20 year Anniversary of the producer

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,
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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:
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$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
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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
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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