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The 1990's a decade of growth.

In my address to this Conference 12 months ago, I stressed the need to restore crude oil prices to OPEC's reference level of $18 per barrel, and emphasized that this was the responsibility of all producers in the market. Oil prices, based on our Organization's reference basket, had fallen from $18.1 per barrel in the first week of October 1987 to $10.6 barrel in the first week of October 1988, a decline of mor than $7 per barrel in the space of one year. Since then, our November 1988 agreement has paved the way for a rallying of prices to around our $18 per barrel reference level -- a target which was reached by April 1989. There have since been fluctuation around this level.

Other factors have also played a part in buoying up the market this year, most notably the removal of significant levels of non-OPEC supply, partly as a result of unfortunate accidents in Alaska and the North Sea. These accidents have highlighted the dangers of extracting oil from the more remote, difficult and environmentally-sensitive areas of the world. While the market has by no means achieved the desired level of stability, there has nevertheless been a clear improvement over the seemingly intractable uncertainly of 1988. Therefore, with just a few eeks remaining before the start of a new decade, we must surely all be asking ourselves what we have to look forward in this most dynamic of global commodity sectors.

The most obvious starting point on which to reflect, and probably the most alarming, is the projected rise in the world's population. This passed the one billion mark early in th1 8th century, doubled again by around 1930, and reached five billion in mid-1987. According to World Bank projections, it is expected to exceed six billion in the year 2000, with almost the entire increase concentrated in the developing countries. If the standard of living of these people is to be raise, then the economic repercussions will be enormous and will clearly have a significant impact on energy demand.

The next step is to predict the average growth rate for the world's market economies. We believe that, if the present inflationary trends in the industrialized countries are kept under contro, the economic growth rate could lie between 2.5 per cent and 3.0 per cent over the next five years, and possibly remain at around 2.5 per cent until the turn of the century. This is based on the likely continuation of the average growth rat of slightly above 2.5 per cent so far in the 1980s, and of 3.3 per cent in the recovery years since 1982. With a projected annual average growth rate of five per cent per year, the newly industrializing countries per year, the newly industrializing countries are expected to out-perform the OECD countries, whose rate will be much closer to the world average.

Energy Demand

Let us now look specifically at energy, and assume a scenario in which, as of 1990, the crude oil price remains constant in real terms at $18 per barrel. We must acknowledge the structural changed in the advanced economies, which have led to the appearance of less energy-intensive industries, thus reducing energy demand per unit of future economic growth. Bearing all this in mind, we project world demand will increase from the existing 100 million barrels of oil equivalent per day to about 120-130m boe/d by the turn of the century -- indicating an annual average growth rate of about 1.7 per cent. Regionally, energy demand growth in the OECD will decline gradually from the present two per cent per annum to about onep er cent by the year 2000, while, in the developing countries, due to their lower per capita energy base, it will remain above two per cent. It will average about 1.5 per cent in OPEC Member Countries during the 1990s.

Oil's share of the total energy mix is projected to fall by two per cent to about 46 per cent by the year 2000, while that of gas will increase by four per cent to 22 per cent. While we expect coal's share to decline slightly from today's level of 22 per cent, the combined share of nuclear and hydro will stay about 11 per cent, or even drop slightly. However, in absolute terms, world oil demand is projected to continue growing from 51 m b/d in 1989 to around 58m b/d by the year 2000, with the OECD countries accounting for about 3 m b/d of the increase, and the developing countries the remaining 4m b/d.

OPEC's share of the world oil trade, which has fallen heavily during the present decade, to a low of 40 per cent in 1985, is expected to rise from the 1988 level of 46 per cent to reach 54 per cent by the end of the centruy, bringing our Member Countries' total supply to 30m b/d from 21-22 m b/d today. Conversely, non-OPEC supplies are projected to fall by 2m b/d in the same period.

One anomaly which expected to be ironed out to a large degree by the year 2000 is the siezeable imbalance between reserved strength and current production levels. In 198,, 84 per cent of the world's known recoverable reserves of 908 billion barrels were located in OPEC Countries. Moreover, the chances of making significant new discoveries are considered to be much higher in the OPEC region than in other parts of the world. And yet our Member Countries accounted for only 46 per cent of world production last year. In other words, non-OPEC countries are producing well over half the world's oil output from less than one-sixth of its total reserves. reducing thelifespan of their reserves to a much lower level than ours -- about 18 years, compared with more than 100 years for OPEC's. Thisi s, of course, a situation which cannot continue indefinitely.

On the face of it, therefore, the outlook for the international oil market during the 1990s is a healthy one, with an appreciable expansion in its size anticipate, even if oil's share of the overall energy mix declines marginally. At first flance, it would appear that themost likely beneficiaries of this will be those oil producers, principally Members of OPEC, which have the capacity to take up the slack in the market, as it arises. But, when one examines the issue a litt more closely, one can see that consumers will also gain from the fact that there will be plenty of oil around well into the 21st century to enable them to fuel their existing industrial enterprises, without radical restructuring. Nevertheless, this potentially favourable situation can get out of hand so easily if no firm multilateral measures are adopted to contain the purely laissez faire approach to oil market management.

This dichotomy has generated the core of OPEC's message throughout most of the 1980s -- that stability is vital for the future health of the international oil market, and ipso facto the world energy industry at large. But stability will not come of its own accord. It must be strived for by peole with the future welfare of the international oil market at heart. Uncertainty is a scourge to us all, except perhaps thelucky speculator. Therefore OPEC as an Organization once again urges its many colleagues in the industry to co-operate with it in attempting to bring about this stability. The 1980s has been characterized by an abundance of losers in the international oil market, whether through direch involvement in its operations or through such peripheral phenomena as massive debt problems and bankruptcies attributable to the perpetual market weakness and uncertainty, most notably in 1986. There is no need for a repetition of this in the 1990s; we do have the means at our disposal to prevent a recurrence of this disorder.

Permanent Quotas

At OPEC, we are taking measures to put our own house in order. The quota issue has remaind a stumbling block to our Organization's cohesiveness, and this has undermined our ability to stabilize the oil market. Despite the complex nature of thisproblem, our Organization has, from time to time, come up with temporary solutions which have engendered a certain degree of market stability -- particularly at critical periods when the world has sung OPEC's nunc demitis. Las month's meeting of our Ministerial Monitoring Committee in Geneva once more took a hard look at this problem. Judging from the open mindedness that characterized the meeting and the genuine desire by all those present to resolve this issue, I am more convinced than ever that a permanent solution is in sight. Such a solution would go a long way towards adding nes life to the Organization, and putting us in an enviable position to face up to the new challenges of the 1990s.

We have been greatly encouraged by the fresh new attitude to co-operating shown by many non-OPEC producers this year, and believe that this augurs well for the 1990s. This more co-operative stance has perhaps been prompted by memories of the devastation caused to their oil industries by the 1986 price collapse and, more recently, the severe market downturn in 1988 -- situations aggravted by the continuous erosion of the purchasing power of the dollar. The US currency's steep decline during the middle of the 1980s had a disastrous impact on our oil revenues. Not only did the oil price fall, not only did we see our market share cut by more than a third in the short space of a decade, but the dollar-denominated revenues which we did receive had greatly reduced purchasing power.

The breakthough in co-operation appeared to come at the beginning of this year, at the meting in London between technical experts from our Organization and 13 non-OPEC oil-producing reas, with a view to developing and strengthening efforts to achieve durable stability. These producers came from both the industrialized and developing worlds and politically speaking the East and West. A month later, many non-OPEC participants announced plants to cut exports in support of our Organization's actions.

The enhanced involvement of the Soviet Union and some of its traditional Eastern European trading partners, presages a radical transformation of the world's energy supply and demand structure during the 1990s. If the present relaxing of East-West trade barriers continues, then the Soviet Union's position as the world's leading oil producer, together with its abundance of natural gas, will have a profound impact on world energy supply patterns. The spirit of glasnost will affect demand in a similar manner. This new order may mean that we shall soon have to incorporate the Soviet Union and its traditional trading partners more directly into our global analyses.

Moreover, there is likely to be a continuation of the present tendency towards readjusting some of the customary divisions within the supply side of the international oil industry. In recent years, for example, some of our Member Countries national oil companies have been consolidating outlets for their crude and products, by setting up refineries and petrochemical industries within their own borders and acquiring downstream assets in consumer markets, especially in the United States and Europe. Such activities are expected to abound.

Regardless of how the industry may develop during the coming years, I should like to reassure you that OPEC's principal resolve will continue unchanged into the 1990s -- namely, the achievement of a stable, orderly international oil market, with equitable returns for its multifarious participants. The indications are that oil will remain the world's most strategic, versatile and comparatively speaking, cheap and abundant energy resource well into the next century. Its role will remain central to the welfare of industrialized society, and we shall retain our firm conviction that a means must be found of utilizing this steadily depleting, finite resource in the optimal manner. This will involved all the interested parties con-operating with each other. Consumers must be prepared to offer producers fair, predictable levels of demand, unimpaired by restrictibe trade practice. In return, producers will seek to guarantee security of supply.

Future energy policies will clearly have to acknowledge the very real and serious issues involved in the realm of environmental protection, if remedial action is to be effective. We must seek to expand our knowledge about the true causes of many of the environmental phenomena, which are not, of course, all energy-related. The scale of the problem is immense, with both local and global connotations, and we cannot, therefore, expect cheap solutions. Furthermore, while we should take immediate action where possible, we are also talking about a long-term problem requiring a long-term solution.

Policies based on emotion or short-term financial advantage rather than sound scientific grounds of longer-term economic realities will only result in unnecessarily expensive and wasteful energy exploitation, with the econcomitant uncertainy on the world's commercial and industrial landscape. We should endeavour to adopt policies which will bring about global economic growth within the context of a clean and invigorating environment. Such policies must necessarily entail the provision of secure energy supplies at fair and moderate prices. We in OPEC are willing to contribute towards the achievement of such a noble objective in the 1990s
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Title Annotation:Dr. Subroto's address
Publication:Economic Review
Article Type:transcript
Date:Feb 1, 1990
Previous Article:PERAC and hydrocarbon industry.
Next Article:Occidental of Pakistan.

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