Alternative Fuels Reach The Transportation Sector.

The seventh strategic lesson is that the price of crude oil remains the most important factor to expansion or contraction in the world's energy business. It was the low price of oil in the years before OPEC's March 1999 agreement which caused capacity shortages in the energy sector in the US and Europe and the severe energy crisis in California. And, because of the oil price factor's influence on the global scale, liquid petroleum today is more vulnerable to alternative fuels than at any time before.

Already before their March 1999 price defence agreement OPEC states had been warned that if the market value of liquid petroleum rises above a certain midfield level, say $18/barrel for Dated Brent, the economics of fuel cells and other alternative fuels for transport could become stronger. Now major oil companies and auto producers have formed alliances to convert methanol or gasoline into hydrogen for fuel cells.

Fuel-cell vehicles have hit the road in some North West European areas this year, and more of them will reach the market in 2002. Toyota Motor Corp. announced on June 18 plans to sell fuel-cell vehicles - including buses and sports utility vehicles - in 2003 as part of its development of environmentally friendly technologies. It has developed a prototype bus running on fuel cells (which produce electric power from hydrogen and oxygen without combustion) jointly with Japan's Hino Motors Ltd., 36.6% owned by Toyota. The bus, with capacity for 63 passengers, can cover more than 300 kilometres with a maximum speed of more than 80 km per hour. Toyota's FCHV-4 sport utility vehicle is to be sold in 2003, if experiments on public roads in Japan and the US succeed.

The eighth strategic lesson is that the developed world has already begun to move into green pricing of energy, which will include emission and congestion taxes. Green pricing of energy is becoming part of the package of structural reform and adjustment measures which the IMF, the World Bank and other multilateral organisations will be demanding of nations that require their assistance.

A variety of green taxes will help OECD governments and some governments in the rapidly developing world reduce carbon dioxide emissions in line with commitments made at the Kyoto conference in 1997. Most new policies will affect the transportation sector.

About 50% of the world's oil demand now is made up of gasoline, automotive diesel, jet fuel and bunker fuel, with motor fuels accounting for 80% of the transportation sector. The other 20% is shared almost equally by sea and air transport.

The oil industry depends heavily on road transport, and in the developing and less developed worlds at least one billion cars are to join the market for the first time within the next 20 years or so.

Strategic lesson No. 9 is that cost-busting technologies are irreversible. Proven cost-cutting trends are irreversible, just as it is impossible for knowledge to be reversed.

Western companies can operate profitably with $10/b oil, particularly if they merge and manage to cut costs considerably, as in the case of ExxonMobil, BP, TotalFinaElf, ChevronTexaco, etc.

Part of this strategic lesson is the fact that the most successful player in the oil business today is the most profitable oil company per employee. It was only after BP reached this level of profitability in early 1998, as recognised by the leaders in Wall Street, that the UK major made the move in mid-1998 to take over Amoco.

It was only after it absorbed Amoco and cut the entire conglomerate into business units that BP moved to took Arco in 1999. The price of Arco, in fact, has been mostly covered by the mark up in the valuation of BP shares in late 1998 and of BP Amoco shares in the period after OPEC's March 23, 1999 oil price defence agreement.

The tenth strategic lesson, yet to be drawn in the industry, is that the vulnerability of liquid petroleum to greener alternatives is irreversible. The trend of cheap oil gaining market share at the expense of greener fuels will become irreversible during this decade.

For oil price defence strategies to become viable in this new century, OPEC and non-OPEC exporters will first have to study the environmental policies of the rich governments and to closely monitor the subsequent responses of the big oil companies. These companies are becoming more energy oriented and will eventually be less dependent on conventional oil.

OPEC strategies will have to depend on the outcome of such international energy conferences as that of Kyoto, despite the fact that Bush has abandoned the Kyoto protocol.