General outlook for the oil market

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.