Global Prospect, Global Responsibility

Severn years after the second summit, OPEC’s third summit was held on 17^th and 18^th of November in Saudi capital, Riyadh.

The atmosphere of this summit was totally different from that of the second summit. Know every barrel of oil has a price of approximately 100 dollars, compared with 10 dollar barrels at the time of the second summit. Demands for oil are increasing day by day. The geopolitical conditions of the world have changed after 11^th of September 2001 and they have influence circumstances of key oil producing countries of the world.

Meanwhile, concerns about global environmental conditions have become deeper and more serious. All this happen at a time when economic developments in internationalization and globalization era are affecting oil and the economy of oil-producing countries more and more.

An initiative was introduced by Saudi Arabia during the third summit. In fact, for the first time a group of non-governmental experts of OPEC members, familiar with international economy and energy were provided the chance to discuss various issues of this key domain along with ministers of petroleum and officials.

The writer, who was also invited to the summit as a non-governmental expert and chaired the main session of ministerial symposium of “OPEC and the Global Economy”, tries to point to some of the main topics of discussion.

 

There are some key points about the price of oil. Firstly, there are always a group of experts who believe that since oil is non-renewable and finite, the price of this vital material must be even more that the current price. Therefore they continuously ask for an increase in oil’s price. Second, some believe that the current price of oil is not real since dollar has become weak. Although every barrel of oil costs approximately 100 dollar, if measured with the real, invariant price of oil, its price is no more than 45 dollars of 1980. In other words, continuous fall of dollar’s value that has accelerated since last year, is the cause of oil’s high price and this price has nothing to do with OPEC decisions. Third, is fluctuation of oil price. These fluctuations are harmful not only for the countries which consume, but also for producing countries. Rise of revenue increases consumption in oil-producing countries and addicts them to high revenues. Therefore when revenues fall, these countries will face stagnation.

The outcome of this procedure is substantial budget deficit, debt, and inflation. Therefore, both producers and consumers are willing to minimize the fluctuations. However, although many of the key market factors such as supply and demand that are the basis of future prices can be projected, these factors are influenced by various economic and non-economic elements. For this, it is very difficult to hand out a reliable evaluation.

One of the other major issues is to separate current increasing prices from supply and demand. In other words nowadays the price of oil is dependent on notes transactions in financial and commodity markets rather than supply and demand. This is a challenge that must be probed and resolved by consumers and producers in future.

 

Security in purveyance of oil is probably the main concern of consuming countries. That may even be the major reason of fluctuations in oil price. According to projections, 118 million barrels of oil must be provided for the markets by 2030. That number should be 106 million barrels by 2020. The most important question here is: is the security of purveyance an independent factor, free from other factors. The answer is: this security inevitably depends on security and level of investment in oil-producing countries. Investment, in turn, depends on geopolitical and political factors.

The two other important questions are:

Have the investments in the current year been sufficient to increase production by 1.5 to 1.8 million barrels every year?

Have the geopolitical developments of oil-producing countries facilitated investments?

The answers to these questions have not been affirmative so far. In fact, according to estimation of some experts, the volume of oil production will not even reach 100 million barrels per day by 2020. Therefore, based on a strategic long-term prospect, huge investment must be the focus of attention. The important thing is that investment is not merely a responsibility of producers, but also consumers.

Statistics indicate that 1.3 trillion barrels of oil have been consumed out of a total volume of 2.5-2.9 barrels and 1.2-1.6 million barrels have remained.

From what has remained, 745 billion barrels belongs to Middle East countries and 960 billion barrels is for other OPEC members. That is 65 percent of the entire supply. So it is very clear that proper conditions must be prepared for investment in these countries.

Developments that took place after 9/11 have plunged the Middle East into a plight. Iraq, which possesses one the largest supplies in the world, is currently in a state of unrest. Iran which holds the second rank in oil and gas supplies is under pressure and sanction by the United States.

Due to unfortunate daily events other countries of the region are also concerned about their security. Even Saudi Arabia which holds the largest oil supply in the world and has the largest production so far, doesn’t hide its worries about the complexity of the situation and inevitably resorts to military and security solutions to sustain and increase its capacity for oil production.

Therefore, a security atmosphere and concerns about geopolitical developments increase the risk of investment, decrease its level and render the desired rate of production inaccessible. Undoubtedly this will result in fluctuation and increase of price.

Therefore, security of purveyance depends on security of investment and geopolitical security of oil-producing countries. To put it more clearly, security reinforcement in oil-producing countries will lead to investment increase, thus production increase and a decrease in fluctuation of prices.

This is a win-win situation for producers and consumers. That also means adopting sanction and threat policy by the United States, following political agenda such as the Great Middle East, and attempt to impose developments are at odds with an unstrained atmosphere for investment and oil production.

Oil and energy are one of the most important economic elements needed by the world. The world is dependent on oil and this dependence will not decrease, at least until 2050.

Oil demands peace and adding fuel to unrest and war in this realm will bring nothing but loss to the global economy, for both producers and consumers.

So as we mentioned, to provide capital, establish security and fulfill their responsibilities, both producers and consumers must try.

 

Financial markets are one the wonderful phenomena that heavily influence different aspects of economic life. Financial markets have surpassed commerce and economy in terms of growth rate in the 90s. Variety of financial instruments has unbelievably increased the volume of daily financial transactions. The volume of transactions in oil markets, that is, paper barrels and oil notes transactions in future markets, spot markets and contract arrangements is boosting with such a rate that the price of oil is set in these markets.

According to appraisals, future market of the United States has witnessed a 442 percent boom in the past seven years. The rate of this increase, has pulled ahead making of regulations to monitor these transactions. Inevitably, a lot of loopholes provide a chance for corruption, notes transaction and gaining huge profits.

Enron abuse was a result of such activities. Continuous fluctuations of oil price are the outcome of such notes transactions in financial markets and have nothing to do with supply and demand.

In fact the more out-of-control these markets become, the less will be the control of producers and consumers on price. Especially the relation between prices, supply and demand will wane.

No wonder that the United States started formulation of detailed regulations on this issue from 2000 in order and revised it last year in order to prevent financial tragedies and misuses. Here, the OPEC members ask themselves that why they should be responsible for sharp fluctuations of oil price while it is the financial markets that are directly responsible for that.

As some experts believe, now it is time that OPEC member countries find a solution for this situation. For this, Ravand Institute (RIEIS) is elaborating on holding a congress to discuss the different aspects of the problem.

 

Along with global warming and as the public become more informed, concerns on environmental issues have risen. This has forced energy consumers to seek a solution. There are two complementary approaches in this regard:

Firstly, the technology of using oil, gas and fossil fuels must be enhanced, so that fuel can be used more effectively and environmental pollutants are reduced.

The technology that is currently center of attention is solidification of carbon resulted from combustion. This technology demands substantial investment that can’t be merely provided by oil-producing countries.

The second approach is to increase the use of renewable energy. High oil prices have captured attention on this approach more than before. As the host of the third summit, Saudi Arabia had selected “Protecting the Planet” as one of the three mottos, which was welcomed by other members.

Of course both approaches need substantial financial resources that must be directly or indirectly influence the price of oil. In other words, only a high oil price can make these activities possible.

In this summit, 300 hundred million dollars was donated by Saudi Arabia and 150 million dollars by each of the countries of Kuwait, Qatar and UAE for environmental studies. That is, 750 million dollars were collected for environmental matters. Meanwhile, Saudi Arabia ask OPEC and non-OPEC countries that due to the global nature of this concern, they all join the Environmental Studies Fund so that research and investigation in this domain takes on more importance.

 

This issue can be viewed from the point of view of OPEC or oil-producing countries. The key question here is: nearly 50 years pass since OPEC was established. What have OPEC members gained in return for selling their most important, i.e. oil? After all these years, shouldn’t they feel that they have gained something by exporting their oil? That they’ve improved their economy and welfare of the citizens?

Such contentment is rarely seen among nationals of oil-producing countries, while existence of it reinforces security and stability of investment.

Unfortunately throughout all these years OPEC has been named as the cartel behind oil price rise. Thus, OPEC members have always been blamed despite the fact that they’ve helped consumer countries to develop.

Although it is true that the responsibility to develop OPEC countries lies in the hand of themselves rather than anyone else, but at least consumer countries can unblock the path to development by avoiding pressure and discrimination.

Before I end this issue I must emphasize something. Producer-consumer ties, whether in commerce or environmental issues, must be redefined based on win-win strategy.

In other words, competition and struggle must be replaced by collaboration at risks and interests. Future humans will have a better life only if they understand each other better, learn to co-exist and share each other in both opportunities and dangers.

The three slogans of the conference were Providing Petroleum, Promoting Prosperity, Protecting the Planet. Are there any other ways rather than mutual understanding and cooperation?