Oil too crucial to be left to fluctuations of markets

Alí Rodríguez Araque
Minister of Energy and Mines
Venezuela

It is common knowledge that the oil industry is going though dire times. Prices have collapsed to levels unimagined a couple of years ago.

The seeds of the current crisis were planted in the midst of the short-lived upturn of the mid-1990s. In an orgy of investment, unwarranted optimism, and reckless expansions in production capacity, the oil industry put in motion a trend that has inflated inventories and flooded the world with oil. The consequences were obvious, but the signs went unheeded until prices went into an abrupt dive.

Obviously, the current situation is bad for all of us involved with the oil industry. However, we in OPEC believe these extremely low prices will also prove disastrous for the whole world. It is true that cheap energy will help the world economy in the short term. People will smile in glee as they fill their cars and fuel their energy requirements with the cheapest hydrocarbons that they have had in decades. Governments will relax as inflationary pressures are eliminated thanks to cheap and abundant energy supplies.

Nevertheless, just as we ignored the signs that have led to the oil-producing nations' current woes, the industrialized nations should realize that oil prices at the levels we reached in February of this year will come back to haunt them in the future. The industry cannot thrive under such conditions, and capacity will be seriously affected.

Let us make no mistake about this: The world will need oil for the foreseeable future, in spite of the aspirations of the "Green" movement. To ignore this reality and permit such a situation to continue in time would be suicidal.

An important group of economists insists that prices should be left to the market. This seems like a bulletproof argument-until you consider the strategic importance of oil for the world. Can we really leave it to the "wanderings" of the market? It takes 3-5 years to develop new production projects. Could the world wait that long while the "market" adjusts its prices? Would the world economy benefit from $100/bbl oil during the next shock? Obviously, the answer is: No.

OPEC's role

The Organization of Petroleum Exporting Countries realizes this situation cannot go on. For selfish reasons? Of course! But this is not the issue.

We in OPEC need to consider a new strategy and work together with non-OPEC producers to stabilize the world oil market. A huge effort in this direction was made during the Amsterdam meeting in which I participated at the start of this month. Negotiations were difficult. The strain on all of us seemed to make an agreement elusive.

Fortunately, we all finally agreed to sacrifice an aggregate portion of our production in order to put some "order" to the market. I must recognize the good disposition and reasonableness of my colleague from Saudi Arabia, Oil Minister, Sheikh Al Naimi, who has helped lead this process with an undeniable large quota of sacrifice.

This reconfirms my thesis during a speech that I gave at the recent meeting hosted by the Energy Council in Washington (OGJ, Mar. 8, 1999, p. 37). There is a community of interests between OPEC and U.S. producers. Rumors about us dumping oil into the U.S. market and Saudi Arabia seeking to drive U.S. producers out of business are absurd. We are the first affected by the drop in oil prices. Our voluntary cutbacks should be the best proof of our efforts to stabilize the market and get over this slump. However, we cannot do this alone.

Independent producers

The independent producers must take heed that we expect everyone to share in these cutbacks.

We will not stand idle if we see that the 2 million b/d we are withdrawing from the market is taken up by other non-OPEC producers.

This strategy would obviously be suicidal. We would be losing market share, allowing higher-cost producers to occupy our space in the market and, eventually, suffering again from depressed prices.

Just as the industrialized nations have their extremists and "policy hawks," so do we in OPEC. Some will argue that we should open our production to full capacity, drive high-cost oil out of the market, and go for a "market-share" strategy.

I do not agree with this policy-nor do my colleagues in OPEC or the Mexican minister of oil, for that matter. This is a lose-lose strategy.

However, neither can we condone a win-lose strategy in which OPEC loses market share while others benefit. Let us all reflect on this matter. The OPEC ministers convened in Vienna are well-intentioned-but we are not collectively stupid.

Conclusion

The viability of the oil industry is not an exclusive interest of OPEC. It is of strategic importance to the whole world.

Former U.S. President Jimmy Carter named his efforts at boosting the U.S. oil industry during the energy crises of the late 1970s and early 1980s as "the moral equivalent of war."

People tend to forget hard times and turn complacent in good times. We need to sponsor a worldwide consensus around the future of oil.

Without wanting to sound alarmist, oil is too important to be left to market fluctuations.

Venezuelan Energy and Mines Minister
Alí Rodríguez Araque
An important group of economists insists that prices should be left to the market. This seems like a bulletproof argument-until you consider the strategic importance of oil for the world. Can we really leave it to the "wanderings" of the market? It takes 3-5 years to develop new production projects. Could the world wait that long while the "market" adjusts its prices? Would the world economy benefit from $100/bbl oil during the next shock?

The Author