Availability Of Reserves.

Then there is the question of whether the five other OPEC countries actually possess the wherewithal to expand their capacity to the same degree as the six Gulf producers. This is disputed. The US Geological Survey, in its World Petroleum Assessment 2000, argues for a relatively even spread of reserve augmentation around the world, indicating that while the Gulf might possess close to two-thirds of the world's currently proven reserves, it would be likely to secure a much smaller proportion of reserve additions and undiscovered reserves.

However, there is an established school of thought, associated primarily with Colin Campbell, which argues that both actual and recoverable reserves are much lower than the levels proposed by the USGS and many of the reserve revisions announced by OPEC states in the 1980s reflect political pressures to secure production quota increases from their colleagues in OPEC rather than new discoveries of geologically-based revisions of already proven reserves. This might impact on the willingness, if not the ability, of Gulf states to raise production to the levels anticipated by the consumer nations.

So far, there has been a marked lack of clarity as to how the Middle East producers might grow their capacity to meet the anticipated surge in demand for their crude. In addition, much depends on whether they will do so in a pro-active or reactive manner.

A pro-active manner would require them to send out clear signals to the market that they do indeed have a policy intended to assure consumers that they will not face supply constraints. A reactive manner simply means that they will wait to announce investment programmes for capacity expansion until the market is just about as tight as they reckon it can get.

The industrialised world assumes the Gulf states will take a pro-active approach. That is the only explanation for the belief of the EIA, embodied in its International Energy Outlook 2001, that OPEC in general and its Middle East members in particular will expand their capacity dramatically over the next two decades against a background of oil prices averaging just $22.41/barrel (in 1999 dollars). Thus the EIA anticipates a rise in overall OPEC capacity from around 34.2m b/d in 1999 to 44.3m b/d in 2010 and then to 62.4m b/d in 2020, with Gulf OPEC capacity rising on the same basis from 24m b/d today to 30.4m b/d in 2010 and to no less than 45.5m b/d in 2020.

The assumptions of the IEA are pretty similar - but a slightly higher OPEC and Middle East capacity is anticipated because it thinks non-OPEC supply will be considerably smaller. It also postulates slightly different prices: an average $21 (Year 2000 prices) for the period up to 2010 and then $28 (year 2000 dollars) for the following decade. For its part, the current OPEC World Energy Model (OWEM) anticipates a somewhat higher $25 average price (at Year 2000 prices) from now to 2010, followed by an increase that would thereafter simply keep pace with inflation in the industrialised world.

OPEC, however, has displayed an interesting degree of caution with regard to whether even its higher level of anticipated prices would truly prove sufficient to ensure investment in production capacity on the scale envisaged by all three organisations. Thus Dr Shokri Ghanem (the former head of OPEC's research division) declared last March 2001) that an oil price of around $25 a barrel "is not only geared towards short-term market stability but also attempts to ensure continuity of investment for supply security".

If $25 attempts to bolster energy security through capacity investment, then what price level is required to assure energy security? Or, to put it another way, does this mean that $20/b oil is likely to ensure energy insecurity?

There is also a very real prospect that for the next several years - or for as long as the United States proclaims it is still engaged in a war against terrorism and that it regards the Middle East as a prime focus for terrorist activities - the oil market will be subject to considerable volatility as a result of price spikes caused by either military action or the threat of military action. Yet, at least for the next year or so, it looks as if this prospect of occasional sharp price spikes will have to be set against a background of oil market fundamentals that will subject OPEC and its members to considerable pressure as they endeavour to ensure that price levels of at least $20/b, and preferably somewhat higher. Curiously enough, US fears concerning the instability of the Middle East have not proved sufficient to counter the general post-September 11 decline in oil prices.

Such circumstances mean that most of the Gulf states (Iraq is clearly a notable exception) can kill two birds with one stone. It is clearly in the political interest of five of the Gulf states - Saudi Arabia, the UAE, Kuwait, Qatar and even Iran - to try to stabilise matters by reassuring an increasingly nervous United States that they are ready to take real steps to reduce market tightness. But, unexpectedly, the prospect now exists that they can achieve this goal in a climate of reduced revenue risk stemming from what should be a period of at least initially higher prices.

Since Middle East governments rely so heavily on oil revenues to furnish the largest element of their budgets, they naturally tend to be revenue maximisers. But for a while, at least, they will not have to be quite so fearful that any increase in capacity, or announced increase in capacity, will immediately prompt a major downturn in oil prices that could wipe out any financial gains that they might hope to secure by means of increased output, and therefore of increased exports.