OPEC: ensuring an energy-secure future.

Silva-Calderon, Alvaro

For over four decades, the Organization of the Petroleum Exporting Countries (OPEC) has been committed to a set of principles geared towards establishing an energy-secure future for the world we live in. Two fundamental objectives have formed the cornerstone of its approach: maintaining oil market stability and striving to attain a fair price for the oil it produces. These goals have been intrinsic to the Organization's aims and objectives since its formation in Baghdad, Iraq in September 1960. And although OPEC has always professed that the management of the oil market should not be up to its members alone, it has made important policy decisions that have brought the industry back from the brink of a number of serious crises and has always taken this inherent "managerial" responsibility very seriously.

In fact, throughout its history, OPEC has found itself to be in the pivotal role in an often difficult balancing act- trying to guarantee adequate revenues for the producers, companies and investors alike while attempting to satisfy the needs of the consumers, especially in providing uninterrupted supplies of oil at a fair and equitable price.

It is no secret that over the years many producing and consuming countries have advocated an international oil market free of controls and outside influence.

As the last two decades or so have shown, that approach simply does not work-certainly not with something as diverse and complex as the global oil sector. Of all the commodities traded on world markets every day, oil is undoubtedly the most unpredictable and volatile. The price of international crude can crash or soar overnight. It can be affected by a multitude of factors and not solely by supply-and-demand-related fundamentals. Hype and speculation have also proved to be extremely problematic. Take the Middle East crisis for example-just the mere suggestion that the United States intended launching military action against Iraq caused the price of crude to surge in a few weeks by something like $10 a barrel, even though global supplies were more than adequate. There was no basis in the supply-and-demand picture for such a hike, yet the uncertainty of what might happen drove prices higher. So to leave such a sensitive trading environment to its own devices would, in our opinion, be a sure recipe for disaster .

However, it must be stressed that oil market management is not something new. If we look back to the early years of the twentieth century, we can see that the first moves towards attempting to balance supply and demand, which ultimately affected prices, were made by the United States Texas Railroad Commission in the early 1930s. Around the same time, the United States Congress endorsed the establishment of the Interstate Oil and Gas Compact Commission.

Both entities had the prime function of controlling production, with a view to maintaining a certain price level. Later, the renowned "Seven Sisters"--a group of major oil companies--took a stronger hold on the manipulation of output and pricing, sparking the birth of OPEC, which was mandated to defend the sovereignty and oil rights of its then five founding members.

OPEC has had to contend with a series of boom-bust periods in the oil market. In fact, a couple of them proved to be real roller-coaster events, threatening the very livelihoods of its members.

The Organization has implemented numerous mechanisms in its bid to rid the market of instability, but due to the very nature of the oil industry, volatility is still very much with us today. Of late, we have been experiencing a new cycle of instability, with the effects of the Middle East crisis and the hostilities in Iraq, one of our sovereign founders. Even though it had no real control over these politically oriented events, it did not mean that OPEC could sit back and wait for the dust to settle. It was imperative to closely monitor the situation and be ready to respond quickly and effectively to any development threatening the interests of the producers, consumers and the industry at large. We are indeed fortunate that some members have spare production capacity to respond to any supply emergency, but from past experience we know that we must not be hasty and need to carefully study the market fundamentals before arriving at any new decisions.

If there is one thing that the oil market has taught us over the years, it is that it cannot be successfully managed single-handedly. The eleven OPEC members currently control only around 40 per cent of global oil production, so it is unrealistic to expect them to cure all ills alone. That is why cooperation among and between producers and consumers is so essential for attaining a healthy and prosperous future. All producers are affected when prices soar or slump, so it is only fair that they should join hands and face any potential crisis together. Oil prices--whether low or high--do not discriminate from one producer to another. As we learned in 1998 when the price of crude sank to under S 10 a barrel, low prices are a common problem requiring common policies and actions. OPEC cannot unilaterally maintain market stability nor should it be expected to shoulder the responsibility alone. If producers and consumers do not act in a concerted fashion, the market will impose its own will, and often with disastrous consequences for us all.

So what can we do as producers of this finite energy resource, to ensure an energy-secure future? First and foremost, we must strive to keep market volatility to a minimum and ensure that prices stay at acceptable levels. We consider a price in the range of $22 to $28 a barrel as being reasonable--that is why we have adopted this as our target price band, carefully calculated as being fair for all market players.

It is interesting to note that the upper limit of $28 actually corresponds to the $1 8-price OPEC was targeting in 1986, taking into account inflation and the value of the dollar. Similarly, the $21 we were seeking in 1990 is on a par with $25 today, which is the middle of the band.

At the same time, we must try and ascertain the best measures to adopt in the face of global market uncertainty and be able to respond quickly and efficiently to any eventuality. We are also very conscious of the need to avoid adopting any measures that will add to the current weakness facing many developed economies, or impede the economic development of poorer nations.

Despite the current global situation, we must never lose sight of the fact that secure energy supply is a vital ingredient in the process of developing the economies of the less fortunate nations of the world. Something like 2 billion people currently have no access to commercial energy supplies. And when around 2.4 billion of the world's population depend on biomass for cooking and heating and 1.6 billion have no electricity, the potential scope for developing conventional forms of energy in these nations is considerable. This offers bright prospects for all players in the oil industry. It represents good business, while it contributes to poverty eradication, supports sustainable development and assists the populations to move from a dependency on biomass sources to commercial forms of energy.

OPEC is constantly looking at new ways and means of improving its market awareness. We are endeavouring to build upon the considerable progress that has been made in the international oil market over the years through the commitment of responsible producers and other principal players. Before the tragic events of 11 September 2001, we had been enjoying a sustained period of order and stability in the marketplace, underpinned by the establishment and successful operation of a transparent and widely accepted pricing mechanism. During times of market uncertainty, we must be ready to strengthen our resolve and ensure that our production policies are in strict accordance with the needs of the market. We also look forward to continued cooperation with our fellow oil producers outside OPEC, as well as with the consumer countries.

Looking ahead, oil is set to maintain its leading position in supplying the world's energy needs for at least the foreseeable future. Although some producers will eventually experince a decline in their production capacities, others will increase their share. But there will be room for all producers to conduct business. Despite recent problems, the medium- and long-term outlook for the global oil sector is for continuing growth. Looking at some of the forecasts and projections drawn up by the OPEC Secretariat from the latest OPEC World Energy Model (OWEM), estimates show that world economic growth is expected to expand by an average of over 3 per cent annually in the next twenty years, with periodic ups and downs.

More than 75 per cent of the increase will come from developing countries, where demand will double over that period. OPEC, in accounting for over 75 per cent of global proven oil reserves, will continue to play a fundamental role on the world energy scene. The OWEM figures predict that world oil demand will rise from around 76 million barrels per day (bid) in 2000 to 89.3 million b/d in 2010, to 107.3 million bid in 2020. With non-OPEC oil production in the first two decades of the twenty-first century likely to reach a plateau, OPEC member countries will satisfy most of this new demand. Our projections show OPEC producing 36 million b/d of crude in 2010, representing 40.2 per cent of global supply, rising to 52.1 million in 2020, with a share of 48.6 per cent.

Even though the status of oil is assured in the years to come, gas use, which our members also possess in large concentrations, will increase even more rapidly. The demand is projected to almost double in the next twenty years, bringing added benefits to member countries' economies. Gas has been increasing its profile as a fuel of choice. It is safe, reliable and a highly efficient source of power generation and is now relatively cheaper to produce, although expensive to transport to the consuming markets. Our estimates show that in the Organisation for Economic Cooperation and Development region, the share of gas in the total energy mix is set to rise from 21 per cent in 2000 to more than 23 per cent in 2010. By 2020, this figure is likely to be well over 25 per cent. In non-OECD countries, the upward path for gas is again similar, with its share in the mix expanding from over 25 per cent in 2000 to more than 27 per cent in 2010. In 2020, the figure is slated to reach over 30 per cent.

Of course, with this projected expansion in both oil and gas use, there is constant need for producers to keep abreast of requirements by expanding their potential to produce energy. The scale of investments OPEC members will need to make to sustain their existing production capacities and cater for the future is enormous. Our projections estimate spending of nearly $100 billion by 2010 and a massive $209 billion by 2020. For the high-cost non-OPEC producers, investment forecasts are mammoth--around $600 billion by 2010 and over $860 billion by 2020.

Looking at the Middle East, its six OPEC members--Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates--together account for 70 per cent of the total OPEC crude supply. They have combined oil reserves of 684 billion barrels and gas deposits amounting to 70 trillion cubic metres. In the years to come, their importance in satisfying world energy demand will grow considerably, making the region vital in fuelling future economic growth. It is also within the region that the extra output capacity of OPEC is located. This is an extremely important fail-safe mechanism for the international oil industry to have in place, given the uncertainty and unpredictability of the market. Despite recent problems, the Middle East region is--and will remain--a stable and reliable supplier of the world's oil.

The huge amounts of relatively low-cost oil and gas that the global economy will need to fuel its expansion are located there and in sufficient quantities. Some consuming countries have expressed concerns about this concentration of petroleum wealth and how it threatens the security of supply, but they should really see it for what it is--a secure source of sufficient energy supplies that their growing economies will need in the future.

Oil, just like any other global commodity, follows the rules and regulations governing supply and demand. However, due to the complexity of the industry and its exposure to so many prevailing influences, it is not a sector that can survive alone in a free market. It requires some form of management, as is the case in some other vital sectors such as agriculture. OPEC has always attempted to provide that service--not, as some would say, to push up prices, but to provide an enabling environment in which the industry can grow and prosper while ensuring the well-being of its member countries. This is no easy task. OPEC is striving to bring about equilibrium and fairness in the global oil sector, but needs support from producers and consumers alike. Wide-ranging cooperation among all players is an essential requisite for the future success of the industry, particularly in today's difficult environment, where supply and demand fundamentals frequently play second fiddle to hype and speculation. We also need to esta blish a fair and reasonable balance in the trading of international oil. The producers only benefit from some 20 per cent of the final price of the finished product, while many consuming governments, through high taxes, earn something like 70 per cent. Even the industry--and here I mean oil companies and refiners--on average take only around 20 per cent.

The OPEC vision for the future has not really changed since its inception, It wants a fair price for its crude to enable member countries to prosper and benefit from the development of their natural resources. But the interest does not end there--it is also concerned that the oil companies are also provided with a working environment that is conducive to the success of their operations. And lastly but of no less significance, OPEC wants consumers to be able to buy their oil at a price that is affordable and fits comfortably into their budgetary calculations. The prosperity and development of OPEC members will translate into solid and fruitful cooperation with the outside world, and that can only benefit all the parties involved. With all its past experience, the Organization is well equipped to face the new millennium in a successful and prosperous manner.

Alvaro Silva-Calderon has been Secretary General of OPEC since 1 July 2002. Prior to this, he was Venezuela's Minister of Energy and Mines, an Emeritus Professor, and a lecturer, for more than 25 years, at the Law School of Universidad Central de Venezuela.