion. DevelopmentsintheMiddleEastplayedade�iningroleinthedevelopmentoftheinternational oil market and the governance structures that emerged after 1973, just as Venezuela had played an important role in the 1950s in convincing the producing countries in the Middle EasttocooperateintheirnegotiationswiththeIOCs.TheMiddleEastwasbothincreasingly importantforitslocation,atthesoftunderbellyoftheSovietUnion,bridgingthenavaland landroutesbetweenEuropeandAsia,andforitsvastenergyresources.Moreover,thepolitical makeupoftheMiddleEastandNorthAfricahadbeenin�luxsincethedemiseoftheOttoman Empire,withthesubsequentMandatePeriodendingwiththeyoungnationstryingto�indtheir directioninapoliticallycontestedregion.Nationbuildinginthediverselypopulatedregion wasdif�icultformostofthenewlyindependentcountries,particularlywithintheboundaries ofpreviouslyadministratedconstructsoftheOttomanEmpireandtheMandatePeriod.The countries were also the theatre of a tug of war over geopolitical spheres of in�luence, as evidencedbytheeventsinIranin1953andthedealingsoftheUS,FranceandtheUKwith Egypt.Internalandregionalcon�lictswereextensiveinthe�irstdecadesofnationhood,with leadership challenges, competing minorities and battles over secularisation, inter-religious challengesandtheseveranceofthelastcoloniallinks.Thepost-wardevelopmentoftheoil industryintheregionhastenedchangeinmanyofthecountries.13Withthedecliningrolesof theUnitedKingdom(UK)andFranceintheregion,theArab-Israelicon�lictincreasinglydrew thegeopoliticalinterestoftheUS,particularlywhentheSovietUniongainedmorein�luence intheregion. Withtheworldeconomyrapidlymodernisingandadoptingthenewoil-basedtechnologies fromtheUS,theimportanceofoilasabasicinputintheeconomybecamelargeandwidespread. Shwadran,Benjamin(1956).TheMiddleEast,Oil,andtheGreatPowers.AtlanticPress,pp.435-445. London. 13 25 TheexpansionoftheEuropeanandJapaneseeconomieswasfuelledbytheeasyaccesstolowcostoil�lows.Althoughsomeconsuminggovernmentscontinuedtoprotectthecoalsectorsin theirowncountries,theswitchfromcoaltooilintheenergymixwasimpressive.Veryoften, oilwassuppliedtocertaineconomiesfromonetothreesourcecountriesonly,increasingthe structural import dependence. This became more problematic after the closure of the Suez Canal in 1967. The rapid expansion of large oil tankers, enabling them to supply countries despitethelongerroutearoundtheCape,largelysatis�iedthegrowingconcernsaboutsecurity ofsupply.Theinternationaloilcompanieshadproventheirreliabilityasmarketmanagersand securityofsupplyproviders.Yetthechangingrelationsintheworldeconomyanddiscussions about the international economic order did not escape them. As time wore on, security of supplybecameanincreasinglyimportantfeatureofconsumercountries’policyagendas. Developments in the US energy economy were somewhat different from those in Europe and Japan.14 The role of the US must be seen in the context of the fact that it is not only a large consumer of oil but also a large producer which has always harboured the entire oil valuechainwithinitsjurisdiction.ManyoftheUSpolicydecisionsweredirectedtowardthe domesticmarketbutdid,nonetheless,impactdevelopmentsintherestoftheworld.Thiswas not only true for issues related to the energy market but also for monetary and economic policies.ThestructureoftheAmericanoilindustrywasdifferentfromthatintherestofthe world,inparthelpedbythesubsoilownershipstructure,thematurityofthesector,andantitrust legislation. Many smaller oil companies were involved in all parts of the American oil valuechain.Increasingly,theinternationaloilcompaniessourcedtheAmericanmarketfrom thecheaperresourcesintheMiddleEastandVenezuela.Thesizeofthesereserveshadmade thecompaniesextremelycrude-rich.WithouttheprotectionoftheGulfPlussystem15,these suppliesrapidlygainedmarketshare.Concernsaboutimportdependencybegantosurface, aided in part by the growing protestations of the smaller oil companies. The debate about promotingdomesticoilproductionorimportingoilfromabroadwastemporarilydecidedin favourofthedomesticindustryin1958,whenmandatoryimportcontrolswereestablished. TheimpactofAmericanenergypoliciesondevelopmentselsewherehasalwaysbeenlarge. Inthiscase,itcreatedasurplusontheinternationalmarketanddecliningoilprices,which in turn led to OPEC’s foundation in 1960. The seeds for the emergence of competing oil governanceweresown. Until the late 1950s, the international oil industry outside the United States, Canada, the USSRandChinahadbeencharacterisedbythedominantpositionofthelargemultinational oil companies known as the Seven Sisters, or the ‘majors’. The host governments did not participate in the production or pricing of crude oil but acted only as competing sellers of licensesoroilconcessions.Inreturn,hostgovernmentsreceivedastreamofincomethrough royalties and incometaxes.Each ofthe majorswas vertically integratedand had control of upstreamoperations(exploration,developmentandproductionofoil)16and,toalesserbut Adelman,M.A.(1996).“TheGenieoutoftheBottle:WorldOilSince1970”.TheMITPress,pp.41-64. Cambridge,MA. 15 ibid. 16 In1950themajorscontrolled85%ofthecrudeoilproductionintheworldoutsideCanada,theUS, SovietRussiaandChina.Danielsen,A.L.(1982).TheEvolutionofOPEC.HarcourtBraceJovanovitch Publishers,NewYork. 14 26 stillsigni�icantextent,ofdownstreamoperations(transportation,re�iningandmarketing).At thesametime,theycontrolledtherateatwhichcrudeoilwassuppliedtothemarketthrough jointownershipofcompaniesthatoperatedindifferentcountries.Theverticalandhorizontal linkagesenabledthemultinationaloilcompaniestocontrolthebulkofoilexportsfromthe majoroil-producingcountriesandtopreventlargeamountsofcrudeoilfromaccumulating in the hands of sellers, thus minimising the risk of sellers having to compete to dispose of unwantedcrudeoiltoindependentbuyersandpushingpricesdown.17 Untilthemid-1970stheoilpricingsystemassociatedwiththeconcessionsystemwascentred ontheconceptofa‘posted’price,whichwasusedtocalculatethestreamofrevenuesaccruing to host governments. Spot prices, transfer prices and long-term contract prices could not play such a �iscal role. The vertically and horizontally integrated industrial structure of theoilmarketmeantthatoiltradingbecametoalargeextentaquestionofinter-company exchange with no free market operating outside these companies’ control. This resulted in anunderdevelopedspotmarket.Transferpricesusedintransactionswithinthesubsidiaries ofanoilcompanydidnotre�lectmarketconditionsbutweremerelyusedbymultinational oil companies to minimise their worldwide tax liabilities by transferring pro�its from hightax to low-tax jurisdictions. Because some companies had more crude oil than they could processwithintheirownverticallyintegratedoperation,whileothershadtopurchaseoilfor theirdownstreamoperations,i.e.werecrudelongorcrudeshort,transactionsusedtooccur between the multinational oil companies on the basis of long-term contracts. However, the pricesusedinthesecontractswereneverdisclosed,asoilcompaniesconsideredthispieceof informationtobeacommercialsecret.Oil-exportingcountrieswerealsonotparticularlykeen onusingcontractprices,asthesewereusuallylowerthanpostedprices.Thus,thecalculations of the royalty and income tax per barrel of crude oil going to the host governments had to bebasedonpostedprices.Beinga�iscalparameter,thepostedpricedidnotrespondtothe usualmarketforcesofsupplyanddemandandthusdidnotplayanyallocationfunction.18The multinational oil companies were comfortable with the system of posted prices because it maintainedtheiroligopolisticposition,anduntilthelate1960sOPECcountriesweretooweak tochangetheexistingpricingsystem. Theoilpricingsystemandthesupplymanagementoftheinternationaloilcompaniesinthe late 1950s to the early 1970s, organised by the Middle East consortia19, was increasingly questionedinthecapitalsoftheproducingcountries.Theywereconcernedaboutoilincome EdithPenrose(1968).TheLargeInternationalFirminDevelopingCountries:TheInternational PetroleumIndustry.Allen&Unwin,London. 18 Mabro,Robert(1984).“OnOilPriceConcepts”.WPM3,pp.6-16.OIES,Oxford. 19 ThefollowingIOCsareoftenreferredtoastheSevenSisters:Exxon,Mobil,Texaco,Gulf,Chevron, BPandShell.EachofthesecompaniestookpartintwoormoreconsortiaintheGulf.SaudiAramco wasownedbytheAmericancompaniesExxon,Chevron,MobilandTexaco,whiletheIraqiPetroleum company,IPC,wasamoreEuropeanaffairwithBP,ShellandtheFrenchCFPasitsmainshareholders andExxonandMobilassmallershareholders.BPandGulfjointlyownedKuwaitOilCompany(KOC). Allcompanies,includingCFP,heldsharesinIranianoilafter1953.ThecompaniesoftheEmirates andQatarre�lectedthesameownershipstructure.In1972,thesesevenlargestcompaniesowned 23.7%oftheexplorationareasintheworld,represented67.3%ofworldprovenreservesandwere responsiblefor70.9%ofworldoilproduction.Evans,J.(1986).OPEC,itsMemberStatesandthe WorldEnergyMarket.Keesing’sReferencePublication.Longman,Harlow.p.24. 17 27 stability which, due to the relatively low oil prices, was mainly dependent on volume. In addition,itwasbecomingclearthatmanagementofpoliticalrelationswascausingafurther distributionofthecoststoaccommodatethemarket.Forinstance,inthe1960swhensupplies fromNorthAfricaandelsewhereneededtobeaccommodatedinthemarket,theexpansion ofproductioninKuwaitandIraqwaskeptbelowworldproductiongrowth,whileproduction fromIranandSaudiArabiawasallowedtogrowmore.Thisre�lectednotonlythestrengthof theIOCsbutalsotheirpoliticalandeconomicimportancetoUSforeignpolicy.20 Fromthe1950sonward,thechanginginternationaloilmarketandchangingpoliticalsituation increasinglyledtoadifferentorganisationoftheoilvaluechain.Thecompaniesbegantoswitch theirinvestmentsinthedownstreampartofthevaluechain,i.e.re�iningandpetrochemicals, fromclosetocrudeproductionfacilitiestothoseclosetothemarket.Theimplicationwasthat oilproducingcountriesbecamecrudeoilexportersratherthanexportersofsemi-�inishedor enduseroilproducts.Thelogicofthisnewstructureoftheoilvaluechainwaslinkedtothe greater demand for a wider array of oil products, making crude oil transport cheaper than the earlier oil product shipments of before. In addition, some oil-importing countries also welcomedtheswitchfromre�ineriesclosetotheoilsourcetomarketre�ineriesforreasons of balance of payment. For the companies themselves, the economic logic of such a change in the location of the various parts of the value chain was enhanced by the trade policies of consuming countries and their own growing reluctance to commit investment capital to countriesundergoinglargepoliticalchanges. The post-war organisation of the oil value chain increasingly re�lected the impact of trade and investment policies by governments, company investment strategies and political and economicuncertainties.Forinstance,thefoundationin1958oftheEEC,acustomsunion,was afurtherimpetusforthecompaniestogeographicallyre-arrangetheoilvaluechain,whilealso Japanpursueditsowntradeandindustrialpoliciesalongtheselines. ThePre-1973Not-So-HomogeneousWorldandOil The relations between producing and consuming countries had already radically changed when, in the 1970s, most producing countries of OPEC nationalised their oil sectors and replaced the international oil companies (IOCs) with their national oil companies (NOCs) asthemainoperators.Untilthen,theverticallyintegratedinternationaloilcompaniesofthe UnitesStatesandWesternEuropehaddominatedtheentirevaluechain,frompittopump, andtogethertheyweredefactotheworld’soilmarketregulatorsandbalancers.Inthisrole theynotonlymanagedsuppliesfromvarioussourcesaroundtheworldbutalsoincomeand in�luence. TheIOCsperformedthistaskwithacquiescencefromtheirhomecountries,mostimportantly theUSandtheUK,whowerethedominantpowersintheMiddleEast.YettheAnglo-Saxon dominantpositionintheMiddleEastandtheoilsectordidnotgounchallenged.Franceand, Alnasrawi,Abbas(1985).OPECinaChangingWorldEconomy.JohnsHopkins,Baltimore/London. Roncaglia,Alessandro(1985).TheInternationalOilMarket.Basingstoke/London.ØysteinNoreng (2006).CrudePower,PoliticsandtheOilMarket.I.B.Tauris,London. 20 28 toalesserextent,Italy,hadalsobeeninterestedindevelopingoilassetsfortheirNOCsbuthad largelymissedoutinthepre-WWIIconcessionroundsandwerelaterunabletogainsubstantial entry.TheFrenchandItaliancompaniesremainedcrudeshort,andwhenNorthAfricanoil wasdevelopedinthe1960s,thedecolonisationprocesspreventedthemfromtranslatingthis positionintodecisiveequity.Moreover,theNorthAfricanconcessionareaswerealreadymuch smallerinareathanthevastareasintheGulfregion,andthenumberofcompaniescompeting for these concessions was much larger due to the international expansion of the American independents.YetdespitethegrowingEuropeanmarket,theinternationaloilcompanieshad toaccommodatethenewsupplies.TheassetsintheMiddleEastandVenezuelamadeupthe lion’sshareofthecompanies’upstreamassets.Duetothemorecompetitivemarketstructure intheUSascomparedtotheinternationalmarketstructure,andtheincreasingshareofnonconsortiumoilontheinternationaloilmarketinthe1960s,thecompaniesexperiencedmore dif�icultyinmanagingthevastresourcesofthesecountries.Thecompanieshadbecomethe swing producers in the international market, while pressure from the host governments to increaseincomefromoilwasmounting.Thesetwotaskswereincreasinglydif�iculttocombine, withoutdenyingincomegrowthtooneortwooftheGulfcountries.Thus,theperiodofIOC governancewascertainlynotwithoutbusinessandpoliticalrivalry,and,moreimportantly,the challengestotheIOCgovernanceoriginatedinconsumingandproducingcountriesandfrom privateandnationalcompaniesalike. Thedominanceofasmallnumberofinternationaloilcompaniesoflarge,low-costoverseas assets in oil reserves and production, mainly in the Middle East, and the ability of these companiestosupplytheinternationalmarkets,madetheseIOCsuppliesanimportantfeature in the security of supply of the oil-importing industrialised countries. In some countries, theIOCsalsohadstronglydevelopeddownstreamsectors(forinstance,theUS,theUK,the NetherlandsandGermany),butmoreoftenthannot,theyhadtosharethedownstreammarket inconsumercountrieswithdomesticNOCs(forinstancewithFrance,Italy,JapanandSpain). Aspricetakers,theseNOCswerealwayslookingtodiversifyawayfromIOCsuppliesandwere, after1973,the�irsttoseekopportunitiestodealwithproducercountryNOCs,whilecountries thatreliedmoreontheverticallyintegratedactivitiesoftheIOCsweremorereluctanttodoso. Thesedifferencesinmarketorganisationamongconsumercountriesalsoplayedanimportant roleinthepost-1973oilrelationsandtheinstitutionalmake-upofenergyrelations. TheUS,althoughanimportantoilproduceritself,wascomfortablewiththeabilitytoin�luence oil�lowsandinthe1950sfacilitateditslargeoilcompaniesinmanagingthemountingpressure toshareincomewiththeproducingcountries.ParticularlythespecialrelationshipwithSaudi Arabiaand,after1953,withIran,placedoilcentrallyinthespecialsecuritypolicyoftheUS, aspartoftheColdWarstrategyandaspartoftheUSinternationaleconomicstrategytoopen upmarketsforAmericanproductsandcapital.Largelyforthisreason,theUSalsoadvocated decolonisation, breaking the economic hold of the traditional powers over resources and marketswhileconvincingthenewrulersoftheadvantagesofparticipatinginthenewfree marketregime.ThecreationoftheBrettonWoodsinstitutionswerepartandparcelofthis freemarketstrategy,andthedominantpositionoftheUSdollarasacrucialcurrencygreatly helpedtheUStogainaccesstonewmarketsandtienewlyindependentcountriesintothenew 29 regime.Theconvertibilityofthedollarandthefactthatallothercurrencieswerepeggedtoit createdacentraleconomicandmonetaryrolefortheUSinthepost-WWIIworld.21 Intheemergingpost-colonialworld,traditionalandnewproducingcountries,wishingtotake morecontroloverthedirectionoftheircountriesandeconomies,inevitablychallengedthis regulatoryroleoftheinternationaloilcompanies.WhentheIOCswerechallengedintheearly 1970storelinquishcontroloveroilreservesandproductionbythegrowinggroupofOPEC countries, the international oil market and the relations among producing and consuming countriesenteredintoanewphaseofdevelopment. InternationalSysteminFlux In a world in which economic progress is so closely related to the availability of relatively low-costoil,anythingperceivedtoobstructthisavailabilitywillleadtopoliticalcon�lictand attemptstoreducetheimpactofthechange.Butthepoliticalresponseisnotalwaysrelatedto theeconomicresponseorimpact.Inthe1970s,thepoliticalresponseresonatedforyearsafter thecrisis,whereastheoileconomyadaptedrelativelyquicklytothenewcircumstances.For instance,the1970soilpriceincreasesbroughtaboutvastchangesintheenergymixofmany importingcountries,whileatthesametimeitpropelledpreviouslyuneconomicaloilreserves intothemainstreamoilmarketdevelopments,creatingnewvaluefortheseeconomies.Still, thepoliticalresponseremainedlargelyfocusedonreducingtheimpactofthepowershiftin favourofproducingcountriesasaresultoftheoilcrisis. Moreover, the substantial changes in consuming countries’ economic structures were merely hastened by the change in the relative price of energy. Already in the late 1960s and early 1970s, many companies saw that rising turnover was not translated in rising pro�its,andtheyincreasinglystruggledwithescalatingcosts.Theirmarketswerematuring. The subsequent increase in energy prices, combined with the communication and process technology developments allowing for more decentralised production processes, provoked alargechangeintheorganisationofproductionandtrade.Inordertomanagethenewcost and reward structures, energy- and labour-intensive parts of the production chain were relocatedelsewhere,alsobene�itingfromthenewexport-orientedpoliciesofsomedeveloping countries. The shock with the oil embargo by OAPEC against the US and the Netherlands (and some other countries) and the production cuts by OPEC in the midst of the 1973-74 crisis are WhiletheUSwasabletofocusitseconomicandmonetarypolicyondomesticissues,allother participantsoftheBrettonWoodssystemwereforcedtodisciplinetheireconomiesinaccordance withtheexchangerateregime.Theywereresponsibleforstayingwithinacertain�luctuationmargin ofthedollar.Ofcourse,theassumptionwasthatinorderforthedollartoful�ilthiscentralrole,the USwouldmaintainasurplusbalanceofpaymentsinorderforthedollartoremainahardcurrency. Italsorequiredvastamountsofdollarreservesforcurrencyinterventionsbynon-USparticipants, forcingtheireconomiesintoamouldrequiringtradesurpluseswiththeUS.SeeEichengreen,Barry andPeterKenen,(1994).“ManagingtheWorldEconomyundertheBrettonWoodsSystem:an Overview”,in:ManagingtheWorldEconomy,FiftyYearsafterBrettonWoods.PeterKenen,(ed.). InstituteforInternationalEconomics,Washington,DC. 21 30 understandable from the perspective of the post-war efforts toward free trade and the eradicationofharmfultradepolicies.BothfreetradeandtheexchangeratesystemofBretton Woodsservedastheunderpinningofaworldeconomythatwasbecomingmoreandmore integrated. Trade and, later, foreign direct investments were seen as important tools in creatinginterdependenciesandpreventingcountriesfromresortingtoharmful(economic) nationalism.Howeverbenevolentthelong-termintentionsofthepost-wareconomicstructure were,inrealitythismarketsystemhaddif�icultyindealingwiththestructuralinstitutional inequalitiesinheritedfromthecolonialera.Theasymmetriesineconomicdevelopment,i.e. knowledge, capital, assets base and economic institutions, prevented developing countries from quickly reaping the bene�its of this system. Moreover, their bargaining position was weak.Althoughthetheoryofthefreetradesystemwasappealing,thestructuralinequalities appearedtobeemphasisedratherthanrepairedinthissystem.22 Againstthebackgroundoftheincreasingfrustrationofdevelopingcountries,thesofttransition to a post-colonial political and economic system was therefore more problematic than had beenforeseenbytheindustrialisedcountries.InitiativessuchastheDecadeofDevelopment inthe1960sdidnotbringaboutenoughchangetopreventamoreconfrontationalposition frombeingadoptedbydevelopingcountries.Theysawtheirlackofeconomicsovereigntyas anobstacletobeingabletomakeabetterbargainregardingtheirintegrationintotheworld economy. Their early attempts to improve their positions through import substitution had failed, and in the late 1960s they renegotiated their re-integration into the world economy throughthevariousrelevantinstitutions.23Theoilindustryhadalsobeenviewedwithdismay since the 1950s, and although some progress had been made with regard to income, the producingcountriesremaineddissatis�iedwiththeirlackofsayoverincomefromoil.Itwas alsothroughtheactionsoftheincomingleaderofLibyathatmajorchangesinthesovereignty over oil were achieved by deftly playing out the interests of the IOCs against those of the Americanindependents.24TheTripoliandTeheranAgreementsof1970and1971markedan importantchangeinthebargainingpositionsoftheoil-producingcountries.Thealreadytight oilmarketsandtheturmoiloflate1973andearly1974removedthelasthindrancesfromthe oil-producingcountries’takingfullcontrolovertheiroilreservesandproduction. Fordevelopingcountriesaroundtheworld,thesuccessofthesecountriesintheirabilityto determine a new bargaining regime was of great political importance and reached beyond oil. Apart from immediate security of supply concerns, the rebellion of the oil-producing countries against the IOCs’ governance was of great geopolitical and economic concern for the US and the other OECD countries, precisely because the rami�ications reached beyond oil issues. Moreover, it not only challenged the IOCs’ bargaining power in the international systembutalsounleashedadiscussionaboutthecostsandbene�itsofthisnewbargainamong themselves. Singer,H.W.(1989).“TermsofTradeandEconomicDevelopment”.EconomicDevelopment,pp.323333;TheNewPalgrave.Eatwell,J.,M.MillgateandP.Newman(eds.). 23 UNGeneralAssembly,UNCTAD,GATT. 24 Odell,P.(1986).OilandWorldPower:AGeographicalInterpretation,PelicanBooks;Yergin,Daniel (1991).ThePrize:TheEpicQuestforOil,MoneyandPower.Simon&Schuster;Sampson,Anthony (1975).TheSevenSisters:TheGreatOilCompaniesandtheWorldtheyShaped.VikingPress,New York. 22 31 Thuswhileinthe1960sotherdevelopingcountriesweredevisingpoliciestoincreasetheadded valueoftheirexports,oil-producingcountriesdidnotseemuchstructuralchangehappening intheireconomies.Theglobalpoliticalatmosphereandtheeconomiclogicoftheinternational arrangementswerechanging,however-notleastbecausetheBrettonWoodsinstitutionswere also challenged in the early 1970s.25 Discussions about a new international economic order underlined the new atmosphere26, and many believed that the economic dominance of the OECD-countrieswouldbereplacedbyasysteminwhichdevelopingcountriescouldclaimmore governance. AYearofConfrontation AftertheTripoliandTeheranagreementsof1971and1972,whichprovidedtheoil-producing countrieswithmorecontroloverthedevelopmentoftheiroilindustries27,theimpatiencewith theoilcompaniesgrew.Inthesummerof1973theyofferedasmallerpriceincreasethanwas needed, with the aim of stopping the erosion of the purchasing power of a barrel of oil. The depreciationofthedollar,thecurrencyinwhichoilwastradedandrisingin�lationaroundthe world had contributed to the producing countries’ desire to increase nominal oil prices and maintaintherealpriceofoil.WiththeIMF–themaininstitutionfordisciplininginternational economicrelations–ratherindisarray,thesensitivity,particularlyintheUS,regardingtheimpact oftheexchangeratecrisisontheinterestsofothercountrieswassmall.Perhapsthisinternal focuswasexacerbatedbytheon-goingUSdomesticpoliticaldif�icultiesoverracialrelations,the VietnamWarandtheWatergatescandal,althoughitisalwaystheprerogativeoflargepowers toactoutofself-interest.Thecountry’smainconcernsweretoreadjustitscompetitiveposition inrelationtoitstradingpartnersinEuropeandtomanagein�lation,whichwasalreadyrising, while maintaining the recent domestic socio-economic bargain. Rising oil prices were to be avoided.Moreover,theUSwasconcernedwithdevelopmentsintheAtlanticCommunityasa resultofEuropeanintegration.FortheUS,1973startedoutasthe‘YearofEurope’withtheidea toreinvigoratetherelationshipwiththeenlargedEuropeanCommunity,butinsteadhadtofocus onovercomingtheincreasingdif�icultiesinthetransatlanticrelationship.InhisPilgrimsSpeech inDecember1973inLondon,Kissingerremarkedthat: Europe’sunitymustnotcomeattheexpenseofAtlanticcommunity,orbothsidesofthe Atlanticwillsuffer.Itisnotthatweareimpatientwiththecumbersomemachineryofthe emergingEurope.Itisratherthetendencytohighlightdivisionratherthanunitywithus whichconcernsus.28 TheUSwasconcernedthatthegrowingdisparityamongtheOECDcountriesaboutsecurityand Williamson,JohnandC.RandallHenning(1994).“ManagingtheMonetarySystem”,in:Managing theWorldEconomy,FiftyYearsafterBrettonWoods.Kenen,Peter(ed.).InstituteforInternational Economics,WashingtonDC. 26 Dolman,A.J.(1976).ReshapingtheInternationalOrder:areporttotheClubofRome,Tinbergen,J. (coordinator).NewYork,Dutton. 27 Johany,AliD.(1982).“OPECandthePriceofOil:CartelizationorAlterationofPropertyRights”,in: OPEC:TwentyYearsandBeyond.ElMallakh,Ragaei(ed.).Westview/CroomHelm,BoulderCO/ London. 28 Kissinger,Henry,TextofAddressbyKissingerinLondononEnergyandEuropeanProblems,New YorkTimes,December131973. 25 32 economicissueswouldcomeatacosttotheirrelationandwealth,whileeventsin1973beganto rapidlyunfold.29Naturally,repairingtherelationshiptooksometime. Therelativelylowoilpricesofthe1960sstimulatedoildemandaroundtheworld,andAmerican oilimportshadalsobeensteadilyincreasing.Investmentsinnewcapacityinthelate1960shad failedtokeepupwithrisingdemand.Between1965and1973,globaldemandforoilincreased atafastrate,withanaverageannualincreaseofmorethan3millionb/dduringthisperiod.30 MostofthisincreasewasmetbyOPEC,whichmassivelyincreaseditsproductionfromaround 14millionb/din1965tocloseto30millionb/din1973.Duringthisperiod,OPEC’ssharein globalcrudeoilproductionincreasedfrom44%in1965to51%in1973.Otherdevelopments intheearly1970s,suchasLibya’sproductioncutbacksandthesabotageoftheSaudiTaplinein Syria,furthertightenedthesupply-demandbalance.Althoughnewre�inerycapacitywasunder construction,productmarketswereunderpressure.Tightenedoilmarketconditionscreateda strongseller’smarketandsigni�icantlyincreasedOPECgovernments’powerrelativetothatof themultinationaloilcompanies. In September 1973, OPEC decided to reopen negotiations with the companies to revise the Tehran Agreement and seek large increases in the posted price. The American IOCs were instructedtonegotiateforonlyaminimalpriceincrease31,whiletheproducingcountrieswere hoping for reparations of past real oil price slippage. The producing countries felt shunned and negotiations were still trundling along when hostilities between Egypt, Syria and Jordan andIsraelbrokeoutinOctober1973.Allthefrustrationofearlieryearscametoaheadina geopoliticalclimatethatwasalreadyrestive.On16October1973,thesixGulfmembersofOPEC unilaterallyannouncedanimmediateincreaseinthepostedpriceoftheArabianLightcrude from$3.65to$5.119.On19October1973,membersofOAPEClessIraqannouncedproduction cuts of 5% of the September volume and a further 5% per month until ‘the total evacuation of Israeli forces from all Arab territory occupied during the June 1967 war is completed and thelegitimaterightsofthePalestinianpeoplearerestored’(quotationsinoriginal).32OAPEC’s announcementtoembargotheUSandtheNetherlandsatthestartoftheOctoberwarin1973 later extended to include Denmark, Portugal and South Africa, and the production cuts to pressureIsraelinwithdrawingfromtheWestBankandGazawerethepoliticalresponsetothe mounting frustration in the Middle East. In December 1973, OPEC raised the posted price of theArabianLightfurtherto$11.651.Asaresult,oil-producingcountriessawtheiroilincome expand beyond their expectations. Equally important, for the �irst time in its history, OPEC assumedaunilateralroleinsettingthepostedprice.33Beforethatdate,OPEChadonlybeenable topreventoilcompaniesfromreducingthemandactedmoreasatradeunion. Onlyrecently,hemadesimilarremarksabouttheevolvingrelationofChinaandtheUSpointingout thatthetwocountriesshouldtakecarenot“analyzingthemselvesintoself-ful�illingprophecies” andthat“con�lictisnotinherentinanation’srise”.Boththen(inthe1973speech)andnow,he emphasisedthatcooperationimpliessubordinatingnationalaspirationstoavisionofaglobalorder andthatitisimportanttomaintainafocusonwhatunites.Kissinger,Henry,“AvoidingaU.S.-China coldwar”,in:TheWashingtonPost,14January2011. 30 BPStatisticalReviewofWorldEnergy2010. 31 Sampson,A.(1975). 32 Skeet,Ian(1988).Twenty-FiveYearsofPricesandPolitics.CambridgeEnergyStudies,Cambridge. 33 Terzian,Pierre(1985).OPEC:TheInsideStory.ThirdWorldBooks,Distributor,BiblioDistribution Center. 29 33 HardTransition The oil price crisis of 1973-74 was one with many dimensions; it not only redesigned the energygovernanceintheworldandchangedthedynamicdriversintheoilvaluechainbutalso hadwiderimplicationsforinternational(economic)relations.Fromaneconomicperspective, the oil price increases implied that the oil-consuming countries immediately faced higher in�lation and growing trade de�icits due to the short-term inelasticity of oil demand. Also, concernsaboutrecyclingtheoildollarsbackintotheinternational�inancialsystemwerelarge becauseofthelowabsorptioncapacityofmostoftheproducingcountriesandthesheersizeof thetransferofwealthinsuchashortperiodoftime.Theinstitutionalstructureformanaging suchimbalances was,however,incomplete,particularlyafterthebreakdown oftheBretton Woodsexchangeratesystem.Theongoingdiscussionsaboutrestructuringmonetaryrelations amongtheOECDcountries34gainedanotherdimensionwhentheoilpricecrisisunfolded.The largetransferofwealthasaresultoftheoilpriceincreasesandtheasymmetricimpacton oil-consuming countries further complicated these discussions. Particularly the developing oil-consumingcountrieswereseverelyaffected,butalsothebalance-of-paymentdif�iculties ofindustrialisedcountrieswerelarge.Themonetaryconsequencesoftheoilpricecrisisstood atthecradleofthemoderninternationalcapitalmarketsasweknowthemtoday,whilethe relation between the dollar and oil prices became a recurring feature on the international agenda.35 The route to oil-dollar recycling could have been the IMF, which was designed to handle balanceofpaymentsurplusesandde�icits.Thesheersizeofthetransfersbetweenconsuming and producing countries and the political tensions that had accompanied OPEC’s decision to increase prices prevented such a solution from coming about quickly. In 1975, at the Rambouillet Summit of November 15-17, the US, the UK, Germany, France, Japan and Italy �inally made some headway in restructuring monetary relations, including enlarging the quota,accommodatingtheshiftineconomic�lows.36YettheproposedchangesallowedtheUS tomaintainitsblockingvoteondecisionsinthegoverningboard.Thesechangeswerelater laid down in the new amendments of the IMF accords in 1976. The position of the leading membersoftheIMFtomaintaincontrolovermonetarypolicycanbeexplainedinpartbythe factthatsomeofthemwereinitiallynotconvincedthattheoilpriceincreasewasstructural andthoughtthatitwouldrequireastructuraladjustmentofthequota.Butastimeworeon, theirbeliefthattheoilpriceincreasewasunsustainableprovedtobeunfounded.Theabilityof OPECtoaccommodatelowerdemandwithlowerproductionsurvivedthepoliticalpressureof thattime,althoughtheerosionoftherealoilpricestrainedsomeproducingcountries’�inances. ThepositionofsomemajorOECDcountriescanalsobeexplainedbygeopoliticalmotivesto stayinthemacroeconomicdrivingseatandanunwillingnesstoaccept-oraslownesstoadapt to-thenewcircumstancesintheworld.Intheend,theIMFdidnotplayacentralroleinoil Dam,Kenneth(1982).TheRulesoftheGame:ReformandEvolutionintheInternationalMonetary System.UniversityofChicagoPress. 35 Koopman,Georg,KlausMatthiesandBeateReszat(1989).OilandtheInternationalEconomy, LessonsfromTwoPriceShocks.TransactionPublishers,NewBrunswick/Oxford. 36 EconomicSummitatRambouillet,France,16-17November1975,in:ForeignRelationsoftheUnited States,1969-1976,VolumeXXXI,ForeignEconomicPolicy1973-1976,pp.386-452. 34 34 dollarrecyclinginthe1970s.Inarestrictedrole,onlyaspecialIMFoilfacilitywassetup,and some individual OPEC member states provided bilateral assistance to particularly hard hit consumingdevelopingcountries,butmostofthesurpluseswererecycledelsewhere. Duetotheinstitutionaluncertaintiesimmediatelyaftertheoilcrisis,alargeshareoftheoil incomefounditswaytotheeuro-dollarmarket,whereitwasplacedinrelativelyshort-term 3-monthfacilitiesandrolledover.Inthespaceofacoupleofmonths,theinternationalprivate bankssawthisrelativelysmallinter-bankmarketswelltomuchlargerproportionswhenthey becamethemainchanneltorecycleoil-dollars.Yettheinternationalprivatebankshadtomake thiscapitalworkfortheminordertomaketheinterestpaymentstotheproducingcountries. Immediately,itbecameclearthattherewouldbeamismatchbetweentheshort-termfacilities withwhichitwasplacedandthedurationforwhichlenderswerewillingtoborrow.Moreover, the appetite in the relatively ‘safe’ OECD countries for borrowing had shrunk and many companies, with better communication and production techniques, began to disinvest in OECDcountriesandmovethelabour-andenergy-intensivepartsoftheirproductionchainto other,lowercost,countries. Developing countries, with their recent switch to export-oriented strategies, found in the euro-dollarmarketthesourceofcapitalthattheyhadcravedinthepastbuthadbeenunable toaccess.TheyhadreliedontheBrettonWoodsinstitutionsto�inancetheirindustrialisation effortsbuthaddislikedthestrictgovernanceattachedtotheseloans.Yettheyrequiredlonger capitalinvestmentsthantheeuro-dollarmarketcouldprovide.Theinternationalprivatebanks solvedthemismatchintimeandriskinessofthelargeloansinprovidingtheirfour-yeardollar loanstovariableinterestrateslinkedtotheLondonInterbankInterestRate(LIBOR).Often thebankstriedtospreadthesubsequentsovereigndebtriskbyparticipatinginloanconsortia andaskingforgovernmentguarantees.Thedevelopingcountriesthusbecameexposedtoboth anexchangeandaninterestrateriskinatimeoflargesystemicuncertainties. Inthemeantime,worldin�lationsoared,inpartbecauseofpoliciesto�inanceexternalde�icits rather than adjust the economies to the structurally higher oil prices, and in part because recyclingwasmoresuccessfulthanhadbeenanticipated.Withthein�luxoftheoilmoniesinto theeuro-dollarmarket,interestrateswereverylow,andoil-producingcountrieswerequickly madeawarethatfromthenontheywouldhavetomanagevaluebothinandabovetheground asanewfeatureoftheiroilindustrymanagement. Governmentde�icitsinoil-consumingcountriesincreasedinthe�irstfewyearsaftertheoil price increase, and demand for oil stagnated in the OECD countries. The restructuring of the economy and the emphasis on policies to diversifyaway from oil radically changed the outlook for investment in the various parts of the oil value chain. Surplus capacity existed throughoutthevaluechain,duetodepresseddemandandthelongleadtimesoninvestments. Astimeworeon,OECDcountriestranslatedthehigheroilpricesintheirexportprices,but developing countries had dif�iculty doing so because their exports were still mainly raw materials.37Aslongasrealinterestrateswerelow,theinternationaleconomicsystemseemed toadjusttothenewsituation,butwhenoilpricesincreasedasecondtime,in1978-79,due Koopman,Georgetal.(1989). 37 35 topoliticalturmoilinIran,OECDeconomicpolicieschanged.Althoughthepriceincreaseof 1978-79waslessstructuralandwaslaterreferredtoasthepriceofa‘panicbarrel’,thepolicy response was de�ined by structural adjustment. The level of in�lation was too high and the externalimbalanceswereagaintoolargeto�inancethede�icits,andausteritypoliciesbecame widespreadthroughouttheOECD. WithastrictUSmonetarypolicy,in�lationwasbroughtbackundercontrol,andrealinterest rates soared, much to the detriment of oil-consuming developing countries, who saw the interest rates on their dollar loans rise and their own currencies lose value against the dollar.Almostimmediatelytheybegantoexperiencedif�icultiesinservicingtheirloans.The 1980swere,forthem,atimeofperiodicaldebtrestructuring.Onlywiththeoutbreakofthe developingcountries’debtcrisisin1982andthesystemicdangerthesedebtsposedtothe largeinternationalprivatebankswastheIMFreintroducedasthemainmonetaryinstitution. For the remainder of the 1980s, the debt crisis hampered economic development in many developingcountriesinLatinAmericaandAsia.Onlyinthelate1980s,withtheBakerand, later,Bradybonds,weretheafter-effectsofthe1970soilcrisesandthehandlingofrecycling digested. The monetary implications of the oil crisis of 1973-74 and 1978-79 were far-reaching: the morestructuredinternationalcapital�lowsoftheBrettonWoodserahaddevelopedinto�lows onthelargelyunregulatedprivateinternationalcapitalmarkets.Withitcametheprivatisation ofrisksassociatedwithinternationalcapitaltransactions,althoughthesystemicriskswereleft withthegovernments.Foroil-consumingdevelopingcountries,theoilcrisis,heraldedasan importantresettingofthepost-colonialbargainingposition,leftthemwithstrictergovernance fromtheIMFandWorldBankthanbefore.Moreover,therestructuringoftheirdebtswasused toenforcecompliancewiththenewinsightsoftheso-calledWashingtonconsensus,inwhich liberalisation of both the trade and capital account was key. This integration of developing countriesintotheinternationalmarketeconomywasthe1980s’answertothehardtransition ofthe1970s.CompaniesbasedinOECDcountrieshadrespondedtothe1970sreshuf�lingof relativepricesintheworldandtheinternationalisationofcapitalmarketsbyrestructuring the organisation of their production chains to secure the new ef�iciencies.38 They needed unhinderedaccesstomarkets,resourcesandcapitaltoescapethematurityoftheirdomestic markets. In the space of a couple of years, labour-intensive industries had disappeared from the OECD countries and were replaced by more service-oriented sectors. This shift in the composition of GDP not only reduced the energy intensity of these economies but also allowedforapartialmoveawayfromoil.Coal,nuclearandnaturalgasgainedprominencein electricitygenerationandindustry.Theinternationalisationofproductionandcapitalandthe restructuringofdevelopingcountries’debtsalsostreamlinedthediscussionabouteconomic governance among the OECD countries, particularly when the EU countries managed to maintaintheirexchangerateregimeandJapangaveupitsmanaged�loatagainstthedollarin themid-1980s. Dicken,Peter(2007).GlobalShift:MappingtheChangingContoursoftheWorldEconomy.Sage PublicationsLtd.,London. 38 36 For producer governments, the international economic developments also had large implications. Their goal to increase and stabilise their real income from oil was lost in the chaotic economic governance prevalent after 1973. In the years to follow, nominal price increasescouldnotkeepupwithin�lation.Producingcountrieswithalowabsorptioncapacity haddifferentproblemsthanOPECcountries,whichhadamoresubstantialabsorptioncapacity. Almostimmediately,thesuccessof1973-74ledtointernalgovernanceproblemsinOPECand showedthediversityofitsmembership.Theseproblemscentredonthedistributionofincome among the member states, an often-recurring theme in the years thereafter. The allocation of risks and bene�its in the new governance system centred on the levels of production of the member states, the price system linking the OPEC crudes to the marker crude, and the roleofthedollarinoilpricing.Somegovernmentshadalsoraisedexpectationsamongtheir populationsforaquickanddecisivespurtinwelfareonthebackofthepoliticalvictoryover theIOCsandtheOECDcountries.Thefallinrealoilprices-butalsothecomplexityofquickly ramping up investments in the uncertain economic environment - quickly frustrated the deliveryofthesepromises.Althoughthereshuf�lingofcontroloverreservesandproduction hadsucceeded,themonetarydevelopmentschallengedtheirabilitytomanagetheireconomic sovereigntyinadifferentmanner. ManagingOilMarketsandMoneyIncome Foroil-producingcountries,theaimtostabiliseoilpricesandsecureastableoilincomehad proventobeverydif�icult.Theeconomicdif�icultiesinthemainmarket,theOECDcountries, hadarrestedgrowthofoildemand.Moreover,thedecisiontoreplaceoilinpowerstationswith coal,nuclearandgaschangeddemandforoiltothewhiterendofthebarrel.TheOPECcountries werethusconfrontedwithlowoildemandgrowthintheirmainmarket,adepreciationofthe dollarandadeclineinthevalueoftheiroilincome,whichcouldnotbecompensatedbythe lowrealinterestrates.Atthesametime,theybeganinvestingintheirowneconomies,mainly inre�iningandpetrochemicals.Theoversupplyinthesemarketswaslarge,however,because asizablecapacityhadbeenunderconstructionfrombeforetheoilpriceincreaseandcameon streamwhenthemarketshadchanged.Largebarrierstotradefortheseproductspersisted intothelate1980s,whentherationalisationofthesectorwascompleted. The performance of these investments was further undermined when oil prices had to be supportedbyproductionreductionpolicies.Thedistributionofproductionquotatostabilise the market had already been dif�icult in the 1970s, bringing to the fore the large diversity among the OPEC member states. The swelled ranks of member states consisted mainly of relativelysmallproducersandproducerswithahigherabsorptioncapacitythantheMiddle East Gulf producers. It was the Middle East producers that were called upon to reduce productionandmanageworldsupply.Thegrowthintheirbuffercapacityinthe1980stesti�ies tothiscostlyrole.Atthesametime,thedecisiontostabilisetheoilpriceatafairlyhighlevel unlockedpreviouslyuneconomicresourcesin,forinstance,theNorthSeaandAlaska,which increasingly competedformarket share with OPEC producers,who were also embroiled in discussions about balancing the quality of crudes and the price compared to the marker crude.Distributingtherisksandbene�itsofbeingthemainoilmarketgovernanceprovider after1973hasproventobemoredif�icultforanorganisationofcountriesthanithadbeen foragroupofcompaniesinthe1960s,inpartbecausemorepoliticswasintroducedthanhad alreadyexistedinoilmarketgovernance. 37 If lack of investment capital had been holding the development of their economies back before1973,theabundanceofcapitalwasalmostasdif�iculttomanagefromtheperspective of development and monetary stability. Although developing the oil value chain in their economies was logical, the performance of these investments was slow to manifest. This waspartlyduetothepartialreversalofthevaluechainorganisationfromre�inerieslocated closetothemarketbacktoclosetothelocationofcrudeoilproductioninaninternational marketalreadysufferingfromovercapacity.Dependingonthestrategyincertainmarkets,the IOCsthatmaintainedaninternationalmarketfocuswereinterestedinjointventuresinthe producingcountrieswhilerationalisingtheirowndownstreamcapacitiesintheOECD.After thenationalisationofreservesandproductionofthe1970s,IOCslikeExxon,ChevronandShell engagedinbackwardintegrationinnewoilprovinces(NorthSea,Alaska)andinreorganising their downstream operations to re�lect their new market positions. Other US companies initiallywithdrewontheirhomemarkets,whileBPwasfocusedonboththeAmericanmarket andtheNorthSea.Somecompanies,bothintheUSandinEurope,werealsoproponentsof protectionoftheirdownstreammarketsforthisnewcompetitionfromproducingcountries. In Saudi Arabia, the downstream sector also suffered from OPEC’s oil production policy becausethepetrochemicalsectordependedonassociatedgasforfeedstock.OPEC’sdecisionto attempttostabiliseoilpricesatthehigh1979levelrequiredsubstantialcutsinoilproduction andsubsequentlyreducedthesupplyoffeedstock.Furthermore,thedevelopmentofsimilar projects in neighbouring countries led to oversupply in the new oil-related industries. The oversupply in international airports, shipyard docks for large oil tankers, re�ining, etc. emphasisedthelackofcoordinationintheseeconomicdevelopmentplansandundermined their initial performance until more coordination was introduced and oversupply in other marketswasworkedaway.39RegionalcompetitionintheGulfwasgreatandwaspolitically driven,particularlyaftertheIranianrevolutionandthesubsequentoutbreakoftheIran-Iraq warinthe1980s. The investment of oil income in the domestic producing economies was both complicated - due in part to gaps in infrastructure and to labour market rigidities - and slow in terms of changing the economic structure of the countries. The dependence on oil income had grown substantially since 1973 and persisted when the new investments were slow in showingpro�its.Throughoutthe1980sand1990s,thedependenceofOPECmemberstates on oil income was very high, particularly as compared to countries such as the US, the UK, NorwayandRussia,whichhadmuchmorediversi�iedindustrialbases.40Therelativelylow absorptioncapacityinsomeproducingcountriesalsopreventedsomeoftheoilincomefrom beinginvestedinthedomesticeconomyandwaseitherinvestedincompaniesintheUSand Europeorinportfolioinvestments.Intheearly1980ssomeindustrieshaddif�icultyraising capital to restructure their businesses. Capital from oil-producing countries was available butoftencreatedpoliticalproblems,andholdingswere,moreoftenthannot,limitedto2224%.Theinvestmentsinmarketre�ineriesintheUSandEuropeencounteredinitialadverse governmentresponseswhentheKuwaitOilCompany(KOC),SaudiAramcoandPetroleosde Venezuela,SA(PDVSA)begantoinvestinforwardintegrationtosecuremarketsfortheiroil. Noreng,Øystein(2007). Treisman,Daniel,“RethinkingRussia:IsRussiaCursedByOil?”in:JournalofInternationalAffairs, Vol.63,no.2,Spring/Summer2010,pp.85-102. 39 40 38 Theoppositionthattheyencounteredwaslargelypoliticallystrategicinnatureandre�lected the fear foreign governments had of becoming dependent on foreign state-held companies asopposedtoforeignprivatecompanies(whoseheadof�iceswereintheOECD).State-held companies, it was feared, would not act in the interest of security of supply or help these consumingcountriestoachieverelativelyinexpensiveenergyprices,twomaingoalsoftheir energypolicies. TheRestructuredOilValueChainAfter1978 The1973crisismadepainfullyclearthattheoilgovernanceofthepreviousdecadeshadcome toanend.InitsplacecameanemboldenedOPEC,representingthenetoil-exportingcountries, which, with its production policies, could in�luence crude oil prices and �lows but also the externalbalanceofimportingcountries.Nationaloilcompaniestookovertheexploitationof crudeoilreserves.Initially,theIOCshadmaintainedaprivilegedroleintradingthisoiland thuswerealsoabletorestructuretheirrelationswiththehostcountrygovernments,butafter thesecondpriceincreaseof1978-79thistradingprerogativeoftheIOCswasseveredandoil found its way to the market directly. With the termination of many long-term oil contracts duringandafterthesecondpriceincreaseandtheintroductionofshorter-termoilcontracts orspotmarketoilcontracts,theverticallyintegratedmodelbecamelessprominent.Although IOCs began to develop oil resources elsewhere, they never returned to their crude-rich positionsofthepreviousdecades.Insteadtheysourcedtheirdownstreamoperationswitha mixtureoftradedandequityoil,basedonmarketprices. ThenationalisationofcrudeoilreservesandproductionstimulatedtheIOCstoconcentrate theirnewupstreaminvestmentsin‘safe’countries,i.e.,wheretheriskofappropriationwas smalltonegligent.TheyreplacedthisoldriskwiththeriskofdevelopingfrontieroilinOECD countries.ThedevelopmentofnewoilinAlaskaandtheNorthSeaplayedanimportantrole intherecoveryofmanycompaniesassigni�icantmarketplayers,helpingthemtoregainsome oftheirmarketpowerintheratherstagnantoilmarketofthelate1970sand�irstpartofthe 1980s.ThepricepolicyofOPEChelpedtheminthisstrategybecauseitprovidedthemwith a more or less guaranteed minimum price with which they could make their business case for developing this more expensive oil. Once this oil came on stream, it began to compete formarketsharewithOPECoil,actingasOPEC’scompetitivefringe.Asaresult,someOPEC memberstateshadmountingdif�icultiesadheringtotheOPECpolicies,particularlybecause nosolutionwasfoundastotheproperpricespreadtotheadministeredOPECcrudes. TheIOCsalsobeganaprocessofconsolidation:purchasingoilreservesonWallStreet,inpartto rebuildtheirportfolioinadditiontodevelopingnewoilprovinces.SomeoftheIOCs,although stricken by the sudden loss of their very pro�itable assets in OPEC countries, managed to surviveandrebuiltthecompanyactivities,whileothersweretakenover.Newbusinessmodels begantosurfacebasedontheirstrongpositionsinthedownstreamanddistributionpartsof thevaluechainandtheirabilitytogenerateknowledgeandcapitaltodevelopmorecomplex upstreamprojects.SomeofthelargeIOCsalsobegantodeveloptheirnaturalgasbusinesses asasecondcoreactivity,particularlywhennaturalgasgainedmoreprominenceintheenergy mixofcountries.Mostcompaniesfocusedtheireffortsoncostsavings,theenergyef�iciencyof operations,technologyandcapital-intensivedevelopments. 39 Yet the overwhelming competitive edge of the IOCs of the 1950s and 1960s, based on the then large and relatively inexpensive opportunity to develop sources of the Middle East, was gone. Companies that had been crude short before 1973 seemed more able to adapt anddevelopstrongtradingdepartments,ineffectbene�itingfromthelevellingplaying�ield, whilecompaniesthathaddependedsolelyupontheirMiddleEastassetsencounteredmore dif�icultiesininvigoratingtheirbusinessmodels.Althoughthepriceincreaseof1978-79had boosted most of the companies’ balance sheets enough to afford investments in new crude oil production capacities, some companies simply did not have the upstream capability to quickly retool for new provinces. Moreover, depressed demand also pressured the margins inthedownstreamendofthebusiness,requiringthesubstantialrationalisationofcapacity. Government policies played an important role in the restructuring of both the re�ining and petrochemicalpartsofthevaluechain.41 Bythemid-1980sbothoilpricesandthevalueofthedollarhadbeguntoslip,reducingthe pressureonthemarginsofthemostef�icientpetrochemicalplantsintheOECD.Furthermore, thechangeinOPECpriceandproductionpolicyallowedSaudiArabiatogainalargershare of OPEC production consistent with their reserve base and subsequently increased the availability of feedstock. The time was becoming ripe to restructure this part of the value chain. When restructuring in OECD markets commenced in the late 1980s, capacities of smallerorlessef�icientcompanieswerescrapped,andmarketaccessforthenewcapacityin oil-producingcountriesbecameeasier.Onlywhenovercapacitieswere�inallyworkedawaydid marketaccessimprove.Insomecases,theNOCsimprovedtheirmarketaccessthroughdirect investmentsinthedownstreamsectorsinconsumingcountriesbypurchasing–eitherinjoint venture or in full – distressed assets of oil companies. Saudi Arabia, Venezuela and Kuwait tooktheleadindevelopingmarketaccessthroughverticalintegrationinforeignmarkets.This wasaresponsetotheincreasingcrisisintheoilprocessingindustryintheircountriesandthe desiretocreatesecurityofdemandfortheiroil. OPECProductionPolicyinaDepressedOilMarket Thecombinationofoilpriceincreasesinthe1970s,theappreciationofthedollarintheearly 1980s, the shift away from oil policies and economic restructuring in the OECD countries greatlyreduceddemandforoil.Whennewsuppliesbegantoenterthemarketintheearly 1980s,theOPECcountrieswereforcedtoreduceproductionsubstantiallyinordertodefend theagreedupon(relativelyhigh)pricelevel.Circumstancessurroundingthepriceincreases in1979-80hadtestedcon�idenceamongOPECmemberstates.Asaresult,thereductionwas mostlybornebySaudiArabia,KuwaitandtheUnitedArabEmirates.Whenmoreproduction cutswereneeded,thecostofhavingstabilisedpricesatahighlevelbecamevisible. 41 40 IntheUSmarket,alargepartofre�inerycapacitywaswithstand-alonesmallre�ineriesgeared towardsthelighterendofthebarrel.Thesectorwasmuchmoredispersedamongmanycompanies, someofthemverysmall,whileinEurope,re�inerieswereoftenpartoflargerpetro-chemical complexes(Marseilles,RotterdamandAntwerp)andthemarketwasmoreofanoligopoly.Bothin theUSandEurope,authoritiesat�irstprotectedtheirdownstreamsectorsandonlylaterbeganto pressurethemtorestructurecapacity.IntheUS,theCleanAirActwaseventuallyastrongmotivation torestructurecapacity,whileinEurope,theCommissionallowedcompaniestoswapcapacitiesto rationalize.Thisalltookplaceinthesecondpartofthe1980s.SeealsoSeymour,Adam(1990).The WorldRe�iningSystemandtheOilProductsTrade.OIES,WG2. TheIran-IraqwarthatbrokeoutinSeptember1980andlasteduntilAugust1988strained OPEC’s cohesion at the political level but also effectively removed both crude oil export capacity and impending downstream capacity from the market, reducing some of the pressureonboththecrudeandproductmarkets.Managingtheinternationaloilmarketand satisfyingthenationalpoliticalandeconomicneedsofthememberstateswasverydif�icult withoutupsettingrelationsamongproducingcountries.Stabilisingthecrudeoilpriceatthe relativelyhighpost-1978-79levelwasthusultimatelyverycostlyandnowappearstohave beenshort-sighted.42Theimpactoftheoilpricedeclineof1986ontheireconomieswasvery large. Conclusion ThepolicyresponseoftheOECDcountries,whichrepresentedthebulkofcrudeoildemand intheworldatthattime,notonlyhelpedtheinternationaloilsectortoabsorbthe1970soil crises but also delineated the framework in which oil relations would evolve thereafter. In additiontotheirmarketsizeandcapitalformation,theOECDcountrieswereveryin�luential inthethenexistingmultilateralorganisations.TheassessmentoftheOECDcountriesofthe impactoftheoilcrisisincludedamixtureofeconomicandpoliticalshort-andmedium-term concerns,inwhichmaintainingthebalanceofpowerwasimportant.Theirresponsetothe 1973-74 crises had been largely political, while their response to the 1978-79 crisis was mainlyeconomic.Unwittinglyornot,theinternationalmonetaryrelationswereredesignedas asideeffectoftheoilcrises.Thisresponsewasnotonlyinspiredbythedeedsoftheproducer countries,whichseriouslychallengedOECDsupremacyoverthemarketeconomygovernance, butalsobythemountingwranglesamongtheOECDcountriesovertheevolutionofthatsame governance system. The different visions and aspirations about the international political andeconomicsystemthathadsurfacedintheearly1970splayedamajorroleinthewaythe consumercountriesrespondedtotheoilcrisesofthe1970sandhow,inadditiontoOPEC, governanceofinternationaloilrelationswaseventuallyshaped. SaudiArabiainitiallyresistedincreasingitspricelevelin1980forthisreason,andfollowedthenew OPECpoliciesfrom1982onwards.Alnasrawi,Abbas(1985),pp.83-85. 42 41 42 Chapter3:ShiftingRelations Introduction Withthegrowthoftradeandthepoliticalemancipationofmanynewcountries,theexpectation thattherewouldbeaquickcatch-upintermsofdevelopmentwaswidespread.Thechanging energyrelationswerepartandparcelofthechangingpoliticalandeconomicrelations.Yetthe speedandthewayinwhichthesechangescameaboutrockedtheinternationalsystemand createdarelativelylongperiodofadverserelations. ThefoundationoftheUnitedNationsanditsmanyorganisationshadcreatedanewsystem ofinternationalgovernanceforaworldthatgraduallytookshapefromthe1940sonward.A worldsystemofnationstates,whichwererepresentedintheGeneralAssembly(GA)ofthe United Nations, replaced the former colonial empires. Many issues were now discussed on aonecountry,onevotebasis,withtheexceptionoftwokeyareasimportantforacountry’s relative power: international peace and security and international economic governance.43 Yetthenewlyindependent,mostlydeveloping,countrieshaddif�icultytranslatingtheirnew political standing into an economic take-off. This increasingly created frustration with the UNgovernancesystemandresultedincriticismoftheskewedeconomicorderintheworld. WhilepoliticalmomentumwasgrowinginthevariousUNinstitutionstodiscusschangingthe governancesystem,theperiodofrapidworldtradegrowthandmonetarystabilityhadcome toanend. Inthe1960s,mountingbalanceofpaymentsand�iscalde�icitsintheUShadweakenedthe dollar, the bedrock of the Bretton Woods system. The European countries were, however, reluctant to appreciate their currencies and thus lose the competitive advantage that had propelledtheireconomicgrowth,withoutgeneratingsomemorein�luenceingovernance.The EuropeancountriesmuchpreferredtheUStoabsorbthis‘economicgovernancecost’,although theyhadbene�itedgreatlyfromtheremovaloftradebarriersinthesuccessiveGATTtrading rounds,theexchangeratestabilityandtheavailabilityofcheapenergy,inadditiontohaving beenabletoremovetheinternalbarrierstotrade.Additionally,inthe1960stheEuropean Community had begun to organise its relations with its members’ (former) colonies in the Yaoundé agreement, followed in the 1970s by the Lomé agreements, in effect giving more bene�itstothesecountriesthanothershadinaccessingtheEuropeanmarketandproviding economic assistance. Particularly France had become more and more outspoken about the IntheUNSecurityCouncil,the�ivepermanentmembers-theUS,France,theUK,RussiaandChina -havevetopower,whileintheIMFandWorldBank,theUSandtheOrganisationofEconomic CooperationandDevelopment(OECD)countrieshaveacontrollingvoteoverIMFpolicy. 43 43 dominance of the US in the international economic system. The War of Independence in Algeria, and the attempts to normalise relations thereafter, also had a deep impact on the Frenchforeignpolicyposition.Atthesametime,theUSwasalsochallengedinitsposition asleadinggeopoliticalpowerintheUN,andNorth-Southissueswereresoundingmoreand more loudly in meetings.44 The forcefulness of some leaders in resisting US leadership was signi�icantandgainedgroundintheyearsprecedingtheoilcrisisof1973: As a closely related phenomenon, increasing LDC cohesion and militancy on the issue of the control of natural resources. While the difference from previous GAs [General Assemblies]wasoneofdegree,wesawsigni�icanceinthethunderousapplausegreeting the speeches of Boute�lika (Algeria), Salvador Allende and other spokesmen for more extremepositions;intheresonanceforchargesagainst‘multinationalcorporations’and theunanimousLDCvoteonpermanentsovereigntyovernaturalresources.45 FromdiscussionsintheUNwelearnthatdevelopingcountriesraisedtheirconcernsabout uneven economic development in the world at any opportunity. It became clear that the discussionaboutoilin1973-74waspartofamuchlargerdiscussionabouttheinternational economicsystem.Inmanydevelopingcountries,theoilpriceincreasesof1973wereseenat �irstasapoliticalactinde�ianceoftheNorth’shegemony. Non-OECDCountries’Perspective DevelopingcountrieswereenthusiasticabouttheassertivenessofOAPECandOPECintaking control of oil. They initially translated this enthusiasm into the adoption of a resolution in theUNGeneralAssembly.Inthisresolutionof1May1974theycalledforanewinternational economic order, in which many of their objections to the existing economic system were voiced.46Thisresponseunderlinedhowtheoilcrisiswasembeddedinwiderissuesconcerning economicgovernanceanddealtwithunequaldevelopmentandgrowth.Also,manydeveloping countrieshadnotenteredtheirenergy-intensivephaseofdevelopment,orhaddonesoonly recently,andwereinitiallylessconcernedabouttheirenergycosts.Instead,theyweremore focusedonbroadeningtheimprovementofthetermsoftradetootherresources,whichwould compensateforhigherenergyprices,andexpandingsovereigntyovereconomicpolicy-making. Thepoliticalclaimofthedevelopingcountrieswereaidedbyapublicdiscussionaboutthe ClubofRome’sreportof1972,whichwarnedofgrowingrawmaterialscarcityandfuelledthe fearsheldbytheOECDcountriesthatthecartelisationofthesemarkets,theirnationalisation, orboth,wasimminent,andalsolaiddowninareportonReshapingtheInternationalOrder.47 ForeignRelationsoftheUnitedStates,1969-1976,VolumeV,UnitedNations,1969-1972,Document109. ForeignRelationsofTheUnitedStates,1969-1976,VolumeE-14,Part1,DocumentsontheUnited Nations,1973-1976,Document1at http://history.state.gov/historicaldocuments/frus1969-76ve14p1/d1. 46 TheDeclarationfortheEstablishmentofaNewInternationalEconomicOrderwasadoptedby theUnitedNationsGeneralAssemblyin1974andreferredtoawiderangeoftrade,�inancial, commodityanddebt-relatedissues(1May1974,A/RES/S-6/3201);http://www.un-documents.net/ s6r3201.htm. 47 Meadows,DonellaH.,DennisL.Meadows,JorgenRandersandWilliamW.BehrensIII.(1972).The LimitstoGrowth.UniverseBooks,NewYork;Dolman,A.J.(ed.),Tinbergen(coordinator)(1976). ReshapingtheInternationalOrder:AReporttotheClubofRome.Dutton,NewYork. 44 45 44 Although not immediately, it became clear that other natural resources were not as easily organisedintoagroupingoralliancewhichcouldbeleveragedinhigherprices,andalsothat scarcity was not as acute as had been feared. Nevertheless, the uncertainty about scarcity, the loosening grip of multinational companies on raw materials and the mounting political demandsintheUNinstitutionsofthedevelopingcountries,eggedonbytheoilcrisistofurther theirdemands,absolutelyprejudicedthevariouspoliticalresponsesoftheindustrialisedoilconsumingcountries.Theearlyenthusiasmoftheoil-consumingdevelopingcountriesbeganto fadewhentheireconomies,too,wereimpactedbytheoilpriceincreases. ThecentrallyplannedeconomiesofChina48andtheSovietUnionandEasternEuropetrading bloc, Comecon, were not dependent on oil imports, and inter-bloc oil trade was based on administrated prices which re�lected a �ive-year average of international oil prices. Based on thatsystem,theimpactwouldbedelayedandthepeakspossiblyaveragedout.Fromthe1960s onward,theSovietUnionwasasmallexportertointernationalmarketsandthussawthevalue oftheseexportsincreaseasaresultoftheoilcrisis.Italsocreatedamuchwidergapbetween theinter-ComeconoilpricesbasedontheBucharestformulaandtheworldmarketprice,raising Sovietinterestinrenegotiatingthissystem.TheavailabilityofcheapenergyfromtheSovietUnion andofcheapcapitalfrominternationalbanksinvolvedinoil-dollarrecyclingenticedtheEastern Europeancountriestospeedupthemodernisationoftheireconomies.Beforelong,however, theBucharestpriceformulawasadaptedtofollowworldmarketpricesmuchmorequickly,in anattempttoreversethegrowingroleoftheSovietUnionasamererawmaterialsupplierto theotherpartnersinthetradingbloc.Theoilcrisisalsohadalargeimpactonrelationswithin thegroupofComeconcountries,somethingwhichisoftenunderestimated.49Forinstance,the 1980sgascampaignwasbutoneoftheresultsofthechangesintheenergyrelationsamongthe Comeconcountries.Althoughdelayed,theoilpricecrisisalsoledtolargechangesinthefuelmix oftheComeconcountries. ConfusioninOECDConsumerCountryRelations The industrialised consuming country front was not as homogeneous as is often assumed, although in the 1980s many of the disparities had softened somewhat.50 The immediate responsetothe1973oilcrisishadbeentorelyonnationalpolicymeasurestomanagedemand, despitetheexistenceofsomejointpolicyinstruments,andtobegintodiversifyawayfromoil, asevidencedbystatementsbyPresidentNixonandsomeEuropeanleaders.51Theavailabilityof domesticresourcesobviouslyplayedaroleinthepoliticalresponsetothecrisis.TheUS,although importingoil,wasalsoasubstantialenergyproducer,andthepriceincreasealsoboostedthe domesticoilsector.Forotherconsumingcountries,expansionofdomesticproductionwasnot animmediateoption,althoughtheshiftinrelativeenergypriceswasalsoforthemanincentive toexploreotheroptionsintheenergymix.Furthermore,somecountriesimmediatelybeganto engageincountry-to-countrynegotiationstosecuretheiroilimports,whileothersreliedonthe abilityoftheIOCstore-arrange�lows. Chinawasself-suf�icientinenergyatthetime,andtheopeningupofitsenergymarketcamemuch later. 49 Gustafson,Thane(1989).CrisisamidPlenty:ThePoliticsofSovietEnergyunderBrezhnevand Gorbachev.PrincetonUniversityPress. 50 Scott,Richard(1994).pp.32-33, 48 45 Within the framework of the OECD, cooperation in oil policy had already been initiated in the wake of the Six Day War of 1967 and included strategic oil stocks and discussions aboutoilsharingintimesoftightsupplies.Yetsurprisingly,thisschemewasnotactivated duringtheoilcrisis.52TheArab-Israelicon�lictandtheoilcrisisexposedthewide-ranging differences of opinion among the US, the European countries and Japan on many issues. Also within the EC it very quickly became clear that solidarity among the member states wouldbethin,alsowithregardtotheembargoontheUSandNetherlands(andlateralso Portugal and Denmark).53 This was not only due to different economic interests, but also to political differences about the extent of European cooperation, the future of the transAtlanticrelations,governanceoftheeconomyand,lastbutnotleast,relationswiththeArab countries. Inparticular,US-Frenchrelationswerestrainedoverbotheconomicgovernanceandsecurity matters, which were further emphasised during the oil crisis. All sorts of differences, whichhadlingeredbefore,begantosurfacein1973.YetinhislandmarkPilgrimsspeech in December 1973 London54, Secretary of State Kissinger made an important outreach55, commenting on relations with the European countries, and the changing relations in the world,saying: Aswelookintothefuturewecanperceivechallengestowhichourrecentdisputesare trivial.Anewinternationalsystemisreplacingthestructureoftheimmediatepost-war years.TheexternalpoliciesofChinaandtheSovietUnionareinperiodsoftransition. WesternEuropeisunifying.Newnationsseekidentityandanappropriaterole.Even now, economic relationships are changing more rapidly than the structures which nurtured them. We, Europe, Canada and America have only two choices: creativity togetherorirrelevanceapart. Hisspeechthenmovedtoenergyrelationsandtheproperresponsetotheoilcrisis,which hedeclaredwerenotcausedbytheArab-Israelicon�lict,butwhichhadmerelyhastenedto bring out the underlying chronic problem to an acute phase. He proposed as a long-term www.ena.lu,Searchundertheheading“OilCrisis1973”. Scott,Richard(1994).P.37. 53 TheNetherlands,atthattime,homeoftheworld’slargestportandimportantforoilandoilproduct suppliestosurroundingcountries,wasparticularlyhitbytheembargo.Tostrong-armtheEC memberstatesintocooperation,theNetherlandswentsofarastothreatentowithholdoilandoil productexports,onwhichGermanyandBelgiumdepended,andnaturalgasexports.SeeHellema, Duco,CeesWiebesandTobyWitte(2004).“TheNetherlandstheOilCrisis:BusinessasUsual”. AmsterdamUniversityPress,pp.73-95. 54 Kissinger,Henry,NewYorkTimes,13December1973. 55 ThiswasnecessarysinceanearlierspeechinApril1973abouttheAtlanticrelationshipandthe inclusionofJapanhadledtoconfusionanddismayamongEuropeancountries,whichwerekeen ondevelopingpoliticalunity.Workontherenewalofthe‘AtlanticCharter’inthesummerof1973 showedhoweverthatrelationsbetweentheUSandFrancewerequicklyunraveling.Pompidou’s health,WatergateandtheroleoftheFrenchforeignministerJobertincarvingoutastrongposition forFranceto‘unlocktheYearofEurope’,wereimportantreasonsforthecoolingofrelations.These issues,includingtheeconomicones,playedanimportantroleintheresponsetotheoilcrisisandits aftermath.Kissinger,Henry,YearsofUpheaval,Little&BrownCompany,Boston,1982,ChapterVThe YearofEurope,pp.151-162andChapterXVITroubleswithAllies,pp.700-746. 51 52 46 solutiontomake‘amassiveeffort’tocreateincentivesforproducerstoincreasesupply,to encourage consumers to use existing supplies ‘more rationally’ and ‘to develop alternate energysources’.ForthispurposeheproposedthattheUS,Canada,EuropeandJapanwould createanenergyactiongrouptosolvewhathecoined‘theenergyproblem’.Thisproposalto cooperateinthe�ieldofenergyresultedintheWashingtonEnergyConferenceinFebruary 1974andthefoundationoftheIEAinNovember1974. YetthefoundationoftheIEAcameaboutwithsomedif�iculty.Thereweredifferencesbetween thosecountriesthatwerehometooneoftheIOCs(theUS,theUKandtheNetherlands)and thosethatwerenot(FranceandItaly),whileinaddition,thelevelofimportdependencyand dependenceontransitcountries(GermanyandBelgium)in�luencedgovernmentalresponse. Distrust among certain consumer countries ran deep, as did domestic political problems, for instance in the UK (about EC accession and a coal strike) and the US (Watergate), complicating a more coordinated response. France, while promoting a strategy of broad cooperation was at the same time, like others, involved in pursuing special relationships with OPEC countries. In the many years thereafter, the failure to overcome the national interestsintheearly1970sandthedifferentforeignpolicyapproachesemergingduringthe oilcrisisbecamealargestumblingblocktobeingabletocoordinateenergypolicieswithin the EU.56 Some of these dif�iculties stemmed from the preference for intergovernmental coordination rather than the intra-governmental approach of the EC of that time, which could have been encouraged by the growing distrust over motives when dealing with the transatlanticrelations.57 In the course of the step-by-step diplomacy process in the Middle East, conducted by American Foreign Secretary Kissinger, tensions in the EC mounted between the Atlanticoriented member states and the French. According to Kissinger’s memoirs covering that particular period, Years of Upheaval, the animosity between himself and Foreign Minister Jobert surfaced repeatedly.58 The differences of opinion between the French and the InaFinalDeclarationoftheCopenhagenSummit:specialannexontheenergycrisis(15December 1973)regardingthestrategytoopendiscussionswithbothproducingcountriesandwithother consumingcountries,itsays:“TheHeadsofStateorGovernmentcon�irmedtheimportanceof enteringintonegotiationswithoil-producingcountriesoncomprehensivearrangementscomprising co-operationonawidescalefortheeconomicandindustrialdevelopmentofthesecountries, industrialinvestments,andstableenergysuppliestotheMemberCountriesatreasonableprices.They furthermoreconsidereditusefultostudywithotheroil-consumingcountrieswithintheframework oftheOECDwaysofdealingwiththecommonshortandlong-termenergyproblemsofconsumer countries.”(www.ena.luSee“Events,PeriodandRelationswithMiddleEast”).Thewordingrevealsthat seekingcooperationwithproducersisstrongerphrasedthanthesentencereferringtotheinvitation oftheUStoformaconsumeractiongroup,mentionedbyKissingerinhisspeechinLondondays beforetheSummit.IntherunuptoandduringtheWashingtonEnergyConferenceEuropeanunity unravelledandtheOECDcountries,exceptforFrance,beganpreparationsintheEnergyCo-ordinating Group,whichledtotheIEA.Scott,Richard(1994)),p.46/47.Untiltoday,securityofsupplypolicyhas largelyfallenoutsidetherealmoftheEU,althoughtheLisbonTreaty(2009)�inallymadeitashared responsibility(withnationalgovernmentsofthememberstates). 57 “Energievergteenenergie(k)beleid”.Lefeber,R.andJ.G.vanderLinde,in:SEW(6),June1987. 58 Con�irmedinaninterviewwithDavignon(wholaterchairedtheECGin1974)onhisassessmentof developmentsattheenergyconferenceinWashingtoninFebruary1974.www.ena.lu.See“Events, PeriodandRelationswithMiddleEast”. 56 47 AmericansalsoemergedduringtheWashingtonEnergyConferenceinFebruary1974.59Inhis speechattheconference,theFrenchForeignMinisterJobertspokeoutagainstanorganisation ofonlyindustrialisedconsumercountries,andinsteadstressedtheimportanceofincluding developingconsumingcountriesandproducingcountries60,despitereferencesintheclosing statementoftheWashingtonEnergyConferenceandintheIEApreamblestocooperationwith producinganddevelopingconsumingcountries.61Francewasdeterminedthattheoilcrisis shouldbeseeninthewidereconomiccontextandincludeallpartiesinareshuf�lingofthe worldeconomicorder.62TheFrenchpromotedEuropeanleadershipinthesediscussions,but otherstook a dim view of their approach, not least because of the confrontational position takenbysomeofthedevelopingcountries,suchasAlgeria,inthemidstoftheoilcrisisandthe valuetheyattachedtothetransatlanticrelation. The Netherlands was particularly upset by the limited support it had received from its EC partners in dealing with the oil embargo and had to strong-arm support for its position as animportantpointofentryforoilandoilproductstotheNorthwestEuropeanhinterland.63 Moreover,itwasalsoamaingassuppliertootherEuropeancountries.TheDutchweredeeply engagedintrans-Atlanticrelationsandwere,perhapsforthatreason,lessenthusiasticabout the French approach. A Dutchman (Van Lennep) was heading the OECD, while the Dutch alsoheldcrucialpositionsintheIMF(Witteveen)andNATO(Luns),creatingamuchcloser relationshipwiththeUSadministrationthanperhapshadbyothercountries. DespitetheUS-FrenchdifferencesandtheearlydeathoftheFrenchpresidentPompidouinthe springof1974,theWashingtonEnergyConferenceresultedintheestablishmentoftheIEA, undertheaegisoftheOECD.TheIEAwasfasttrackedtostartworkasquicklyaspossible,andin November1974theInternationalEnergyProgrammewasadopted,givinghandsandfeettoan emergencyresponsepolicyforthememberstates.64ThenewpresidencyofGiscard‘dEstaing didnotchangethepositionofFrancewithregardtotheIEAanditdeclinedtojoin.Moreover, the French redoubled their efforts to promote more wide-ranging discussions in which oil wouldbepartoftheagenda,too,intheConferenceonInternationalEconomicCooperation. InApril1975,inanattempttoenticeFranceinthroughtheIEA’sbackdoor,theindustrialised consumercountriesparticipatedinapreliminaryConferencetotheInternationalEconomic SpeechbyJobertattheenergyconferenceof11February1974inWashingtonandthepress conferenceof13February1974.Ortoli,fortheEuropeanCommission,andWalterScheel, ForeignMinisterofGermanyandspeakingfortheECPresidency,alsostressedcooperationwith consumingdevelopingandproducingcountriesdemonstratingtheEuropeanconcernsaboutwider internationalrelations.(Atwww.ena.lu.See“Events,PeriodandRelationswithMiddleEast”).The conclusionofmostministerswashoweverdifferentfromthatofJobertattheendofthemeeting, whentheyagreedtoparticipateintheECGandthentheIEA. 60 TheAmericanshadarguedthatconstructiveproducer-consumercooperationcouldonlycomeabout whenconsumerswouldcooperateamongthemselves�irst.ThefactthatOPEChadactedinunity hadconvincedthemthatconsumersalsoneededtobecomeorganise.www.ena.lu.See“Events, PeriodandRelationswithMiddleEast”.Kissinger,Henry(1984),p.920-925;SeeHellema,Duco,Cees WiebesandTobyWitte(2004),pp.214-217., 61 Scott,Richard(1994).pp.45-48. 62 Odell,Peter(1986).pp.239-244. 63 Hellema,Duco,CeesWiebesandTobyWitte(2004). 64 Scott,Richard(1994). 59 48 Cooperation,heldpriortothelargerconferenceofthisnamelaterthatyearinParis.65Inthis preliminary conference Algeria, Saudi-Arabia, Iran and Venezuela participated on behalf of the producing countries; other developing countries were also present. A failure to reach agreementonoilmattersnotonlychangedthescopeofthelargerconferencelaterthatyear, butalsoclosedthebackdoortoearlyFrenchparticipationintheIEA.France’sparticipation in emergency policies was then secured through the later adoption of similar EC policies, mimickingmembershipinthisroundaboutmanner. France’s efforts to discuss the oil crisis in a wider international economic context did not stop there. They also organised the very �irst G-7 meeting, which at the time included 6 countries:theUS,theUK,Germany,Italy,JapanandFrance.Theyconvened15-17November 1975atRambouillet,withtheoilcrisisandrestructuringofmonetaryrelationsdominating theagenda.FromthedocumentsofPresidentFord,releasedbytheUSStateDepartment,we learnthatthediscussionsatRambouilletabouttheoilcrisisandtheinternationalmonetary situation were surprisingly frank and profound.66 The atmosphere was constructive rather than acrimonious. The change in leadership in some of the leading industrial countries and the economic situation certainly played a role in this change of temperature. Yet the approach among the leading industrial countries remained divergent, with France focused onthewider,moresystemic,politicalandeconomicissuesandtheAmericansmorefocused on speci�ic issues within the prevailing political and economic arrangements. Interestingly, theotherleadersalsoexpressedtheirpreferencefordialoguewiththeproducingcountries, althoughtheywerealsoawareofthedif�icultiesduetotheantagonisticNorth-Southrelations. Importantly,atthemeetingalsoagreementontheneedtorestructuretheIMFwasreached, althoughittooksometimeforittobe�inalised.Balanceofpaymentassistancefordeveloping oil-consumingcountrieswasalsoagreedupon,reachingouttothisgroupofcountries. The success of the �irst G-7 meeting was not repeated in the Conference on International EconomicCooperation,whichstartedon16December1975.Toomanyissuesandtoomany opposing views and positions prevented this conference from producing any substantive results,althoughdiscussionscontinuedforanumberofyears.Thediscussionsbetweenoilproducingand-consumingcountriescontinuedaswelluntiltheoilcrisisof1978-79,atwhich time,intheeyesofconsumingcountries,OPECcountriestookadvantageoftheIranian-Islamic revolutionbyallowingpricestoincrease.Fromthenon,thedialoguebrokedownduetoalack oftrust. Thus, the attempts of France to come to a restructuring of the global governance system, includingthatofresourcetradeandmakingtheECafront-runnerinthosedevelopments,did notreallymaterialise.Thesecondoilcrisisandthesubsequenttighteningofthemoneysupply in the US and the general atmosphere of economic restructuring changed the focus from the international to the national spheres. The US change in economic and monetary policy was instrumental in changing the focus of economic policy-making in other countries. The Europeancountriesveryquicklydiscoveredthatdivergingeconomicpolicieswereconstrained Metzemaeker,L.“DeEuropeseGemeenschapendeenergiecrisis”,in:NieuwEuropa,No1,January 1975,pp.52-56.Viawww.ena.lu 66 “EconomicSummitinRambouillet,France,15-17November1975”.in:ForeignRelationsoftheUnited States,1969-1976,VolumeXXXI:ForeignEconomicPolicy1973-1976,pp.386-452. 65 49 bytheirintegratedeconomies.Francehadtofollowthetightmonetaryandeconomicpolicies prevalentinothermemberstatesandwasunabletofollowitsownformulainthisnewround ofimbalances. Also,thecommonenergypolicytowhichtheECmemberstateshadaspiredinDecember1973 wassidelinedasaresultofthecon�lictingpolicyapproaches.TheEuro-ArabDialogue,alsopart ofthemany-prongedECenergydiplomacyinitiativesoftheECSummitmeetinginDecember 197367,alsoquicklypeteredoutwhenoilwasremovedfromtheagenda.TheConferenceon International Economic Cooperation, held in Paris on 16 December 1975 and destined to includeaproducer-consumerdialogue,becamesidetrackedinallsortsofotherdevelopment issues.In1991,againwiththeactiveinvolvementofFrance,the�irstministerialmeetingofa producer-consumerdialogue,nowknownastheInternationalEnergyForum,tookplaceinthe atmosphereprevalentafterthe�irstGulfWarinwhichconsumingandproducingcountries recognisedsuf�icientcommoninterestsinoilmarketstabilitytobewillingtotryagain. MaintainingProducerUnity The events surrounding the second oil price increase in 1978-79 and the economic impact startedaperiodofmoreconfrontationandestablishedadualgovernancestructure,withOPEC representingtheinterestsofproducercountriesandtheIEArepresentingtheinterestsofthe consumingcountries.TheproducingcountriesorganisedinOPEChadbeenstrugglingwith theimpactofin�lationontheirrealoilincomeinthe1970s.ManyOPECmemberstateshad embarkedon ambitious development programmes, using theiroil incometo leverage them into industrial economies, and some had used their oil reserves as collateral for loans. The changingmonetaryrelations-butalsotheshrinkingdemandforOPECoilinOECDmarkets -testedtheirneweconomicpoliciesandtheirrolesininternationalpolitics. TheNorth-Southdiscussionsalsoimpactedtherelationsamongtheproducingcountrieswhen it became clear that winning the oil debate with the international oil companies and their homecountrieswasonething,butwinningstabilityofoilincomewasanother.Acomplicating matterfortheproducingcountrieswasthelargedifferenceamongtheOPECmemberstates in absorption capacity. The economies of the OPEC countries varied widely in terms of oil reserves, production capacity, population, institutional make-up, economic development and political orientation. They represented a group of developing countries, some of them newly independent and not always politically stable at the time. In the period between the twooilcrises,bothIranandIraq,whichwereembroiledinabloodywarduringmostofthe 1980s,encounteredinternalpoliticaldif�icultiesandachangeofleadership.Manycountries struggledwiththepoliticalabsorptionofthenewriches,insomecasesbecausethepaceof modernisationwastoofast,leadingtoangeramongmoreconservativeforcesinsociety,while inothercountriesitwastooslow,leadingtosocialunrest.Adaptationtothenewcircumstances thuschallengedboththeinternal(mainlyeconomic)policiesandtheexternalpoliciesofthe producingcountriesinaninternationalcontextthatwasalsohighlyuncertain. AnnextotheSummitConferenceFinalCommuniqué,in:BulletinoftheEuropeanCommunities. December1973,No12,pp.11-12.www.ena.lu 67 50 Asaresult,OPECmeetingswereasifinakaleidoscope;everywordandmovemadeadifference incapitalcitiesaroundtheworld.Ateachmeeting,theworldpresswasoutinlargenumbers, addingtothepoliticalstresssurroundingtheministerialmeetings.Publicstatementsserved morepurposesthanoilpolicyalone,whichnodoubtcomplicatedenergydiplomacyfurther, withpoliticiansengagedinbothdomesticandinternationalpoliticalpositioning.Theturmoil surrounding the OPEC meetings was complete when Carlos, an international terrorist, captured the entire entourage of oil ministers, convening in December 1975 at the OPEC headquartersinVienna.Itshowedthatoiland(international)politicshadbecomecompletely intertwinedintheheatedatmosphereofthosedays.AlthoughOPECrepresentedproducing countriesfromSouthAmerica,Africa,AsiaandtheMiddleEast,thedominanceofthelatter impliedthatthepoliticaldif�icultiesamongArabcountriesandtheArab-Israelicon�lictkept croppingupontheoilagenda.Inbothconsumingandproducingcountries,the�irsthalfofthe 1970swasclearlyanintenseandchaoticperiodinwhichpoliticalandeconomicbalancingand re-balancingcreatedmassiveuncertainties. The migration of oil relations from the economic sphere (both commercial and strategic) solidlyintothestrategicpoliticalspherenotonlyaffectedrelationsbetweenproducersand consumers,butalsoamongproducers.Oilproducerswithrelativelymodestprovenoilreserves andasubstantialabsorptioncapacitybecameproponentsofhigherprices,theso-calledprice hawks,whileproducerswithsubstantialprovenreservesandlowerabsorptioncapacities,the moderates,preferredpoliciesthatunderpinnedtheirlonger-termoilincomestability.These economicpositionsandpreferenceswereoftendefendedinpoliticalterms.Theimpactofthe oilpriceincreaseondevelopingconsumingcountriesledtotheerectionofseveraldevelopment funds to assist these countries with their economic problems. Nevertheless, the economic problemsofthisgroupofdevelopingcountriesdidcausesomestrainwithintheGroupof77 countries,whichhadat�irsthoorayedthechangeintheoilmarketgovernance.Alsohere,the complexityoftheinternationalpoliticalandeconomicsituationwasampli�iedbythechanges inexchangeratesandmoney�lows,challengingtherelationsamongoilproducingcountries andrelationswithconsumingcountriesastimeworeon. NationalversusInternationalGovernance Forasubstantialnumberofyears,OPECmeetingscarriedmuchgeopoliticalweight.Ontheone hand,thissignalledtheimportanceofoilandoilpricestotheworldeconomy.Yetontheother hand,itechoedthenewprojectionofpowerininternationalrelationsbyagroupofdeveloping countries.68Theintertwiningofgeopoliticsandthenewtaskofrunningtheiroilsectorsina waythatbothservedtheeconomicdevelopmentoftheircountriesandmaintainedstabilityin theinternationaloilmarketsimmediatelyafter1973-74begantoemphasisethedifferencesin policyprioritiesbetweentheOPECmemberstates.ForlargeoilexporterssuchasSaudiArabia, stabilityandprosperityoftheglobaleconomywascrucialasthisensuredhealthygrowthin long-termoildemand.Forsmallerexporterswitharelativelylargeabsorptioncapacity,such asAlgeria,securingarobustpriceintheshortertermwasimportant.Thesedifferencesinoil policyprioritiescametotheforeintheoilpricecrisisof1978-79,provokedbyproblemsin Montgomery,ScottL.(2010).ThePowersthatbe,GlobalEnergyfortheTwenty-�irstCenturyand beyond,pp.213-240.TheUniversityofChicagoPress. 68 51 Iranianoilproductionandagainintheeventssurroundingtheoilpricecollapsein1985-86.69 DuetoastrikeoftheIranianoilworkersin1978,Iranianexportsquicklydeclined.Japanwas alargeimporterofIraniancrudeoilandwasforcedtopurchaseoilontheverysmallspot markettosupplementitsdeliveries.Atthetime,mostoilwastradedinlong-termcontracts, ofwhichsomewereacontinuationoftheagreementswiththelargeoilcompanies,andsome ingovernment-to-governmentcontracts.Thespotmarketrepresentedonlyasmallshareof totaltrade,allowingplayerstobalancedemandandsupply.WiththeIranianexportsindefault onthelong-termcontracts,Japanbegantopurchaseoilonthisspotmarket,pushingprices to unprecedented levels. At the same time, due to growing supply uncertainty caused also by discussion in OPEC, the IEA member countries decided to increase the strategic reserve requirements,temporarilypushingupdemandinanever-tighterinternationaloilmarket. The OPEC countries did have surplus capacity to compensate for the lost Iranian capacity. The way in which this surplus was offered on the international market revolutionised oil trade. Saudi Arabia offered its additional production on the international market at the pre-crisis prices, but other member states increasingly offered their oil on the spot market -at�irstonlytheadditionallyproducedoilbutlatermostoftheiroil.Thedifferenceinprice betweenthecontractedoilandthespotmarketbecameverylargeindeedandledin1980to theabandonmentofincreasinglymoreofthelong-termcontractsforthetemporarilymore lucrativespotmarketdeals.70Thishadaprofoundeffectonoilmarkets,asde-integrationand emergenceofnewplayersexpandedtheexternalmarketinwhichbuyersandsellersengaged intransactionsatarm’slength.Thecrudemarketbecamemorecompetitive,andthemajority ofoilmovedthroughshort-termcontractsorthespotmarket.Priortothesedevelopments,the markethadconsistedofasmallnumberofspottransactions,usuallydoneunderdistressed conditions,fordisposingofsmallamountsofcrudeoilnotcoveredbylong-termcontracts. The position of Saudi Arabia to increase production and charge the old price of oil was frowneduponbythosememberstatesmoresensitivetoshort-termgainsinoilincome.71They sawSaudiArabia’spolicyasafrustrationoftheirattempttomaximiseshort-termoilincome andarguedthatoilwasmovingtowardsthenewequilibriumpricelevel.Theyalsowelcomed thepriceincreasesascompensationforthein�lationoftheyearsbefore.Theadvocatesofprice increaseswereallcountrieswithalimitedcapacitytomanageoilincomethroughproduction policies.Theearlieroilincomeincreasehadbeenincorporatedintheireconomicplanningand servedasanunderpinningforinternationalbankloans.Thecountrieshadembarkedonan intenseindustrialisationprocessthatwasjustbeginningtogainmomentum. Saudi Arabia saw the abandonment of the earlier price policy and structure of trade as a danger to their long-term policy goals and feared the in�lation of higher oil prices and its probableimpactondemand.Withitsrelativelylowabsorptioncapacity,thecountrywasvery concernedaboutmanagingthevalueofitsoilunderandaboveground,bothintheshort-and longerterm.Itsholdingsininternationalcapitalmarketsmadeitmoresensitivetomonetary Mabro,Robert(ed.)(1986).OPECandtheWorldOilMarket:TheGenesisofthe1986PriceCrisis. OxfordInstituteforEnergyStudies/OxfordUniversityPress,Oxford. 70 Hartshorn,J.E.(1993).OilTrade,PoliticsandProspects.CambridgeUniversityPress. 71 Noreng,Øystein(2006),p.110. 69 52 developments.Also,itwasawarethatifthe‘new’oilpricehadtobedefended,itwouldfall mainlytoSaudiArabiatocutproduction.TheOPECcountriescouldnotagreeonhowbestto respondtotheIraniancrisisandwere,foratime,dividedoverpriceandproductionpolicy. Saudi Arabia, producing lower-priced oil at maximum capacity (at the time 10 million b/d) found out that its substantial production increases were not enough to stabilise the internationaloilmarketatalowerpricelevel.In1981itagreedtoadaptitspoliciestothe majoritypositioninOPECandbeganaperiodofseriousproductioncutbacks.Intheyearsto come,regionaltensionswouldde�inetherelationswithinOPEC,linkingMiddleEastpolitics more�irmlytooil. TheUShostagecrisisinIranandthepositiononoilpricesofamajorityoftheOPECmember statescreatedanewpoliticalclimateintheUSandamongitsallies:lessforgivingandless cooperative with regard to oil-producing countries. Moreover, the economic impact of the secondpriceincreasewaslargeandledtoaradicalre-orientationofmonetaryandeconomic policies in the OECD countries. The erosion of trust in consuming countries regarding cooperationwithOPECwasverylargeindeed.Thedevelopedconsumingcountriesbeganto pushaheadwithpolicies,changingtheirdependenceonimportedOPECoil,andattemptedto reducetheshareofoilintheirenergymixes.Fordevelopingconsumingcountries,adecade ofeconomichardshipcommencedasaresultofthesecondoilpriceincrease,thesubsequent re-orientationofmonetarypolicies,highertaxationofpetroleumproductsandoilsubstitution policies. MaintainingCohesion Oil politics within OPEC very quickly became not only a discussion about the international oilpricelevel,butalsoaboutthedistributionofincomeamongthememberstates.72Dueto the difference in reserves, production capacity, absorption and politics, the costs of OPEC’s productionpolicybefellonlyafewmemberstates.SaudiArabia,KuwaitandtheUnitedArab Emirates were the main contributors to OPEC’s growing spare capacity in the 1970s and 1980s,althoughothermemberstatesalsoagreedtocapsomeoftheirproductioncapacity. Yetthesecountrieswerealsoamongthosethatcompliedratherlooselywiththeseproduction agreements,redistributingthecostmostlyontothethreeGulfproducers.AlsowithinOPEC, themoreexpensiveoilwasproduced�irst,whiletheoilthatcouldbeproducedwithlower costshadtostayintheground.ThedeclineindemandforOPECoilandtherelegationofOPEC totheroleofswingproducercreatedeconomichardshipinmanyOPECcountries,particularly whenNon-OPECoilbegantoencroachonitsmarketshareandundercutOPECprices.73 The OPEC meetings in the early part of the 1980s were de�ined by declining supply managementandpriceadjustmentsuntilthelatterpartof1985whenSaudiArabiaclaimed a share of OPEC production consistent with its of�icial reserve base and long-term policies. ThishelpedtorepositionOPECoilinthemarket,asthenewpolicyimpliedmoreproduction andlowerprices.Loweroilpricesalsostimulateddemandindepressedeconomies,suchas the European economies and the oil-consuming developing countries with debt problems. Noreng,Øystein(2006),p.113. Alnasrawi,Albas(1985),pp.83-85. 72 73 53 Furthermore,theoilpricedeclinecoincidedwithareorientationofOECDmonetarypolicies. In the Plaza and Louvre agreements, the G-7 countries had agreed in 1985 to depreciate thedollarinacoordinatedintervention.TheeraoftheWashingtonconsensuscommenced, andtheliberaleconomybecamethenewnorm.Thedoubleeffectofloweroilpricesanda depreciateddollarfreedtheworldeconomyfromitslowgrowthpathandhelpedtofurther restructure developing country debt. But the �lip side of this policy was that oil producing countries, among which were half of the OPEC member states, and which had used highly valuedoilreservesascollateralforinternationalbankloans,werenowtheworld’snewdebtor countriesrequiringIMFassistance. New oil discoveries in non-OPEC countries, helped by OPEC price policies, implied that signi�icantamountsofoilbegantoreachtheinternationalmarketfromoutsideOPEC.74The increaseinthisoutsidesupplyalsomeantanincreaseinthenumberanddiversityofcrude oil producers. These producers were setting their prices in line with market conditions, undercuttingOPECprices.Withthecontinueddeclineindemandforitsoil,OPECsawitsown marketshareintheworld’soilproductionfallfrom51%in1973to28%in1985. Itbecameclearbythemid-1980sthattheOPEC-administeredoilpricingsystemwasunlikely to hold for long and OPEC’s − or, more precisely, Saudi Arabia’s − attempts to defend the markerpricewouldonlyresultinlossofmarketshare,asotherproducerscouldoffertosell theiroilatadiscounttotheadministeredpriceofArabianLight.Asaresultofthesepressures, thedemandforSaudioildeclinedfrom10.2millionb/din1980tobelow3millionb/dinthe summerof1985. Forashortperiodin1986,SaudiArabiaadoptedthenetbackpricingsystemtorestorethe country’smarketshare.75Soonafterward,otheroil-exportingcountriesadoptedthissystem inanattempttoenhancetheirmarketshares.Thenetbackpricingsystem,whichprovidedoil companieswithaguaranteedre�iningmarginevenifoilpricesweretocollapse76,contributed tothe1986pricecollapse,from$26abarrelin1985tolessthan$10abarrelinmid-1986. Outofthe1986oilpricecrisisemergedthecurrent‘market-related’oilpricingsystem.The transition, however, did not occur instantaneously. In 1987 Saudi Arabia reverted back to of�icialpricingforabriefperiodoftime,butthepositionwasuntenable,asmanyotheroilexportingcountrieshadalreadymadetheswitchtothemore�lexiblemarket-relatedpricing Thisprocessbeganwellbeforethe1970s.TheNorthSeaattractedoilcompaniesstartinginthe early1960s,andthe�irstroundsofleasingwereawardedin1964and1965.In1969,oilwasfound intheNorwegiansector,andin1970amajor�ind(theEko�isk�ield)wascon�irmed.In1969inthe UKsector,Amocofoundsomeoil,butitwasdeemedtobenon-commercial.In1970,BPdrilledthe exploratorywellthatfoundtheForties�ield.Oneyearlater,Shell-EssodiscoveredtheBrent�ield.Itis importanttonotethatallthesemajordiscoveriesprecededthesigni�icantriseinoilprices.Seymour, A.(1990),TheOilPrice&Non-OPECSupplies,OIES,showsthathalfoftheincreaseinnon-OPEC supplyovertheperiodof1975-85wouldhavematerialisedregardlessofthelevelofoilprices. 75 Foradetailedanalysisofthenetbackpricingsystemandthe1986pricecollapse,seeMabro,R. (1986).OPECandTheWorldOilMarket:TheGenesisofthe1986PriceCrisis,OIES3. 74 54 system.ThedateastowhenSaudiArabiaexplicitlyadoptedthepricingformulaisnotclear, butitmighthaveoccurredsometimein1987.77Thisopenedanewchapterinthehistoryofthe oilmarket,whichsawOPEClosecontroloftheadministeredpricingsystemandtransferthe powerofpricingcrudeoiltotheso-calledmarket. Inthemid-1980sitwasclearthatthepowerprojectionofthe1970s,withoilasaweapon for redesigning the economic and political power structure in the world, was incomplete. Other strengths in the economic, political and security spheres were just as important to establishingapositionofpower.Yettheimpactofthetwooilpriceincreasesofthe1970shad shownthatcooperationtoincluderatherthantoexcludecountriesintheinternationalsystem wasimportant,andthatgradualchangeisverydif�iculttomanageinaworldwherenational, private and public interests compete for prominence. Despite the change of course within OPEC, the economic dif�iculties of individual member states and the Iran-Iraq war de�ined theirrelationsinthesecondpartofthe1980s.Althoughoildemandbegantogrow,energy policies - for instance in Europe - prevented a quick return to previous oil demand trends, whiledemandinelectricitygenerationwasstructurallylost.Astheoil-consumingcountries haddiscoveredtheimportanceofsecurityofsupplyinthe1970s,theoil-producingcountries discoveredtheimportanceofsecurityofdemandinthe1980s.Thesetwoimportantpillarsof energypolicybecamethekeytotheinitiativesforclosercooperationinthe1990s. Conclusion The result of the vast changes in the oil value chain and oil producer-consumer country relationswasthatfrom1973onwardstheIEAcountriesborethecostofsecurityofsupply withtheirstrategicreserves,whilesomeOPECcountriesborethecostofoilmarketstability with their buffer production capacity. Together, these mechanisms provided the post-1973 marketwithsecurityventstoovercomeshort-termmismatchesanddisruptions.Previously, thishadbeentheself-regulatedtaskofthemaininternationaloilcompanies.Despitethenew international organisations, until the late 1980s the governance of oil market security was conductedinof�icialinstitutionalisolationandwasverymuchpartofgreatpowerpoliticsand dramaticshiftsineconomicpolicymaking.Althoughthepotentialstrengthofmorecooperation betweenconsumingandproducingcountrieswasgraduallyrecognisedinmorecircles,inthe 1980s the countries were unable to overcome the political and economic differences that originatedinthe1970s.Onlywheneconomicbarriersintheinternalandexternaleconomies of many countries were removed and developing country debts were integrated in a new economicgrowthmodel,inadditiontosomeimportantgeopoliticalstumblingblocksbeing removed,suchastheendoftheIran-IraqwarandthefalloftheBerlinWall,didthetimeripen forcloseroilcooperation. Itinvolvedageneralformulainwhichthepriceofcrudeoilwassetequaltotheexpostproduct realisationminusre�iningandtransportcosts.Anumberofvariableshadtobede�inedinacomplex contractincludingthesetofpetroleumproductsthatthere�inercanproducefromabarrelofoil,the re�iningcosts,transportationcostsandthetimelagbetweenloadinganddelivery. 77 Horsnell,P.andRobertMabro(1993).OilMarketsandPrices,TheBrentMarketandtheFormation ofWorldOilPrices.OIES,OxfordUniversityPress,Oxford. 76 55 56 Chapter4:FromConfrontationto Cooperation Introduction The1980slefttheOPECmemberstateswithwidelydifferentoutlooksonhowbesttoreapthe bene�itsfromtheeconomicupswingintheglobaleconomy.Thesedifferencescametoahead inFebruary1990,whenIraqopeneditsnewoilexportpipelinethroughSaudiArabia,onlyto �indthatitcouldnotbesuf�iciently�illedwithoil.TheIran-Iraqwarhadleftthecountrywith hugedebts,andwithoutforeigndirectinvestmentorasubstantialincreaseinoilrevenues, Iraq could not �inance new capacity investments. Overnight, Iraq reverted from a recent convert as volume producerback into a pricehawk, challenging the oil policies of member stateswithmoreinternationally-orientedandlong-termstrategies.Themonthsthatfollowed witnessedarapiddeteriorationofrelationsbetweenIraqandtheotherGulfstates,resultingin theoccupationofKuwaitinAugust1990,despitetheintenseeffortsofSaudiArabiaandothers tomediate.ThegeopoliticalimpactofIraq’soccupationofKuwaitwaslarge,notleastbecause, ifunchallenged,theywouldrepresentabout20%oftheworld’sprovenoilreservesandabout 5%ofworldre�iningcapacityinthatyear.Moreover,theythreatenedsecurityofproduction in the neutral zone and in Saudi Arabia. Such a threat to oil security was unacceptable to both producers and consumers. Immediately, oil from Iraq and Kuwait was denied market access, while other producers tried very hard to compensate for lost supply to manage the priceimpact.Acoalitionofwillingcountries,mainlytheUS,theUK,SaudiArabiaandFrance andforcesfromArabcountriessuchasEgypt,MoroccoandSyria,begantobuildupmilitary strengthalongIraq’sborderstocontaintherisk. The1990-1991GulfWarandtheResponsetotheSupplyDisruption The�irstGulfWardemonstratedtheimportanceofutilisingsparecapacityintimesofcrisis.78 AsaresultofIraq’sinvasionofKuwait,some4.5millionb/dweretakenoutoftheoilmarket. ThereweredisagreementswithinOPECmembersastothebestwaytorespondtothisadverse supplyshock.OPECmembers,mostlythosethatdidnothaveanysparecapacityatthattime, opposedanyproductionincrease.ThesewereinfavouroftheIEA’sactivatingitsemergency responsemeasuresandreleasingstocksfromthestrategicpetroleumreserves.Others,ledby SaudiArabiaandVenezuela,wereinfavourofboostingoilsupplies.Thesemembercountries arguedthatsincetheinterruptionofsupplywasinducedbyOPECmembers,andgiventhat manyOPECcountriesweresittingonlargesparecapacity,theOrganizationshouldstepinand aimtostabilisetheoilmarket.Furthermore,sincedevelopingcountrieshadlittleinventory Harks,Enno(2010),pp.252-54. 78 57 capacity,andsincetheiroildependencewasmuchhigherthanthatofOECDeconomies,itwas thosecountriesthatwouldsufferthemostfromthesupplyinterruption. Onthe16thofAugust1990,SaudiArabiacalledforanimmediateextraordinaryOPECmeeting. DespitestrongoppositionfromsomekeymembercountriessuchasAlgeriaandIran,theOPEC MinisterialCommitteeconvenedinViennaonthe29thofAugust.Themeetingwassuccessful inreachingadealinwhichOPECmembersagreedto“increaseproduction,accordingtoneed”. OPECarguedthatthisdecisionwouldhelptorestatetotheworldthattheOrganization“stands formarketstabilityandregularsupplyofoiltoconsumers”.OPEC’sViennaagreementalsocalled forconsumers“toactivelyparticipateinthestabilisationprocess”.Thereweresomeconcerns amongOPECmembersthatthedecisiontoincreaseoutputwouldcoincidewithIEA’srelease ofstocks,placingdownwardpressureonoilprices,thoughtherewasnoclearindicationatthat timethattheIEAwascontemplatingsuchamove.DuringtheOPECmeeting,SaudiArabiamade initialcontactwiththeIEAtoobtainastatementfromtheconsumerorganisationinresponse toOPEC’sdecisiontoincreaseproduction.Onthe29thofAugust,theExecutiveDirectorofthe IEA,MrsHelgaSteeg,issuedastatementwhichwelcomedOPEC’sincreaseinoilproductionand notedthatthe“oilsupplysituationhasnotwarrantedadditionalmeasures,includingrecourse togovernmentstockpiles”.However,thestatementnotedthattheproposal“foralinkbetween aproductionincreasebyOPECandgovernmentstockdrawbytheIEA,aswellasforajoint meetingbetweenIEAandOPECMinisters,isnotfeasible,politicallyoreconomically”.Thespeed at which this statement was issued indicates that contacts and channels of communication betweenIEAandsomeOPECof�icialsmayhavealreadybeenestablished,perhapswellbefore theeruptionoftheGulfWar.79Intermsofcontent,thestatementindicatesthatalthoughtheIEA membercountrieshavetakenpreparatorymeasures80,theypreferredtoshifttheresponsibility of�illingthesupplygaptoOPEC. TheGulfWarprovedtobeaturningpointinproducer-consumerrelations.81Itrevealedthe importanceofaconcertedandcoordinatedglobalresponsetoanadversesupplyshock.On October 1, 1990 in the UN General Assembly, the Venezuelan President Perez called for an urgentmeetingofproducersandconsumersundertheauspicesoftheUNtohelptheworld face“thepoliticalrealitiesofoil”,statingthat“excessive�luctuationsareharmfultoallofus, consumers and producers, and only favour speculators”.82 He proposed that the dialogue shouldstartwithameetingbetweenOPECandtheIEA.Thisechoedanearlierproposalmade Inaprivateinterview,PrinceAbdulazizBinSalmanBinAbdulaziz,AssistantMinisterforPetroleum AffairsinSaudiArabia’sMinistryofPetroleumandMineralResources,revealedthatinitialcontacts withIEAweremadeinthelate1980s.Inarecentinterview,DrAlirioParra,aformerEnergyand MinesMinisterofVenezuelabetween1992and1994,revealedthatinthelate1980s,andunknown tootherOPECmembercountries,heinvitedtheExecutiveDirectoroftheIEAforavisittoCaracas. 80 Scott,Richard(1994).P.166. 81 SeeinterviewDr.SubrutoinOPECBulletin3/10,pp.pp.10-15,wherehesaid“Re�lectingonthe periodasawhole(ofhistimeasSecretarygeneralofOPEC),however,Ibelievethatthemost importantdevelopmentwastheestablishmentofcooperationbetweenOPECandtheInternational EnergyAgency(IEA).Formanyyearspriorto1988andduringtheearlypartofmytimeatthe Secretariat,therelationshipwasoneofcatandmouse.Itoftenfeltlikethetwoorganisations werecrossingswordseverytimetheymet.(…)ThesloganIrememberfromthattimewas‘from confrontationtocooperation’.Andthereisclearlyamorecooperativeenvironmenttoday.” 82 MiddleEastEconomicSurvey,Vol.XXXIV,No.1,p.A7,8October1990 79 58 intheWorldCommissiononEnvironmentandDevelopmentin1987whichcalledforcloser cooperationbetweenconsumersandproducers.AttheWorldEconomicForuminDavosin 1989, the Chairman of the Commission and the Norwegian Prime Minister Gro Brundtland calledforaninformal“WorkshopofMinisters”frombothproducingandconsumingcountries todiscussenergyrelatedissues.83Asapetroleum-exportingindustrialisedcountry,Norway feltthatitwasinabridge-buildingpositionbetweenproducersandconsumers.Theconcept ofa“workshop”wasmeanttounderscoreinformalityandtoimplythattheinitiativewasnot intendedtoproduceabigconferencethatwouldcreatehighpoliticalexpectationsthatcould inturnnotbemet.Thesecalls,however,fellondeafears,withimportantconsumersregarding cooperationwithproducersatthepoliticallevelasineffective,giventhewidedivergenceof interests between the two groups. Norway attached great importance to having the US on boardforthedialogueprocess,butlaterin1989thenewPresidentBushmadeitcleartothe NorwegiansthattheUSstillhadmisgivingsaboutthedialogue. In1989,Venezuela’snewPresidentPerezwasconfrontedwitheconomichardshipathome. Unlikeinthe1970swhenhepresidedoverthecountryintheyearsofincreasingoilincome, henowhadtodealwithacountryunderanIMFrestructuringprogramme.Moreover,PDVSA managementhadproposedfairlylargeexpansionplansandforwardintegrationstrategiesin theUS.Ifachieved,theseplanscouldpotentiallycreatedif�icultiesinOPECintheabsenceof anexpansioninworldoildemandandasothercountrieswereinterestedinraisingsupplyto boosttheirincome.Perezbegantoaimforinternationalrecognitionforsupplyanddemand issues by initiating multilateral initiatives. In a meeting on the sidelines of the 45th Session of the UN General Assembly in September-October 1990, Presidents François Mitterrand of France and Carlos Andres Perez of Venezuela provided their political support for the initiationofthe‘MinisterialSeminar’ofproducersandconsumers,whichwiththehelpofthe Norwegians,ledtothe�irstmeetinginParisin1991. ForVenezuela,Francewasanaturalchoicetopartnerwith,asFrancecontinuedtobeviewed by many OPEC members as open to such initiatives. France had been a main promoter of suchadialogueinthe1970s,andotherEuropeancountrieshadshownconsistentinterestin suchdialogues. Therelations with producingcountriesremainedimportant forFrance and theEuropeansingeneral,andbasedonthe�irstcontactsinthe1970s,theEUlaterengaged intalkswithOPECandtheGulfCooperationCouncil.Atthesametime,althoughFrancehad declinedtojointheIEAwhenitwasinitiallyestablished,theyhadtakenthe�irstinternalsteps toprepareforIEAmembershipin1990andbegantoparticipateinthegoverningboardlater thatyear.84 Otherproducers’interestinopeningadialoguewithconsumershasalsointensi�iedduring the early 1990s. PDVSA, Kuwait Oil Company (KOC) and, to a lesser extent, Saudi Aramco, hadembarkedonforwardintegrationstrategiesinthemainmarketsfortheiroil.Theyhad purchased downstream facilities in the US and Europe and were keen to further develop Walther,Arne(2007).“DialogueforGlobalEnergySecurity:TheRoleoftheIEF”,in:MiddleEast EconomicSurvey,Vol.50,No.47,19November. 84 In1992,Francerati�iedtheagreementtojointheIEA,explainingthelistingoftheof�icialyearof membership.BecausemembershipoftheIEAinvolvedsigningatreaty,therati�icationtookplacein 1992,butFrancehadparticipatedintheIEAgoverningboardsincelate1990. 83 59 theseassetsinanefforttosecuredemandfortheiroil.Therestrictionsonproductionwere increasinglyseenasanimpedimenttotheirdevelopmentasverticallyintegratedoilcompanies. Other OPEC member countries, mainly those with a smaller oil asset base, debt problems and/orregionalordomesticpoliticalinstabilities,wereunabletopursueasimilarstrategyto securedemandfortheiroil.Economichardshipand/orpoliticaldif�icultiesalsoimpededthese countries’abilitiestoinvestinproductioncapacity,temptingsometoagainconsiderforeign direct investments to bring their capacities closer to potential. Some producers considered improvement in relations with consumers through a purposeful dialogue could help in creatingcon�idencebetweenpartiesandhenceresultinamoreconduciveenvironmentfor investmentintheirenergysectors. TheIsfahanOilConference Callsfortheproducer-consumerdialoguebegantospreadwidelyduringandintheaftermath oftheGulfWar.InhisaddresstotheannualmeetingoftheIndonesianPetroleumAssociationon 16October1990,OPECPresidentMrSadekBoussenacalledforanendtotheconfrontational behaviourbetweenproducersandconsumers,proposingthatthetwosidesreachaconsensus onadesiredequilibriumoilpricelevel.Hecalledforaninternationalconferencethatincluded OPEC,non-OPEC,IOCsandconsuminggovernmentstobeheldaftertheGulfcrisistodiscuss theoutlookforpricestability.85 IranalsoattemptedtomendfenceswithothercountriesandorganisedaconferenceinIsfahan on27-29May1991entitled‘OilandGasinthe1990s:ProspectsforCooperation’.Themeeting wasattendedbyseniorof�icialsfromproducingandconsumingcountries,includingministers from the Soviet Union, Saudi Arabia, Venezuela, Indonesia, Nigeria, the UAE, other senior of�icialsfromFrance(theDeputyMinisterofIndustry),Japan(anof�icialfromMITI)andChina (theDeputyMinisterfromtheMinistryofPetroleum)andrepresentativesfrominternational oilcompanies.ThethenIranianoilministerMrAghazadehwasthemaindrivingforcebehind theIsfahanconference.IranopeneditsoffshoreoilandgassectorforIOCinvestmentsinthe periodaftertheIran/Iraqwarandenteredintonegotiationswithinternationaloilcompanies for joint investments. Iran had a very ambitious programme of increasing capacity from around3.5millionb/dto5millionb/dby1993,whichcouldnotbeachievedwithoutforeign players’involvement.MrAghazadehconsideredthatagenuineproducer-consumerdialogue could help in creating con�idence between parties and hence result in a more conducive environmentforinvestmentintheoilandgassectors.Moregenerally,oneoftheobjectives of the Isfahan meeting was also to open new lines of communication between the various parties, which had been blocked due “to many misconceptions and misunderstandings”. In aninterviewjustbeforetheIsfahanmeeting,MinisterAghazadehmadeastrongcaseforthe dialogue,statingthatifthetwosidesweretoreachcommonunderstandingaboutoilreserves belonging to the world and all parties involved being responsible for safeguarding these reservesandoptimisingtheiruse,then“thiswillcreateastrongreciprocalbondandlaythe foundationsforameaningfulproducer-consumerdialogue”.86TheMinisteralsowelcomedthe French-Venezuelaninitiative,arguingthatifthedialogueisorganisedinsuchawaythatboth MEES(1990).“BoussenaCallsonProducersandConsumerstoReachConsensusEquilibriumPrice forOil”,Vol.XXXIVNo.4,29October,p.A3. 86 MiddleEastEconomicSurvey,Vol.XXXIV,No.34,27May1991 85 60 partiescanachievemutualgains,thenthiscouldpromotereliabilityandstabilityinthe1990s andthedecadesafter.AsimilarmessagecamefromanotherkeyproducerduringtheIsfahan conference.Mr.HishamNazer,SaudiArabia’sMinisterofPetroleumandMineralResources, expressedstrongsupportforthedialogue,statingthat“therecentcrisisintheGulfbrought into sharp focus the extent of this interdependence, especially with reference to oil”. In his speech,helaidthefoundationforanimportantcomponentofthedialogueforyearstocome, stating: Totheconsumers,securitymeanstheavailabilityofsuppliesatreasonablepricestofoster theireconomicgrowthandcompetitiveness.Thisclearlymeansthattheconsumershave asharedinterestwiththeproducersinordertogiveasolidfoundationtotheconceptof ‘energysecurity’.Totheproducerssecuritymeanscontinuedaccessintothemarketsof oilimportingcountries,thesteadyshareofoilintotalenergyconsumptionoverthelong term, and fair and stable prices that allow for their sustainable development over the lifetimeoftheresource.De�inedthisway,securityisamutualconcernofproducersand consumers.ItiswhatIhavetermed‘reciprocalsecurity’.87 TheParisEnergySeminar Thecallsforaproducer-consumerdialoguepropagatedwidespreadreactionsandresponses andproducedanewmomentumwithinproducingandconsumingcountriesalike.Exploiting the momentum, in 1991 the governments of France and Venezuela called for a meeting at the ministerial level between representatives of oil-exporting and consuming countries. In the invitation letters to participants, the organisers emphasised the importance of the meetingespeciallyinthelight“ofthelessonsderivedfromtherecentGulfcrisis,whichhas evidencedthefactthatoilproducersandconsumersaretodaymoreconsciousofthelongtermconvergenceoftheirinterests”. However, not all of the parties were enthusiastic about the French-Venezuelan initiative. VenezuelaandFrancetriedtogathersupportfortheproducer-consumerdialogueinitiativeby bringingonboardkeyconsumingcountries.InMay1991,USPresidentGeorgeBushrejected theproposalbytheVenezuelanPresidenttoconductmultilateraltalksbetweenoilconsumers andproducers.TheUSobjectiontothedialoguewasthree-fold.First,adialoguewithalarge numberofcountrieswasunlikelytoproduceanymeaningfulresults.Second,multilateraltalks with OPEC would eventually lead to discussions on production and prices. The US made it clearinthevariousministerialconferencesthatitsgovernmenttakesnoviewonoptimal,fair, orjustoilpriceandproductionlevels,asitbelievesthatpriceandproductiondecisionsare bestlefttomarketforcesresultingfromtheindividualactionsofproducersandconsumers. Finally,inthe�ieldofenergyrelations,theUShasalwaysfavoureddirectbilateraltalkswithits majorsuppliers.Intheend,however,theUSdidobservethemeetingatarelativelyjuniorlevel, afterassurancesthatissuesofpricesandproductionwouldremainofftheagenda. The IEA also seemed to be uncomfortable with this high-level political dialogue. Instead, it optedtoorganiseanannualTechnicalMeetingofExpertsfrombothproducingandconsuming Nazer,Hisham(1991),“TheInterdependenceofProducersandConsumersintheOilMarket”,Vol. XXXIV,No.35,3June. 87 61 countriesasa‘con�idence-building’gesture.The�irstsuchmeetingwasheldinFebruary1992 andcontinuedwellintothe1990s. Saudi Arabia participated at the Paris Energy Meeting, but also at a junior level. Given the keyroleitplayedinstabilisingoilmarketconditionsduringtheGulfWar,theKingdomfelt thatitshouldhavebeengivenamoreprominentroleinthepreparationfortheParisEnergy Meeting.AsforotherOPECmembers,theyalsodidnotplayaleadingroleinthedialogue,with littlecoordinationtakingplaceamongthememberstates.Inmanyinstances,someministers regarded the meeting as an opportunity to detail their countries’ hydrocarbon sector and investment opportunities. In contrast, consuming countries were better focused, raising issuessuchasaccess,transparency,energysupplysecurityandtheroleofmarketsinoilprice determination. The �irst meeting took place in Paris on the 1st and 2nd of July 1991 with France as a host andVenezuelaasaco-host.Inpreparationfortheseminar,theorganiserscontactedNorway as a potentially collaborative participant, which re�lects Oslo’s important role played in organising the �irst meeting.88 Twenty-�ive countries and nine international organisations participatedinthismeeting.89Theagendawasverybroadandcoveredmanyaspectsofthe oilmarket,includingissuessuchasthemajoruncertaintiesofthe1990sandtheirimpacts oninvestment,thefunctioningofthefuturesmarket,andwaystoenhancethetransparency andthesmoothfunctioningofthemarket.Theagendaalsofocusedonindustryissuessuch ascooperationbetweenthedifferentcomponentsoftheindustry,thechallengesin�inancing petroleuminvestments,andthedegreeofintegrationbetweentheupstreamanddownstream componentsanditsimplicationonsecurity.Environmentalissuesalsofeaturedhighlyonthe agenda,andissuessuchasthefutureroleofoilinthesocialandeconomicdevelopmentsand whetheroilcouldbecomeacleanersourceofenergywereraised. Giventhebroadagenda,thediversityandcomplexityoftheissuesraisedandthelowinterest shownbykeypartiessuchastheUS,theUK,JapanandSaudiArabiainthedialogue,the�irst meetingachievedlittleprogressonresolvinganyofthekeyissues.Nevertheless,theFrench SummaryoftheSeminarresultspointstoconsensusonafewbroadissues,suchastheneed tostrengthenthemarketsoitcanfunctioninapropermanner,andtoimprovetransparency so individual players can base their investment and purchasing decisions on accurate information.Therewerealsocallsforcountriestocommittotheprinciplesofpredictability andcontinuity“inordertoensurethatthemarketfunctionproperlywhileatthesametime creatingastableenvironment”.TheParisSeminaralsohighlightedthehighdegreeofenergy interdependencewhich“dictatesaconcreteandpragmaticapproach”forcooperationinmany areas,suchasraisingproductioncapacity,theutilisationofstocksandthestrengtheningofthe integration between upstream producers and downstream consumers. However, the major TheroleofNorwayisalsore�lectedinthefactthattheNorwegianMinisterofForeignAffairswasone oftheprincipalspeakersattheopeningsession. 89 ProducersincludedAlgeria,Egypt,Indonesia,Iran,Mexico,Nigeria,Norway,Oman,SaudiArabia, theUSSR,theUAEandVenezuela.ConsumersincludedBrazil,Canada,Czechoslovakia,France, Germany,theNetherlands,India,Italy,Japan,SouthKorea,theUKandtheUS.Thenineinternational organisationsincludedtheIEA,EBRD,IBRD,ECC,GCC,IMF,UN,OPECandEUROPIAonbehalfof EuropeanOilCompanies.TheEuropeanCommissionwasrepresentedattheCommissionerlevel. 88 62 achievementoftheParismeetingisthatit‘broketheice’betweenproducersandconsumers andsetthefoundationforpotentialfuturecooperation.Theseminarallowedtheparticipants to “break certain taboos and even to propose joint projects. The era of confrontation, we hope, is over; dialogue and communication must take its place”.90 The G-7 summit held in LondoninJuly1991welcomedtheproducer-consumerdialogue,notingthattheGulfcrisis “hasledtoimprovedrelationsbetweenproducersandconsumers,contactsamongallmarket participants [being] further developed to promote communication, transparency and [the] ef�icientworkingofmarketprices”.91 Despitetheseconcreteachievements,theParisseminarshowedthataconstructivedialogue stillhadalongwaytogo.Atthattime,MEEScommentedonthemeeting: ItisclearthatFranceandVenezuela,aftermucheffortandpersuasion,andtakingfull advantageofthepost-Gulfcrisisawarenessoftheneedtotackleenergyproblemsona multilateralbasis,havesucceededinstartingthedialogueontherighttrack,despitethe factthatinonesensediscussionsinthemeetingsweremoreofamonologuesincethe leadingindustrialstates(US,UK,Japan)didnotmakeanycontributionandsomevital issues,likepricesandproduction,weredeliberatelyexcludedfromtheagenda.92 OilMarketDevelopmentsandtheDialogueinthe1990s Oil market developments in the rest of the 1990s in�luenced the content of the producerconsumerdialogueandshapedtheinterestsandattitudesofkeyplayerstowardscooperation. The1990sprovedtobeagloomydecadefortheoilmarket.DespitethecollapseoftheSoviet Unionanditsdiminishedcontributiontoglobaloilsupplies,the‘containment’ofIraqwhich meanttheexitofIraqfromtheoilmarketformostofthedecade,andtheUSsanctionsonIran andLibyawhichlimitedcapacityexpansioninthesecountries,theworldoilsupplycontinued to grow faster than demand. From being a price setter in the mid 1980s, OPEC’s role was transformedtothatofameremanagerofsurpluscapacity,withOPECbeingsqueezedfrom boththedemandandsupplysides:arelativelyslowgrowthinglobaloildemandandexpansion innon-OPECsupply,thoughatamuchslowerratethanthatofthe1980s.Anenvironmentof lowoilprices,poorlyinformedoptimismaboutnon-OPECsupplyandwidespreadpessimism about the prospects for global oil demand threw the industry into a deep recession and reducedtheattractivenessofinvestmentinallpartsoftheoilsupplychain.Producersfound itdif�iculttoadjusttothisnewreality.Theissueofhowtoallocatetheburdenofoutputcuts increasedthetensionbetweenOPECmembersandultimatelyresultedinanoversupplyofoil andthecollapseoftheoilpricein1998.TheAsian�inancialcrisisof1998broughttoanend the hopes of stronger oil demand from Asian economies. The growth in Asian demand did eventuallymaterialise,butOPECcountrieshadtowaitforafewmoreyears. Oilcompaniesalsohadtoadjusttothisnewworld.Theyembarkedonindustrialand�inancial restructuring,whichresultedin,amongotherthings,theerosionoftheirhumancapitaland FrenchSummaryoftheSeminarResults,MrDominiqueStrauss-Kahn,theFrenchMinisterof IndustryandForeignCommerce,2July1991.Source:MEES,vol.XXXXIV,No.10,p.A6,8July1991. 91 http://www.g8.utoronto.ca/summit/1991london/communique/energy.html 92 MEES,vol.XXXXIV,No.10,p.A3,8July1991. 90 63 managerial skills. Oil companies lost their appeal to investors who preferred to invest in high-growthcompanies.Eventually,awaveofmergersswepttheoilindustry,resultinginthe concentrationoftheindustryandtheemergenceofanewclassofoilcompanies,theso-called ‘supermajors’. In such an environment, security of demand and oil price stability became the dominant concerns for producing countries. On the other hand, for consumers, the issue of supply security,thoughstilldiscussed,receivedlessattentioninpolicycircles.TheUSfeltcon�ident enoughtoimposesanctionsonkeyoil-producingcountrieswithoutfearingtherepercussions of their negative impact on global oil supplies. In contrast, the climate change agenda was elevated in consuming countries’ policy agendas. Sustainable development, taxation of petroleumproductsandgreentaxesbecamethefocusofconsumers’interestinthedialogue, issuesthatproducersconsideredasadditionalthreatstoanalreadyveryweakoilmarket. Anotherproducer-consumermeetinginJuly1992followedtheParismeeting.Themeeting, entitled“GlobalEnergyPolicyInter-relationship”washostedbyNorwaywithEgyptandItaly actingasco-hosts.93Whilethemeetingreiteratedtheimportanceofthedialogue,giventhe increased interdependence between countries, it also highlighted the gulf between the two parties,especiallyinrelationtotheeco-taxproposedbytheEC.Inthismeeting,OPECmade clearitspositionregardingthecarbontax,consideringitasanotherformofexcisetaxandone whichisprimarilyaimedatreducingoildemandwithnegativerepercussionsonoilproducing countries’exportrevenuesandconsequentlyontheireconomicandsocialstability.Suchtaxes also entailed a large transfer of income from producers to consumers. This was echoed in themedia,wherePlattsconsideredthatthe“gapbetweentheNorthandSouthgrowswider andtheEC’sCarbonTaxproposalsimplyregistersastoohostileanideatothoseproducers struggling to balance and contain fast-growing populations at 20/bbl”.94 One important aspectofthismeetingisthatitplacedanewandcrucialfocusonRussia,insteadofonlyon the traditional IEA-OPEC agenda. Whereas there were no agreed conclusions at the Paris meeting,atthemeetinginNorway,thehostandco-hostssummedupinadocumentthethrust oftheexchanges,leavingittoindividual delegationstosaywhat theywantedtothemedia onanindividualbasis.Thejointdocumentbythehostsandco-hostsissuedonthe8thofJuly cameoutasbeingveryweak.Thememorandumnoted,“energygoestothecoreofpolitical, economic and environmental interests”; emphasised the importance of “the interlinkage betweensecurityofsupply,demandandinvestments”andthat“ofdevelopingtechnological partnerships between producers and consumers”. Such diluted statements re�lected deep divisionsbetweenthetwocamps. The3rdInternationalEnergyConferenceheldinSpainon19-20September1994reiteratedthe samemessagesfromthepreviousmeetings.95However,therewerethreenewdevelopments thatareworthnoting.First,forthe�irsttime,theparticipantsagreedonadocumenttobe publishedattheendoftheconferenceintheformofconcludingremarks.Thedocumentwas Themeetingwasattendedby22countries,theEuropeanCommission,theIEA,OPECandtheUN. Platt’sWeek,6July,1992. 95 ThehostcountrywasSpainandtheco-hostswereAlgeriaandMexico.Threecountriesparticipated inthe3rdInternationalEnergyConference,inadditiontotheEuropeanCommission,theIEA,OPEC andtheUN. 93 94 64 notabindingresolutionbutrepresentedaconsensusamongthevariousparticipants.Second, in terms of content, for the �irst time, the participants made an explicit reference to price stability,inwhichtheconcludingremarksnotedthat“pricestabilityisakeyconcernforthe energysecurityfromthepointviewofbothconsumersandproducercountries.Itistherefore necessarytoenhancethestudyofthelimitsofthatreasonablepricelevelinordertoidentify therangethatwouldprovideforcommonbene�itsandatthesametime,avoidtherisksofprice volatilityforbothconsumerandproducercountries”.Suchaconcludingremarkrepresenteda U-turnfromthepreviousapproach,whichhadexcludedanydiscussiononprices.Finally,the concludingremarksemphasisedtheincreasingstrategicimportanceofnaturalgasinenergy security,callingformeasurestoincreaseitsuseintheenergymix,whichwouldhelpachieve environmentalbene�itsandef�iciencyimprovements. The4thInternationalEnergyConference,heldinVenezuelaon25-27September1995-the �irsttimesuchameetinghadbeenheldinanOPECcountry-provedtobedisappointing.Forty�iveproducingandconsumercountriesand28oilandenergyministersparticipatedinthe meeting,includingeightOPECMinisters(Algeria,Iran,Kuwait,Nigeria,Qatar,SaudiArabia, theUAEandVenezuela).Themeetingwasco-sponsoredbyRussiaandtheECCommission. Keyconsumingcountries-theUS,UKandJapan-sentjuniordelegates.Ratherthanbeinga dialoguebetweenproducersandconsumers,theissueofquotadisciplinedominatedbilateral talksamongtheOPECMinisters.Thereweregrowingconcernsaboutthequotaobservance problem, with Saudi Arabia and Kuwait delivering messages to Venezuela on the need for OPECquotadiscipline.TheplenarysessionsintheConferencereiteratedthesamepositions, with producingcountriesraisingtheissueoftaxesonfossilfuelsandconsumingcountries raising the usual environmental concerns. The conference ended on a downbeat note and, unlikepreviousmeetings,theConferencedidnotissueanyconcludingremarks. Bythetimeofthe5thInternationalEnergyConferenceheldinGoa,Indiain1996,ithadbecome clearthatthedialoguehadlostmomentumandhadfailedtomakeanyconcreteachievements. Whilepartiesrecognisedthattheexchangeofviewsbetweenproducersandconsumerswas useful, the dialogue had turned futile, with both parties simply reiterating their positions. Thiswasre�lectedintheconcludingstatements,whichwereverygeneral,suchas“ensuring asustainableenergyfuturefortheworldisbothachallengeandanopportunity”or“energy initsintimaterelationtoeconomicdevelopmentandenvironmentencompassessomeofthe mostcriticalissuesmankindwillfacecollectively”.Itwasrecognisedthatforthedialogueto intensify,theremustbeachangeinapproach.95AHereagain,Norwayplayedanimportantrole. AttheendoftheGoameeting,itwasagreedthatNorwaywouldhostameetingofof�icialsin ordertohelptoprepareforthenextconferenceataministeriallevel. TheProducer-ConsumerDialogueandthe1998AsianFinancialCrisis In1998,keyplayerssuchasSaudiArabiastartedshowinggreaterinterestintheproducerconsumer dialogue. This can be explained in large part by the events surrounding the oil marketin1998,whereover-productionanddeclineinAsianoildemandintheaftermathof theAsian�inancialcrisiscausedacollapseintheoilprice. 95A Zhiznin,Stanislav,(2007).EnergyDiplomacy.EastBrook,Moscow,pp.97. 65 The roots of the 1998 oil price crisis could be traced to earlier events in the 1990s. In anticipationofhigherglobaloildemandandthewishforfurtherdownstreamintegrationin consuming countries, Venezuela embarked on an ambitious investment programme which saw Venezuela’s capacity and production increase well above the OPEC quota. In October 1997, Venezuela’s production amounted to 3.2 million b/d, substantially above its OPEC quota. A temporary increase in the oil price in 1996 and observing another OPEC member increaseitsmarketshareinducedSaudiArabiatoincreaseitsproductionaboveitsquota.In October1997,SaudiArabia’sproductionstoodat8.27millionb/d-approximately300,000 b/d more than the old quota. OPEC members sought to legitimise their production levels, whichwerewellaboveOPECof�icialquotas,andpushedforanevenhigherquotainthe103rd MeetingoftheOPECconferenceheldinJakartabetween26Novemberand1December1997. IntheJakartameeting,theOrganizationdecidedtoraisetheoutputceilingfromtheprevious of�iciallimitofaround25millionb/dto27.5millionb/d.Intermsofanincreasefromactual levelsofproductionatthattime,thisrepresentedamodestincreaseofaround400,000b/d. Nevertheless, this increase coincided with fall in Asian demand due to the Asian �inancial crisis,causingacollapseoftheoilpricefromaround$18in1997tobelow$10in1998.96 Anothercomplicationinthe1990sforOPEC’sproductionpolicywastheUNsanctionregime for Iraq. Iraq was allowed to export oil in order to generate income to �inance imports for medical and nutrition needs. The sanction regime allowed for a set income, and when oil pricesweakenedIraqwasallowedmoreexportvolume.Ineffect,thisunderminedtheefforts ofOPECtostabilisepricesandcontinuedtohinderOPECpolicies. Allproducingcountriesfelteconomicallyandpoliticallyvulnerabletotheoilpricecollapse andstartedexploringwaystoreversethedeclineintheoilprice,whichcouldonlybeachieved byimplementingoutputcuts.Non-OPECproducersrealisedthattheoldpolicyoffree-riding onOPECcutswasnolongerappropriateandthattheyneededtocooperateamongthemselves andwithOPECtobringbalanceintothemarket.AsMabro(1998)notes,the“awarenessof somenon-OPECcountriesabouttheneedtoco-operatewasperhapsamostsigni�icantfeature ofthe1998oilpricecrisis”.97Therewereindicationsthatsomenon-OPECproducers,suchas MexicoandNorway,werewillingtocutsuppliesinordertostabilisetheoilprice.Fromthe sideofOPEC,therewasawarenessamongmostmembersthatreversingthedeclineintheoil pricecouldnotbeachievedwithoutcooperationfromnon-OPECproducers. Early1998witnessedmanyinitiativesaimedatbridgingthegapbetweenVenezuelaandSaudi Arabia.Mexico,hurtbythedrasticfallinoilrevenues,approachedSaudiArabiainJanuaryto explorewaystoreversetheslideintheoilprice.AtthattimetheleveloftrustbetweenSaudi ArabiaandVenezuelahadreachedverylowlevelsandwhileSaudiArabiashowedawillingness toengageindiscussions,theKingdomagreedtodosounderverystrictconditions,themost important of which is that all members concerned should commit to cutting output. In an interviewpublishedintheof�icialSaudiPressAgencyon8March,SaudiArabia’sOilMinister Ali Al-Naimi declared that the Kingdom has abandoned once and for all the role of swing producerstatingthat“thosewhodemandthattheKingdomshouldassumealone,ortogether with other GCC countries, the burden of market stability do not recognise that the Kingdom Mabro,R.(1998).TheOilPriceCrisisof1998.OIES,SP10. Mabro,R.(1998).p.32 96 97 66 pursuesaconsistentlinewhichisbasedonthefactthatmarketstabilityisajointresponsibility, andoneofthemainreasonsforthepricedecreaseisduetothenon-adherenceofsomeOPEC countriestotheirquotas.Thesecountriesshouldtakesigni�icantandtangiblestepstoreduce their production so that other producing countries could cooperate to achieve stability”. The Kingdom’smessageoftheimportanceofjointresponsibilityinimplementingoutputcutscould notbeclearer.InMarch1998,asecretmeetingtookplacebetweenVenezuelanandMexican representatives.MexicomanagedtoconvinceVenezuelathatcuttingproductionwouldserveits interestsinthelongterm.Venezuelaagreedtoproductioncutsontheconditionsthatthesecuts betakenfromexistingproductionandnotfromquotas,thatthemeetingwouldnotdiscusslong term-investmentplans,andontherequirementthatnon-OPECcountrieswouldalsoimplement productioncuts.98Onthe19thofMarch,theEnergyMinistersofNorwayandMexicometinOsloto discuss“bilateralproblemsinoilpolicy”aswellas“thecurrentoilmarketsituationandpossible futuredevelopments”.AsecretmeetingbetweenSaudiArabia,VenezuelaandMexicotookplace inRiyadhbetweenthe21stand22ndofMarch,inwhichthepartiesagreedtocutproductionby 1.725millionb/d,ofwhich1.325mb/dwouldbecutbyOPEC(excludingIraq)whilenon-OPEC exportersincludingNorwayand,Mexicowouldcuttheremaining400,000b/d.OnMarch30, 1998,inits104thExtraordinaryMeetinginVienna,OPECmembercountriesrati�iedtheRiyadh accord and agreed to voluntary cuts from each country’s current production levels, totalling 1.245millionb/deffectiveApril1,1998.TheConferenceacknowledgedthat“theproduction cutspledgedbysomenon-OPECoil-producingcountries,inparticulartheSultanateofOman, Mexicoandothers,andagreedtocontinueconsultationswiththenon-OPECoilproducersso as to establish and maintain stability in the oil market in the future”. At its 105th Ministerial ConferenceconvenedinViennaonthe24thofJune1998,OPECagreedtoafurtherroundofcuts, bringingtheOrganizations’totalreductionssinceMarch1998to2.6millionb/d. ASaudidelegationledbyMinisterAliAl-NaimivisitedWashingtonandmetwithateamfrom the US Department of Energy headed by Energy Secretary Frederico Pena in May. In this meeting, the Saudi side urged the US to take a more positive view of the current collective effortbyOPECandnon-OPECoilexporterstoreduceoutputinpointingoutthatsuchamove providesstabilitytotheoilmarket.TheUSrefrainedfromexpressingoutrightUSopposition to the joint action between OPEC and non-OPEC. Nevertheless, they re-emphasised the US positionthatit“cannotendorsecollectiveactionwhichmightattempttointerferewiththe market.”99 Against the background of these turbulent market conditions, the 6th International Energy ConferencetookplaceinCapeTowninSouthAfricabetweenthe29thandthe31stofOctober 1998.Beforethemeeting,NorwaycalledforameetinginitsembassyinLondontoformalise a support group known as the Informal Support Group (ISG) to assist the host country in preparingtheagendafortheministerialmeetinginCapeTown.100Oneofthepurposesofthe Mabro,R.(1998). MEES,VOL.XLI,No.20,18-May-1998. 100 ThegroupconsistedofFrance,Norway,theUK,Japan,theEC,theNetherlands,India,SouthAfrica andSaudiArabia.TheEUCommissionwasalsoanISGmember.Asamatteroffact,theactivities oftheCommissionintheproducer-consumerdialoguebecame,afterthepublicationofthegreen paperonsecurityofsupply,animportantpartofdevelopingsharedviewsamongmemberstateson securityofsupplyissues. 98 99 67 ISGwastogivethemeetingmorestructuresothatitcouldresultinamorepurposefuldialogue. AlthoughtheoriginsoftheISGcanbetracedbacktothepreparationoftheministerialmeeting in India, it was given more structure in 1998. The group agreed to the terms of reference draftedjointlybyUKandSaudirepresentatives.TheISGwaslaterexpandedtoincludetheUS, RussiaandItaly,whileChina,IndiaandIranwereinvitedtojoinaftertheRiyadhmeeting,and wasincorporatedintotheIEFframework. In terms of representation, the conference was a success, attracting 46 countries and six international organisations. However, in terms of content, the concluding statements surprisingly did not re�lect any of the dramatic events of earlier that year, with only a shy concludingremarkstatingthat“oilmarketstabilityisabasicpre-requisiteforenergysecurity andadynamicglobaleconomy”.Ineffect,themeetingamountedtonomorethananexchange of views about the general situation of the oil market. After the meeting in South Africa, Saudi Arabia, the organiser of the next meeting, suggested a new name for the producerconsumer dialogue: the International Energy Forum, which would underline the informal characterofthemeetingsandcouldleadtomoreopendiscussions,avoiding“Conclusionsand Recommendations”. Conclusion The�irstdecadeofproducer-consumerdialoguesendedwithalargersenseoftrustamong thecountriesinvolved.Themeetingspromotedagreaterunderstandingandacommonalityof perceptionsamongparticipants,helpingdecisionmakingatthenationallevelandpromoting cooperationbetweenexistingbodies.Securityofsupplyanddemandwasarecurringtheme of the informal discussions, as were investments and market stability. Both consuming and producingcountriesoftenrepeatedacallforgreaterdatatransparency.Environmentalissues andenergytaxeswereamongthethemeswhichremainedsubjecttodifferentviews.The�irst decadecanthereforebeseenasalongprocessofcon�idencebuilding.Nevertheless,thefact thatrelativelylowoilpricesdominatedthroughoutthedecade,eventhoughthedecadeboth startedandendedwithhigherprices,wasperhapsafactorintheslowstartwithregardto substantivematters. 68 ColourPlates WeacknowledgewiththanksthefollowingimagesprovidedbyIEFHostCountries, theOPECSecretariatandSaudiAramco. 69 IEF2–Solstrand1992.IEFMinistersattheMinisterialWorkshoponEnergy. 70 IEF5-Goa1996.IEFMinistersatthe5thInternationalEnergyConference. IEF7-Riyadh2000.HRHKingAbdullahIbnAbdulazizAl-Saud(thenCrownPrince) opensthe7thIEFinRiyadh. IEF7-Riyadh2000 71 IEF7-Riyadh2000 72 IEF7-Riyadh2000 IEF8-Osaka2002.Delegatesatthe8thInternationalEnergyForum. IEF8-Osaka2002.Delegatesatthe8thInternationalEnergyForum. 73 2003-InhisformerroleasChairoftheExecutiveBoard,NoévanHulstsignstheprotocol onimmunitiesandprivilegesfortheIEFSecretariatwithH.E.AliAlNaimi ofIEFHostCountry,SaudiArabia. 74 IEF9-Amsterdam2004.CrownPrinceoftheNetherlands,Willem-Alexander joinsIEFMinistersforthe9thIEF IEF9–Amsterdam.ArneWalther,the�irstSecretaryGeneraloftheIEF,participatesina MinisterialpanelsoonaftertheestablishmentoftheIEFSecretariatinRiyadh. IEF9–Amsterdam.H.E.MinisterBrinkhorsthoststhe�irst InternationalEnergyBusinessForum(IEBF).ChairedbyPeterSutherland. 75 IEF10-Doha2006-H.E.MinisterAbdullahBinHamadAl-Attiyah,DeputyPrimeMinister andMinisterofEnergy&IndustryQataraddressesfellowIEFMinisters. 76 IEF10-Doha2006.IEFMinisters IEBF2-Doha2006.IEFMinistersandBusinessLeaders IEF11-Rome2008.IEFMinisters IEF11–Rome2008.The�irstmeetingofJODIHeadofDelegations. 77 IEFSecretaryGeneral,NoévanHulstcongratulatesincomingChairoftheExecutiveBoard,AldoQuiroga asMexicoassumestheroleofhostcountryforIEF12attheconclusionofthe11thIEFinRome. 78 HRHPrinceAbdulazizbinSalmanAlSaud,ChairoftheIEFExpandedHighLevelSteering GroupconferringwithIEFSecretaryGeneralNoévanHulst. Dialoguemakesadifference–IEAExecutiveDirectorNobuoTanaka,OPECSecretaryGeneral AbdullahEl-BadriandIEFSecretaryGeneralNoévanHulstatIEF11inRome2008. Thedialoguehasitslightermoments... 79 June2008-HRHKingAbdullahIbnAbdulazizAl-SaudhoststheJeddahEnergyMeeting June2008-HRHKingAbdullahIbnAbdulazizAl-Saud,MinistersandIndustryLeaders attheJeddahEnergyMeeting 80 June2008–PressConferencefollowingtheJeddahEnergyMeeting November2008-InternationalSupportGroupMeeting(ISG),OPECVienna. December2008-PrimeMinisterGordonBrownHoststheLondonEnergyMeeting 7thInternationalJODIConference,Quito,Ecuador-June2009 81 IEF12–Cancun2010.MexicanPresidentFelipeCalderóninauguratedthe12thIEF IEF12–Cancun2010.IEFMinisters. 82 H.E.GeorginaKesselMartinez,MinisterofEnergyofMexicochairingasession ofIEF12Cancun MinistersofEnergyandhigh-levelof�icialsissuethehistoricCancunDeclaration agreeduponby66IEFCountries 83 IEF12-Cancun2010.IEFMinisters 84 IEBF4–Cancun2010.IEFMinistersandBusinessLeaders. Chapter5:The2000s-Shiftsin InterestsandtheInstitutionalisation oftheIEF Introduction The turn of the 21st century proved to be an eventful period for the global economy and energymarkets.Itwitnessedmajortransformationsintheoilmarketaswellasshiftsinthe attitudes and the interests of some key players, helping to shape new producer-consumer energy relations. Key among the oil market transformations were: the rapid rise in nonOECDoildemand,drivenbyrapideconomicgrowth,urbanisationandgeneralimprovements in living standards; the shift in international oil trade �lows associated with the rise of the Asianconsumer;theriseofNOCsasimportantplayersontheglobalenergyscene;thelarge concentrationofprovenoilreservesinthehandsofafewNOCsinproducingcountries;and theemergenceofnewanddiversesourcesofsupplyinAfrica,LatinAmericaandtheFormer SovietUnion.Thesechangesledtotherisingimportanceofnewenergyplayersoutsidethe auspicesofIEAandOPEC,suchasChina,India,Russia,Brazil,SouthAfricaandtheCaspian countries. These new players have different interests, aspirations and perceptions of the energychallenges. The 2000s also witnessed the most sustained increase in oil prices in recent history, with theannualaveragepricerisingyear-on-yearforsevenconsecutiveyearsbetween2002and 2008.Thisboom,however,endedwithaspectacularcollapseoftheoilpricetowardstheend of2008.Therapidriseinoilprices,thesharppriceswingsandheightenedvolatilitybrought several key issues to the fore. These included the role of spare capacity in promoting oil marketstability;improvementoftheinvestmentclimateintheenergysector;theunderlying drivers of oil price movements; the economic, political and social costs associated with oil price instability; and the measures that producers and consumers are able to undertake to improvethefunctioningofthemarket,suchasenhancingdatatransparencyandregulating derivativesmarkets.The2000swerenotonlyaneventfultimefortheglobaloilmarket,but thedecadealsowitnessedtherapidlyincreasingimportanceofnaturalgasoninternational energy markets and in producer-consumer relations. In addition to these transformations, nationalenergypoliciesinconsumingcountriescontinuedtoevolve,drivenbyenergysecurity concerns and the climate change agenda, while producing countries’ long-term investment plans,theirrisingdomesticdemandandissuesofaccesstoreservesremainedatthecentreof consumers’energysecurityconcerns. In parallel with these developments, the �inancial layers surrounding the physical markets also witnessed structural changes that imposed themselves on the producer-consumer dialogue.Thesechangesweremanifestedinthemassive�lowsof�inancialinvestmentsinto commoditiesmarkets;theentryofnewtypesofplayerssuchashedgefunds,pensionfunds, 85 insurancecompaniesandindexinvestors;�inancialinnovationwhichallowedinvestorstogain greaterexposuretocommoditiesthroughthecreationofsophisticated�inancialproducts;and the higher degree of interconnectedness between �inancial and physical markets in the oil priceformationprocess. ShiftinInterests Alongsidethesetransformationinenergymarkets,the2000ssawashiftintheinterestsof keymarketplayers.Formostofthe1990s,producerswerenotveryactiveinthedialogue,and theirinterestswerenotverywellarticulated.By2000,however,thesituationhadchanged andakeyproducer,SaudiArabia,expressedstronginterestinthedialogue.TheKingdom’s politicaland�inancialsupportprovedtobeimportantforstrengtheningthedialogueinthe 2000safteradecadeinwhichthedialoguehadmadelittleprogressonsubstantivematters. TheshiftinSaudiArabia’spositioncanbeexplainedinlargepartbytheeventssurrounding theoilmarketin1998,throughwhichtheKingdomrealisedthatitcannotaffordtonotactively engageininternationalenergypolicyandstrengthenitsenergyrelationswithbothproducers and consumers. The Kingdom made the IEF central to its bilateral and multilateral energy relations. There was also awareness within OPEC that stabilising the market may at times requireclosercooperationwithnon-OPECproducers. Whileinthemid1990sVenezuela’splanstoboostproductivecapacityinaweakmarketcreated serioustensionsandcon�lictswithinOPEC,thisbecameaminorfactorinthe2000s.Thearrival ofHugoChaveztothePresidencyofVenezuelaheraldedamajorchangeinthedirectionofthe country’soilpolicyandareversalinitsexpansionplans.Thestrikesthateruptedfollowing Chavez’sdecisiontochangethemanagementofPDVSAandexerthiscompletecontrolover thecountry’soilpolicyresultedinamajorglobaloilsupplyshock,withproductiondropping sharplyinthe�irstmonthsof2003.TherelationsbetweenVenezuelaandtheUScontinued to deteriorate in the 2000s, reaching very low levels in September 2008, when Venezuela brokeoffdiplomaticrelationswiththeUS.Althoughdiplomatictieswerere-establishedlater inJune2009afterthearrivalofPresidentBarackObamatotheWhiteHouse,thetraditional strongtradeandinvestmentrelationsandcooperationthatcharacterisedtheUS-Venezuela relationsinthe1990swereneverrestored.Iran’splanstoexpanditsoilandgasproduction capacityinthe1990swerealsoderailed.InternationalsanctionsagainstIranintensi�iedas relationsbetweenIranandtheWestcontinuedtodeteriorateoverIran’snuclearprogramme. Nevertheless,theinterestsofIranandVenezuelainthedialoguedidnotfadeaway,andthetwo countriescontinuedtoparticipateinthevariousMinisterialmeetingsduringthe2000s.But unlikethe1990s,duringwhichthesetwoproducersassumedanimportantroleininitiating andpromotingthedialogue,IranandVenezuelatookmoreofabackseatinthepastdecade. TheUSpositionregardingthedialoguecontinuedtooscillateduringthe2000s.The7thIEFin Riyadhin2000sawanimportantdevelopmentintermsofbothappearanceandcontent.For the�irsttimeinIEFhistory,theUSwasrepresentedataveryseniorlevel,bythethenSecretary ofEnergyBillRichardson.InpreviousIEFmeetings,theUShadalwaysoptedforalowerlevel ofrepresentation,re�lectingitslukewarmsupportfortheproducer-consumerdialogue.More importantly,duringthismeeting,theUScameoutclearlyinsupportofapricerangewhich overlapped with that of OPEC at that time. In a press conference on the 18th of November duringthe7thIEFmeeting,SecretaryofEnergyBillRichardsonstated: 86 $10/Bistoolowand$30/Bistoohigh.Whenitismorethan$30/Bconsumingcountries, particularly developing countries, are hurt. Stock levels drop, and it leaves the world vulnerabletospotshortagesandpricespikes.Weshouldnotgetdrawnintoaccepting $30/Bnorshouldwetrytoreturnto$10/Boil.AsI’vesaidmanytimes,fortheUnited Statestheidealpriceisbetween$20/Band$25/B. This announcement represented a major shift in the position of the US government, which until then had refused to discuss oil prices. Secretary of Energy Bill Richardson quali�ied theabovestatementbynotingthatrelying“onopencompetition,marketforces,isthe�irst principle”thattheUSabidesby.This,however,isaclearcontradiction:opencompetitionwill mostlikelydrivethepriceeitherbeloworabovetheoptimalor‘ideal’pricerange.Tomaintain the price within a given range, some form of market intervention - most likely through the auspicesofOPEC-cannotbeavoided.Theideaofanoptimalpricerangedidnotsurvivelong. InJanuary2002,SaudiArabianOilMinisterAliAl-NaimiannouncedthatOPEC’spriceband mechanism would be suspended due to imbalances in the world oil market, while the US reiterateditstraditionalpositiononrelianceonmarketforcestodeterminetheoilprice.In the12thInternationalEnergyForum(IEF)inMexicoinMarch2010,theUSDeputySecretaryof EnergyDanielPonemancalledforfreemarketstoreignsupreme,statingthatthe“goalofthe USisaclearandlong-standingone,andthatistoletsupplyanddemandsetprices”. In 2000, energy had become a more important topic on the US political agenda, with the occurrence of the Californian electricity crisis, mainly a result of regulatory imperfections, beingacrucialcontributor.ButalsodevelopmentsintheMiddleEasthadcaughtWashington’s attention, namely the ongoing activities in Iraq and discussions in the UN Security Council aboutaswitchtosmartsanctions.ThefactthatshortlyaftertheelectionsofNovember2000 President-electBushappointedaspecialenergyteamtodeviseanewenergypolicyfortheUS showshowserioustheconcernswiththeinternalandexternaldimensionsofenergypolicy hadbecome.InMay2001thiscommittee,ledbyDickCheney,presenteditsreport.Themain thrust of the policy proposals concerned the internal energy policy, stimulating domestic energysupply,andinfrastructure.Nevertheless,afullchapterwasdevotedtorelationswith other consuming and producing countries. In addition to diversity of supplies, cooperation with both producing and consuming countries was deemed very important to enhancing energysecurity.101 Another important development was that the European Commission, which was becoming moreconcernedwithsecurityofsupply,aswitnessedbythegreenpaperTowardsaEuropean StrategyfortheSecurityofEnergySupply(Com769�inal,2000),began,moreactivelythan before,topromotesecurityofsupplypolicyattheEUlevel.AttheRiyadhmeetingboththe Presidencyofthattime,France,andEUCommissionerdePallaciowerepresentandcoordinated theEUcommitmenttothedialogue.FortheEUCommissiontheproducer-consumerdialogue wasanimportantchanneltoengageindiscussionsonglobalenergymarketstability,whileits competenceinthesematterswasstilldebatedinternally.TheCommissionhadbeeninterested in the producer-consumer dialogue from the start and became an active participant in the EnergyPolicy(2001).ReportoftheNationalEnergyPolicyDevelopmentGroup,May2001,http: //wtrg.com/EnergyReport/National-Energy-Policy.pdf 101 87 ISG.CommissionerCardosaeCunhaparticipatedinthe�irstandsecondmeetingsinParisand Bergen(Norway),respectively,whileCommissionerOrejawaspresentatthethirdinSpain. CommissionerPapoutsisattendedthemeetinginVenezuela,whilehemissedthemeetingsin IndiaandSouthAfrica. Thesharpriseinoilpricesin2008providedanotherbigpushforthedialogue,increasingthe involvementofkeyconsumercountriessuchastheUK,France,Germany,NorwayandIndia. As oil prices started rising sharply in mid-2000s, some of�icials from both consuming and producing countries started playing the ‘blame game’, attributing the oil price hike to each other’spolicies.By2008,therealisationarosethatthisblamegameandprovocativeremarks from both parties often exacerbated existing market volatility and that it was therefore in the interest of all parties to make their best efforts to reduce unhelpful commentary and communicatetheirconcernsinprivate.Moreimportantly,therewasgreaterawarenessofthe costsofoilpriceinstability.Bothpartiesrecognisedthatlowandvolatileoilpricesundermine investmentintheoilsectorandlaytherootsforthenextenergycrisis,whilehighoilprices couldendangerglobaleconomicprospectsandresultindemandreduction.Indiawentastep further,proposingapricebandmechanisminwhichconsumingcountrieswouldguarantee thatoilpricesnotfall belowanagreedlevelandproducingcountrieswouldguaranteethat theynotriseaboveanagreedlevel.Theproposalwonthebackingofsomeconsumercountries, thoughduetothedif�icultiesinimplementingsuchapricebandtheideawasnotpursuedany further. However, the support for the producer-consumer dialogue as one of the means to tacklethecausesofpriceinstabilitycontinuedtostrengthen.AttheG-8SummitinL’Aquilain thesummerof2009,theG-8leadersfoundexceptionallyclearwordsabouttheneedforan improvedenergydialogueframework: It is in the interest of both producers and consumers to enhance transparency and to strengthentheirdialoguetowardsreducingexcessivevolatilityinthemarket.Fossilfuel producing,transitandconsumingcountriesmustworktogethertoincreasestabilityand predictability of supply and demand patterns and promote investments in the energy sector,includingbysupportinganddevelopingfurtherpredictablelegalandregulatory frameworks....We call for better coordination among the international institutions and for the acceleration and strengthening of the existing initiatives towards a more structureddialogue,…..,betweenproducing,transitandconsumingcountries,focusedon improvingtheinvestmentclimate,discussingwaystoreduceexcessivevolatilityofprices andpromotingenergysecurity.102 TheInstitutionalEvolutionoftheIEF Thepoliticalandeconomicdevelopmentsofthe2000sprovedtobedecisivefortheproducerconsumerdialogue,asmanifestedbothintheinstitutionalevolutionoftheIEFandintheintensity, breadthandcontentofthedialogue(discussedinthenextchapter).Sinceitsinceptionin1991, theIEFasanorganisationhadremainedlargelyinformal,providingaregular,biannualforumfor producersandconsumers.Whiletheinformalityfeaturewasseenaspracticalandconvenient forbothpartiesduringthe1990s,itwasimportanttocreateacentralinstitutionthatwouldplan G-8Leaders’Declaration“ResponsibleLeadershipforaSustainableFuture”,L’Aquila,10July2009, Paragraph42. 102 88 andcoordinatefutureIEFactivitiesandbroadenandstrengthentheglobalproducer-consumer dialogue. The institutional framework had been built on practice since its inception in 1991, andthebeginningofthenewmillenniumseemedtobetherighttimetofurtherdebatewithin theorganisationastoitsfuturemodusoperandi.103The7thInternationalEnergyForumheldin Riyadhfrom17-19November2000provedtobetheturningpointfortheinstitutionalisationof theproducer-consumerdialogue.Inthatmeeting,SaudiArabia’sthenCrownPrinceAbdullah IbnAbdulazizAl-SaudproposedtocreateapermanentSecretariatandheadquartersfortheIEF. Inhisspeech,heemphasisedthatproducersandconsumersshouldseekcooperationbasedon constructiveandtransparentdialoguebetweenallpartiesinterestedinenergyissues.Toachieve thesegoals,thethenSaudiCrownPrincesuggested: the establishment of a permanent secretariat for the Energy Forum to work towards promoting a continuous dialogue between producers and consumers. This dialogue should also include the industry and all other parties interested in energy matters. The establishmentofsuchasecretariatwillenhanceourdialogueandmakeitmoreregular andmoreconducivetoachievingourgoals.TheKingdomstandsreadytohosttheForum’s SecretariatinRiyadh.104 The proposal to establish the IEF Secretariat was welcomed at the Ministerial meeting and embracedtwoyearslateratthe8thInternationalEnergyForuminOsakainSeptember2002.105 A permanent body of staff subsequently began its work in December 2003 in temporary accommodation and then relocated to the newly built headquarters in Riyadh in 2005. The establishmentoftheIEFSecretariatmarkedaturningpointfortheIEFasanorganisation:it provided the Forum with an administrative arm. The Secretariat performs a number of key functions which include providing a neutral platform for dialogue; exchanging energy data and information among energy producing, consuming and transit States and energy-related industries;organisingseminars,symposia,conferences,workshops,trainingprogrammesand roundtablediscussionsonenergy-relevantglobalorregionalissues;establishingdialogueand cooperationwithotherenergy-relevantentitiesinundertakingresearchandanalyses;preparing anddisseminatinganalyticalreports,statementsandpressreleasesonactivitiesoftheForum; andprovidingassistancetoMembersoftheForumtoensurethatthedialogueamongthemis morefocusedandresult-oriented. Since its establishment, the Secretariat has played a key role in providing logistical support for the Ministerial meetings, including preparing and disseminating the agenda, providing backgroundmaterialfordiscussion,andpreparingthehostcountry’sConcludingStatements. The Secretariat has also been given the important role of translating some of the broad objectives of the dialogue into concrete initiatives.106 The outcome of such reform efforts SeetheIEF-commissionedReportoftheExpertGroup,asconvenedbythe2008ad-hocenergy ministersmeetingsheldinJeddahandLondon.16January2010.Seealso12thInternationalEnergy ForuminCancun,Mexico,March29-31,2010,MinisterialDeclaration. 104 MEES,Vol.XLIII,No.48,27November2000. 105 th 8 InternationalEnergyForuminOsaka,September21-23,2002,Summarybythehostandthecohosts. 106 However,thesuccessinthisareahasbeenlimited,asrecentlyacknowledgedbytheCancun MinisterialDeclarationwhichcalledfora“moreresult-orientedforum”. 103 89 hasbeenamoreambitiousagendainwhichenergyministershavebeenwillingtodiscussa widerangeofenergyissuesasre�lectedinsomeoftherecentConcludingStatements.These have become more substantive, providing insight into the common interests of producers andconsumers,andevenidentifyingsomeareasofagreementwhichcouldformthebasis for joint coordinated actions between the parties in the future.107 The IEF Secretariat has also become more active and dynamic. Communication has improved: an updated website has made available background documents about most IEF meetings, as well as bi-annual newslettersandvariousreportsandarticlestothepublic,thereforerenderingIEFactivities moretransparent.108TherepresentationoftheIEFatotherorganisations’activitiesviathe IEF’sSecretaryGeneralorotherpermanentstaffrepresentativeshasbeenanimportantstep towardsraisingtheIEF’spro�ilewhilealsopromotingtheIEF’smaincause.TheSecretariat has moreover gained from the expansion of its activities, often in cooperation with other relatedorganisationsandresearchinstitutions.109 Towardstheendofthedecade,asecondreformprocesswasinitiatedwiththeaimoffurther strengtheningtheinstitutionalframeworkoftheIEFinordertofacilitateandpromoteamore effective and productive dialogue. The sharp swings in oil prices in 2008 and 2009 helped shifttheglobalattentionbackontotheoilmarketandprovidedthemuchneededsupportfor theinstitutionaldevelopmentoftheIEF.InJune2008,SaudiArabiatookanunprecedented actionbycallingforanad-hocmeetingbetweenproducerandconsumercountrieswiththe aim to identify the causes of the current high oil prices. At the Jeddah Energy Meeting, the UKcommittedtohostingafollow-upmeetinginLondonbytheendof2008.ByDecember, theglobaleconomyandtheoilmarkethadwitnessedamajorshock.IntheLondonEnergy MeetinginDecember2008,theChair’ssummarynotedthatthe“recentdevelopmentsinthe globaleconomyhadhighlightedtheneedtoexaminetheinstitutionalarchitectureasitrelates toenergy,toensurethatitmosteffectivelysupportsthecreationandmaintenanceofwellfunctioningmarkets,whilereducingexcessivevolatility”. An Expert Group (EG) was established pursuant to the decisions made in the Jeddah and Londonad-hocEnergyMeetings(2008)toproviderecommendationstothe12thInternational Energy Forum (IEF) Ministerial meeting on 29-31 March 2010 in Cancun, Mexico for “strengtheningthearchitectureoftheinternationaldialogue,theIEF,andreducingvolatility intheoilmarket”.AHighLevelSteeringGroup(HLSG),coordinatedbytheIEFSecretariatand includingof�icialsfromthehostandco-hostcountriesofthe12thIEF,alongwiththehostsof thetwoad-hocMinisterialmeetingsinJeddahandLondon,oversawthetermsofreference Perhapsthemostnotableoftheseisthe11thInternationalEnergyForuminRomein2008, wheretheConcludingStatementincludeddiscussionaboutbothlevelsandvolatilityofoilprices, interdependence,investmentintheentireoilandgassupplychain,increasedcooperationbetween IOCs,NOCsandservicecompanies,achievingtheMillenniumDevelopmentGoals,CarbonCapture andStorage(CCS)andasustainableenergyfuture. 108 AllareavailableonlineattheIEFwebsite,http://www.ief.org. 109 TheIEFisnowapartnerorganisationoftheIEA,OPEC,theIMF,theUN,theIGU,OAPECandthe WorldBank.Ithasconcludedmemorandaofunderstandingwithanumberofresearchinstitutes, whichoftenco-organisespecialforasuchastheCCSSymposium:withChathamHouse,theEnergy andResourcesInstitute(TERI),InstitutFrancaisduPetrole(IFP),InstituteofEnergyEconomicsof Japan(IEEJ),andtheEnergyCharterConferenceSecretariat. 107 90 and work of the EG.110 The HLSG was chaired by HRH Prince Abdulaziz Bin Salman Bin AbdulazizAl-SaudofSaudiArabiaandco-chairedbyGrahamWhiteoftheUnitedKingdom. The EG recommendations for areas of reform were modi�ied by the HLSG and both the recommendationsandtheimplementationplanoftheHLSGwerereviewedandendorsedby anExpandedHigh-LevelSteeringGroup(EHLSG)composedofrepresentativesfromproducer andconsumer,developedanddevelopingcountries,tobepresentedtotheministersatthe12th IEFMinisterialinCancuninMarch2010. The Cancun Ministerial Declaration proved to be a landmark declaration in more than one respect. For the �irst time in its history, a document was approved by no less than 66 countries.ItalsomarkedacriticaljunctureinthehistoryofIEF’sinstitutionaldevelopment. Resulting from the EG recommendations, the most important proposal accepted at the 12th IEF Ministerial was that of the IEF Charter. Given the lack of any document outlining the structural framework, the working processand objectives of the IEF, the creation of such a charterwasoverdue.111HRHPrinceAbdulazizbinSalmanbinAbdulazizAl-Saud,theChairof theHLSG,statedthatthe“Declarationisanembodimentofthesharedviewsofproducersand consumersandarecognitionoftheneedforstronger,broaderandmoreeffectivecooperation. TheIEFCharter,re�lectingtheexpandedroleandadditionaltasksoftheIEF,willenableus toachievesuchanobjective.”LordHunt,UKEnergyMinisterstatedthatthe“international agreementwillsettheIEFonacoursetobecomingaForumthatwillguideactionanddelivery forbothproducersandconsumers”. Tooverseethecreationofthenewcharter,theMinistersintheCancunMinisterialestablisheda newHLSG,composedofrepresentativesofthecountriesthatapprovedtheCancunMinisterial Declaration.112 The HLSG whose chairmanship and co-chairmanship remained the same, was given the responsibility of overseeing the drafting of the IEF Charter, with a mandate to develop and �inalise the IEF Charter before March 2011, in accordance with the Guiding PrinciplescontainedintheEHLSG’sRecommendationsandImplementationPlan. The IEF Charter was written by the IEF Secretariat and overseen by the new HLSG to be presented for formal agreement by the ministers in the Ministerial meeting to be held in Riyadhon22February,2011.TheshortperiodinwhichtheCharterwaswrittenandapproved anditsbreadtharetestimonytothecommitmentofproducersandconsumerstocooperation TheHLSGiscomprisedofthefollowingelevencountries:Algeria,France,Germany,Japan,Kuwait, Mexico,Norway,Qatar,SaudiArabia,UnitedKingdomandUnitedStates. 111 Asdiscussedabove,theStatuteoftheIEFSecretariatincludesanoutlineoftheobjectivesofthe Secretariatonly,whiletheIEFasawholeessentiallyfunctionedwithoutanyformaldeclarationofits purposeorprovisionsforitsorganisation.SeetheIEF-commissionedReportoftheExpertGroup,as convenedbythe2008ad-hocenergyministers’meetingsheldinJeddahandLondon.16January2010. 112 ThefollowingcountriesapprovedtheMinisterialDeclaration:Algeria,Angola,Australia,Austria, Azerbaijan,Bahrain,Belgium,Brazil,BruneiDarussalam,Bulgaria,Canada,China,Colombia, CostaRica,CzechRepublic,Denmark,Ecuador,Egypt,Finland,France,Germany,Greece,Hungary, India,Indonesia,Iran,Iraq,Ireland,Italy,Jamaica,Japan,Jordan,Korea,Kuwait,Mexico,Morocco, Netherlands,NewZealand,Nigeria,Norway,Oman,Pakistan,Philippines,Panama,Peru,Poland, Portugal,Qatar,Romania,Russia,SaudiArabia,SlovakRepublic,SouthAfrica,Spain,SriLanka, Sudan,Sweden,Switzerland,Thailand,Turkey,Turkmenistan,UnitedArabEmirates,United Kingdom,UnitedStatesofAmerica,VenezuelaandYemen. 110 91 andtheeffectivenessoftheHSLGtobridgethegapbetweenthedifferentinterests.Central featuresoftheCharterinclude:amissionstatement,orobjectivesoftheorganisation,thereby de�iningwhattheIEF’sfuturerolewillbe;provisionsregardingIEFmembership;provisions regardingdecision-makingattheexecutiveleveloftheIEF,includingtheExecutiveBoard;and provisions for the �inancial contributions to be made by member states, organisations and otherforumparticipants.113 The agreement to establish an IEF charter represents a decisive juncture in producerconsumerrelations.TheCharterdescribestheIEFas: anintergovernmentalarrangementthatservesasaneutralfacilitatorofinformal,open, informed and continuing global energy dialogue among its membership of energy producingandenergyconsumingStates,includingtransitStates. The Charter states that the fundamental objectives of the IEF are to foster greater mutual understanding and awareness of common energy interests among its members, promote a better understanding of the bene�its of stable and transparent energy markets, and to narrow the differences among energy producing, consuming and transit Member States on global energy issues. Another key objective is to facilitate the collection, compilation and dissemination of data, information and analyses that contribute to greater market transparency,stabilityandsustainability. BesidesprovidingastatementofIEFobjectives,theCharteralsospeci�iesthevariousorgans of the Forum, consisting of Ministerial activities made up of biennial Ministerial Meetings, extraordinary Ministerial Meetings and Working Groups at Ministerial or other levels for the performanceofaspeci�ictask,theExecutiveBoard,aSecretariat,anInternationalSupportGroup andanIndustryAdvisoryCommittee.TheCharterspeci�iesthefunctionsofeachoftheseorgans andthelinksbetweenthem.AttheapexoftheIEFaretheBiennialMinisterialMeetings,which “aretheprimarybodyoftheForumandserveasaneutralvenueforhigh-level,informal,open, informedandcontinuingglobalenergydialogueamongtheMembersoftheForum”.TheIEFis governedbyanExecutiveBoardandisheadedbyaSecretaryGeneral,initiallyArneWalther, andsince2008byNoévanHulst.TheExecutiveBoardconsistsofrepresentativesofMinistries responsible for energy matters from thirty-one members of the Forum. The representatives oftheIEAandOPECarenon-votingmembersoftheExecutiveBoard.Fromamongthethirtyone members of the Board, twenty-three serve as permanent members and eight as rotating members, where the permanent members are the host country of the Secretariat, the eleven largestoilandgasproducersandtheelevenlargestoilandgasconsumers. Another important organ is the International Support Group (ISG), whose function is now morespeci�iedintheCharter,namelytoprovidetheExecutiveBoardandtheSecretariatwith advice on the structure and themes of the forthcoming biennial Ministerial Meeting and to adviseandassisttheExecutiveBoardandtheSecretariatintheimplementationofthebiennial ProgrammeofWork.TheISGiscomprisedofrepresentativesfrommembersoftheExecutive 12thInternationalEnergyForuminCancun,Mexico,March29-31,2010,MinisterialDeclaration.High LevelSteeringGroup,DraftRecommendationsandImplementationPlan,Draftsubmittedforthe HLSG’sconsiderationandapprovalatits�irstmeeting,6-7February2010,Riyadh. 113 92 Board,theIEAandOPECSecretariatsandfromasmanymembersoftheForumasarewilling to participate. The Chair of the Executive Board and the Secretary-General can invite other internationalorganisationstoparticipateintheISG. Another organ is the Industry Advisory Committee, whose role is to advise the Executive BoardandtheSecretaryGeneralonactivitiesoftheForum.TheIndustryAdvisoryCommittee includesrepresentativesofbusinessenterprisesandindustryentitieswhichcontributetothe ForumandareinvitedbytheSecretary-GeneralinconsultationswiththeExecutiveBoard. InadditiontoorganisingtheinstitutionalstructureoftheIEF,theCharteralsoaimedtoprovide adequateandpredictable�inancialresourceswiththeIEFCharter,callingonitsmembersto ensure the provision of the IEF and its Secretariat with a minimum, stable and predictable sourceoffundingtopermitlong-termplanningandtheful�ilmentofmulti-yearprogrammes. Anotherimportantinstitutionaldevelopmenthasbeendirectedtowardsinvolvingagreater variety of actors in the dialogue. There was recognition in the 7th IEF that business and industry leaders should be more involved in the producer-consumer dialogue, which had sofarremainedlimitedtomeetingsattheministeriallevel.Inconsequence,a�irstinformal gathering of business leaders took place prior to the 8th IEF Ministerial in Osaka in 2002, followedbythe�irstInternationalEnergyBusinessForum(IEBF)atthe9thIEFMinisterialin May2004inAmsterdam.Sincethen,ithasbeendecidedthattheIEBFbeheldregularlythe daybeforetheIEF’sbiannualMinisterialmeetings,andreportsofIEBF�indingsbepresented atsubsequentMinisterialmeetings.114 TheJointOilDataExercise(JODE)−laterrenamedtheJointOilDataInitiative(JODI)−was alsotheoutcomeofproposalsmadeatthe7thIEFinwhichthehostandtheco-hoststatement emphasisedtheimportanceof“improvingandtimelyaccessingtoenergydata”for“market assessmentandtransparency”.Theideaofanoildataexercisewas�irstairedatanISGmeeting intheprocessofpreparingforthe7thIEFinRiyadh.Callsforgreateroilmarkettransparency throughtheprovisionofdatatoacentraliseddatacollectioncentreledtothecreationofa workinggroupandthestartofJODEin2001onatrialbasis.115Twoyearslater,thefeatures oftheinitiativebecamemoreconcrete,andtheJointOilDataInitiative(JODI)asapermanent mechanismwasestablishedin2003.Thehostandco-hostofthe8thIEFissuedastatement commendingthemonthlyoildatareportinginitiativeestablishedbytheAsiaPaci�icEconomic Cooperation(APEC),theEU(throughEUROSTAT),theIEA,theLatin-AmericanOrganization for Energy Cooperation (OLADE), OPEC and the United Nations Statistics Division (UNSD) andurgingallcountriestoparticipate,notingthat“datatransparencywillonlybeachievedif allpartiesarefullycommittedtothisimportantinitiative”.ThedevelopmentofJODIandthe dedicationofthesixpartnerorganisationswasanimportantjusti�icationfortheestablishment oftheIEFSecretariat.FollowingtheendorsementbyIEFMinisters,andwiththesupportof partnerorganisations,theIEFassumedtheroleandresponsibilityofcoordinatorofJODIin January2005andcurrentlymanagestheJODIWorldDatabasewiththeobjectiveofimproving thequalityandtransparencyofinternationaloilstatistics. IEF,AbouttheIEBF,availableathttp://www.ief.org. “AboutJODI”,http://www.jodidata.org/aboutjodi.shtm;Seealso7thInternationalEnergyForumin Riyadh,November17-19,2000,Summarybythehostandtheco-hosts. 114 115 93 TheimportanceofachievingbetterqualitydatathroughJODIforenergysecuritywasforcefully echoedbytheG-8HeadsofGovernmentintheirSt.PetersburgPlanofActiononGlobalEnergy Securityin2006.Theparticipantswelcomed“thebeginningofimplementationoftheJointOil DataInitiative(JODI)andwilltakefurtheractiontoimproveandenhancethecollectionand reportingofmarketdataonoilandotherenergysourcesbyallcountriesincludingthrough developmentofaglobalcommonstandardforreportingoilandotherenergyreserves”.The G-8leadersalsoinvitedtheIEF“toworkontheexpansionofJODImembershipandtocontinue toimprovethequalityandtimelinessofdata”.High-levelpoliticalsupporttoJODIhasbeen expressedalsobyAPECSummitsandotherinternationalmeetingsofMinisters. Against this backdrop of high-level political attention and expectation, the IEF Secretariat hosted the 6th International JODI Conference in Riyadh in November 2006. The Conference gathered 120 participants, representing thirty governments, nine international energy organisations, nine international and national energy companies, and research institutes andconsultants.Itmarkedthe�irstanniversaryofthereleasetothepublicoftheJODIWorld Database. The JODI World Database was released to the public in November 2005 by King Abdullahonoccasionoftheof�icialinaugurationoftheSecretariatheadquarters,alsoattended byMinistersofimportantIEFcountries.116 JODI has since become a permanent database that collects oil market data from all IEF memberstates.117TheSecretariathasconsistentlypromotedJODIasrepresenting“thesingle most important collaborative effort to address the issue of market data transparency”. The promotionofgreatertransparencyinenergymarketshasbeenarecurringkeymessageinmost internationalgatherings.Partnerorganisationsparticipateintheprojectviadatasubmission, trainingworkshopsforstaffsubmittingdata,andprovidingtechnicalsupport.118JODIhasa niche,giventhatitisarareattemptofdatacomprehensivenessinamarketcharacterisedby divergingestimatesandlaggingdataavailability.CallsweremadeinrecentIEFMinisterials toincludeotherdatarelevanttodemandandsupply,suchasreservesandinvestmentinnew capacity.Firsttrialshaveinadditionbeenmadetoincludedataongasmarkets.119 Whiletherehasbeenasteadyimprovementinthetimelinessandqualityofdatasubmissions toJODIinrecentyears,importantgapsstillexistintermsofgeographicalcoverageandtypes andqualityofdata.Completeness,timelinessandqualityofdatasubmitteddiffersubstantially betweenmembercountries,somethingthedatabaseiscurrentlystillunabletoovercome.120At Walther,Arne(2007).“DialogueforGlobalEnergySecurity:TheRoleoftheIEF”Aspeechgivenat theCenterforInternationalandStrategicStudiesWashingtonD.C.,7November. 117 IEFSecretariat,ProgrammeofWorkandBudgetfor2005,February2005,p.11,andre�lectedin variousIEFpublications.In2004,IEFSecretaryGeneralArneWaltherdescribedJODIasafuture “�lagshipforouractivityofpromotingproducer-consumerdialogue.”WPA,25October2004,p.5. 118 IEFSecretariat,ProgrammeofWorkandBudgetfor2006,1January2006,p.i;JODI’swebsiteishttp: //www.jodidata.org. 119 11thInternationalEnergyForum,Rome,20-22April2008,ClosingStatementbyhostItalyandcohostingcountriesIndiaandMexico;12thInternationalEnergyForuminCancun,Mexico,March2931,2010,MinisterialDeclaration. 116 94 present,submissionsbymembercountriesaremadeonavoluntarybasis.Thedatacoverage isquitenarrow.Countriesprovidedataonproduction,re�ining,trade,demandandstocksof sevenproductcategories.TheCancunMinisterialDeclarationin2010hasbeenvocalinthe necessitytoimproveJODI’scoverage,timelinessandquality,stating: The IEF Secretariat data and information system should be forward-looking. Further supportfortheIEFSecretariat’songoingworkintheexpansionofJODItocovernatural gasisneeded.AdditionalexpansionofJODIshouldalsoincludedataoninvestmentin newcapacityintheupstreamanddownstreamoilandgassectors,incooperationwith relevant organisations. The comparison of of�icial data against secondary (other than governmental) sources and subsequent analyses could prompt participating states to providebetterdata,therebyimprovingJODI’stimelinessandquality.TheIEFSecretariat should also explore the collection of demand-relevant data such as energy pricing information,energyintensityandenergyef�iciencymeasures. TheInstitutionalisationandFormalityoftheDialogue The institutional evolution of the International Energy Forum has been one of the de�ining featuresoftheproducer-consumerdialogueinthe2000s.Thisinstitutionalisation,however, did not induce any shift towards creating a global energy organisation with binding global energygovernance,nordiditaffecttheinformalityofthedialogue.Thecentralityofenergyin acountry’seconomic,politicalandsocialdevelopmentandthestrongaversiontorelinquishing national decision-making processes in the �ield of energy suggest that this objective is impossible to achieve. The twenty-year history of the IEF demonstrates that the parties concernedarestronglyattachedtotheideaoftheinformalityofthedialogue.Thisisexpressed veryclearlyinthenewIEFCharter,whichstatesthatthe“Charterdoesnotcreateanylegally bindingrightsorobligationsbetweenoramongitsmembers”.Theemphasisoninformalityis expected,asenergyissuesinvolvequitecomplexpolitical,economicandsocialdimensionsthat aredif�iculttoreconcile.ChangingtheIEFintoaforumwithpowertomakebindingdecisions woulddampentheinterestofbothproducersandconsumersandcouldlimitthescopeforan openandfrankdiscussion.AsnotedbytheExpertGroupreporttotheHSLG,theinformality ofthedialoguehasmadeit“non-threateningandattractive,sincetheparticipantshavehad nothing to lose but possible opportunities to gain”. Though some interviewees have voiced concernsabouttheeffectivenessofinformaldialogues,whetherdialogueisformalorinformal seemstobeofsecondaryimportancetoitsachievements.Itispossibletohaveaformalbut unproductiveandineffectivedialogue;oraninformaldialoguewhichisofhigh-qualityand effective in addressing participants’ concerns and improving relations among participants. Thus,thesuccessofthedialogueisnotlinkedtoitsnature,butrathertoitsquality,content andtheextenttowhichthedialogueisabletocreatecommongroundtoallowproducersand consumerstotacklesomeofthecommonproblemsandchallengestheyfacethroughhigher levelsofcooperationorattimesthroughcoordinatedefforts. ConcernabouttheunevenqualityofdatasubmittedtoJODIhasrecentlybeenexpressedbyIEA HeadofEnergyStatisticsJean-YvesGarnierintheWPA:“Notallthecountriesareperformingthe sameway.Youhavegoodpupilsintheclassandyouhavepupilswhostillhavetodosomeextra workforthemtomeettherequirementsofJODI”.WPA,XL:13,12April2010,p.10. 120 95 96 Chapter6:OilMarketDevelopments inthe2000sandtheContentofthe Dialogue Compared to the 1990s, the agenda of the 7th IEF and subsequent meetings dealt with a broadenedsetofthemesanddiscussiontopics.Inadditionto‘theusualsuspects’ofdemand, supply and investment outlooks in the oil market, other topics �iltered into the dialogue: the changing structure of the energy industry, sustainable energy development, technology challenges, energy poverty and the mutual impact of energy markets and climate change. Thesetopicsreceivedmorefocusedattentionlateroninthedecade.121 ShiftsinGlobalOilDemandDynamics One of the most important shifts in oil market dynamics in recent years has been the accelerationofoilconsumptioninnon-OECDeconomies.Between2000and2009,demand growthinnon-OECDcountriesoutpacedthatofOECDcountriesineveryyear(seeFigure6.1). Duringthisperiod,non-OECDoilconsumptionincreasedbyaround10.5millionbarrelsper day(mb/d)whilethatofOECDdroppedby2.1mb/d.AttheheartofthisgrowthliestheAsian Paci�ic region, which accounted for more than 50% of this incremental change in demand duringthisperiod,butotherareassuchastheMiddleEastandLatinAmericahavealsobecome importantcentresforoilconsumption.Thisshiftinglobaloildemanddynamics,whichisstill in its early stages, will have wide geopolitical and economic implications, affecting many aspectsoftheoilmarket,suchastheemergenceofnewplayerswiththeirownorganisational models,theopeningupofnewtraderoutesandre�iningcentres,andtheestablishmentofnew pricingbenchmarks. Non-OECD demand became one of the key subjects of debate in the producer-consumer dialogue that has taken place since the early 2000s. The Closing Statement of the 8th IEF in Osaka in 2002, for instance, notes that the growing demand of emerging economies, especiallyfromAsia,“willhaveinternationalenergyimplicationssuchastheincreasedneed forinvestments,increasingtradeinoilandgas,andtheneedforenvironmentally-acceptable energy utilisation”.122 Mr Akira Amari, the former Japanese Minister of Economy, Trade and Industry,carriedthisnewAsianself-con�idenceintotheproducer-consumerdialogueinhis 7thInternationalEnergyForuminRiyadh,November17-19,2000,Summarybythehostandthe co-hosts.Comprehensivesummariesandbackgroundmaterialonallofthementionedtopicscanbe foundontheIEFSecretariatwebsiteathttp://www.ief.org. 122 Summarybythehostandtheco-hostsofthe8thInternationalEnergyForuminOsaka,September 21-23,2002.Similarstatementsfollowed,forinstanceatthe10thIEFinRomein2008,which concludedthat“worldenergydemandissettoincreasesigni�icantlyinthecomingdecades,with stronggrowthprojectedinemergingeconomiesanddevelopingcountries.” 121 97 OpeningStatementtothesecondAsianRoundtablein2007,claimingthat“itwouldnotbean overstatementtosaythatworldenergyproblemsinthefuture[will]dependon[Asian]energy policiesinthecomingdecades”. Figure6.1:OECDandNon-OECDOilDemandDynamics TheriseofAsiandemandwasnotonlyre�lectedasoneofthethemesfordebateinthedialogue; AsiancountrieshavealsobeenmembersoftheIEFandhaveparticipatedinvariousforaand symposia,andhaveinrecentyearsincreasedtheirengagements,forinstanceashosts,co-hosts andsponsorsofawidenumberofforaandsymposia.123TheriseinAsiandemand,andtheshift inweightinoilandgasmarketstowardsnon-OECDcountries,maybeseenasthemainreason behind the development of a more regionally focused producer-consumer dialogue, though concernsaboutcompetitionbetweentheIEF,theIEAandOPECandfearsofduplicationsof effort between these organisations may have also played a role in the regional activities of theSecretariatintheperiodsbetweenMinisterials.InJanuary2005,the�irstofsubsequently biannual AsianMinisterialEnergyRoundtables washeldinDelhi,India,followingasimilar conceptasthebiannualIEFMinisterials.SinceDelhi,twomoreAsianRoundtableshavetaken place,oneinRiyadhinMay2007andathirdinTokyoinApril2009.ThefourthRoundtable isplannedfor2011inKuwait.Attendeesincludedenergyministersfromseventeencountries fromEastandSouthAsia,includingChinaandIndia,andtheGulfStates(de�inedasWestAsia), alongwithrepresentativesoftheIEA,theIEFandOPEC.124TheaimofanAsianRoundtablehas beentogiveAsia-speci�icenergyissuesaseparateforumfordebate.Criticismofsuchregional Forexample,ChinabecamethehostoftheIEF’s�irstCCSSymposiuminSeptember2009,with China’sNationalDevelopmentReformCouncil,China’seconomicmanagementagency,assponsor. Japan,partofOECD-Asia,hasbeenhosttoanumberofIEFevents,includingthe8thIEFMinisterialin Osakain2002. 124 ThefulllistofattendantcountriesincludeBahrain,Brunei,China,India,Indonesia,Iran,Iraq,Japan, Kuwait,Oman,Pakistan,Philippines,Qatar,SaudiArabia,SouthKorea,ThailandandtheUAE.Like theIEFMinisterials,theAsianRoundtablesareheldalternatelyinaproducerandaconsumerstate. 123 98 approachesisbasedonthenotionthattheydivertattentionfromglobalinitiativesbycreating regionalblocsandbycrowdingministers’calendars.Theargumentthatregionalapproaches are unable to solve global problems, such as uncertainty over fundamentals and �inancial regulation,hasalsobeenputforward.125Anadditionalconcerninrelationtotheoutcomesof Asianandotherregionalinitiativesistheextenttowhichthemeetingsactuallyfocusontheir statedpurpose,thediscussionofspeci�icallyAsia-relevanttopics.Infact,anumberofagenda pointsoftheAsianMinisterialsreiteratetypicalIEFMinisterialdiscussionpoints,withlittleor nospeci�icrelevancetoAsiaoverandabovetheirrelevancetoalloilmarketparticipants.Many oftheRoundtables’conclusionsresembleIEFMinisterialSummaryStatementswithlittleless speci�icityorresult-orientation,includingissuesoftransparency,pricevolatility,investment outlooks,amongmanyothers. Asia-speci�ictopics,suchasAsianupstreamanddownstreaminvestments,theroleofAsian NOCs,thedomesticpricingpoliciesofpetroleumproductsandtheenvironmentalconcernsin theAsianPaci�ic,promisegreaterrelevanceandjusti�icationforanAsianinitiativeinaddition toglobalfora.Onepromisingstartinthisdirectionhasbeenmadeintheareaoftechnology that enhances energy ef�iciency and reduces emissions, for instance in the case of carbon captureandstorage(CCS)technology.Inthisarea,the3rdAsianRoundtablenotedthat: Participants recognised that fossil fuels will continue to be a dominant part of the energy mix for the foreseeable future and that carbon capture and storage (CCS) will playanimportantroleinpromotingthesustainableuseoffossilfuels.Inthiscontext, participantsstressedtheimportanceofdevelopingroadmapsforinnovativetechnology, promoting demonstration projects, discussing regulation, monitoring methodology, socialacceptanceandfundingforCCS,suchasinclusionofCCSintheCleanDevelopment Mechanism(CDM),andstrengtheninginternationalcooperationtopromotetechnology transfer.Participantsaf�irmedthatinordertoaddressclimatechange,engagementfrom theenergysectoriscrucial. FutureOilSuppliesandtheInvestmentChallenge Inthe2000s,investmentintheenergysectormovedbackintothecentreofattention.Surging oilpricesaddedtoexistingfearsofinsuf�icientfuturesupplyandraisedconsumers’concerns overinvestmentlevelstonewheights.Thesubsequentoilpricecollapseinthesecondhalf of 2008 in turn reinforced producers’ concerns over an unpredictable price environment, rendering investment decisions all the more dif�icult. Like no other topic, the investment challengebecameanomnipresentthemeintheproducer-consumerdialogue. Consecutiveupwardcorrectionsinoilandenergydemandoutlookseverysingleyearbetween 2000 and 2008 raised expectations about higher overall consumption levels. At the same time, the less than expected growth of non-OPEC supply, due to maturing oil �ields and above-groundconstraints,disappointedhopesofadequatesupplygrowth.Despitethesharp oilpricerisebetween2001and2008,theresponseofnon-OPECsupplyoutsidetheFormer SovietUnion(FSU)remainedweak(SeeFigure6.2).Duringthisperiod,non-OPECtotalliquid Suchcriticismwasexpressedbyanumberofintervieweesaboutallregionalapproaches,including AsianapproachesandtheEU’snumerousowninitiatives. 125 99 production added 3.14 mb/d to the world’s oil supply. Most of the increase was accounted forbyRussia,whichaddedaround2.8millionmb/d.Morerecently,however,Russiansupply growthhassloweddownandfellslightlyin2008.Russiaoilproductionexpandedin2009, partlyinresponsetochangesintaxation,butmostanalystsarescepticalaboutwhetherthe expansioninRussianoilsupplyaswitnessedintheearly2000scanberepeated. Figure6.2:Non-OPEC(ex-FSU)andFSUSupplyGrowth (Year-on-year,thousandbarrels/day) The increasing pessimism about non-OPEC supply over the past few years re�lects key structuralchanges,themostimportantofwhicharehighdeclineratesforexisting�ieldsand changes in the sources of non-OPEC supply growth.126 Many mature basins have witnessed rapiddeclines.AccordingtoarecentOPECreport,theweightedaverageoftheannualobserved declinerateovertheperiod2000-2008stoodat4.6%perannum,implyingthat1.8mb/dof non-OPECsupplyneedstobereplacedsimplytopreventsupplyfromdeclining.127Suchhigh declineratesimplythatspecialattentionneedstobegiventorecoveryrates.Furthermore,the mainsourcesofnon-OPECsupplygrowthhavebecomemorevariedascomparedtothe1970s andnowincludedeepoffshoreinBrazilandtheGulfofMexico,ethanolintheUSandtarsands inCanada. Acombinationofhighoilpricesandlimitedaccesstoreserveshaspushedmanyoilcompanies innon-OPECcountriestoexplorenewfrontiers.Thesenewfrontiersincludetheexploitation ofoilreservesindeepandultradeepwatersinplacessuchastheGulfofMexicointheUS, AngolaandNigeriainWestAfricaandBrazilinLatinAmerica.Inaddition,oilcompanieshave beenlookingatpotentialdevelopmentofunconventionaloilsuchasoilsands,bitumen,shale oil,CoaltoLiquid(CTL)andGastoLiquid(GTL),extraheavyoilandbio-fuels.Accordingto IEA,WEO2009. OPEC(2009).WorldOilMarketOutlook2009.OPEC,Vienna,Box4.2. 126 127 100 a latest EIA International Energy Outlook, global production of unconventional liquids will increasefrom3.4mb/din2007to12.9mb/din2035,accountingfor12percentoftheworld’s totalliquidssupplyin2035. Thesechangeshaveanumberofimportantimplications.Onaverage,ithasbecomemorecostly todevelopoilreservesinnon-OPECcountries.Inaddition,maintainingstabledeclineratesin mature�ieldsrequirestheuseofadvancedandmorecostlytechnology.Furthermore,thescale andriskpro�ileofnon-OPECsuppliersaredifferentfromthoseofthepast.Itisnowtechnically, �inancially, and managerially much more challenging to extract oil in these areas. Regarding deepoffshore,theBPoilspillintheGulfofMexicohasraisedseriousconcernsaboutsafetyand thematurityoftechnologyandhasnecessitatedthereassessmentofthebalanceofcostsand bene�itsofoperatingatthesenewfrontiers.Althoughsuchenvironmentaldisasterswillnot stopthedriveforoffshoreoilproduction,theyaremostlikelytoresultinmoregovernment regulation and will place the industry under very close scrutiny. This may cause delays in projectcompletion,inducinguncertaintyaboutthetimingofentryandthesizeoftheoutput increment.Moreover,theproductionofunconventionaloilsuchastarsandsandshaleoilraises seriousissuesregardingtheenvironmentalcost.Finally,becauseofthedifferentriskpro�ile andthehighercostsinvolvedindevelopmentandproduction,non-OPECsupplyhasbecome moresensitivetooilpricecycles.Speci�ically,thereseemstobeanasymmetricresponsetooil pricechanges.Asharpriseintheoilpriceinducesamodestinvestmentresponseinnon-OPEC countries,whileadeclineintheoilpricegeneratesasharpfallininvestmentintheoilindustry, especiallyinthosesegmentswithrelativelyhighmarginalcosts. The weak response of non-OPEC supply to the sharp rises in oil prices, and the change in theriskpro�ileofpotentialsourcesofnon-OPECsupply,shiftedtheattentiontoinvestment decisionsandresourceaccessinresourcerichcountries.The2000swerecharacterised,like nopreviousdecade,bythedominanceofNOCsovertheworld’soilandgasreserves.Thisis instarkcontrasttotheearly1970s,whenIOCsdominatedtheoilindustry.Theconcentration ofprovenreservesinthehandofNOCsimpliesthattheyareexpectedtoplayanincreasingly importantroleinprovidingfuturesuppliestothemarket.Giventhatthebulkofoilreserves areintheMiddleEast,theissueofinvestmentintheoilsectorsoftheregionreceivedspecial attention.ManyinternationalorganisationssuchastheIEA,andalsotheEnergyInformation Agency (EIA) of the US Department of Energy, project that most of the increase in global demandforoilwillbemetbyOPECandespeciallytheMiddleEastproducerswithinOPEC. From consumers’ perspective of energy security, this would require that these Middle East oilexportersincreasetheirinvestmentoutlayssubstantiallyorincreasetheinvolvementof foreigninvestorsinthedevelopmentoftheiroilandgassectors. Formostofthe1980sand1990s,investmentintheoilandgassectorsinOPECcountrieswas stagnant.Thelargesparecapacityandtheoilpricedeclineinthe1980sandmostofthe1990s threwtheindustryintodeeprecession,reducedtheattractivenessofexistinginvestmentplans andadverselyaffectedtheincentivetoinvest.Thiswasaccompaniedbywidespreaddemand pessimismandexaggeratedexpectationsofnon-OPECsupply.Geopoliticalinstabilityandwars havealsopreventedcapacityexpansioninmanyMiddleEasterncountries.Forexample,the Iran–Iraqwar,theIraqiinvasionofKuwaitandtheUSinvasionofIraqhavelimitedthecapacity of Kuwait, Iran and Iraq to channel investment into their oil sectors. Economic sanctions againstIran,LibyaandIraqlimitedtheaccesstotechnologyandforeigncapitalandhindered 101 anyseriouscapacityexpansion.Furthermore,oilpriceshaveoftenbeenvolatile,blurringthe distinctionbetweentransitoryandpermanentpricemovements.Thepotentialuncertainties facingtheoilmarketinthecurrentcontexthavebecomemorecomplex,especiallyuncertainty concerningimportingcountries’responsestotheclimatechangechallenge.Assuggestedinthe literatureregardingirreversibleinvestmentunderuncertainty,thelargeinvestmentoutlays inoilprojectsandtheirreversiblenatureoftheseinvestmentshavetheeffectofincreasing the value of the option to wait. There is thus a case for delaying the investment until new information about market conditions arrives, especially information about expected global demandandoilsuppliesfromothercountries.Fortheoilindustry,theoptiontowaitisvery valuable,thoughtightmarketconditionsduetounderinvestmentcanresultinanaccelerated riseintheoilprice,morefrequentpricespikesandhigherpricevolatility.Suchbehaviourin oilpriceshasimportantdirectimplicationsonoildemandthroughpriceeffectsanditsimpact ongrowth.Yettherearealsoindirecteffects,sincesuchpricedynamicswillresultinachange inconsumerbehaviour,theaccelerationoftechnologicalinnovationsandgovernmentpolicy, withdetrimentaleffectsonlong-termglobaloildemand. Inmanyoil-exportingcountries,therelationshipbetweentheownerofthenaturalresource (i.e.thegovernment)andtheoperatorandextractorofthesereserves(i.e.theNOC)ishighly complexandinef�icient,yieldingverylowratesofinvestmentintheoilsectorandcausinga generaldeteriorationintheNOCs’capabilities.Giventhecompetingandincreasingdemands for economic, social and infrastructure projects, the �inancial resources channelled to NOCs are rather limited, and this prevents them from undertaking the necessary investment, acquiring technological capabilities and enhancing their managerial expertise. The impact of the inef�icient relationship between NOCs and their governments is likely to be felt more stronglyincomingyears.ManyNOCsfromresource-richregionsmightbeunderestimatingthe magnitudeofthecostandtheeffortthatcapacityexpansionrequires.Inmanyinstances,since nationalisationthemaintaskofNOCshasbeentomanageexcesssupply,nottogrowcapacity. Currently,fewNOCshaveexperienceindealingwithlarge-scalecapacityexpansionprojects. The sharp rise in oil prices during the 2002-2008 price cycle also highlighted tightness in re�iningcapacity.Excessre�iningcapacityandlowhistoricalmarginsinthe1990scurtailed investmentinre�iningtoverylowlevels.Onlymandatedproductqualityimprovementsand environmentalprotectionobligationsgeneratedinvestmentprojectsirrespectiveofreturns. Strictenvironmentalregulationshavemadethebuildingofre�ineriesmoredif�icultornearly impossibleincertainmarkets.Theexpansionofre�iningcapacityhasalsobeenconstrained byuncertaintyabouttheextentandtimingofgovernmentregulationswithwhichre�ineries mustcomply.Thus,overtheyears,there�iningsectorhaslostmuchneeded�lexibility,given thechangesinthestructureofdemandforitsproducts,themandatedmodi�icationofproduct speci�icationsandotherenvironmentalrestrictions,andthechangingmixofitscrudeslate, due to higher incremental volumes of sour and heavier crudes. This more generalised underinvestment problem across the different parts of the oil supply chain has important policyimplications.Evenifinvestmentsintheupstreamoilsectormaterialiseandresultin anincreaseinoilproduction,bottlenecksinre�iningcapacitymeanthatthishighercrudeoil production will not necessarily translate into higher volumes of petroleum products which consumers want. Since producers have little control over the global oil logistics systems, a closecoordinationofinvestmentplansisrequiredbetweenoil-consumingcountriesandoilproducingcountriestoaddressthebottlenecksintheoilvaluechain. 102 TheInvestmentIssueandtheProducer-ConsumerDialogueinthe2000s The investment environment in the oil sector, infrastructure constraints and bottlenecks became the focus of the producer-consumer dialogue. The need for investment alongside the entire supply chain has been one of the consistently recurring themes at IEF meetings, bothinitsMinisterialsandatsubjectsymposiaandregionalforasuchastheAsianEnergy Roundtable.In2002,atthe8thIEF,naturalgashadjoinedtheinvestmentdebate,whichhad alsobeenexpandedtoincludeonceagaintheconceptofenergysecurity: While there appears to be suf�icient oil and gas to meet the world’s growing demand forenergyto2020,amassiveamountofinvestmentwouldberequiredinexploration for,anddevelopmentandtransportationof,additionaloilandgassupplies.Oilandgas producing countries emphasised the importance of secured and reliable demand to energysupplysecurityandfutureinvestmentinthissector,whileconsumingcountries welcomed recent developments that encourage foreign investment in oil and gas producing countries. The Forum stressed the importance of a favourable investment climateformarketstabilityandenergysecurity.128 Transparencyasaseparateaspectofsecuritywasalsoincluded,nowspeci�icallyinrelation to investment. Participants “underscored the importance of transparency and exchange of energydataformarketpredictabilityandstability,providingalsoforamorestableinvestment climatewhilesupportingplanningandenhancingglobalenergysecurity”.129 Theinclusionofindustryleadersatthe9thIEFin2004inAmsterdamthroughthe�irstIEF BusinessForum(IEBF)addedtheindustry’sviewontheissue.TheIEBF’sclosingstatement recommendedthatgovernments“createatransparent,predictableandconsistentpolicyand regulatory framework”.130 They called for countries to focus their policies on promoting a stableeconomic,�iscal,regulatoryandlegalclimatewhichwillencourageandattract�inancial resources and especially foreign direct investment (FDI) in energy, including investments in cleaner fossil fuels and in the reduction of detrimental environmental effects of growing energyuse.TheForumalsoemphasisedtheavailabilityoffundsthroughdevelopmentbodies and questioned whether the energy sector can attract suf�icient funds in the global capital market. It called upon �inancial institutions, investors and policy makers to improve their assessment on the attractiveness of energy. The meeting also emphasised the urgency of changingtheimageoftheoilsectorinthepubliceye.131 Atthe10thIEFin2006inQatar,theinvestmentagendawasfurtherexpandedbytheinclusion ofthedimensionofNOC-IOCcooperationandtheideathatenergycompaniesthemselveswere Summarybythehostandtheco-hostsofthe8thInternationalEnergyForuminOsaka,September 21-23,2002. 129 Conclusionsbyhostandco-hostoftheInternationalEnergyForum,10thInternationalEnergyForum, 2ndInternationalEnergyBusinessForum,Doha,Qatar,22-24April2006. 130 Summarybythehostandco-Hostsofthe9thInternationalEnergyForum,Amsterdam,22-24May 2004. 131 ibid 128 103 part of the investment solution. In the 10th IEF, Ministers noted “the potential of reciprocal and joint investment between producers and consumers as well as between National Oil Companies and International Oil Companies, all along the energy supply chain. This would increase the volume of investment in the energy sector and enhance energy security by establishinginterdependencies”.132 Bymid-decade,thetopicofhowtoimprovetheinvestmentclimatehadtakenonanalmost monotonoustone,reiteratedthroughoutallIEFactivities.Highoilpriceshaddonetheirpart of popularising the call for more investment – after all, times had never been better as oil pricesgo,andinvestmentinnewdevelopmentswerenotonlyeconomicinconventionaloil andgasbutalsoincreasinglysoinunconventionaldevelopment,suchasoilsandsandshale gas, soon to become the latest catch words in the industry. Much smaller in scale than IEF Ministerials,theG-8SummitinSt.PetersburginJuly2006becametheunusualsiteofdialogue betweendifferentoilmarketparticipants.Globalenergysecurityhadbeenchosenamongthe summit’sthreemainthemesfordiscussion,inthecontextofrisingglobaldemandforenergy, raisingoilprices,andariseinclimatechangedebateandpolicyresponse. Startingin2006,theinvestmentdebatewithintheIEFbecameincreasinglytiedtotheparallel debatesurroundingincreasinglyhighoilpricesand,lateron,in2008,theissueofheightened oilpricevolatility.Thesurgeinprices,attributedpartlytotightfundamentalsandpartlyto �inancial market structures, rapidly increased the urgency in the calls for investment along thesupplychain.Forproducers,investmentdecisionsremainedlockedbyuncertaintiesabout prices, about the economic viability of their development projects and about demand. The latteroftheseconcernsstemmedfromseeinghighdemandgrowthfromAsiabutadeclinein demandgrowthinmostOECDcountries,combinedwithtwoyearsofnegativeglobaldemand growthin2008and2009−the�irstsincethe1980s−anduncertaintyabouttheavailability ofsuppliesfromotherregions. Lockedintoreiterationsofalreadyexistinggoals,theForuminevitablyendedupasanonlooker ofoilpricemovements.TheJeddahEnergyMeetinginJune2008,bycontrast,addressedthe issueofinvestmentinafarmoredynamicmanner.SaudiArabiaalsoissuedapledgetoinvest in more capacity if needed. The meeting, called by Saudi Arabia, was in part an emergency responsetothesurgeinoilpricesandresultedinaJointDeclarationbythegovernmentof SaudiArabiaandtheSecretariatsoftheIEAandOPEC,the�irstofitskindatanIEFmeeting. TheJeddahJointStatementclari�iesthat“appropriateincreaseininvestmentbothupstream anddownstreamisnecessarytoensurethatthemarketsaresuppliedinatimelyandadequate manner.Predictableenergyandinvestmentpoliciesaswellasbetteraccesstotechnologyare necessarytothisend”andinvites“enhancedcooperationamonginternational,nationaland service companies from all producing and consuming countries in investment, technology andhumanresourcedevelopment”.133Inaddition,suggestionsweremadetoincludedataon investmentinnewcapacityintheupstreamanddownstreamoilandgassectors intheIEF’s centraldatabaseJODI. Conclusionsbyhostandco-hostoftheInternationalEnergyForum,10thInternationalEnergyForum, 2ndInternationalEnergyBusinessForum,Doha,Qatar,22-24April2006. 133 JointStatement,JeddahEnergyMeeting,22June2008. 132 104 Investment-RelatedTopics In addition, the IEF substantially expanded its various activities with regards to speci�ic investment-related topics. Its new, subject-focused symposia and fora, offered since 2008, have included regular events such as the CCS Symposium and the NOC-IOC Forum, along with other events such as the IEF-IFP Technology Forum and the Energy Ef�iciency Forum plannedforthespringof2011.Whilenotprimarilyfocusingoninvestmentitself,allofthese fora serve the purpose of enhancing information sharing and thus aim to promote a more conduciveenvironmentforinvestment.TheIEFcommissionedareportontheprospectsof biofuels,stillanenfantterribleformanyoilandgasproducers,asprospectsforbiofuelshave added to already existing demand uncertainty for oil and gas producers.134 Another report, the IEF’s Uncertainties Report, was published in July 2009.135 A symposium looking at one speci�icaspectoftheinvestmentchallenge,theneedforinvestmentinhumanresources,was organisedbytheIEFinMarch2009.Skillsshortagesintheindustry,lamentedbybothNOCs andIOCsthroughoutthe2000s,remindedmanyofthe1980s,whentheoilindustrylostits attractivenessasanemployer.136Throughoutthe2000s,staffshortagesoncemorebecamean issueofconcern.The1990swiththeirlowoilprices,andthesupermajors’cost-cuttingwhich includedstaffcuts,hadlefttheirtollontheindustry’sskillsbase.Itsimageasanattractive employer had furthermore suffered as a consequence of the oil industry’s environmental recordontheonehandandpeakoildebatesontheother. Previously, the skills shortage had been raised at a number of producer-consumer forums, including the 11th IEF Ministerial in April 2008. This Forum noted the need to broaden cooperation and exchanges in the �ields of human capital and technology advancement. It pleadedtheimportancefortheoilandgasindustriestoworktogetherwithuniversitiesand researchcentrestopromoteaworld-widecampaigninconsumingandproducingcountries, with the aim of improving the image and rewards of technicians and skilled staff working in the oil and gas industries.137 The Jeddah Energy Meeting’s Joint Statement identi�ied the problemwithgreaterdepth,stating: TheHumanresourcescrunchisanindustry-wideproblemrequiringglobalcooperation towards a resolution. Studies show that by the end of this decade, the oil and gas industry may be faced with signi�icant shortages, due to a wave of retirements and inadequaterecruitment.Akeyfactorinthisunfortunatesituationistheperceptionby manypotentialrecruitsthattheindustryisina“sunset”phase.Competingforrecruits Mandil,ClaudeandAdnanShihab-Eldin.“AssessmentofBiofuelsPotentialandLimitations”, February2010,availableonlineathttp://www.ief.org/PDF%20Downloads/Bio-fuels%20Report.pdf .Ministersatthe11thIEFhadaskedforsuchareporttobeproduced. 135 “UnpackingUncertainty:InvestmentIssuesinthePetroleumSector”,July2009,AReport commissionedbytheIEF,writtenbyPFCEnergy.Availableonlineathttp://www.ief.org/ PDF%20Downloads/IEF%20Unpacking%20Uncertainties%20Report.. 136 Qatar’sEnergyandIndustryMinisterAbudullahAl-AttiyahremarkedattheIEFHumanResources SymposiuminDohainMarch2009:“Isincerelyhopethatwedonotseeanexodusfromoil-related disciplinessimilartothatofthemid1980s.” 137 See11thInternationalEnergyForum,Rome,20-22April2008,ClosingStatementbyhostItalyand co-hostingCountriesIndiaandMexico. 134 105 withtheI.T.andotherhi-techsectors’imagesofhard-hats,drilling-rigsandotherheavy machinerycontinuetocharacterisetheindustryinthepressandelsewhereeventhough computingpower,R&D,andcutting-edgehigh-techofalldescriptionsaretherealityofa modernoil&gascompany.Theseandotherfactorscombinetodiscouragebeliefinthe sectorasanemployerofchoice.138 The Joint Statement at the end of the meeting called for “enhanced cooperation among international,nationalandservicecompaniesfromallproducingandconsumingcountriesin investment,technologyandhumanresourcedevelopment”.139 TheHumanResourcesSymposiuminMarch2009washeldunderthetitle“TacklingtheHuman Resources Crunch in the Petroleum Industry”. Attendees included industry representatives from oil and gas companies, as well as representatives of educational institutions. For the IEF,thesymposiumwasanopportunitytohighlightsharedinterests:theneedbytheenergy industries for skilled staff in the long-term on the one hand, and the attractiveness of the hydrocarbon industries as an employer on the other: “An industry-wide de�icit of skilled employeesrepresentsacriticalbottleneckandlong-termchallengetothepetroleumsector”, saidIEFSecretaryGeneralNoévanHulstattheSymposium.Hefurtherstatedthatcommonly held,negativeperceptionsoftheindustryshouldbechallengedbybettercommunicating“the realityofthemodernoilandgassectorasahigh-tech,diverseandenvironmentallyconscious entity,integraltothelong-termfutureoftheglobaleconomy”.140Importantly,keymessagesto addresstheskillsshortagewereagreedupon,albeitwithoutspeci�iccommitmentsbyeither side:industryactionintheformofbroadenedmentoringprogrammes,widenedscholarship andinternshipopportunitiesforuniversitystudentsas“proactiveinitiativeswiththepotential toattract,developandretaininterestinthesectorascareerpathofchoice”,morecooperation betweenindustryandacademia,aswellastheimmediateimportanceforcompaniesto“resist short-termeconomicpressurestoimplementcutsinworkforce.”141 ChangingIndustryStructures:TheNOC-IOCRelationship In the current environment, four key features of IOCs stand out: their limited access to reserves; their relationship with oil-producing countries; the increased competition from multipleplayers;andtheadherencetotheprincipleofmaximisingshareholdervalue.Asnoted bytheEconomist,IOCsare“smallnexttotheindustry’struegiants:thenationaloilcompanies (NOCs)ownedorcontrolledbythegovernmentsofoil-richcountries....Ofthe20biggestoil �irms,intermsofreservesofoilandgas,16areNOCs”.142IOCsoftencitethedif�icultyofaccess toreservesinresource-richregionsasthemainobstacletoreplenishtheirreservesandto ExecutiveReport,JeddahEnergyMeeting,22June2008. JointStatement,JeddahEnergyMeeting,22June2008.Concernhadalsobeenexpressedatthe NOC-IOCForuminMarch2009,whereparticipantsnotedthat“thehighaverageageofpersonnel intheindustryandhowtoattractyounggraduatesisasourceofconcern”andthat“long-term considerationsshouldprevailasmoreskilledstaffwillbeneededtomeetfutureglobaloilandgas requirements.”ConcludingStatement,NOC-IOCForum,KuwaitCity,30-31March2009. 140 PressRelease,IEFHumanResourcesSymposium,13-14April2009,Doha,Qatar. 141 ConcludingStatement,IEFHumanResourcesSymposium,13-14April2009,Doha,Qatar. 142 TheEconomist(2006).“NationalOilCompanies:ReallyBigOil”,August10. 138 139 106 increasetheirproduction.Oftotalglobaloilandgasreserves,only14percentarefullyopen toIOCcompetition.TherestareheldbygovernmentsandNOCs;IOCscanhavesomeequity access (11 percent do) or no equity access (58 percent).143 As markets have tightened and transitionedfromabuyer’stoaseller’smarket,thetermsandconditionsdemandedbythe ownershavebeenhardeningovertime.Thesetrendswillbefurtherreinforcedbygrowing long-termdemandforoilandgas,andbydecreasingopportunitiesopentoIOCs. AlthoughbothNOCsandIOCsoperatewithinthesameindustry,theyhavedifferentobjectives andfacedifferentchallenges.WhileIOCsaremainlyconcernedwithpro�itability,shareprices and risk management, NOCs have to deal with government bureaucracy, local politics and optimisingthelifeofreservesacrossgenerations.Manyconsiderthatsuchdifferencescanact asgroundsforcooperationbetweenIOCs,whichseekattractiveinvestmentopportunitiesin below-groundresources,andNOCs,whichseekabove-groundresources,namelytechnology, capital and managerial skills for dealing with large projects provided by IOCs. However, technology and capital are no longer the main drivers of IOC-NOC relationships. With the support of service companies, NOCs are now able to tackle tasks that were not feasible in thepast.Furthermore,theriseinoilpricesmeansthatgovernmentsarenolongerstarving for capital. Some IOCs have not fully recognised this change of circumstances and have not adequatelyexplorednewformsofengagementwithsomeofthestrongerNOCs. IOCs have also been facing tough competition from other players in the industry. In recent years,manyoilimporters,suchasChinaandIndia,havebeenkeentofurtherdeveloptheir NOCs.TheseNOCsare eager to increase theirinternational investments and acquire assets to secure new sources of oil supply. They hence compete �iercely with IOCs in acquiring overseas assets. Since, unlike other oil companies, they are not driven by the objective of maximisingshareholdervalue,theyarelikelytobe�lexibleinnegotiatingcontractswithNOCs inoil-exportingcountriesandwiththeirgovernments.Furthermore,theseNOCsmaybene�it from state-to-state connections and thus gain better access on the basis of a more general agreementbetweenthetwostates. Asinotherperiodsoftheindustry’shistory,smalleroilcompanies(knownasindependents) insearchofanewidentityvis-à-vistheestablishedclubofmajorsarecompetingwithIOCsfor ashareintheoilbusiness.Theseindependentsarewillingtoexploresmallerareaswithlow hydrocarbondeposits,topickupconcessionblocksabandonedbymajorsandtocreate‘niche’ advantages.Thetechnologybroughtinbytheseindependentshasbeenplayinganimportant roleinrevivingtheoilsectorinmanycountries.Oilservicecompaniesalsoworkdirectlywith resource-rich NOCs, providing them with the necessary technology on a fee-based system. Theseservicecompaniescansometimesengageinmanagingprojects,blurringthedifferences betweenthemandIOCs. ItisimportanttonotethatalthoughtheseplayerscompetewithIOCs,thereisalsoasymbiotic relationship between the various players. When large and complex discoveries are made, independentsoftenrelyonIOCsforthe�inancinganddevelopmentofthesebasins.BothIOCs andindependentsrelyinturnonservicecompaniesforservicessuchasdrilling,geophysical services, reservoir characterisation and interpretation and well-testing. In fact, IOCs and Zanoyan,V.(2004).“TheOilInvestmentClimate”,MEES,Vol.XLVII,No.26. 143 107 independentsconstituteamajorsourceofrevenueforoilservicecompanies.Thelatterthus actively seek to establish good working relationships with their clients. Finally, NOCs and IOCscanenterinstrategicalliances,implementjointprojects,andmakejointbidsforenergy assets.RecentexamplesincludethejointbidbyBPandChinaNationalPetroleumCorporation (CNPC)forthedevelopmentoftheRumaila�ieldinIraqin2009;Shell’sandCNPC’splansto jointlydevelopandproducenaturalgasinChina’sSichuanbasinin2010;andBP’sshareswap andArcticexplorationdealwithRussia’sRosneftin2011. Under the pressure of shareholders and �inancial investors, there has been a shift in IOCs’ strategytowardsmaximisingshareholdervalue.ThishasmeantashiftinIOCs’�inancialand investmentstrategies.Ratherthanusingthebulkofcash�lowforinvestmentinexploration, developmentandproduction,IOCshavepursuedastrategyofreturninglargecash�lowsto shareholdersthroughbuy-backschemesorthroughissuingdividends.ManyIOCshavealso engaged in a wave of mergers and acquisitions in an attempt to improve their pro�itability throughcuttingcosts.Anotherimportantmotivebehindthemergerstrategywastoimprove IOCs’ reserve to production ratios by purchasing other companies’ booked reserves. This was viewed as an alternative to investment in the relatively expensive and risky business of exploration and development. Maximising shareholder value also meant a shift from the verticallyintegratedstructurewhichcharacterisedtheoilindustryinthe1960sand1970s. Instead,thevariouspartsofthesupplychainarebeingtreatedasindependentpro�itcentres: ratherthantreatingupstreamanddownstreamaspartsofthesamesupplychain,investment isdivertedawayfromrelativelylowpro�itcentressuchasre�iningormarketing,towardsmore pro�itablesegmentssuchasupstream. TheIOC-NOCandProducer-ConsumerDialogue The need for investment, skilled human resources and experience in long-term and unconventional oil and gas development has led to many calls for enhanced cooperation between NOCs and IOCs to pull on a single strand within the industry. Consumer nations’ concernoverresourceaccessfortheirownmultinationalsupermajorsisanadditionalmotive. Proponents of greater NOC-IOC cooperation argue in favour of the capital investment IOCs areabletoprovide,theirhumanresourcesandprovenexperiencewiththemanagementof long-termandcomplexprojects,aswellastheirtechnicalknow-how.Theproducer-consumer dialoguewasbroughtintoplayinthiscontextasaforumfacilitatingdialoguenotonlybetween governments but also between industry players themselves, especially between NOCs and IOCs. The IOC-NOC relationship increasingly became a subject of discussion at IEF meetings throughout the decade. Ministers at the 11th IEF in April 2008, for instance, called for “increased cooperation between IOCs, NOCs and servicecompanies as a major opportunity in coping with the increasing costs, complexity and risks of large investment projects”. Similar calls were later made at the Jeddah Energy Meeting in June, 2008, and at the IEF- 108 IGUSymposiuminNovember,2008.144ParticipantsattheIEF-IFPTechnologySymposiumin Decemberconcludedthat“partnershipbetweenNOCsandIOCsintechnologicaldevelopment and implementation is a win-win situation” and called for “a renewed collaboration and a strengthenedcooperation”.145 InMarch2009,theIEF,incooperationwiththeGovernmentofKuwait,organisedthe�irstof whatisintendedtobearegularforumbetweenIOCsandNOCs.Heldunderthetitle“NOCs-IOCs CooperationandPartnershiptoEnhanceEnergySecurity”,theforumwashostedandsponsored by Kuwait Petroleum Corporation (KPC). Primarily targeted at industry representatives, the forumwasdesignedtopromoteregulardialoguebetweenNOCsandIOCsandtodemonstrate waystoimprovetheircooperation.Itisevidentthattheprinciplefunctionofthisforum,given it was the �irst of its kind, was to send messages rather than to come up with solutions. In consequence,manyoftheforums’conclusionsaimedathighlightingindustryneedsmovealong generalguidelines:acalltogovernmentstosetclearandstablepolicyframeworks,theneed foroverallinvestmentalongthevalue-chainandforpoliticalstability,andthemessagetothe industrythatitshouldavoidgivingintoshort-termpressuresandtofurthercutexpenditure onjobs,capitalandtechnology.Atatimeofgreatuncertaintywithintheoilindustry,NOCsand IOCsagreedonawishlist,includingthesteadyemphasis,clarityandstabilityofenergypolicy frameworks,aswellas�iscal,legalandeconomicregulation.Theforumfurthermoregraspedthe opportunitytocallonitselftorefrainfromrespondingtothecurrenteconomicpressuresbyjob cuttingandcapitalspending.146Themeetingcouldnot–andwouldnot–movebeyondgeneral supportforgreaterNOC-IOCpartnershipallalongthevaluechain.147 TechnologyandtheClimateChangeChallenge Sincetheearly2000s,theconceptofsustainabilityhasmovedincreasinglyintothelimelight of the industry’s focus and has become one of the key themes of the producer-consumer dialogue.Factorsrenderingsustainabilitycrucialtothe2000sdialogueincludebotholdand newsourcesofuncertaintyfortheindustry:theissueofpricevolatilitythathamperlong-term demandstabilityforoilaswellasnaturalgas;prospectsofthedeclineoflow-costreservesand thecostriseforthedevelopmentofnewreserves;andtheimpactoftheclimatechangedebate andresultingcarbon-reductionpoliciesbyconsumingcountries.Newtechnology,bothneeded torecoveroilandgasreserves,andtorespondtoaglobaltrendtowardscleanerenergyalong theentirevaluechain,hasbecomethesubjectofmuchofthefocusofintra-industrydialogue, whilethesocialandenvironmentalresponsibilityofproducersandconsumersofenergyalike MinistersattheJeddahEnergyMeetinginJune2008concluded: Thatco-operationisenhancedamonginternational,nationalandservicecompaniesfromall producingandconsumingcountriesininvestment,technologyandhumanresource development.(JointStatement) AndtheIEF-IGUSymposiuminNovember2008: encouragedNOCsandIOCstoenhancecooperationandpartnershiptodevelophuman resourcesandencourageR&Deffortsinpursuitofef�iciencyandcostimprovements throughtechnologicaladvances.(ConcludingStatement) 145 ConcludingStatementbyIEFSecretariatandIFP,IEF–IFPSymposium“EnhancingGlobalEnergy Security,RoleofTechnologyinthePetroleumSector”,15December2008,Riyadh,SaudiArabia 146 IEFNewsletter,May2009,Issue13,p.11. 147 ConcludingStatement,NOC-IOCForum,30-31March2009. 144 109 challengesthetraditionalorientationofthebusiness.Riskmanagementisalsoincreasingly comingtotheforeasanimportantissue. The 11th IEF Ministerial in Rome in April 2008 speci�ically addressed the challenges of a sustainableenergyfuture,whichrequires“ef�iciencyimprovements,technologicaladvances inbothproductionandconsumptionoffossilfuels,anddevelopmentofalternativelow-carbon energysources”.148Ministersatthe11thIEFhadalsoexpressedamoreconstructiveapproach towards energy ef�iciency, while highlighting for the �irst time a shared understanding that CCS technology had moved into the focus of the industry. In the Closing Statement, Ministers af�irmed the mutual bene�its: “Improving energy ef�iciency through action plans, sectoralapproachesandsharingofbestpracticesinenergyproduction,transportationand consumption is cost-effective” since this enhances “energy market stability, environmental sustainability and economic development”. The forum also emphasised the importance of carboncaptureandstorage(CCS)asoneoftheoptionstoreducegreenhousegasemissions fromfossilfuels.Theparticipantsexpressedthemselvesclearly,notingthat“CCSdevelopment anddeploymentwillplayacrucialroleindeliveringasustainableenergyfuture.Inclusionof CCSintheCleanDevelopmentMechanismsshouldbeenactedassoonaspossible(...).”149 TryingtotacklethetechnologychallengehasmadetheIEFandmanyofitsactivitiesalsoa forum for debate over technology – both between industry participants over technological options, and between consumers and producers over the prospects for different sets of technology and their impact on consumption patterns on the consumer side and recovery ratesontheproducerside.Therelevanceoftechnologyinthisregardhasbeenemphasised throughout the industry. There is clear recognition that “meeting expanding energy needs –whiletacklingcarbonemissions–willrequiredeliveringtechnologyatanunprecedented scaleandpace”.150Manyofthesurroundingconcernsandquestionsweretakenastepfurther at a specialised symposium in December 2008. The IEF-IFP Technology Symposium was co-organised by the IEF and the French Institut du Pétrole, with participation from oil and gas companies, technology and service providers and representatives of a number of IEF member states. Pragmatically, the symposium was promoted as “a symposium on the role oftechnologyinthepetroleumsectorinenhancingglobalenergysecurity”151–aconscious choiceagainstreferencetocarbon-cuttingmotivesbehindthistechnologicalchange.Thefocus at the Technology Symposium was directed primarily at how technological advances were abletoenhanceoilandgasrecoveryrates,aswellasatef�iciencygainsthroughtechnological improvements. Lip service was paid to environmental motives behind technology: CCS technologyremainedtheonlytopicwithdirectrelevancetoclimatechange,butthedebate oncemoreremainedfocusedonCCSandimprovingrecoveryrates,withgeneralscepticismas toCCStechnology’sabilitytoeffectivelyreduceCO2emissions. 11thInternationalEnergyForum,Rome,20-22April2008,ClosingStatementbyhostItalyand co-hostingcountriesIndiaandMexico. 149 ibid 150 WPA,XXXVI:7,13February2006,p.1. 151 ConcludingStatementbyIEFSecretariatandIFP,IEF–IFPSymposium“EnhancingGlobalEnergy Security:theRoleofTechnologyinthePetroleumSector”,15December2008,Riyadh,SaudiArabia. 148 110 The �irst CCS Symposium, co-organised by the IEF and Australia’s Global CCS Institute, followedtheIEF-IFPSymposiuminSeptember2009,havingagreaterfocusonCCStechnology. The symposium was held under the title “Challenges and the Way Forward in Accelerating CCS Development and Deployment, in Particular in Oil and Gas Producing Countries” and distinguisheditselfbybeingdrivenbyveryspeci�icobjectives.Theeventwasremarkablenot onlybecauseitconsciouslyputgreaterweightonCCStechnologyitself,but alsobecauseit washostedbyChina’sNationalDevelopmentReformCouncil,animportantsignoftheeven moreactiverolewhichthenewlargeenergyconsumerssuchasChinaarehopedtoplayinthe comingdecade.InthisforumCCStechnologywasonceagainplacedinthecontextofenergy securitybutfoundremarkablymoreconciliatorywordswithregardstoclimatechange: Inacarbon-constrainedworld,theissueofglobalenergysecurityisofutmostimportance, giventhelevelofprojectedlong-termenergydemandandcontinuingdominanceoffossil fuelinthefutureenergymix.Thesustainabilityoffossilfuelproductionandconsumption, especiallywithregardtotheenvironmentalfootprint,isanissueofcommonconcernand globalimportance.152 With a focus on CCS technology, the advantage of the forum was clear in that it was able to address its topic in its agenda and its discussions in far greater depth, and with clearer outcomesthanmanyofthelargerforumswithmuchbroaderagendas.Thisframeworkalso allowedforgreaterjusticetobedonetothequestionofCCStechnology’spotentialtomakea positiveimpactinparticipatingcountries’aimsofreducingtheirCO2output.Theimportance ofCCStechnologyhasalsobeenhighlightedbyitsregularinclusionintoIEFMinisterialclosing statements: Ministersaf�irmedthatfossilfuelswillstillprovidethelion’sshareoftheenergysupply fordecadestocome,althoughrenewableenergywillhavetoplayanincreasingrolein theenergymix.Sincethereisanurgentneedtomitigateclimatechange,itisinescapable [thatitwillbenecessary]toalsoradicallyimprovetheenvironmentalsustainabilityof fossilfuels.Carboncaptureandstorage(CCS)isoneofthekeytechnologiestoachieve this. The progress of CCS has been encouraging, but cost, knowledge sharing and the necessaryregulatoryinfrastructureremainassigni�icantobstacles.WhereCCScanbe deployedinconjunctionwithEnhancedOilRecovery(EOR),itmayprovetobeacatalyst andsteppingstonetocommercialdeploymentofCCS.153 Energyef�iciencyhasbeenasecondareaofagreement,andonewhichbecamethestarting pointformanylaterIEFactivitiesfocusedontechnologicaldevelopment.Giventhatoiland naturalgasareexhaustibleresourcesandthattheseresourceswillremainimportantinworld energyconsumptionforyearstocome,theMinistersemphasisedinthe8thIEFtheimportance of the long-term ef�icient use of oil and natural gas. They also recognised that cleaner and more ef�icient fuel technologies, such as fuel cells and GTL, would have a contributing role ConcludingStatementbyIEFSecretariatandGlobalCCSInstitute,IEF-GlobalCCSInstitute Symposium,27-28September2009,Beijing,China. 153 ConcludingStatementbyhostcountryMexicoandco-hostingcountriesGermanyandKuwait,12th InternationalEnergyForum4thInternationalEnergyBusinessForumCancun,30-31March2010. 152 111 inthefuture.Theycalledforparticipantstoexplorepoliciestoencouragethedevelopment and deployment of such technologies.154 The Jeddah Energy Meeting went one step further andemphasisedthatenergyef�iciencyshouldbe“promotedinall sectorsthroughpassing on market price signals, technology transfer and the sharing of best practices in energy productionandconsumption”.155 EnergyPoverty EnergyPovertyinmanydevelopingcountrieshasbeenrecognisedasalamentableaspectof overallpoverty.Itiswidelyknownthatthelackofaccesstomodernformsofenergysuchas petroleum products and electricity inhibits economic and social development and increases poverty.Povertyandenergypovertyoftengohandinhand.Manycharacteristicsofthepoor such as low and irregular income, lack of basic education and limited access to social and publicservicesimplythattheoptionsavailabletothepoorintermsofenergysourcesarealso quitelimited.Furthermore,suchcharacteristicsimplythatpoorhouseholdsexhibitastrong preferenceforfreelyavailablebutinef�icientanddirtyfuelssuchas�irewood.Thus,transitioning tocleanandmodernfuelsconstitutesakeyobjectiveformanydevelopingcountries. The lack of access to modern fuels affects economic and social development through many channels. As households transition to more modern forms of fuel, the fuel becomes more ef�icient. For instance, in terms of cook-stoves, most traditional biomass stoves are very inef�icient and use much more energy than non-biomass-burning stoves. Research has also shownthatmodernfuelsarecleanerandsafer.Althoughbiomassfuelshavefewcontaminants such as sulphur or metal, poor households do not allow enough air�low into the stove, resultinginindoorairpollutionandserioushealthrisks.Giventhatwomenaremostclosely associatedwiththecombustionofbiomass,theyhavethehighestexposuretohealthrisksof allmembersofthehousehold.Itisestimatedthatindoorairpollutionkills2millionwomen andchildreneveryyear.HalfthisnumberliveinChinaandIndia.Otherstudies�indthatgood healthhasapositive,sizableandstatisticallysigni�icanteffectonaggregateoutput.Thus,at themacrolevel,negativehealthconsequencesduetouseoftraditionalformsofenergyhave anegativeimpactoneconomicgrowthanddevelopment.Furthermore,collectingfuelwood isatime-consumingactivitywhichmeansthatlesstimeisavailableforproductiveactivities andinvestmentinhumancapital.Thisimpactswomenandchildrenthemost,sincetheyhave theprimaryresponsibilityforcollecting�irewood.Evidencesuggeststhattheuseofbiomass is higher for those households where more women and children (i.e. labour resources) are available.Manystudies�indthatchangesinthequalityofenergyservicesenhanceseconomic productivity,evenafteraccountingforthephysicalavailabilityofenergyperse.Speci�ically, theincreaseduseofmore�lexibleenergyformssuchasliquidfuelsandelectricityenhances productivity by enhancing “the discovery, development, and use of new processes, new equipment,newsystemsofproduction,andnewindustriallocations”.156 Summarybythehostandtheco-hostsofthe8thInternationalEnergyForuminOsaka,September 21-23,2002. 155 JointStatement,JeddahEnergyMeeting,22June2008. 156 Schur,S.H.(1984).“EnergyUse,TechnologicalChange,andProductiveEf�iciency:AnEconomicHistoricalApproach”,AnnualReviewofEnergy,Vol.9,409-425.,p.415. 154 112 Theenergypovertytopichas�ilteredintothedialogue,andbothproducersandconsumersare keentobeseentacklingtheenergypovertychallenge.The11thIEFinRomein2008recognised thescaleoftheenergypoverty,noting: Yetovertwobillionsofpeopledonotyethaveaccesstomodernenergyservices.This perpetuatesthepovertycycleandinhibitseconomicdevelopment,availabilityofclean waterandfood,whilepreventingtrainingandacceptablehealthstandards.157 Duringtheperiodofsustainedoilpriceincreasesfrom2002-2008,energypovertybecame atopicofmorewidespreadconcern,giventhathighoilpricesnaturallyhitleastdeveloped countries the hardest – similarly to the 1970s, when the �irst oil price shocks began to be associatedwithgreaterenergypovertyandhelpfundssuchasOPEC’sOFIDwereintroduced forthepoorestnations.TheJeddahEnergyMeetinginJune2008commentedthat“oilprice risesandtheunderlyingvolatility,willhaveanimpactontheeconomiesoftheconsumingand producingcountriesalike,especiallyintheleast-developedcountries”andrecommendedthat “developmentassistancefromnational,regionalandinternational�inanceandaidinstitutions be intensi�ied to alleviate the consequences of higher oil prices on the least-developed countries”.158IntheJeddahEnergyMeeting,KingofSaudiArabiaAbdullahIbnAbdulazizAlSaudproposedanenergy-for-poorinitiativewiththeaimtohelpdevelopingcountriescope withthehighoilprices.KingAbdullahallocated$1billionforanOPECFundandoffered$500 millioninsoftloansthroughtheSaudiFundforDevelopmentto�inanceprojectsindeveloping countriestoalleviateenergypoverty. InDecember2009,theIEForganisedaspecialEnergyPovertySymposiuminJohannesburg, where representatives from a number of large non-governmental organisations such as the IEA, the New Partnership for Africa’s Development (NEPAD), OPEC, the OPEC Fund for InternationalDevelopment(OFID),theWorldEconomicForum(WEF)andtheWorldBankmet withindustryrepresentativestodebatethecurrentstateofenergypovertyanditspotential remedies.Theforumwasthusalsohopedtomakeacontributionbeyondindustrybordersand towardsthewidergoalofhumandevelopmentasadvocatedbytheUNMillenniumGoals.159 NaturalGasandtheProducer-ConsumerDialogue The 2000s were not only an eventful time for the global oil market but also witnessed the rapidly increasing importance of natural gas on international energy markets. Natural gas continuouslyraiseditspro�ileinglobalenergymarketsinrecentyears,aidedbyfast-growing suppliesofLique�iedNaturalGas(LNG)andmulti-decadedemandgrowthbothwithinand outsideOECD.160ManyofthemembersoftheIEFaretodaybothmajoroilandgasproducers ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico,11thInternationalEnergy Forum,Rome,20-22April2008. 158 JointStatement,JeddahEnergyMeeting,22June2008. 159 ConcludingStatementbyIEFSecretariatandSouthAfricaMinistryofEnergy,IEFSymposiumon EnergyPoverty,8-9December2009,Johannesburg,SouthAfrica. 160 Theshareofnaturalgaswithintheglobalprimaryenergymixstandsnowatover23%,comparedto 34%foroil,withprospectsforfasterdemandgrowththanforoilinthemid-termfuture.Totalgas demanddeclinedin2009dueprimarilytotheglobalrecessionbutispredictedtogrowaccordingto theIEAReferenceScenario.IEA,WorldEnergyOutlook2009,p.366;BPStatisticalReview2010. 157 113 andconsumers,soitwasclearlyonlyaquestionoftimeuntilnaturalgasmarketissueswould alsoentertheagendaoftheproducer-consumerdialogue.161 Beginning in the early 2000s, references to energy markets and the industry throughout a wide range of publications have increasingly been made no longer only in terms of oil but with reference to gas as well. IEF publications such as Ministerial Statements and Chair SummariesofIEFMinisterials,inadditiontootherdocuments,haveregularlyreferredsince 2000 to the oil and gas industries and underscore the importance of gas in global energy consumption.162Atthe�irstIEBFinAmsterdam,thePresidentoftheInternationalGasUnion (IGU) participated alongside oil industry leaders. Many of the topics discussed at meetings suchasIEFMinisterials,butalsoatG-8summitssuchastheSt.Petersburgsummitorganised byRussia,theworld’slargestgasproducer,dealtwithenergymattersofequalinteresttothe gasindustry,includingaccesstoresources,datatransparency,energymarketregulationand climatechangedebates.Similarly,the11thIEFin2008explicitlystatedtherisingimportance ofgasintheproducer-consumerdialogue: TheForumnotedthegrowingrelianceofconsumingcountriesonnaturalgasimports. Itwassaidthatlargegasprojectstendtobecapitalintensivewhilerequiringlonglead timesbeforetheybecomeoperational.Inaddition,gastransportandtransitsmayaffect severalcountries.Betterco-ordinationbetweengovernmentsandcompaniesandspecial regionalagreementsneedtobepromotedaccordingtoMinisters.163 Thediscussionofgas-marketissuesgainedgreaterbreadththroughoutthedecadeandbegan toincludethemessuchastheincreasedimportdependenceofconsumerstates,theneedfor greaterinvestmentbytheindustrysharedbythegasandoilindustries,andtheenhancedroleof naturalgasinviewofclimatechangepolicies.164Inparalleltotheproducer-consumerdialogue ontheoilfront,theparticipantsemphasisedtheimportanceofthemultilateralapproachand IEFmembersincludeallmajorproducersandconsumersofnaturalgas.Manyofthecompanies presentatforasuchastheIEBFsarebynowalsomajorproducersofnaturalgas,includingboth nationalandinternationalenergycompanies.Shell,forinstance,isexpectedtomakehalfofits newproductionin2010ingas,whichalreadycontributes40%ofthecompany’stotalproduction andmakingittheleadinggascompanyamongthesuper-majors.CompaniessuchasStatoilHydro, Gazprom,ExxonMobil,ConocoPhillipsandTotal,amongothers,havemadesubstantialinvestments innaturalgasinrecentyearsaswell.WPA,XXXVIII:3,21January2008,p.1. 162 TheSummaryofthe7thIEFin2000,forinstance,reads:“TheForumunderscoredtheroleofenergy pricesandenergyavailabilityinworldeconomicprosperity,andthecentralrolethatoilandgasplay inenergyconsumption.”7thInternationalEnergyForuminRiyadh,November17-19,2000,Summary bythehostandtheco-hosts. 163 ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico,11thInternationalEnergy Forum,Rome,20-22April2008. 164 Forinstance,Ministersatthe11thInternationalEnergyForuminRomeinApril2008notedintheir ClosingStatement: 5.TheForumnotedthegrowingrelianceofconsumingcountriesonnaturalgasimports. 6.TheForumstressedthatbringingavailableresourcestothemarketrequiresadequateand timelyinvestmentintheentireoilandgaschain. TheChair’sSummaryatthe3rdAsianMinisterialEnergyRoundtableon26April2009concluded: Participantsrecognisedthatnaturalgasplaysanincreasingandessentialroleinenhancing energysecurityandmitigatingclimatechange. 161 114 intergovernmentalsolutionswhichareneeded“tobringforwardnewinfrastructure,tojointly exploreandexploitnewgasreserves,andtohelpestablishrobustandsecuremarketstothe bene�itofallparties”.Sucheffortsrequire“longtermcooperationbetweengasproducersand consumers,andtransitcountries”. Discussion about greater transparency of gas markets led to calls at various IEF fora to expandJODI,theinternationaloildatabase,toincludegasmarketdata.165The�irstIEF/IGU (International Gas Union) Ministerial in Vienna in 2008 was a testimony to the growing importance of natural gas in the producer-consumer dialogue. The IGU brings both governmentsandcompaniestothenaturalgastable,andIGUsupportedthedatatransparency effortsofIEF.Theproposalwaslaterembracedatthe12thIEFinCancunandhasledto�irsttest runswithindividualcountriestogathergas-relateddataforJODI. InNovember2008,theIEForganiseda�irstMinisterialforumfocusedentirelyondialogue overgasmarkets.TheforumwasorganisedincollaborationwiththeInternationalGasUnion (IGU), a multinational association of gas producing states and industries, in an attempt to provideanarenatotheworld’sgasmarketprotagonists.Underthetitleof“TheWorldGas MarketsGoingfromRegionaltoGlobal”,theaimwastodebatecurrentdynamicsinthegas industry and to identify key challenges facing the industry today. The wider objective of increasingmutualunderstandingbetweengasmarketparticipantswasoutlinedintheforum’s summarystatement: Thesharedunderstandingisthatthroughanenhancedandsustaineddialoguenatural gasstakeholderscanbetteraddresskeychallengesfacingthegasindustrysuchasmarket transparency,investment,interdependence,transitandcontractualframeworks.166 The meeting had both practical and impractical implications. The need for gas markets participantstocommunicateanddebatebeingself-evident,theprincipalbene�itofforasuch astheIEF-IGUMinisterialliesinitsabilitytosponsorfocuseddialoguebetweenallsides.Many ofthechallengesidenti�iedanddiscussedinViennamirroredoilmarketproblems,suchas securityofdemandandsupplyconcerns,investmentallalongthevaluechain,theimpactof environmentalregulation,theneedforskilledhumanresources,andaccesstoresources.167 Futureforathatfocusmoreonspeci�icallygas-relatedissuesandthatavoidreplicatingother ongoing fora such as the IEF Ministerials might further contribute to the debate. Possible topics include gas pricing and price harmonisation and cross-border trade and the greater interconnectednessofregionalmarkets. The2ndIEF-IGUMinisterialGasForumwasheldinDoha,Qatar,on30November2010under thetitle“TheRoleofNaturalGasinaSustainableEnergyFuture”.Inthismeeting,thediscussion The�irstsuchcallwasformallymadeatthe11thIEFinRome.Similarcallsfortheinclusionof gasdatatoJODIweremadeatotherinternationalforums,forinstanceattheG-8Summitin July2009,whichdeclared:“Webelievethatgreatertransparencyingasmarketsisrequired.We thereforecallupontheIEFtoexaminethepossibilityofextendingJODI-typeactivitiestonatural gas.”G-8LeadersSummitDeclaration,ResponsibleLeadershipforaSustainableFuture,L’Aquila,8 July2009. 166 IEF-IGU1stMinisterialGasForum,JointIEF-IGUSummaryStatement. 167 ibid 165 115 focusedonthekeychallengesfacingthenaturalgasindustryandexploredpotentialsustainable measurestotheclimatechangechallenge.Theparticipantsreemphasisedtheenvironmental qualitiesandadvancesintechnologywhichrendernaturalgastobean“essentialpartofthe globalsolutiontoclimatechange”where“thenaturalgasindustryhasthescale,technology, and resources to reduce CO2 emissions”. Interestingly, the participants expressed optimism aboutthefutureofgas,emphasising: Duetoanumberofpolitical,technical,economicandmarketrelatedfactors,theexpected periodleadingtoasubstantialrenewableenergybasewillbelengthyandwillrequire signi�icantsubsidies.Naturalgascanbean“enablingfuel”.Itcanplayaroleofa“dual” fueltorenewablesbyenablingincreaseddeploymentofenergysupplyfromintermittent renewable technologies. Natural gas is abundant, affordable and environmentally acceptable.Hence,towardsasustainableenergyfuture,naturalgasismorethanabridge, it’sadestinationfuel. The participants, however, recognised the investment challenge and urged the industry to adoptalong-termviewandincreaseinvestmentinthegasvaluechaineveninanenvironment ofincreasinguncertaintyandweakmarketconditionscharacterisedbyagasglutandrelatively lowprices.TheparticipantsfurtheremphasisedthattheconvergenceoftheinterestsofNOCs andIOCsislikelytobehigherinthenaturalgasbusiness,statingthat“strongerpartnerships, multifaceted cooperation and innovative arrangements between NOCs, IOCs and service companieswillbeneeded,particularlyforthechallengesofdevelopingremoteanddif�icult gasresources”.Inthismeeting,theparticipantsalsoannouncedthattheIEF,incooperation with its JODI partner organisations and GECF, are considering the launch of the Gas-JODI Database in 2011 which will provide more accurate assessment of market conditions and hencebene�itgasmarketplayers. Conclusion The�irstdecadeofthe21stcenturywasapositivedecadefortheproducer-consumerdialogue. It ventured into a new set of themes of mutual interest which helped increase further the awarenessofinterdependencebetweenthetwoparties.Whileissuesofsecurityofdemand and supply continued to underlie the dialogue, these issues were given more content, as re�lectedinthedebateoninvestmentwhichwasapproachedfromamuchwiderperspectiveto includeissuesofpolicyuncertainty,datatransparency,humancapitalshortages,theIOC-NOC relationshipandtheroleoftechnology.Similarly,althoughtheclimatechangeissuewasnot directlyaddressedinthevariousIEFmeetings,therewassomeconsensusontheimportance ofsustainabledevelopment,energyef�iciencyandtherolethattechnologiessuchasCarbon capture and storage (CCS) can play in addressing environmental concerns. Such consensus cancreatethebasisforfuturecooperationorevencoordinationofpolicies.Incontrasttothe 1990s,issuessuchastaxationofpetroleumproducts,greentaxes,howtomaintainaneffective levelofsparecapacityinthesystemandtheexplorationofwaystostabilisetheoilpricetook abackseatinthedialogue.Thisbynomeansimpliesthattheseissueshavebeensolvedor havebecomelessimportant.Butitseemsthatbothpartieswantedtoavoidconfrontational topicsandfocusmoreonthemesthatcanbringthemclosertogether.Furthermore,someof thekeypartiesmaynotyetbereadytodealwithsuchcontentiousissues.Whilethisapproach iseffectiveinbuildingcon�idence,inthelongrun,thereisariskthatkeyissuesthatlieatthe 116 heartofconsumers’andproducers’concernswillbecomemarginalised,leadingtoalossof interest in the dialogue. Furthermore, while the dialogue in the 2000s was able to identify themainchallengesandbottlenecksfacingtheenergyindustry,itcameshortofformulating concreteinitiativestoresolvesomeofthesebottlenecks.Thisre�lectsthatwhileconsumers andproducershavebecomemoreawareofthechallengesfacingtheoilmarketandaremore consciousoftheotherparty’sconcerns,thereisstillwidedivergenceofintereststhatprevent bothpartiesfromtakingthedialoguetoahigherlevel. 117 118 Chapter7:OilMarketDevelopments in2008,TheYearofTwoHalves Introduction If developments in oil prices prior to 2008 were considered eventful, then those of 2008 are spectacular in comparison. The remarkable developments in both the �inancial and oil marketsmade2008oneofthemostexcitingyearsoftheproducer-consumerdialogue.The �irsthalfoftheyearsawasharpriseintheoilpricewhichincreasedfromlessthan$100per barrelinthebeginningof2008tomorethan143dollars/barrelonthe11thofJuly(SeeFigure 7.1). The 11th International Energy Forum held in Rome from 20-22 April, preceded by the 3rdIEBF,unsurprisinglybecameaforumdominatedbypricedevelopments.TheForumnoted that“oilpricesshouldbeatlevelsthatareacceptabletoproducersandconsumerstoensure globaleconomicgrowth,particularlyindevelopingcountries”.168Drivenbyconcernsaboutthe possiblede-couplingofoilpricesfromindustryfundamentals,theForumnoted: Theavailabilityofoilandgasresourcesissuf�icienttomeetworldneedsoverthenext decades.However,publicandmarketperceptionsarenotinlinewiththegeologicaloil and gas realities. IEF countries were invited to work together to re-align public and marketperceptionswithmarketfundamentals. One of the central questions had become which factors had led to the current oil market situation.169 Some observers in the oil industry and in academic institutions attributed the behaviourofpricestostructuraltransformationsintheoilmarket.Accordingtothisview,the boominoilpricescanbeexplainedintermsoftightenedmarketfundamentals,rigiditiesinthe oilindustryduetolongperiodsofunderinvestment,andstructuralchangesinthebehaviour of key players such as non-OPEC suppliers, OPEC members and non-OECD consumers.170 On the other hand, other observers considered that the changes in fundamentals, or even changes in expectations, have not been suf�iciently dramatic to justify the sharp rise in oil 11thInternationalEnergyForum,Rome,20-22April2008,ClosingStatementbyhostItalyandcohostingcountriesIndiaandMexico. 169 Foracomprehensiveoverview,seeFattouh,B(2009).OilMarketDynamicsthroughtheLens ofthe2002-2009PriceCycle.OIES,WPM39;Jesse,Jan-HeinandCobyvanderLinde.(2008) “OilTurbulenceintheNextDecade”,CIEP,2008/03,June2008,athttp://www.clingendael.nl/ publications/2008/20080700_ciep_energy_jesse.pdf. 170 Seeforinstance,IMF(2008),WorldEconomicOutlook(October),Washington:International MonetaryFund;CommodityFuturesTradingCommission(2008),InteragencyTaskForceon CommodityMarketsInterimReportonCrudeOil;Kilian,L.andMurphy,D.(2010).“TheRoleof InventoriesandSpeculativeTradingintheGlobalMarketforCrudeOil”,CEPRDiscussionPaperNo. DP7753. 168 119 prices.Instead,theoilmarketwasseenashavingbeendistortedbysubstantialandvolatile speculative �lows of �inancial investments in deregulated or poorly regulated crude oil derivativesinstruments.171Thislatterviewwassharedbymanyobserversandorganisations, includingOPEC.InDecember2007,theOPECSecretaryGeneralAbdullahal-Badriarguedthat “themarketatthistimeisnotcontrolledbyfundamentals;itiscontrolledbyspeculationand speculators.Untilthisphenomenonisoutofthemarket,wewillseevolatilityinthemarket dayafterdayandmonthaftermonth”.172 Figure7.1:EuropeBrentSpotPriceFOB(DollarsperBarrel) TheJeddahEnergyMeeting Themarket,unimpressedbythemeetinginRome,continuedtoseeever-increasingpricesofoil, reachinglevelsabove$134perbarrelsonJune20.Bynow,someofSaudiArabia’scloseallies startedpubliclyexpressingtheirdissatisfactionwithoilpricebehaviour.Malaysiarequestedthat theissueoffuelpricetoptheagendaatthemeetingoftheOrganizationoftheIslamicConference (OIC),withtheForeignMinisterRaisYatimstatingthatIslamiccountriesmustaddresstheissue immediatelybecauseoilisproducedlargelybythem.Someproducingcountriesalsoexpressed theirdissatisfactionaboutoilpricebehaviour,blamingacombinationofspeculationandthelow dollarforthesharpriseintheoilprice.Noneofthesereasonscouldconcealwhatincreasing numbersofcommentatorsatthisstagesawasaprincipalincapability–ratherthanunwillingness See,forinstance,theTestimonyofMichaelGreenbergerbeforetheCommodityFuturesTrading CommissiononExcessiveSpeculation:PositionLimitsandExemptions,5August2009.Greenberger providesanextensivelistofstudiesthatareinfavourofthespeculationview. 172 WPA,Vol.XXXVII:49,10December2007,p.7. 171 120 –byproducingcountries,includingOPEC,toactivelyin�luenceprices.On9June2008,Saudi Arabia took an unprecedented action by calling for an emergency meeting between core producersandconsumers,withtheaimtoidentifythecausesofthecurrenthighoilpricesand thethreatthisposestoglobaleconomicgrowth.173TheJeddahEnergyMeetingwasheldonJune 22,2008uponthepersonalbackingandinvitationbySaudiArabia’sKingAbdullahIbnAbdulaziz Al-Saudandattendedbypoliticalheavyweights,suchasUKPrimeMinisterGordonBrownand ChineseDeputyPresidentXiJinpingwith36nationsandthemainIOCsbeingrepresentedatthe Meeting.Perhapsforthe�irsttimesincethe1990s,bothproducersandconsumersgenuinely sharedtheopinionthatcurrentoilpricesweretoohighandthatthecurrentvolatilityoftheoil pricehadbecomedetrimentaltobothconsumingandproducingcountries.Thiswasre�lected intheagreementonaJointStatementbytheKingdomofSaudiArabia,theIEA,OPECandthe IEFSecretariatsattheendofthemeeting.174IssuesagreeduponintheJointStatementmarkin manywaysamilestoneintheproducer-consumerdialogue.Theyincludedacallfor“immediate collaboration”betweentheIEA,OPECandtheIEF,thestatedrecognitionoftheimportanceof sparecapacityforthestabilityofglobaloilmarketsandtheneedforappropriateinvestment intheoilsupplychain.Forthe�irsttime,theideawasraisedtoinitiateannualdatacollection oninvestmentplansincrudeoilandre�iningcapacity.Finally,energyef�iciencywasembraced universallyasdesirablebyallsectorsoftheindustry.Adiscussionthatsurfacedjustpriorto theJeddahmeetingwastheimpactoffossilfuelsubsidiesforend-consumers,whichstimulated demand,andwaswidelyseenasapotentialsourceofenergysecurityissuesinasituationof limitedsupplies.Atthetime,subsidiesinChinaandIndia,andalsotheMiddleEast,wereseenas asourceoftherapidincreaseofdemand. Moreimportantly,duringtheJeddahEnergyMeeting,SaudiArabiasentastrongsignaltothe marketthatitwasdeeplyconcernedaboutsharprisesinoilpricesandtheimpactstheseoil price may have on growth and demand. Despite the fact that the market was well supplied, the Kingdom announced that it would bring additional supply to the market. Saudi Arabia’s declarationthatitwouldincreaseoutputto9.7mb/d,followedlaterbymarketcon�irmationof thatincrease,playedakeyroleinconvincingthemarkettopriceinamoreelasticsupplycurve. Someofthethrustbehindrisingpriceshadcomefromaperceptionthatkeyproducerswere unwilling,orevenunable,toincreaseproductiontolimitoilpricerises.Thatpositionbecame untenablewhenakeyproducerannounced,andthendelivered,signi�icantincreasesinoutput. Thirty-eightcountrieswereinvitedtoattendtheJeddahMeeting:USA,UK,France,Germany,Italy, Russia,Japan,Brazil,Canada,Mexico,Norway,India,SouthAfrica,Australia,TheNetherlands, Korea,Bahrain,Oman,China,Spain,Kazakhstan,Azerbaijan,UAE,Qatar,Kuwait,Libya,Algeria,Iraq, Venezuela,Angola,Nigeria,Iran,Ecuador,Poland,Egypt,Turkey,Austria,Indonesia.International organisationsinvitedincludedOPEC,IEA,IMF,EuropeanCommission,InternationalEnergyForum, andtheWordBank.TheOrganizersalsosentseparateinvitationstoalargehostofnationaland internationaloilcompaniesandre�inerieswhichincludedAramco,ExxonMobil,JapanOilCompany, Shell,BP,Total,ENISpa.,Reliance,Mitsubishi,Petronas,Pedrovas,SK,Sinopec,NIOC,Adnoc, Nippon,Sonatrach,IraqOil,KuwaitPetroleumCompany(KPC),OmanOil,QatarPetroleum,Repsol, StatoilHydro,ConocoPhilips,Chevron,Marathon,Sonangol,Petrobras,PEMEX,CNPC,BABCO. 174 JointStatementbytheKingdomofSaudiArabiaandtheSecretariatsoftheInternationalEnergy Agency,theInternationalEnergyForumandtheOrganizationofPetroleumExportingCountries. JeddahEnergyMeeting,22June2008.TheIEF’sSecretaryGeneral,NoévanHulst,calledthis JointStatement“ahistoricaleventinmanyways.”NoévanHulst,inInternationalEnergyForum SecretariatNewsletter,November2008,Issue12,p.7 173 121 SaudiArabia’sannouncementtoincreaseoutputdidnothaveanimmediateeffect,however, andpricescontinuedtorise,reachingapeakofover$143perbarrelonthe11thofJuly.By then,concernsaboutthehighoilpricesandtheirimpactontheglobaleconomywerefurther ampli�ied. This was re�lected in the 34th G-8 Summit held in Toyako, Japan between the 7th and9thofJuly,atwhichtheG-8leadersexpressed“strongconcernsaboutthesharprisein oilprices,whichposesriskstotheglobaleconomy”.Theleaderscalledforconcertedefforts “toaddresstheunderlyingcausesforthebene�itofall...recon�irmingthesharedinterestand responsibility of energy producing and consuming countries in promoting global energy security” which requires enhancing further the dialogue and partnership.175 In hindsight, thisshowsthattheeconomicproblemsthatharshlysurfacedinthefallof2008werelargely undiagnosedininternationalgatherings176,perhapsinthehopethatthesignalsaboutstresses andstrainsintheUSeconomywouldremainadomesticproblem.However,withthedollaras amaintransmittingmechanismandthelargebalance-of-paymentimbalancesintheworld, thesehopeswerenothingmorethanwishfulthinking.Thelinkagebetweenoiland�inancial market developments had again presented itself at the core of international economic relations,whichmaytakeyearstoaddress. TheFinancialCrisis,theOilPriceCollapseandtheLondonEnergyMeeting Thecollapseoftheoilpriceinthesecondhalfof2008soonprovedtobemorespectacular than�irstthoughttobe.Asaresultofsupply-sideresponsesfollowingJeddah,butalsodue tomountingevidencethatOECDdemandhadweakenedmorethaninitialexpectationshad suggested,oilpricesfellfromapeakofmorethan$143forEuropeBrentSpotpriceon11July to$124attheendofthemonth,to$108bymid-August,$105bythestartofSeptemberand to$95on12September–thelasttradingdaybeforetheLehmanbankruptcy.Thedefaultof LehmanBrotherson15September2008markedadrasticreversalindemandexpectations forglobaloilmarkets,asaconsequenceofincreasingexpectationsofaglobalrecessionand thespreadingoftheUSsubprimecrisisintoglobal�inancialmarkets.Onecouldarguethatthe sharpreversalinoilpricesfromJuly2008toDecember2008cameintwodistinctphases(See Figure7.1).The�irstwasacoolingoffinpricesfromtheirpeaks,broughtonprimarilybythe combinationofasupply-sideresponsefromthekeymarginalproducerfollowingtheJeddah meetinginJune2008,andbymountingevidenceintherear-viewmirrorthatOECDdemand hadweakenedfarmorethan initial expectations and provisionaldata �lowshadsuggested. Thesecondphasewasmoredirectlyassociatedwiththeintensi�icationoftheglobal�inancial crisis and the associated decline in expectations of future global economic growth in the aftermathofLehmanBrothers’collapse. In mid-September 2008, just as Lehman Brothers was entering into bankruptcy, the Wall StreetconsensusofexpectationsforUSgrowthin2009stoodat2.5%.BytheendofOctober, G-8HokkaidoToyakoSummitLeadersDeclaration,HokkaidoToyako,8July2008.Availableat http://www.mofa.go.jp/policy/economy/summit/2008/doc/doc080714__en.html. 176 Thiswaslatercon�irmedintheG-20MeetinginWashingtonwheretheleadersadmittedthat “policy-makers,regulatorsandsupervisors,insomeadvancedcountries,didnotadequately appreciateandaddresstherisksbuildingupin�inancialmarkets,keeppacewith�inancial innovation,ortakeintoaccountthesystemicrami�icationsofdomesticregulatoryactions”. DeclarationoftheSummitonFinancialMarketsandtheWorldEconomy,WashingtonDC, November15,2008,Paragraph3. 175 122 consensusexpectationshadshrunktozerogrowth,andbytheendofFebruary2009theyhad fallenfurthertoadeclineof2.5%.Overjust�ivemonths,theforecastforUSeconomicgrowth fellby�ivepercentagepoints.Intermsoftheoilmarketrepercussions,thereweretwoeffects simultaneously at work in the months that followed the Lehman bankruptcy. The �irst was theparallelimpactofsharplyreducedeconomicprospectsontheexpectationforoildemand growth.Thesecondwastheimplicationofarushtoliquidityandawayfromriskinmarkets. The truncation of, and re-pricing in, credit markets brought about a sudden desire for far greaterliquiditywithinmost�inancialmarkets.Activityacrossriskiermarketsinparticular wasseverelycurtailed,whileassetholderssoughtsaferinstrumentsforretainingvalue.The reduction in the amount of gearing available to investors also brought about a fairly rapid unwindingofpositions,withanygivencapitalbasenowbeingdeemedcapableofcoveringa substantiallyloweramountofmarketrisk.Theformerwasenoughtocreatethemomentum forasharpretrenchmentinprices,andthelattercausedtherapidliquidationofpositionsand sharpincreaseinriskaversion,whichinturncreatedtheconditionsforanundershootinoil prices. The root causes of the �inancial crisis and the actions that governments should take to avoid future crises became the main focus of the G-20 meeting held in Washington on the 15th of November. The G-20 leaders emphasised the importance of strengthening �inancial marketsanddesigningnewregulatoryregimes.Whiletherewasrecognitionthatenhancing sound regulation is �irst and foremost the responsibility of individual countries, given the globalisationof�inancialmarketstherewasemphasisonintensifyinginternationalcooperation amongregulatorstostrengtheninternationalstandards,toenhancetransparency,topromote integrityin�inancialmarketsandtoreforminternational�inancialinstitutions.Asdiscussed below, such reform efforts had signi�icant spill-overs on commodities markets and on the contentoftheproducer-consumerdialogue. Againstthisbackground,theLondonEnergyMeetingwasheldonthe19thofDecember2008. Themeetinghadbeenoriginallyplannedasasecond-stepmeetingfollowingJeddahtodeepen thedialogueabouttheheightenedoilprice.Followingthecollapseofoilprices,themeeting assumed a distinctively different character from the Jeddah Energy Meeting. Nevertheless, the London Energy Meeting was an important step in the producer-consumer dialogue. It reaf�irmedthesupportofkeyconsumingcountriestothedialogueeveninanenvironmentof lowoilprices,whichwasaveryimportantsignalcomparedtothosegiveninearlierperiods. ThemeetingcalledfortheestablishmentofanExpertGroupunderthesupervisionofaHighLevelSteeringGrouptomakerecommendationsandproposemeasurestomitigateoilprice volatility.177Italsoprovidedaforumfortheexchangeofviewsabout thecurrenteconomic climateandexploredwaystopromoterapideconomicrecoveryatatimewhenexpectations about the impact and length of the recession in different parts of the world were rapidly deteriorating. Efforts by the UK Government in gathering a wide support for the London EnergyMeetingplayedakeyroleinmaintainingthemomentumbehindthedialogue,attimes whenmanyconsumingcountriesbegantoloseinterestasaresultofloweroilprices. No joint Statement was produced at the London Energy Meeting, but the Chair’s summary re�lects some insights into the concerns raised by participants. The key long-term concern LondonEnergyMeeting,19December2008,UKChair’sReport. 177 123 became price instability: the sharp swings which the oil price had shown in 2008 and its impactonlong-terminvestmentweremajorconcernssharedbyproducersandconsumers, andtherewasenoughcommongroundtomaketheLondonmeetingmeaningfuldespitethe reoccurringdichotomizationofproducersandconsumersvis-à-vistheloweredoilprice.The participants “reaf�irmed the priority of reducing volatility in the oil market” and called for thebetterfunctioningofoilmarketswhichwouldprovide“moreconsistentpricesignalsto enable producer and consumer countries to have greater con�idence in making investment andpurchasingdecisions”. FinancialCrisisandtheContentoftheProducer-ConsumerDialogue The �inancial crisis and the debate surrounding it had an immense spill-over effect on the content of the producer-consumer dialogue, by drawing the attention of global discussants totwomainareas:thelinkagesbetween�inancialmarketsandoilmarketsandtheregulation ofcommodityderivatives;andtheimpactofthecrisisoninvestmentintheoilsectorandthe implicationsforlong-termoilsupplies. FinancialMarketsandOilPriceBehaviour The sharp swings in oil prices and the marked increase in volatility during the 2008-2009 pricecyclepolarizedviewsabouttheunderlyingcausesofoilpricedrivers.Thepolicyand academicdebatebecamestronglydominatedbythedichotomybetweenfundamentalsversus speculation,withtheempiricalevidenceprovidinglimitedconcreteevidenceinsupportofone explanationortheother. Theinvolvementof�inancialplayersintheoilmarketisnothingnew.Investmentbankshave beenoneofthelargesttradersofcrudeoilandpetroleumproductssince1985.However,these bankshavebecomemoreinvolvedinbridgingthegapsbetweenproducersandamorediverse setof�inancialplayers.These�inancialplayerscanbedividedintothreebroadcategories.First, therearethehedgefunds,whichalsocomeindifferentvarieties.Therearethemacrohedge fundsthattradeinarangeofmarkets,notjustcommoditiesandhaveatop-downapproachand takeaviewonmacroeconomicissues.Therearethespecialistcommodityhedgefundsthatare morebottom-up,uselargequantitiesofdataandtakeastrongviewoffundamentalsofsupply anddemand.Therearealso“blackbox”hedgefundsthathaveaviewoftheoilpricebased oncalculationsknownonlytothem.Second,thereareinstitutionalinvestorsthatprimarily consistofpensionfunds,sovereignwealthfundsandinsurancecompanies.Theytypicallyput asmallshareoftheirfundsintocommoditiesforthesakeofportfoliodiversi�ication.They tendtosellwhenpricesarehighandbuywhentheyarelow,stabilisingthemarket,owing to price-weighted limits in their portfolios. Finally, there are retail investors, which include privateinvestorsandhighnetworthindividuals.Retailinvestmentincommoditymarketshas beenoneofthefastestgrowingcategoriesviatheeasy-to-accessExchangeTradedProducts (ETPs). Many reasons have been suggested as to why these �inancial players have increased their participationincommoditiesmarkets.Thehistoricallylowcorrelationbetweencommodities’ returns in general and �inancial assets’ returns, such as stocks or bonds, has increased the attractiveness of holding commodities for portfolio diversi�ication purposes for some 124 institutional investors, such as pension funds and insurance companies. Expectations that commodities will have relatively higher returns in investment than �inancial assets, due to the perception of tightened market fundamentals stimulated by China’s quick ascent as a commodity importer and continued disappointing performance of non-OPEC supply, have motivatedmanyinvestorstoentertheoilmarket.Becausecommodityreturnsarepositively correlated with in�lation, many investors have entered the commodities market to hedge againstin�lationriskandaweakdollar.Financialinnovationhasalsoprovidedaneasyanda cheapwayforvariousparticipants−bothinstitutionalandretailinvestors−togainexposure tocommodities. Initially,theinstitutionalplayers’exposuretooilwasthroughcommodityindices.Acommodity index swap is simply a �inancial instrument that allows for the exchange of �inancial �lows betweenthebuyerandthesellerbasedonthevalueofaspeci�iedindex.Inthecaseofmost swaps,thatindexwillbethepriceorpricestripofasinglecommodity.A‘swapdealer’,usually abankorbroker-dealer,offersinvestorsaswapwhosevalueislinkedtothevalueofaspeci�ied commodityindex.Theseswapsaresold‘overthecounter’(OTC).Swapdealerswhoareshort intheOTCmarketmaychoosetohedgetheirriskinthefuturesmarketbytakinganoffsetting position;theymay�indanaturalhedgewithintheirexistingoverallbook;ortheymaychoose toaddthatrisktotheirbook.Thus,indexinvestmentstendtobelongonly,andasigni�icant proportionoftheirtransactionswillultimatelypassthroughthefuturesmarketinsomeform. Greatermaturityinthemarkethasledawayfromrelianceonpassiveindicesandtowardsa moreactive,bespokenandfocusedapproach.Anotherwaytogainexposuretocommodities isthroughexchange-tradedproducts(ETPs).ETPsarecomprisedofexchange-tradedfunds (ETFs) and exchange traded notes (ETNs). Like commodity swaps, ETPs allow investors to gain exposure to commodity indices or particular commodities. Unlike commodity swaps, ETPsareconstructedasfundswhosesharecanbetradedonthestockexchangelikeanyother share,andtheETPsthemselvescanbestructuredasbeinglongorshort.Commodity-based ETPshavegrownrapidlyinrecentyears,astheyseemtoofferasimpleandacheapwayfor investorstogainexposuretocommodities. Despite ful�illing the key roles of liquidity provision, the widespread entry of new �inancial players, their trading strategies and the leverage supporting such strategies, and the large �lowsoffundsinandoutofthepaperoilmarkethaveraisedseriousconcernsabouttheimpact of�inanciallayersontheoilpriceformationprocess.Someobserversholdtheviewthatthe newplayerstradeonnoiseandsentimentratherthanonfundamentals,withadverseeffects on the functioning of oil markets. Others argue that �inancial investors have the tendency toherd,astheseinvestorstendtofollowtheapparenttradingstrategiesofotherinvestors. Herding undermines the role of price discovery, may induce higher volatility and, under certaincircumstances,canleadtosharppriceswings.Somearguethatcrudeoilhasacquired thecharacteristicsof�inancialassetssuchasstocksorbonds.Manyempiricalpapersexamine whether the price behaviour of commodities mimics that of �inancial assets and whether commodity and equity prices have become increasingly correlated. One important aspect ofthe‘�inancialisation’oftenhighlightedistheincreasingrolethatexpectationsplayinthe pricingofcrudeoil.Inthecaseofequities,pricingisbasedonexpectationsofa�irm’sfuture earnings.Intheoilmarket,expectationsoffuturemarketfundamentalshaveincreasinglybeen playinganimportantroleinoilpricing.Ifthereislargeuncertaintyastowhatthelong-term oilmarketfundamentalsare,orifperceptionsofthesefundamentalsarehighlyexaggerated 125 andin�lated,thentheoilpriceinthefuturesmarketcandivergeawayfromitstrueunderlying fundamentalvalue,causinganoilpricebubble. Empiricalstudiesontheimpactof�inancialplayersonoilpriceshavebeenthin.Duetodata limitations,thediversityofplayersinthemarket,andthedif�icultyofidentifyingthemotive behindtradingdecisions,theempiricalliteraturehasstruggledtooffermuchinthewayof �irmconclusions.Consequently,atpresentthereisabroaddiversityofviewsabouttherole of�inancialmarketsinpriceformation.Nevertheless,the2008oilpricecyclehasbroughtthe issuesof‘excessive’speculationandtheregulationofcommodityderivativesmarketstothe fore. In the Third Asian Ministerial Energy Roundtable meeting in Tokyo in April 2009, the Chair’ssummarynoted: Participants recognised that excessive �luctuations in oil prices are undesirable for both energy producers and consumers, and that �inancial markets have an impact on oil price formation. Participants were made aware of the discussions under the G-20 on strengthening �inancial supervision and regulation. Regarding transparency of commodity markets and supervision on over-the-counter markets, participants appreciatednationalauthorities’effortsandcalledforfurtherharmonisedactionssuch astheintroductionofpositionlimits.178 DuringtheSixthEU-OPECEnergyDialogueinViennainJune2009,theforumwarnedthat“the speculation issue had not been resolved yet and that the 2008 bubble could be repeated if adequateregulatoryreforms,includinggreatertransparency,werenotmadetobepartofan overallreshapingoftheglobal�inancialsector”.The12thIEFDeclarationinCancunin2010, however,wasmorecautious,statingthat“givenconcernsaboutthelackofconclusivedata, theIEFshouldnotadvocateanyparticularformofregulation”.Instead,Ministersrecognised thepotentialimpactofregulatingderivativesmarketonthefunctioningoftheoilmarketand hencerecommended: Whereauthoritiesareconsideringadditionalregulationandtohelpcreateef�icientand effectivemarketconditions,itisproposedfortheconsiderationoftherelevantauthorities thatanyregulationshould(i)promotemarkettransparency;(ii)retainnecessarymarket liquidity;and(iii)beimplementedinapracticalfashion,avoidingadisorderlyunwinding ofpositionsaffectedbyanynewregulation. TheCancunMinisterialDeclarationwasalsoclearabouttheIEF’sroleinanyfutureregulatory effortsstatingthatwhilethe“Secretariatshouldcatalogueregulatoryeffortsinmajorenergy derivatives markets179, it should play no regulatory role, “leaving direct market oversight responsibilitytostates”. Chair’sSummary,TheThirdAsianMinisterialEnergyRoundtable,Tokyo,JapanApril26,2009. Tothisendandinordertopromotegreatercoordinationamongregulators,theIEF,incooperation withtheIEAandOPEC,organisedaroundtableforregulatorsinNovember2010.Theroundtable discussedregulatoryproposalsfromallovertheworldandexaminedtheirpotentialimpactsonthe oilmarket. 178 179 126 TheInvestmentIssue Astheglobal�inancialcrisispersisted,attentionwasdivertedtothelong-termdynamicsofoil supplyandtheimpactofthe�inancialcrisisoninvestmentintheoilindustry.Thepowerful shocksonglobaloildemandandexpectationsofitsgrowthwerecounteractedbyapowerful supply response from OPEC and expectations of further weaknesses in non-OPEC supply. Long-term uncertainty about demand and oil prices affects the incentive to invest in new productivecapacity,whilelowoilpricescanlowerexplorationanddevelopmentactivityand rendersomeoftheexistingprojectsunviable.Furthermore,thehighcostoffundingandthe loweravailabilityofcreditcanpreventsomeoilcompaniesfromundertakingnewinvestments orevencompletingexistingones.Asonemarketobserverputsitatthattime: Withthebackdropofahailofrecentannouncementsoncapitalexpenditurereductions for both conventional and non-conventional oil, together with the continuing move away from investment in alternative energy, we believe that the sharp fall in industry con�idenceislikelytohaveamorelastingeffectonthehealthofthesupplyside.Indeed, forthatnottorepresentasevereproblemoverthecourseofthefollowingdecade,the weaknessinglobaloildemandwouldhavetobecomefairlyprolonged.Ittendstobeafar longerprocesstoreinstateprojectsthanitistomothballorcancelthem,andthescaleof thecurrentindustryfreezeandcon�idencelossseemslikelytoseverelyaffectnon-OPEC production.Further,givenhowmuchofexpenditureinmatureareasisdirectedattrying tocontaindeclinerates,wesuspectthatthosedeclineratesmightnowbesetforanother stepup.180 High uncertainty about prospects of long-term demand has also affected investment plans in OPEC countries. In its 2009 World Oil Outlook, OPEC announced that its members have delayed or even postponed over 35 projects until after 2013, with total crude oil and NGL capacity hovering around 5 mb/d. The report claimed that "the surge in investment plans in OPEC Member Countries that were aimed at addressing perceived market tightness, particularly in 2007 and the �irst half of 2008, would in actuality have turned out, at least partially,tobeforunneededcapacity.Allofthisunderscoresagainthegenuineconcernsover securityofdemand".Intermsofinvestments,OPECmembershaveplannedtoreducetheir upstreaminvestmentrequirementforthemediumtermovertheperiod2009-2013from$165 billiontoaround$110-120billion. Thus, while the investment issue has always dominated the producer-consumer dialogue, itwaselevatedduringthe�inancialcrisiswithconcernsthatlackofinvestmentduetolow oil prices, uncertainty and credit constraint could create the grounds for tight oil market conditionsandhigherpricesonceoildemandstartstorecover. TheYears2009-2010:RecoveryandStabilisation Oilpricebehaviourin2009canbedividedintotwodistinctphases.The�irstistherecovery phasewhichsawBrentspotpricerisefromaverylowbaseof$33.73on26December2008 to almost $78 on 31 December 2009, an increase of more than 160%. The second is the Barclays’Capital,OilMarketWeekly,January2009. 180 127 stabilisation phase, which saw the oil price oscillate within a relatively narrow price band between$60and$70betweenthemonthsofJulyandSeptemberandthenbetween$70and $90intherestof2009andmostof2010(SeeFigure7.1). The negative dynamics unleashed by the �inancial crisis caused oil prices to undershoot in December2008.Asinassetmarkets,oilpriceswereboundtorecovertosomeextent,asmany investorsrealisedthatthefallinoilpriceshadgonetoofarbytheendof2008.Justasthe movetowardpricelowshadbeenaccompaniedbyarapidreductioninbothGDPgrowthand oildemandexpectations,therecoveryinpricesaccompaniedaperiodofimprovinggrowth expectationsandaparticularlymarkedreboundinoildemandexpectationsfollowinga�lowof strongerthanexpectedglobaldemanddata.Inlinewiththestabilisationofexpectationsabout theglobaleconomyandoildemand,therewerealsoconcernsattheheightofthe�inancial crisisthatcreditconstraints,thehighdegreeofuncertaintyandthelowpriceenvironment wouldlimitinvestment�lowsintotheoilsector,withnegativeconsequencesonfuturenonOPECandOPECsupplygrowth.Therewas(andstillis)astrongsentimentthattheoilindustry cannolongerfunctioninarelativelylowpriceenvironment. Thus, to avert an oil crisis in the medium term, prices needed to be adjusted upward from theirlowsinDecember2008.Concernsaboutlong-termfundamentalsplacedalimitonhow muchmarketplayerswerewillingtodiscountthepriceatthefrontendrelativetotheprice atthebackendofthefuturescurve.Ontheonehand,theoilpricewasrelativelyhighgiven currentmarketfundamentals.Ontheotherhand,theoilpricewasrelativelylowcompared toperceivedlong-termfundamentals(seeFigure7.2).Thus,theoilmarketreachedapointat whicheitherthelonger-termfuturepricehadtoadjustdownwardorthefrontendthefutures curvehadtoadjustupwards.Intherecoveryphase,itwasthefrontpartofthecurvethatmoved up.Thisimpliesthatinthe�irstmonthsof2009marketexpectationsoffuturefundamentals becamethedominantfactorinthepriceformationprocess.Whileoilmarketfundamentals(as indicatedbythedemandsupplybalance)remainedweakin2009,participantsattachedlittle weighttothesebearishsignalsandoilpricescontinuedtorise. 128 Figure7.2:WTITermPriceStructure(December2008,MonthlyAverage) Oncetheprocessofpricerecoverywascomplete,themarketenteredthestabilisationphase. Inthelastfewmonthsof2009andformostof2010,oilpricesoscillatedwithintherange of $60-$80, though the upper end of the range has been broken a few times. In effect, the oil market operated within an implicit band. This is remarkable given the highly volatile expectationsabouttheprospectsoftheglobaleconomyandthelargeuncertaintyaboutoil marketfundamentalsatthetime. The2008-2009OilPriceCycleandtheProducer-ConsumerDialogue The 2008-2009 oil price cycle proved to be an important turning point in the producerconsumer dialogue. Extraordinary price instability and heightened levels of uncertainty pushedbothproducersandconsumerstointensifytheircooperationandexplorewaystoface thesecommonchallenges.Theyear2008witnessedtwoextraordinarymeetings(theJeddah Energy Meeting and the London Energy Meeting) of the producers and consumers outside formal schedules. Provocative remarks from both producing and consuming states which oftenexacerbatedmarketvolatilitywerereplacedbyprovocativeannouncementsfromlarger producingandconsumingcountries. Duetotheseverityofthepricecycle,therewasarealisationamongconsumersandproducers thatnoonewasservedbyoilpricesthatwereeithertoolow(theoilpriceinDecember2008) ortoohigh(theoilpriceinJuly2008).Ontheonehand,lowoilpricesconstrainthe�lowof investmentrequiredbytheindustrytoensurestableoilsupplies.Ontheotherhand,highand volatileoilpricescandamageprospectsforglobalgrowth,canresultinoildemanddestruction andcreateworldwideimbalanceswithdestabilisingconsequences.Thesesignalsoriginated frombothconsumingandproducingcountries.TheFrenchPresidentNicolasSarkozyandthe 129 then UK Prime Minister Gordon Brown urged “oil producers to agree a target price range, basedonaclearerunderstandingofthelong-termfundamentals...thatarenotsohighasto destroytheprospectsofeconomicgrowthbutnotsolowastoleadtoaslumpininvestment,as happenedinthe1990s”.181Similarsignalshavealsoemergedfromkeyoilexporters.Inarare precedent,KingAbdullahofSaudiArabiasaidinanewspaperinterviewthatheconsiders$75 tobea‘fair’priceforabarrelofcrudeoil.HereiteratedhispositioninDecember2009arguing that"we[theSaudis]expectedatthestartoftheyearoilpricesbetween$75and$80abarrel andthisisafairprice...Oilpricesareheadingtowardsstability”.182TheSaudiOilMinister,Ali Al-Naimi, justi�ied the target price as the “price that marginal producers need to maintain investments suf�icient to provide adequate supplies for future oil consumption needs”.183 IntheOPECmeetinginSeptember2009,MrAl-Naimiannouncedthatthecurrentprice“is goodforeverybody,consumersandproducers”.HereiteratedhispositioninDecember2009, arguingthat"themarketisstablerightnow,volatilityisatminimum,everybodyishappywith theprice,itisintherightrange”.184 WhilethemarketexpectedpricestoadjustfromtheverylowlevelsreachedinDecember2008, therewasuncertaintyastothepriceorpricerangethatwouldstabilisemarketexpectations. Thereisawiderangeofpricesatwhichthemarketcanclear.Theissuethenis:howdoesthe marketconvergetoonepricerangeandnotanother?Inanenvironmentofhighuncertainty, publicinformationorsignalsmaytakealeadingroleinmovingthemarket,evenifthesepublic signalsdonotnecessarilyre�lectlargechangesinunderlyingfundamentalsorprovidenew informationtothemarket.Ithaslongbeenrecognisedthatwhenindividualsareconfronted withlargeuncertainty,focalpointsmayinsomeinstancesplayanimportantroleinproviding apointofconvergenceforindividualexpectations.185Somefocalpointsmaybeapriorimore reasonable or more prominent and noticeable than others. It remains unclear whether the various signals from consumers and producers stabilised expectations and were in part responsible for the oil price oscillating within a relatively narrow implicit band. However, there is little doubt that the signals have much stronger effects on market sentiment when governments of different countries agree and communicate their views to the market. This createsafurtherrolefortheproducer-consumerdialogue.TheCancunMinisterialDeclaration capitalisedonthedynamicsoftheconvergenceofviewsbetweenconsumersandproducers aboutapreferredoilpricerange,withtheIEFshowingmorewillingnesstointeractwiththe marketandrepositioningitselfintheglobalmap,stating: The unique composition of the IEF (covering both producer and consumer countries including major producers outside OPEC and major consumers outside IEA) and its neutralstatuspositiontheIEFSecretariatforanenhancedroleinprovidingimproved andexpandedrelevantmarketdataandcompiling/pullingtogetherrelevantanalytical reportswithrespecttoboththephysicalandpaperoilmarket.Thiswiththeobjective GordonBrownandNicolasSarkozy.“WeMustAddressOil-MarketVolatility”.TheWallStreet Journal,8July2009. 182 Reuters(2009).“OilPriceMightRise‘Reasonably’–SaudiKinginPaper”.26December. 183 Reuters(2008).“LowOilPricesMeanLessFutureSupply–Saudi”.19December. 184 Daya,AyeshaandMaherChmaytelli(2009).“SaudiArabia’sAl-NaimiSaysOilPriceIsPerfect”, Bloomberg,December5. 185 Schelling,T.(1963).TheStrategyofCon�lict.OxfordUniversityPress,NewYork. 181 130 to achieve a more constructive and focused producer-consumer dialogue, based on a greaterdegreeoftrustandopenness,thatcouldpromotecon�idence-buildingmeasures amongproducersandconsumersandsendstrongmarketsignalstohelpstabiliselongtermexpectations. Oneofthemajorfeaturesthatcharacterisedtheoilmarketduringthe1980sandthe1990s was the stability of expectations about the long-term oil price. The stability in long-term expectations establishes a relationship between the spot oil price and expected change in prices.Asustainedincreaseordecreaseintheoilprice(afeatureofpriceswings)cannotbe maintained,asexpectationsofsupplyanddemandresponseswouldputa�loorandaceiling on the price, and thus prices oscillated within a narrow band. In the Cancun Ministerial DeclarationinMexicoinMarch2010,producersandconsumersnotedforthe�irsttimethe importanceofstabilisingexpectations,recommendingthattheIEFshould: disseminatekeyinformationrelatedtomarginalcost,investmentlevels,andalternative energysourcesthatcouldhelpstabiliseshortandlong-termexpectations. AnotherinnovationintheCancunMinisterialDeclarationistheindicationofthewillingness of consumers and producers to communicate with the market, recommending that the IEF should: actastheforumthroughwhichabettermutualunderstandingofviewsiscommunicated tothemarket. Conclusion TheIEF’semphasisonexpectationsandtherolethatsignalsfromproducersandconsumers can play in stabilising expectations − and hence, prices − can be considered to be a breakthrough in the producer-consumer dialogue. It was the �irst time that producers and consumersshowedawillingnesstointeractandtosendsignalstomarketparticipantswith theaimofstabilisingexpectations.Inthisrespect,theJeddahEnergyMeetingprovedtobea gamechanger.Ifanticipatedfeedbacksareslow,orareperceivedtobeabsentoneitherthe demandorsupplyside,themarketislikelytodriftupwarduntilthesefeedbackskickin.If marketperceptionsarewrongabouttheextentandthetimingoffeedbacks(forinstance,if themarketbelievesthattherearenofeasibleinstrumentswhileinfacttheseexist),thenthe dialoguecanplayaroleinpreventingsharppricemovementsbyincreasingthevisibilityof thesefeedbacksandpolicyresponses.TheLondonEnergyMeetingwasalsoimportantasit reaf�irmedthesupportofkeyconsumingcountriestothedialogueinanenvironmentoflow oil prices. It would be interesting to monitor how the producer-consumer dialogue would respond to the next oil price cycle, which many analysts predict that has already started. Theeventsof2008,thefurtherinstitutionalisationoftheIEF,andcreationofanewcharter indicatethattheproducer-consumerdialoguewillonlyintensify,especiallyasoilpricesreach critical thresholds that are considered to be harmful for both consumers’ and producers’ interests.However,itremainstobeseenwhethercoremembersfrombothsideswillshowthe willingnessandhavethecapabilitytotakeconcretemeasuresandsendcrediblesignalsthat couldin�luenceandstabilisemarketparticipants’expectations.Thesuccessorfailureindoing sowillplayanimportantroleinshapingproducer-consumerrelations. 131 132 Chapter8:TheRoadAheadforthe Producer-ConsumerDialogue In its relatively short history, the producer-consumer dialogue can already look back at many important achievements. Many of these achievements have come about in the past ten years. Yet without the con�idence building of the early years, none of the achievements would have happened. The dialogue has been nurtured by various countries and has survived because noonepartyhasorhasbeenallowedtoclaimthedialogueasitsownorbecomeavehiclefor specialinterests.Everycountrythatatonetimeoranotherhasnurturedthedialoguecanstill beconsideredacorecountrytoday,willingtonudgethedialoguealongifneeded.In2008Saudi Arabia’sKingAbdullahIbnAbdulazizAl-Saudcalledonthesecorecountriestosignalthemarket aboutthesupplyanddemandrealities,whiletheyalsoprovidedmuchneededstabilityduringthe aftermathofthe�inancialmarketcrisislaterthatyear. In the future, new countries will need to come along to extend the dialogue further. With the dialoguenowenteringitsthirddecade,theemphasisonthetraditionalproducingandconsuming countriesischangingtoincludenewconsumersandproducers,bringingnewdimensionsand challengestothedialogue. Twentyyearsafterthe�irstmeetinginParis,theIEFhasevolvedintooneofthemostinclusive platformsfordialogueinwhichconsumersandproducersmeetonaregularbasistodiscussissues ofcommoninterestpertainingtotheglobalenergyscene.Atpresent,theIEFmembercountries accountformorethan90%ofglobaloilandgasconsumptionandproduction.Suchabroadand diversebaseofconstituents,however,doesnotinitselfguaranteeasuccessfulandconstructive dialogue. After all, these member countries have very diverse interests which are often very dif�iculttoreconcile.Anecessaryconditionforasuccessfuldialogueisthatdespitetheirdiverse interests,thereisrecognitionamongmembercountriesofsharedaimsandanawarenessofthe commonchallengesfacingproducersandconsumers. Perhapsthemainachievementofthedialogueofthepasttwentyyearsisitssuccessinincreasing theawarenessofthehighdegreeofenergyinterdependencebetweenconsumingandproducing countries,whichmostlikelywillincreaseintheforeseeablefuture.Ratherthantreatingitasa sourceoftensionandcon�lict,theIEFhasbeencallinguponbothconsumersandproducersover theyearstoembraceinterdependence“foritspotentialasacohesiveforceunderpinninghealthy growthoftheworldeconomy,fairenergytrade,andinternationalcooperation”.186Suchstatements areafarcryfromthetenserelationsbetweenoilproducersandconsumersthatprevailedinthe 1970sand1980sandre�lecthowmuchhaschangedforthebetterintherelationship. ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico,11thInternationalEnergy Forum,Rome,20-22April2008. 186 133 Toalargeextent,thedialoguehasalsosucceededinbringingcloserthetwomainconsumer andproducerorganisations:OPECandtheIEA.Thefollowingexcerptfromarecentinterview withDrAlirioAParra,aformerEnergyandMinesMinisterofVenezuelabetween1992and 1994,shedssomelightontheextenttowhichtheseenergyrelationshavechanged: Intheearlydays,whentheIEAwassetup,itwasprobablywiththeintentoftryingto destroyOPEC.ThesetwoOrganizationssimplydidnottalk.TheheadsofOPECandthe IEA would not even be seen in each other’s company. You could not get the Executive DirectoroftheIEAtocometoVienna.Infact,the�irsttimehecame,hearrivedsecretly andhadlunchwiththethenSecretaryGeneral,privatelyinaVienneserestaurant.Today, thingsaretotallydifferent.YouseetheOPECSecretaryGeneralandtheIEAExecutive Director at seminars, on panels, they meet together, they are on different committees. Theymayhavetheirownpointsofview,buttheytalk,theydiscuss,andtheycooperate whencooperationisnecessary.Theydifferwhendifferencesareimportant,butthings havechangeddramatically.187 Another visible and concrete example of success in the producer-consumer dialogue is theestablishmentoftheJointOilDataInitiative(JODI).188TheSecretariathasconsistently promotedJODIasrepresenting“thesinglemostimportantcollaborativeefforttoaddressthe issueofmarketdatatransparency”.Thepromotionofgreatertransparencyinenergymarkets hasbeenarecurringkeymessageinmostinternationalgatheringsandisconsideredcrucial toachievingsecurityofbothsupplyanddemand.Therearestillcriticalproblemsthathave challengedtheachievementofJODI’sobjectivesofprovidingtimelyandreliabledataonall IEFmemberstates.YetJODIremainsthesinglemostcomprehensiveattempttocollectdata ofsuchmagnitude.AnotherimportantachievementofJODIisthatithasraisedawareness ofthetechnicaldif�icultiesinvolvedinimprovingthequalityandreliabilityofenergydata and its timeliness. This has induced the Secretariat and its partners to play a more active role in improving data collection methods in different countries through providing advice, organisingworkshopsandconductingtrainingsessions. TheIEFhasalsoachievedacertaindegreeofinstitutionalisation,whichhashelpedtogive the dialogue more structure. This institutionalisation, however, has not induced any shift towards creating a global energy organisation with binding global energy governance, nor hasitaffectedtheinformalityofthedialogue.Thetwenty-yearhistoryoftheIEFshowsvery clearlythatthepartiesconcernedarestronglyattachedtotheideaoftheinformalityofthe dialogue. This is expected, as energy issues involve quite complex political, economic and socialdimensionswhicharedif�iculttoreconcile.ChangingtheIEFintoaforumwithpowers tomakebindingdecisionswoulddampentheinterestofbothproducersandconsumersand couldlimitthescopeforanopenandfrankdialogue. In the early years, the agenda for the Ministerial meetings was set in an ad-hoc manner withoutmuchthoughtgoingintode�iningtheissuesfordiscussionoranalysissupportingthe OPECBulletin,September2010,p.50. IEFSecretariat,ProgrammeofWorkandBudgetfor2005,February2005,p.11,andre�lectedin variousIEFpublications.In2004,IEFSecretaryGeneralArneWaltherdescribedJODIasafuture “�lagshipforouractivityofpromotingproducer-consumerdialogue.”WPA,25October2004,p.5. 187 188 134 dialogue.Sincethe2000s,theproducer-consumerdialoguehasbecomemoreorganised,in largepartduetotheeffortsoftheSecretariat.Nevertheless,theagendaremainsverybroad; thedialoguehascoveredalargenumberoftopicsovertheyears,asseeninpreviouschapters. Suchabroadagendahashadtheeffectofdilutingthedebateattimes.Thereisalsoafeeling thattheagendaisoftendrivenbythevolatilemarketeventswithnosenseofcontinuity.A constructivedialogueshouldbesupportedbyrelevantandaccuratedata,statisticsandother qualitative information. It should also be informed by independent, in-depth and rigorous theoreticalandempiricalanalysesandstudies.ThiswouldrequiretheIEFtocollectresearch inkeyareasthatimpacttheoilandotherenergymarkets,inadditiontotheexpertpapers thatithasalwayshadpreparedforMinisterialmeetings.Inthisfunctionitcanrelyonthe research strengths of existing institutions so as to avoid any duplication of effort. While producingandconsuminggovernmentsmaydecidenottosubscribetotherecommendations comingoutfromthevariousresearchprojects,theseanalyticalstudiesremainessential,as theyinformandenhancetheproductivityofthedialogue. AlthoughthebiennialMinisterialmeetingsareattheapexoftheproducer-consumerdialogue, cooperationshouldnotbereducedtothishigh-levelevent.Thedialogueshouldbeperceived asanongoingprocess189incorporatingawiderangeofactorsandmanifestedinanumberof activities,themostofimportantofwhichare:theprovisionoftimelydataandinformation; providingtechnicalassistancefortheimprovementofdatacollectionmethods;conducting in depth and analytical studies; and engaging actively with market players, international organisationsandresearchcentres. Thepasttwentyyearshaveshownthattheintensityandbreadthofthedialoguehavebeen drivenlargelybykeymarketevents.Oftheseevents,oilpriceinstabilityhasbeenthemain impetusbehindtheintensi�icationofdialogueinrecentyears.Itisinterestingtonote,though, thatwhiletheparties’mainconcernsareaboutthelevelandvolatilityoftheoilprice,neither consumersnorproducershaveaninterestinmanagingthepricelevel.Thereisanimplicit agreementthatthedeterminationoftheoilpriceshouldbelefttomarketforces.Thisdoes notimplythatpricesarenotdiscussedinMinisterialmeetings.Buttheclosingstatements are very general. They often call to “reduce price volatility in the interests of producers and consumers” because volatility “complicates the interpretation of market signals and may adversely affect investment”. Other statements call on “both producer and consumer countries...to take action to reach sustainable price levels” without describing what these actionsmightbe.Similarly,inthe2004-2008pricecycle,concludingstatementsexpressed concerns about the level of oil prices, noting that “oil prices should be at levels that are acceptable to producers and consumers to ensure global economic growth, particularly in developingcountries”withoutanyindicationofwhattheselevelsshouldbe. Historically, producers and consumers have had very divergent interests: producers tend to favour higher prices while consumers favour lower prices, depending on the stage in the oil price cycle at which importers and exporters �ind themselves. Recently, there has beenarealisationthattoolowortoohighoilpricesservenoneofthegroups.Ontheone Asnotedbyoneinterviewee,onelimitationoftheproducer-consumerdialogueisthatitgains intensityandmomentumandistakenseriouslybyministersduringcrisistimes.However,innormal times,thedialogueisnotgiventhesameattention. 189 135 hand,lowoilpriceswillconstrainthe�lowofinvestmentrequiredbytheindustrytoensure stableoilsupplies.Ontheotherhand,highandvolatileoilpricescandamageprospectsof globalgrowthandcreateworldwideimbalanceswithdestabilisingconsequences.Themere convergenceofinterestsandviews,however,isnotenoughtostabiliseexpectationsinthe long term or to ensure a relatively stable behaviour of oil prices. Thus, if one of the key objectivesofthedialogueistopreventoilpriceinstabilityandtomitigatethecostsassociated withsuchinstability,thenthequestionconfrontingconsumersandproducersis:Whatcould thedialogueachieveintheeventofpriceshocks? In the event of an oil price collapse, the response from producers is predictable. Through theauspicesofOPEC,producerswouldimplementoutputcutstopreventpricesfromfalling below a given �loor deemed unacceptable for producers. If OPEC is able to generate the expectationsofsucharesponse,thenitmightnotevenneedtoimplementthecut.However, themarketmaywishtoseewhetherappropriatecutscouldbeimplementedinpractice-in whichcaseitcouldtakesometimebeforeOPECsucceedsinreversingthepricedecline.While producers’actionsarepredictableinafallingmarket,thesamecannotbesaidforconsumers. In theory, there might be some options available for importing governments. For instance, non-OPECsupplierscouldsupportOPECpolicybyannouncingoutputcuts,ashappenedin 1998,inwhichcasethemostrelevantdialoguewouldbebetweenproducersfrombothsides. Leaders in consuming countries could send clear signals that low oil prices are damaging, providepublicsupportforOPECcutsandsupportthecooperationbetweenOPECandnonOPEC countries. Alternatively, importing countries could show a willingness to support thepricebycreatingarti�icialdemand–forinstancethroughbuildinguptheirstocksand strategicpetroleumreservesintimesofslackmarkets.Itisclearthattheseandothersimilar optionsrequirefar-reachingchangesinpolicywhich,sofar,noconsuminggovernmentseems willingorevencapableofimplementing. Intheeventofasharpriseinoilprices,onepotentialresponsewouldbeforOPECtoincrease productionandmanagethepriceceiling.However,theresponsefromOPECinarisingmarket isnotstraightforward.ThekeyfunctionofOPECisnottoimposeaceilingonoilpricesbut toensurethatthemarketiswellsupplied–i.e.,thatsupplydisruptionsareavoided.Unlike acentralbankthatcanincreaseinterestratestobringin�lationdown,OPECdoesnothave a mechanism or an agreed set of tools to lower oil prices. Moreover, OPEC is concerned that increasing production without any coordination with consuming governments on the issueofstockreleasecouldresultinanuncontrollabledeclineinprices.Theeventsof1991 showedtheimportanceoftheimplicitcoordinationbetweenOPECandtheIEAontherelease of stocks. Due to geological and policy constraints, the short-term response of consuming countriesisrathermutedintightmarketconditions.Onthesupplyside,somegovernments mightencouragetheexplorationanddevelopmentoftheiroilreserves,butinthepastsuch apolicyprovedtobeineffectiveinproducingfastenoughfeedbackonthesupplyside,given thelimitedsizeofreservesandthetimelagsinvolvedinbringingproductiontothemarket. Onthedemandside,theimpactofhighpricesremainsmuted,giventhatoildemandinthe shortrunishighlyinelastic.Ofcourse,highoilpriceswouldeventuallyhavetheirimpacton demand,butthefeedbackisperceivedtobetooslowandgradual.Policyannouncementof theintroductionofef�iciencymeasurescanhaveonlyalong-termimpactbutareunlikelyto playanimportantroleinin�luencingmarketplayers’short-termexpectations. 136 Theabovediscussionrevealstwofeaturesthathaveshapedthecontentofthedialogueto date.First,anypolicytocounteroilpriceshockswouldnotbecredibleifmanagedbyparties withverydivergentinterests.Inarisingmarket,producersloseinterestinpolicingtheupper boundary and, when prices fall, consumers lose interest in policing the lower boundary. The producer-consumer dialogue has not matured enough to deal with such complex issuesortosuggestpotentialwaystomanageoilpriceinstability.Second,thereisaclear powerasymmetryintheshortterm.Whileproducershaveoptionsinbothfallingandrising markets,consumersaremuchmoreconstrainedintheirpoliciesintheshortterm.Inthelong term,however,thebalanceofpowertendstoshiftinfavourconsumerswhocanpursueoil substitutionpolicies,implementef�iciencymeasures,raisetaxesonpetroleumproducts,and encouragethedevelopmentofalternativesenergysourceswhichhavetheeffectofreducing long-term oil demand and the share of oil in the energy mix. Thus, an important role for theproducer-consumerdialogueistobridgethegapbetweenthelongtermandshortterm interests of consumers and producers in order to create a more predictable and stable oil market. Doesthefailuretobargainaboutpricelevelsortomanagethepricelevelwithinboundsmean that the producer-consumer dialogue has failed? The answer is no. Since both sides agree thattheoilpriceshouldbesetbymarketforces,theproducer-consumerdialoguehasaimed atimprovingthefunctioningofthemarket.Recenteventsrevealthatbothsideshavebeen advocatingpoliciesthatenhancetheprice-determiningroleoftheoilmarket.Oneofthemajor concernshasbeenthein�luenceof�inancialmarketsonthelevelandvolatilityoftheoilprice and,inrelationtothis,whetherthelarge-scaleentryof�inancialplayershashadtheeffect ofshiftingthepriceawayfromunderlyingmarketfundamentals.Effortsarecurrentlybeing madetounderstandthelinksbetweenthe�inancialandphysicallayersoftheoilmarketand whetherregulationisneededtoimprovemarkettransparency. TheIEFhasalsobeenshowingawillingnesstoengagewiththeissueofstabilisingshort-and long-term expectations through better mutual understanding of oil market conditions and communicatingtothemarket.Sincethepricecanoscillatewithinawidebandduetomarket structure,suchcommunicationsorsignalscanplayanimportantroleinin�luencingoilprice behaviour.Theconvergenceofviewsofkeyplayersaboutapreferredoilpricerangein2009 hashelpedstabilisemarketexpectationsintheoilmarket.Thiscurrentconvergence,however, is unlikely to be sustained if not supported by coordinated efforts between producers and consumers.TheIEFhasthereforebeencallingforbetterinformationdisseminationaboutkey variablessuchascosts,investment�lowsandthedemand-supplybalancesoastoavoidthe developmentofalargedivergenceofopinionbetweenconsumersandproducers.Whenkey playershavedifferentbeliefsregardingoilmarketfundamentalsduetolimitedandimperfect informationaboutmarketfundamentalsanduncertaintyaboutthebehaviouroftheseplayers indifferentmarketcircumstances,itisnotpossibletosustainconvergenceofviews. Inthepast,supplydisruptionsprovedtobedecisivefortheproducer-consumerdialogue,as theyincreasedtheawarenessofcommoninterestsamongpartiesandrevealedtheusefulness ofcoordinatingactionsinkeyareassuchastheuseofstocksandsparecapacity.Duringthe 1990s,disruptionsdidnotfeatureprominentlyinthedialogue.Theavailabilityoflargespare capacityandthewillingnessofOPECto�illthegapinthecaseofphysicaldisruptionsmeant that concerns about disruptions received little priority in the policy agendas of consuming 137 countries. The rapid rise in demand in the mid-2000s and the various supply shocks in producingcountriessuchasIraq,Venezuela,andNigeriabroughtbacktotheforetheissue ofsparecapacityanditsroleindampeningpricevolatility.Despiteitsriseinimportanceon thepolicyagenda,producersandconsumersshiedawayfromtheissueforalongtime.Itwas notuntiltheJeddahmeetingin2008thatspeci�iccallsweremadefortheexpansionofspare capacity: The existence of spare capacity throughout the oil supply chain is important for the stability of the global oil market. Hence an appropriate increase in investment, both upstream and downstream, is necessary to ensure that the markets are supplied in a timely and adequate manner. Predictable energy and investment policies, as well as betteraccesstotechnology,arenecessarytothisend.190 Theabovestatementhighlightsanimportantdimension,asitacknowledgesthatmaintaining sparecapacityistheresponsibilityofbothproducersandconsumers;itshouldbeextended totheentiresupplychainandnottoupstreamplayersonly.However,thestatementisgeneral and does not address the complexity of the issues surrounding spare capacity: Does spare capacityconstituteapublicgood?Ifitdoes,shouldallpartiessharethecostofmaintaining sparecapacity?Ifsparecapacityistobeheldinproducingcountries,canconsumingcountries �indacceptablemechanismstocompensateproducingcountries?Insuchasystem,whomakes thedecisiontoreleasethesupplyfromexistingcapacity?Theseandotherquestionshavenot yetbeenthesubjectoffrankdiscussionanddebate.Currently,policiesconcerningwhetherto maintainsparecapacityandatwhatlevelsaresolelysetbyindividualgovernmentswithno coordinationevenbetweenproducingcountries. Ratherthanfocusingongeopolitically-induceddisruptions,thedialoguehasshiftedtowards potentialdisruptionscausedbythelackofinvestmentintheoilsupplychain.Theinvestment issue has been a recurring theme in most Ministerial meetings. One of the important achievementsofthedialogueinthisareahasbeentheincreasingawarenessthatinvestment isasharedresponsibilitybetweenproducersandconsumers,asbringingavailableresources tothemarketrequiresadequateinvestmentandtimelyinvestmentintheentireoilandgas chain. Nevertheless, the fact remains that the decision to develop reserves in producing countriesismainlyinthehandoftheirgovernmentsandtheNOCs,andnoneoftheproducers wishtorelinquishthissovereigndecisioneitherthroughdiscussionoragreementsbetween producingcountriesorbetweenproducingandconsumingcountries.Asaresultofthewave of mergers in the 1990s, investments in upstream and in re�ining are now in the hands of privatelyownedoilcompaniesinmanyconsumingcountrieswheregovernments’in�luence is mainly in the area of regulation. Recognising this asymmetry, the producer-consumer dialoguehasneverattemptedtocoordinateinvestmentplans.Instead,ithasexploredways toremoveimpedimentstoinvestmentintheoilsector.Thebasicmessageofthedialoguehas beentheimportanceofadequateinvestment,aidedby“favourableenergy,�iscal,investment andenvironmentalrelations”which“areneededforfreerandexpandedtradeinoilandgas and for sustainable world economic growth”.191 The IEF agenda has broadened to discuss JointStatement,JeddahEnergyMeeting,22June2008. Summarybythehostandtheco-hosts,7thInternationalEnergyForuminRiyadh,November17-19, 2000. 190 191 138 speci�icmeasuresthatcaninduceinvestmentintheenergysector,suchasreducinglong-term uncertaintythroughincreasingtransparencyandimprovinginformation�lowsoninvestment plans, energy security and climate change policies and their potential impact on demand, enhancing the corporation between NOCs, IOCs and Service Companies, and broadening cooperationandexchangesinthe�ieldsofhumancapitalandtechnologyadvancementand manyothermeasures.Thedialoguebetweenproducingandconsumingcountriesandamong industryparticipantshasresultedingreaterunderstandingofthenatureoftheinvestment problemandappreciationoftheindividualsides’pointofview.However,concreteinitiatives andproposalstoalleviatetheinvestmentproblemhaveremainedlimited. Duringthepasttwodecadesincreasedenvironmentalconsciousnesshasbeentranslatedin manypartsoftheworldintoconcretepolicyresponses.Oneofthekeyframeworksforthis policyresponsehasbeentheUNFrameworkConventiononClimateChange(UNFCC).In2005, theKyotoProtocolcameintoforce,animportantcornerstoneunderlyingmanystates’national legislationtocurbgreenhousegasemissions,andmainlyfromconventionalformsofenergy intheformofcoalandoil.TheClimateChangeAgendahasbecomeatoppriorityinpolicy agendas.In2009,G-8Leadersstatedinveryclearwordsthat: Climatechangeisoneofthegreatestchallengesofourtime.Asleadersoftheworld’s majoreconomies,bothdevelopedanddeveloping,weintendtorespondvigorouslyto this challenge, being convinced that climate change poses a clear danger requiring an extraordinaryglobalresponse,thattheresponseshouldrespectthepriorityofeconomic andsocialdevelopmentofdevelopingcountries,thatmovingtoalow-carboneconomy isanopportunitytopromotecontinuedeconomicgrowthandsustainabledevelopment, that the need for and deployment of transformational clean energy technologies at lowestpossiblecostareurgent,andthattheresponsemustinvolvebalancedattentionto mitigationandadaptation.192 By contrast, climate change as an issue has played a subordinate role in the producerconsumerdialogue.Oneofthefewoccasionsofclimatechangebeingmentionedinaclosing statementofanIEFMinisterialwasin2008,whereministersstatedthat“co-operationand effectivedialoguethroughtheIEFisanimperativeforgrantingenergysecurityandde�ining coordinated energy strategies to confront the global climate change challenge”.193 Because of the complexities surrounding climate change debates and the fact that there are other internationalforumsinwhichclimatechangesissuesarecurrentlybeingaddressedataglobal level,animportantthemeisleftouttheIEFagenda.Asinthecaseofprices,theproducerconsumerdialoguetouchesontheclimatechangeagendabutinanindirectway.Forinstance, overtheyears,thedialoguehasreferredtowide-rangingissuessuchasthedevelopmentof alternativeenergies,thedevelopmentofcarbon-friendlytechnologyincludingCarbonCapture andStorage(CCS)andtheenhancementofenergyef�iciency.The11thIEFMinisterialconcluded thatasustainableenergyfutureimpliesef�iciencyimprovements,technologicaladvancesin bothproductionandconsumptionoffossilfuels,anddevelopmentofalternativelow-carbon G-8Summit,DeclarationoftheLeaders,TheMajorEconomiesForumonEnergyandClimate, L’Aquila,9July2009. 193 ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico,11thInternationalEnergy Forum,Rome,20-22April2008. 192 139 energysources.194PreviousIEFMinisterialshadagreedontheneedtoacceleratealternative energiesbutalsonotedthatthedevelopmentoffossilfuelsresourceswillcontinuetoberelied upontomeettheexpectedenergydemand.195TheIEFhasalsoadvocatedtheneedforenergy ef�iciencytobe“promotedinallsectorsthroughpassingonmarketpricesignals,technology transfer and the sharing of best practices in energy production and consumption”.196 Thus, while producers and consumers have so far averted discussing the issue of climate change in a direct way, they have been willing to explore policies that can have direct impact on theenvironmentandsustainabledevelopmentwithoutplacingthesepoliciesinthegeneral contextoftheclimatechangeagenda. Theaboveexamplesshowthatinthelastdecadebothpartieshaveavoidedconfrontational topicssuchasgreentaxesandthe�inancingofsparecapacityandhavefocusedmoreonthemes thatcanbringthemclosertogether.Furthermore,theyalsorevealthatmanykeyplayersare notyetreadytodealwithsuchcontentiousissues.Thisapproachhasbeeneffectiveinbuilding con�idenceandpromotingtrustamongtheparties.However,thereisariskthatinthelong runthekeyissuesthatlieattheheartofconsumers’andproducers’concernswillbecome marginalised,leadingtoalossofinterestinthedialogue.Furthermore,whilethedialoguein the2000swasabletoidentifythemainchallengesandbottlenecksfacingtheenergyindustry, itcameshortofcomingupwithconcreteinitiativestoresolvesomeofthesebottlenecks.This re�lectsthatwhileconsumersandproducershavebecomemoreawareofchallengesfacing theoilmarketandmoreconsciousofotherparty’sconcerns,thereisstillwidedivergenceof interestsandevenunwillingnessbysomepartiestotakethedialoguetothenextstagewhere moreconcreteinitiativescouldbeimplemented. Manyoftheeventsthathaveshapedtheproducer-consumerdialoguewillcontinuetoplay animportantroleintheyearstocome.Whileeveryeffortcanbemadetoimprovethequality ofthedialoguethroughsupportingitbyafocusedagenda,reliabledataandinformationand soundanalyses,thefactremainsthatadialogueissuccessfulandusefulonlyifitisableto tackleissuesthatareofcommonconcernsforbothparties.Oftheseconcerns,thedegreeof uncertaintyengul�ingenergymarketsanditsimpactoninvestmentwillcontinuetodominate thedialogue.Whilethehighdegreeofuncertaintyhasbeenthepredominantfeatureofthe industrysinceitsestablishment,policyuncertainty,especiallyinrelationtoclimatechange policies, will become a dominant factor. In this regard, the IEF can provide a forum for the exchangeofinformationaboutthenatureofthesepolicies,thetimingoftheirimplementation andtheirshort-andlong-termimpacts.Anotheraspectofuncertaintyconcernstheinvestment policies and plans of producing countries. Since investment decisions are in the hands of producingcountries,theIEFislikelytoplayalimitedroleinremovinginvestmentbarriers andimprovingmarketaccess.Nevertheless,theIEFcanplayanimportantroleintheregular exchangeofinformationaboutproducingcountries’investmentplansandtheirlongtermoil policies. ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico,11thInternationalEnergy Forum,Rome,20-22April2008. 195 Conclusionsbyhostandco-hostoftheInternationalEnergyForum,10thInternationalEnergy Forum,2ndInternationalEnergyBusinessForum,Doha,Qatar,22-24April2006. 196 JointStatement,JeddahEnergyMeeting,22June2008 194 140 With rising geo-political tensions, one cannot exclude the possibility that political shocks whichdisruptoilorgassuppliescouldoccur.Insuchevents,theIEFshouldbeattheheart ofcoordinationeffortsbetweencountrieswithsurpluscapacityandcountrieswithstrategic stocks. But the bottom line remains that for interest in the producer-consumer dialogue to persistinthelongrun,itshouldbeabletodealwithakeyconcernthatliesattheheartof producers’andconsumers’interests:thepricelevelthatisacceptabletobothparties.There havebeenmanycallstoestablishapricebandwithanoilstabilisationfunddesignedtokeep prices within reasonable bounds. However, as discussed above, a fundamental weakness of theseproposalsisthatsuchasystemwouldhavetobemanagedbypartieswithverydivergent interests.Furthermore,itwouldbedif�iculttodesigntheinstitutionalmechanismsthatcould generate feedback to prevent the price from straying outside the band, let alone to �ind agreementonsuchaschemeamongthememberstates. Given these factors, it is unlikely that the IEF will evolve into a forum in which consumers and producers try to manage the oil price. Instead, the IEF can aim for a softer kind of mediation, based on its role of championing transparency. Given the role expectations play intheprocessofoilpriceformation,oneofthemainobjectivesofbothoil-importingandexportinggovernmentsshouldbetostabilisemarketparticipants’longer-termexpectations aboutarangeofoilpriceswhichbothpartiesconsideracceptable.Furthermore,ifanticipated government responses are slow, or are perceived to be absent on either the demand or supplyside,themarketislikelytodriftawayfromthepreferredpricerange.Thiscreatesa reasonforcooperationanddialoguebetweenconsumersandproducers.Forexample,ifthe market believes that spare capacity is thin, while in reality supplies are abundant and key governments are willing to bring these supplies to the market, then the IEF could play an importantroleinstabilisingexpectationsbyincreasingthevisibilityofthesepolicyresponses, likewhathappenedintheJeddahEnergyMeeting. In part, expectations are formed on the basis of data and information and on analysis surrounding these data. Poor data contribute to the volatility of oil markets, both through allowing inaccurate information to �ilter into investors’ expectations and by increasing speculation on crucial data. Although the coverage and quality of information about crude oil market fundamentals have improved in recent years, there are still some major data problems.Onthedemandside,dataonoilconsumption,eventhoseforOECDcountries,are notstandardised,aresubjecttomajorrevisionsandarepublishedwithaconsiderabletime lag.Thisproblemisbecomingmoreacuteasmanycountriesandregionsinthenon-OECD, suchasChina,IndiaandtheMiddleEast,havebecomeamajorsourceofdemandgrowthin recentyears.Inmanyofthesecountries,thereareseriousstatisticalshortcomingsintheareas ofdataonconsumptionandonthepricingpoliciesofpetroleumproducts,includingthesizeof subsidiesandtaxesimposedontheseproducts.Regardingdataoninventories,OECDdataon crudeoilandproductstocksarepublishedmonthlyandwithconsiderabledelay.DataonnonOECDstocksarenotavailableonaregularbasisandaresubjecttoagreatdealofspeculation. For instance, in the context of China, it would be dif�icult to gauge whether the growth in importsisduetoanincreaseinactual demandoranincreaseinthedesiretostockpile.In additiontolaggingindicatorsofsupplyanddemand,itisimportanttoexplorethepossibility of increasing the availability and transparency of data that can help us better understand future market fundamentals. For instance, on the supply side, detailed data on investment plansintheoilsectorandinalternativeenergycanaffectexpectationsaboutmedium-term 141 andfuturemarketfundamentals.Onthedemandside,informationonenergypoliciesandtheir potentialimplicationsforlong-termdemandwouldalsoalterlong-termexpectations.Infact, theprovisionofbetterdataandinformationandindependentandcredibleanalysisofhow themarketfundamentalsmayevolveinthefuturemayreducethedegreeofuncertainty.Such analysismayalsohelpdilutesomeoftheextremeviewsandsignalsthatinsomeinstances dominatethemarketpsycheanddrivecoordinated�inancial�lows.Itisintheseareasthatthe IEFshouldbeabletocarveitselfaroleinglobalenergymarkets. Whilealltheissuespertainingtocreatingtransparencyonthesupply,processinganddemand sidesremainimportant,theriseofnewconsumingcountrieswiththeirownorganisational model will introduce a new set of discussions to the dialogue: consumer-consumer dialogues.AlreadyduringtheJeddahconference,energysubsidieswereanimportanttopic. Energy subsidies can place pressure on prices in tight markets, send false signals about supply needs and redistribute energy �lows among countries according to ability to afford subsidies.Discussionscanalsoarisefromthefactthatconsumercountriesdeploydifferent organisational models in their energy industries and support investments along the value chain to generate energy �lows for their national economies rather than the international market. These new types of consumer dialogue, also important for producing countries, cannoteasilybediscussedwithinthetraditionalenergyorganisationswheremembershipis limited,buttheycanbecoveredintheIEF. Thesameistruefornewdimensionsintheproducersideofthedialogue.Asnewfuelsenter themixtheycompetewiththeconventionalfossilfuelsandcomplicatesecurityofdemand issues.Withthegrowingcomplexityoftheglobalenergymarkets,thecorecountriesofthe earlydaysofthedialoguewill�indthemselvesmoreandmoreengagedwithnewcountriesand newissues,essentiallylookingforthesametrustoverandoveragain.Alsowiththeadvance ofnewenergy-relatedorganisationssuchastheGasExportingCountriesForum(GECF)and theInternationalRenewableEnergyAgency(IRENA),itisimportantfortheIEFtocontinueto bringalltheseseparatediscussionstoaconstructiveplatform. Importantly,thedialogueshouldhopetohavethesortofsupportersthatmadethedialogue asuccessinthe�irsttwentyyears.Althoughthedialogueismainlyaboutnotablesactingon behalfoftheircountriesandorganisations,itisclearthatthemaintenanceanddevelopment of personal contacts, also at this level of international politics, are very important in order forgovernancetofunctionwell.Inmanycountries,politicianschangeeveryfewyears,which can make it more dif�icult to develop personal contacts. These contacts are often prized at theadministrativelevel.Manyofthemeetingswerepreparedandcommunicationchannels keptopenbyagroupofassiduousrepresentativesofthesesamecountriesandorganisations, withoutwhichtheIEFwouldnothavesucceeded.Althoughnotmentionedspeci�icallyinthis overview of the producer-consumer relations, the importance of their work is nonetheless noteworthy. In its short history, the dialogue has already crossed many milestones. Consumers and producers have overcome some of their past myths, fears and suspicions and have become moreawareofanumberofcommonchallengesrelatedtoenergymarkets.Theinstitutional structure supporting the dialogue continues to strengthen; the structure and quality of the dialoguehavealsoimprovedovertheyears.The2000swerethetimeinwhichtheIEFemerged 142 asaninstitutionalisedforumwithitsownpermanentinfrastructureandanewcharter.With allthisinmind,theevidentconclusionmustbethatthepasttwentyyearshavebeenpositive fortheproducer-consumerdialogue.Nevertheless,manychallengesremainandmanyothers arelikelytoemergeinthefuture.Thisrequiresthatproducersandconsumerscontinuetheir effortsofcooperationwiththeintentiontoprotecttheirlong-termcommoninterests.They mustalsocontinuetoactivelyattempttogainbetterunderstandingofeachother’spositions. Thewayinwhichproducersandconsumersexpresstheirinterests,towhatextenttheyare willing to engage in issues that lie at the heart of their energy concerns, and whether they succeedinrelatingtheseenergyissuestothewidercontextofpolitical,economicandsocial securityandtheclimatechangechallengewillde�inethefuturepathofthedialogue. 143 1stIEFSecretaryGeneral, ArneWalther 144 CurrentIEFSecretaryGeneral, NoévanHulst
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