Certain Considerations Affecting the World Oil Market

In listing “Certain Considerations Affecting the World Oil Market”, more accurate predictions of GNP growth rates are the crucial need without which forecasts are bound to be proven wrong. Yet the difficulties in improving upon GNP estimates are found in OECD member states — whose ability to project on the basis of better data collection is greater and more important than those of the developing world. Demand data of the OECD is subject also to continuing revisions although the International Energy Agency is improving upon its timely collecting and analysis of what is also crucial to projections of oil market requirements. But supply data — mainly from OPEC members — has become notoriously weak and untrustworthy, greatly complicating the task of how much supply, from where, is actually in the market.

If the challenge peculiar to OPEC is to stimulate demand for oil and the ability to do so with reasonable price targets, then the world is steadily becoming more aware of the fact that vital decisions in supply are made by Saudi Arabia, Iraq, and (to a lesser extent) Iran. A few other producers contribute but the fundamental question is whether Saudi Arabia and Iraq will cooperate on a durable basis to affect the level of oil in international trade and therefore its price. Can they work together? The author believes not. There are too many other political and security interests between them — oil is not their only concern.

Given the strategic importance of Saudi and Iraqi oil, is there a sufficient role for other OPEC members to accept domination by these two producers? Probably not. It will continue to be very difficult for the cartel to maintain discipline.

Important also is the question as to whether non-OPEC sources have probably reached a plateau and will now decline. This view is widely discussed with the assumption that OPEC's key producers will become evermore important. Will the application of further investments and new technology in exploration and production regain a role for other and new suppliers? Yes. Non-OPEC sources are not at a “dead end”.

Moreover, oil importing governments will renew their efforts to sponsor investment into domestic energy resources. Key to their efforts has to be acceptance of the point that foreign (OPEC-Gulf members) price-setters must not be able to determine whether domestic resources will or will not be developed as a consequence of the OPEC price. Today, an oil importing country setting its domestic price at $25/barrel could exploit virtually any of its energy assets. But one difficulty confronting the private sector is the notorious tendency of governments to change with new regimes upsetting what had become energy policy.

Finally, oil markets and governments have now to reckon the impact of environmental pressures on alternate fuels. So important are these environmental pressures that in many countries national energy policy may be defined increasingly in environmental terms rather than in more traditional economic and security considerations.