Printer Friendly

Assessing the outlook for oil in the short, medium and long-term.

At the beginning of a New Year, Dr. Subroto, Secretary General of the Organization of Petroleum Exporting Countries, outlines OPEC's view of developments in the oil market during 1993 and beyond.

The price and supply of oil and gas may at times be relatively stable, but it is seldom static. There are simply too many factors at work to allow us to make long-term predictions which can be left on a shelf and trusted to remain unchanged. There are always areas of the world, and areas of the oil and gas industries, which are enjoying growth while others are in decline. Even at the best of times, when economies are operating smoothly and markets are calm, we must expect the unexpected. This is more true at time like these, when the strongest of economies around the world are stalling and demand is subsequently sluggish, even if this is only a short-term phenomenon.

I believe that OPEC plays as useful role in these times by not only emphasizing the stability of prices, but also by continuing to ensure that the supply of oil is reliable, not only in the short term, but also in the longer term, despite any short-term demand fluctuations. OPEC Members demonstrated their commitment to stability and reliability as recently as November 1992, when the Oil Ministers of OPEC Member Countries met in Vienna to consider the outlook for 1993. The short-term market for oil last November was dominated by rising stocks and falling prices. The OPEC Ministers agreed to address these problems by imposing a voluntary production ceiling of almost 24.6 million barrels per day - excluding Ecuador - for the first quarter of 1993, which involved temporary allocations of production levels for each OPEC Member. That agreement should eventually calm the market when Members give adequate signals that they are implementing the agreement.

The short-term outlook facing OPEC Ministers in November was defined by OPEC's Economic Commission Board as follows:

World economic growth was estimated at 1.5 to 2.2 per cent in 1993., which meant that world oil demand was estimated at 65.35 million barrels a day, up from 64.8 million barrels in 1992. The total of non-OPEC supplies and worldwide natural gas liquids was assumed to decline slightly, which meant there would be a call on OPEC oil and stocks of 24.9 million barrels a day in 1993, which is 1.2 million barrels a day higher than for last year.

We should recognize that various early predictions which were made for a vigorous global economic recovery were too optimistic. Although the forecast economic growth rate, on which OPEC has based its prediction of the growth in demand for 1993, is better than for 1992, it is still well below the rates witnessed in the late 1980s. Thus we cannot expect such a vigorous rise in oil demand as in the late 1980s.

General issues which may particularly affect the oil market in the near term include the following:

* economic uncertainties in the United States, Europe and Japan, and particularly the impact of the policies of the new US administration;

* the uncertainty of supplies from the Commonwealth of Independent States and the possibility of higher production from the North Sea;

* any variance in normal weather patterns; and

* movements in the level of world oil stocks.

In the context of the above, it can be observed that many officials of the CIS have recently stated that they do not foresee any improvement in the production picture in 1993. While production will continue to decline, the need for hard currency may compel the CIS members to reduce domestic consumption in order to maximize their exports. Consequently, the ability to reduce internal demand, together with the general economic situation in the CIS, will determine the overall impact of the CIS on the world oil market.

Overall, the market is not expected to be especially volatile in the first quarter of 1993, or indeed for the rest of the year. However, as I have said, we must expect the unexpected. There are many factors affecting the oil market in the short, medium and longer terms, apart from the simple balance of demand and supply: issues such as the re-entry of Iraq into the market and the extent of OPEC's accommodation of Iraq's exports, the taxation of oil around the world, regional trade and sustainable development of developed and developing countries and environmental issues.

At the November Conference, the OPEC Oil Ministers reaffirmed their support for continuous and closer cooperation between OPEC and IPEC, the Independent Petroleum Exporting Countries, with a view to strengthening the oil market. The Ministers also welcomed the continuing dialogue between oil producers and consumers, and encouraged OPEC Members to have an active role in the growing environmental agenda.

Although OPEC's Members have many other issues to consider, their main short-term objective continues to be the stability of the oil market. This should come as no surprise to those who know the Organization well. After all, the stability of the oil markets and the steady supply of oil to consumers is a fundamental guiding principle of OPEC, and it was mandated in OPEC's founding statutes more than 30 years ago.

These principles are being upheld despite the erosion of oil income due to inflation and currency fluctuations. The volatility of currencies was particularly apparent just a few months ago and it had various repercussions on the oil industry, reflecting different locations and operations OPEC Members' immediate concerns were for the relative strength of the American Dollar, to which the price of oil is pegged.

The fluctuating value of the dollar has a considerable impact on the earnings of our Members. For instance, we saw an improvement in the spot price for the OPEC basket between March and August 1992 of 46 cents per barrel, but the real price, adjusted for exchange rate movements and inflation, actually fell by 53 cents per barrel. Thus the price in money terms exaggerates the real price by almost one dollar or five per cent.

The average price for the OPEC basket in the first nine months of 1992 was only $ 18.35 per barrel - well below the current reference price of $ 21 a barrel. This reference price for the OPEC basket of crudes was first set in 1990 and has been reaffirmed many times since. Had it been adjusted to keep its real value, the nominal price would now be closer to $ 25 a barrel. The effect of this inflationary pressure over the long-term is partly demonstrated by the fact that the price of oil now is less than half of what it was, in real terms, in 1974. Despite these upheavals, OPEC Members have maintained dollar-pricing and avoided sudden adjustments which could upset the market. We continue to seek positive measures which reinforce our market position and help us in our goal of achieving a stable and realistic income with minimal disruption.

An important element in achieving these aims is the stability and growth of demand. This hinges greatly on the level of economic activity in both the developed and the developing world. The growing economic activity in both the developed and the developing world. The growing economic difficulties facing the world do not provide a strong stimulus for the growth of oil demand, both in the short and medium terms. This ultimately would result in lower incomes for producers-a situation that could slow down the pace of their economic expansion and even diversification.

The Medium-Term Outlook

In the medium term, as I will now discuss, these difficult economic conditions could have a negative impact on investment which would hamper the necessary growth of supply. Given stable markets and moderate economic growth worldwide, OPEC's forecast for the medium term suggests that the balance of supply and demand for the period up to 1995 will result in an increase in the call on OPEC oil to a little under 28 million barrels, an increase of 4.0 million barrels a day over the period.

Assuming that OPEC Members on average utilize only 90 per cent of their production capacity - a level of utilization that could be used to define the sustainable volume of production, taking into consideration maintenance and other disruptions - then our Members will require a production capacity of 32 million barrels a day by 1995 in order to satisfy the expected level of market demand.

Should OPEC Members - and their customers - seek a wider safety margin, then production capacity will need to be even higher. To achieve this will require a substantial investment in exploration and development of new and existing fields - sooner rather than later. The finance would need to come from OPEC Members themselves and foreign investors. The investment would be forthcoming only if a healthy level of demand builds the prospects for a good return on capital.

However, there are a number of pressing issues which could threaten or distract us, especially in the medium term from recognizing the need for expansion of our production capacity and the maintenance of adequate oil reserves. The various policy measures that are being contemplated to tackle environmental problems, such as the issue of a Carbon/Energy Tax, the European Energy Charter and the accelerated development of energy resources in the former Soviet Union are important factors that OPEC needs to monitor in the years ahead.

We must tackle inappropriate regulations, such as the Carbon/Energy Tax. We know that this tax, which has been proposed by the European Commission, would not necessarily improve the environment and could harm the EC's domestic economies. Most probably, the tax would simply increase government revenues without necessarily reducing greenhouse gas emissions, especially if coal continues to enjoy subsidies. This is an issue which is often more influenced by politics than by economic or environmental concerns, as we have seen recently in the failed attempt to restructure the British coal industry. OPEC's aim is to avoid the mixing of domestic politics of oil consumers with trade, and moves which would shift oil revenues away from producers to the government of consuming nations.

Uncertainty about the impact of environmental proposals and the pace of economic development around the world leads to uncertainty about the demand for, and the price of OPEC oil. The level of demand must be predictable if the necessary investment is to be pledged to explore and expand production capacity in developing countries.

Many regions are competing vigorously for investment in their oil sectors and investors must choose the best profile of returns on investment. International oil companies, which form the bulk of such investors, have the added motivation of ensuring continued supply for their downstream industries and they will thus benefit substantially from any region where exploration will result in large and cheap oil reserves.

OPEC Member Countries offer the best prospects for oil exploration and extraction. There are many reasons for this, including the huge proven OPEC oil reserves, low extraction costs and favourable economics. The largest growth in oil production capacity in the 1990s is expected to come from OPEC Member Countries, particularly those in the Middle East - and for good reason.

The world's proven oil reserves now stand at over 1000 billion barrels, of which OPEC Members hold 77 per cent. The reserves-to-production ratio of non-OPEC countries is only 16 years, while the average in OPEC Member Countries is more than 90 years. More importantly, the per-barrel cost of expanding capacity in OPEC regions, particularly in the Middle East, is the lowest in the world, as is the cost of maintaining current production.

Investors cannot deny the attractiveness of OPEC's geological potential and their superior prospects for higher returns on investment. Investors need to take into account the probability of success, the size of the investment, the technology required and the political risks, and balance those against the fair and reasonable rate of return required. This should be combined with a just respect for the social, economic and political conditions of the producing country, as it is only with a sense of mutual trust and respect that investors and producers can hope to enter into a successful partnership. In most OPEC countries the high probability of success and the rather short pay-back times combine with sufficient degree of security to yield a very low risk for oil investors.

In contrast to this attractive region, we can consider the situation in Eastern Europe and the members of the Commonwealth of Independent States. The European Energy Charter has attempted to provide a working structure for energy development in the East European and CIS countries. However, it should be remembered that not only are the reserves in these countries much lower than those of OPEC, but that these countries are likely to become major consumers and therefore their net contributions to world oil exports will not be sustainable. Other factors which should be considered by investors are the costs, logistics and political environment they will face; these cannot be more favourable than those in OPEC Member countries. We therefore believe that OPEC Member Countries provide a far more attractive and reliable source of supply, particularly in the long term.

The Long-Term Outlook

Nobody can deny that there will be a growing demand for oil, which will remain the single most important commodity in the energy markets for the foreseeable future. The world economy is expected to enjoy sustainable growth of 2.5 to 3 per cent every year until 2010. The world's population is expected to grow from 5.3 billion in 1990 to more than 8 billion by the year 2020. Much of this growth will be in developing countries which will need a lot more energy.

The 15th Congress of the World Energy Council in Spain last year concluded that despite improving energy efficiency and attempts to promote the use of alternative fuels, oil's share of the total energy mix should show only a moderate decline and will still be the single largest source of energy in the world for at least the next three decades. Oil will be major factor in world energy over the next three decades whatever the scenario - whether it is business as usual in the world economy, a period of low growth, or even a period when renewable energy systems are encouraged.

The growth of oil in absolute terms will allow the oil market to remain stable despite the relative decline in its market share. The growth in overall energy demand, particularly for oil, will be strong in developing countries where total energy consumption is projected to rise by up to 250 per cent by the year 2020. Total worldwide energy demand will also grow appreciably over this period. Renewable forms of energy will increase their market share over the next few decades but will still not be comparable to conventional forms of energy. Among the conventional sources of energy, the use of nuclear energy, and gas in particular, are forecast to increase substantially.

Due to the various growth factors I mentioned earlier, the use of energy, including oil, will grow in spite of concerns about short and medium-term economic growth, environmental protection and rather ambitious assumptions about improving energy efficiency.

As the World Energy Council pointed out there are many good reasons for making sure that affordable energy continues to be made available to consumers, especially in developing countries. Despite long-term issues such as environmental protection, our first priority must be people - especially people who are living in poverty in the developing world. Affordable supplies of energy are fundamental to securing the economic development of these people and to improving their living standards and basic services. Only those people who are enjoying economic development can afford to concentrate on long-term objectives such as the control of population growth and environmental pollution.


In the short and medium term, we can expect to see a balanced market. This will result from stable supply and demand and reasonable prices. This balance may change over time, but oil will continue to play a fundamental role in the global energy market in the long term. We in OPEC have an important role to play in maintaining the balance of market forces and we will continue to emphasize the balance of supply and demand and the stability of prices at a reasonable rate of return for our Members and those who invest in our industry.

There are many issues demanding our attention in the short term, in the medium term and increasingly in the longer term. OPEC will continue to devote considerable resources to research and analysis and to communicating its views in order to promote stability in the face of these challenges.

However, OPEC does not act alone. We want to encourage the widest possible dialogue on issues such as environmental regulations, sustainable development and global trade, and we want to foster the growing dialogue between producers and consumers and between governments, private industry and special interest groups. We believe that our Member Countries provide the most reliable solution to the future demand for oil. We firmly believe that, based on mutual understanding and respect on both sides, investment in OPEC Member Countries will be very attractive financially for all those involved.
COPYRIGHT 1993 Economic and Industrial Publications
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Publication:Economic Review
Article Type:Industry Overview
Date:Feb 1, 1993
Previous Article:Future of lubricant industry is bright - Anwar Javed.
Next Article:PPL's dynamic exploration world - 1989-1992.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters