|The Courier N° 130 Nov - Dec 1991 - Dossier: Oil - Reports: Kenya - The Comoros (EC Courier, 1991, 96 p.)|
- Working for stability in the oil markets -
Former Indonesian oil minister, Dr Subroto has been Secretary General of the Organization of the Petroleum Exporting Countries (OPEC) for the last four years. During that time, he has helped to steer this international body through a difficult period in which the oil markets have been buffeted by conflict in the Gulf, an economic downturn and growing environmental concerns.
The Secretariat which Dr Subroto heads operates from its headquarters in Vienna under the direction of the OPEC Board of Governors. It is financed by the thirteen Member Countries, each of which pays the same contribution, irrespective of size or oil production. The Secretary-General is appointed by the OPEC Conference for a period of three years, with the possibility of renewal for a further three years. Dr Subroto is currently in his second term of office.
In this interview with The Courier, Dr Subroto describes the objectives of OPEC and answers questions about some of the current challenges facing the Organization.
· Dr Subroto, how would you describe the current role of OPEC and how do you see it developing in the future?
- Well, we have to start from the beginning and that is the statute of OPEC and the objectives of the organisation. There are three things that are important. One is the coordination of the policy of OPEC member countries, the second is to maintain stability in the market and the third is to ensure an adequate supply to the consumers. These have always been OPECs objectives and they will remain so in the future.
In July 1990, we stipulated our policy for the next decade and there are certain principles that we mentioned then. First of all, is the principle of dynamic stability, meaning that we want to see a gradual increase in prices that reflect the world economy, inflation and so on. The second principle is that we follow market-related pricing. In other words we do not fix the prices - that is something which of course is not practicable in a situation where OPEC is only producing 23.8 million barrels a day while non-OPEC production is something like 29 million barrels per day. The third principle is that of optimisation of revenue. In other words, if and when prices go up, or growth goes up, we will increase both the price and the volume produced so that not only one group of countries will benefit from the improvement in price. The last principle is that we want to ensure that oil remains an important energy source in the coming decade. That means that we have to fine-tune it in such a way that the price relationships between oil, coal, gas and other energy resources is right. So, the answer to your question is that OPEC will remain an organisation which, I think, will be important and necessary for the member countries but also for the world at large because we are aiming at stabilising the price through adequate supply to the consumers, while at the same time assuring a steady income for the producers.
· To what extent does OPEC, in its policies and activities, take into account the interests of developing countries, whose economies are dependent on imported oil?
- Well, here, what we are aiming at is stability - stability in prices and trying to avoid the violent fluctuations that you have seen in the past. The widely fluctuating prices that we had in the 1980s was good for neither producers nor consumers whether in the developing world or in the industrial world. What we are aiming at is to match the supply with the demand in such a way that we ensure a stable price, to the benefit of the world at large.
· Do you think that the influence of OPEC in the world is as strong today as it was, say, 15-20 years ago?
- I would not venture to say that it is stronger or weaker or about the same. What I would say is that OPEC as an international organisation will continue to have a useful function in the world by aiming at price stability. This can be achieved by better cooperation between the producers, the consumers and the major players in the oil industry.
· I see from some of your recent speeches that you have an interest in environmental issues. Obviously, concerns about pollution and the burning of hydrocarbons are now firmly on the political agenda in most developed countries. How do you think this is likely to affect the markets for oil and gas products over the next decade and in what way is OPEC involved in specific measures to tackle the environmental problem?
- The environmental problem will certainly add a degree of uncertainty in the oil market. The reason for this is that the measures being taken by the industrialised countries under the environmental guise are primarily aimed at reducing consumption of oil. This will, to a certain extent, influence the security of demand. We do not know what the effect of environmental policies will be on the demand side. Clearly, if the industrialised countries continue to pursue administrative, regulatory and economic measures aimed at oil, demand for it will go down. On the other hand, we see that the policies of industrialised countries designed to reduce oil consumption have the effect of slowing down economic growth and development in the developing countries. So the effect will be worldwide.
Looking particularly at the developing world, we see that the increase in population and the aspiration of these nations to improve their standard of living is bound to increase the demand for oil. What this means is that you have here two opposing forces; On the one hand, there is this effort to reduce consumption but on the other, we see the pressure of increasing demand for oil in particular. Oil producers have to weigh up these two forces. The question is; to invest or not to invest? And if there is a certain hesitation to invest, on the part of producing countries, because of this uncertainty about future demand, we may face a certain shortage of supply in the middle of the decade.
· On a related point, you delivered a speech in Tulsa in which you talked about adverse and discriminatory public policies in industrial countries which are aimed at reducing oil demand irrespective of the resulting sub-optimal transition in the world energy mix. You went on to call for these policies to be removed from the rules and regulations IEA member states. What policies in particular were you referring to?
- Clearly, there is fiscal policy. You know that oil is new heavily taxed - in certain countries the tax is twice the price of the oil itself and that is discriminatory because at the same time, for example, coal is subsidised. Policies such as these distort the allocation of resources and are certainly to the detriment of the oil producers. There is now talk about imposing a carbon tax, on top of the gasoline taxes already in place. So you see there is a clear bias against oil vis-is other energy resources and we do not think that this is fair.
Discrimination in taxation
· Do you not think that such an approach may be justified in an environmental context so long that it is not discriminatory as regards other forms of hydrocarbon pollution?
- You know that coal emits more fumes than oil and in a way more than gas. But what we see at the moment is that oil and oil products are particularly heavily taxed, while coal is subsidised. So there is a clear discrimintaion in taxation between different forms of energy. We are also concerned about CO2 emissions but we know too that there are still many questions to be answered. The scientists are not quite clear about the fact or the extent of global warming, when it will happen and by how much the temperature will increase. It is more or less the consensus of the industrialised countries that only by taxing oil heavily, can you reduce the CO2 emissions below the 1990 levels by the generally accepted target date of 2005. But if you tax oil that heavily, then something must give - and that something will be economic growth and development.
· On a more political note, in what way did the conflict in the Guy affect OPEC, given that both Kuwait and Iraq are members of the organisation?
- First of all, I must state that OPEC is an economic organisation and that it continues to act in an economic fashion. So, in a way, the political conflicts that have taken place, like the war between Iran and Iraq and more recently between Kuwait and Iraq have not changed the character of OPEC as an organisation. We have continued with business as usual because we talk about the economics of oil and not about the political problems between countries. But of course, in another way, the war in the Middle East has had a profound effect on the oil industry. The fact that between four and four and a half million barrels per day were taken out of the supply because of the UN embargo meant that other OPEC countries had to increase their production in order to fill the gap. On this issue, we like to show to the world that OPEC is a responsible organisation. Had we not increased production, prices would have gone out of control. We decided to forego that because we wanted to stabilise the price and it should be noted that only OPEC was effectively in a position to do this because non-OPEC countries were already producing at almost 100% capacity. As a result of OPECs action, the situation right now is that most of the producer countries, bath in OPEC and outside, are producing at their limit. This means that if something happens on the supply side or on the demand side that influences or disrupts the balance, then you will have a disequilibrium which will affect prices.
· Presumably on the supply side, one might envisage Iraqi oil coming back on stream in the not-too-distant future. What effect is that likely to have on the market?
- We know that this is a political situation, but looking at it from the technical aspect, I think Iraq will eventually have the capability to return to their pre-war production which was somewhere between three and four million barrels per day. Currently, Iraq needs 400 000 barrels per day for domestic consumption and has the ability to produce one million barrels daily. Their ability to return to pre-war production levels is a function of at least three things. One is the resource availability and I think that Iraq has the potential in this area. The second is the need for capital to repair the damage which has been done to production and maintenance equipment. Of course, on this point, we have to take into consideration whether the capital will be forthcoming or not. Finally, there is the political aspect whether-the UN will lift the sanctions. So, there are still a lot of uncertainties. But suppose Iraq comes into production again in 1992 and perhaps at the same time Kuwait gets back to its pre-war production level. That clearly means that there will be significantly more oil on the market. At the same time, we need to look at the other side of the equation - and that at the moment means the production situation in the Soviet Union. We hear about the continuous decline and perhaps even the near-collapse of Soviet Union production. Nor do we think that this can be corrected in a short time through the influx of capital and technology from the West. The political situation must be stabilised first. So these are the two aspects which we shall have to weigh carefully during 1992.
A third factor that influences the outlook for 1992 and beyond is the extent to which the world economy develops. Assuming that we are able to overcome the recession, and I am sure this is already taking place, we can expect world demand to increase in 1992-93. Current estimates are between 2.8% and 3% annual growth. Translated into oil consumption, this means that annual demand will increase by something like 800 000 to I million barrels per day. SO, these are the factors that we have to look into to be able to see the supply and demand picture in the coming years.
· It was widely reported in the press recently that Saudi Arabia was thinking of leaving OPEC. What is the background to this story and is there any truth in it?
- I would take it with a grain of salt. OPEC is an organisation where sometimes very frank exchanges of ideas take place between the Ministers. I am convinced that OPEC needs Saudi Arabia as Saudi Arabia also needs OPEC.
OPEC - a model for other commodity suppliers?
· A lot of developing countries are reliant on raw materials for their economic development. A feature of recent years has been the low prices which these materials have obtained in the international markets and this has had adverse consequences on the economic development of these countries. What do you think of the idea which has been put forward by some people that OPEC-type structures should be set up for other commodities?
- Well, first of all you have to realise that oil is not coffee, or tobacco, or copper, or pepper or peanuts. Oil is a political commodity. It has important strategic and political significance which is not the case say with tin or cocoa. No commodity has the value of oil. I think that trade in oil amounts to something like 300 billion dollars and no other commodity can match that.
We should also remember that there are already many forms of what we would call producers associations - where producing countries get together and form an organisation to work for the interests of their particular commodity. For example, we have a tin agreement, a rubber agreement and a copper agreement involving types of producer association similar to that of OPEC. But we know that they cannot be compared with oil in terms of importance; in other words, in terms of volume. These commodity associations have tried to apply what they call buffer stock operations, by buying and selling when the price is below or above a certain target price. It may be a good idea in theory, but in practice we have seen that it does not work. So this attempt to copy, if you like, the experience of OPEC is not a new idea. In fact, it began in 1975 when there was a lot of talk about a new international economic order. Commodity agreements were born at that time, but the outcome of the experiment was not very encouraging.
Interview by Simon HORNER