General outlook for the oil market

By Subroto

The following is the first of a two-part article based on a paper presented by Subroto, a former secretary general of the Organization of Petroleum Exporting Countries, at the 1994 Annual Indonesian Petroleum Association Convention on Oct. 4 in Jakarta.

JAKARTA: Although oil remains a strategic commodity in the world economy, there are new trends discernible that should attract our attention. There is a clear tendency that the perspective and the role that oil plays on the international arena has changed considerably. There are striking contrasts in several key concepts regarding the workings of the oil market. In fact, these contrasts themselves provide the signposts and key driving forces into the coming decade. What are the changes that have taken place in the last couple of years?

Proven oil reserves in 1994 are right now over 1 trillion barrels, compared to 625 billion barrels back in 1973. You do not hear people talking anymore about shortage of oil. Exploration in Africa, Latin America and Asia has taken place. Discoveries in other areas of the world led to rising production to somewhat balance the weight of the Middle East producers, although the majority of the world reserves remain in that region. In a way, there is a feeling of complacency that the world somehow is awash with oil.

For the third time oil producers and consumers sit together in Cartagena, Spain, to talk about energy interdependence, after having met in Paris in 1991 and in Solstrand, Norway in 1992. Although the meeting so far are more "public relations exercises", more and more there is the awareness that neither availability of oil supply at low cost nor steady rising demand are predetermined, but both are driven by economic forces. Exchange of ideas, meeting of minds, coordination and communication, can bring more understanding and transparency between the two, hopefully, leading to less uncertainty and more predictability of the future.

Although oil remains a strategic and a political commodity, through the rise, the flexibility and transparency of the futures market, the functioning of the oil market has been changed in a fundamental way. Not only is oil carried in super tankers around the world, but electronics carry it in real time through the trading rooms on every continent. Thanks to this media, the oil price adjusts very swiftly to changes in supply and demand, and in so doing considerably smoothens the oil price violent fluctuation. In most cases oil is not traded by term contracts or spot market, but more and more through NYMEX in New York, IPE in London and SYMEX in Singapore.

Today, environmental concern commands central attention in many countries. Whether one agrees or not with the focus, speed and intensity of environmental policies, the oil industry can ignore this issue only at its own peril.

Many industrialized countries have implemented energy taxes, strict emission control regulations, energy diversification and conservation, to combat pollution. In many cases, taxing hydrocarbons is motivated by revenue considerations and has nothing to do with environment. In results in the siphoning of economic rent that should be received by oil producers.

In 1993, for instance, European Community countries, received $200 billion in taxes on 11.8 million barrels of oil products they consumed, compared to $74 billion that oil exporters earned from the same amount of oil. In this context, the question should be asked, is the carbon and energy tax, initiated by the European Community, still alive.

The German Environment Minister Klaus Topher, a backer of the tax, told the European Parliament recently, that he would continue to push for the levy during the German Presidency of the European Union, which ends in December. Demand for a carbon- energy tax came also from the European Commission President Jacques Delors, but sofar the EU Finance Ministers are still lukewarm.

Efficient use of energy is now the catchword and it has changed to a considerable extend the lifestyle and habits of many energy users in the West, reducing significantly the amount of oil and energy they consume. The industrialized countries have been able to de-link the use of energy from economic growth and this decrease in energy intensity continues to be a key factor in oil demand. Energy intensity, i.e. the quantity of energy used to produce one unit of gross domestic product (GDP), according to some estimates, will decline by about 25 percent in the coming 25 years.

Oil intensity will decline even further, namely by 40 percent during the same period. This explains why oil demand in industrialized countries are flat, while their economies are still growing. Newly industrializing countries in the developing world are not yet able to do that. On the producers side this ethic is also clearly evident. The expectation that the oil industry will have to work in a low price environment and severe competition, compelled the industry to reduce costs in all sectors, to restructure their organization and to apply cost- saving technologies.