WPC: OPEC-IEA dialogue improving, but price still an issue

Sept. 5, 2002
The heads of the organizations representing the world's main oil exporters and top oil importers claimed to have found common ground anew on the issue of oil market stability, judging from their talks at the World Petroleum Congress in Rio de Janeiro this afternoon.

Bob Williams
Executive Editor

RIO DE JANEIRO, Sept. 5 -- The heads of the organizations representing the world's main oil exporters and top oil importers claimed to have found common ground anew on the issue of oil market stability, judging from their talks at the World Petroleum Congress in Rio de Janeiro this afternoon.

But as always, the two groups remain at odds on the means to achieve that stability—particularly on the issue of oil pricing policy.

Alberto Calderòn Silva, secretary-general of the Organization of Petroleum Exporting Countries, and Robert Priddle, executive director of the International Energy Agency, both praised the growing dialogue between their organizations as they sat down for the first-ever joint press conference of the two organizations following their talks in the final plenary session at WPC, which concludes today.

Calderòn went so far as to suggest that future oil market stability rests on support for OPEC's base case projection for oil prices remaining at the group's target price band of $22-28/bbl for an OPEC basket of crudes.

Priddle, however, commented at the press conference in reference to the price band that "Simply by producers saying it's a good price doesn't make it a good price."

Where the two found common ground was in continuing efforts at maintaining their joint dialogue at the OPEC ministerial meeting scheduled for Sept. 19 in Osaka. And both expressed relief that efforts failed at the World Summit on Sustainable Development in Johannesburg to set specific targets for market shares for renewable energy sources.

In addition, they concurred in expressing confidence that OPEC has laid to rest the use of oil supplies as a political cudgel, particularly with regard to Middle East strife. Separately, Priddle hinted that the ultimate aftermath of a regime change in Iraq might be an increased downward pressure on oil prices.

OPEC view
Calderòn claimed that there "appears to be some form of consensus" emerging among producers and some consuming nations that OPEC's efforts at establishing a price band is "a step in the right direction" following the $9-34/bbl price extremes of 1998-2000.

"It would appear that, at least in the current economic climate, a price of $25/bbl for the OPEC basket fits quite snugly into everyone's way of thinking as a price that is both fair and reasonable to all, as well as being sustainable."

Calderòn noted that the issue of a target price range is becoming increasingly acceptable to non-OPEC oil exporters, pointing out that the subject is now "clearly on the agenda" for the round of producer-consumer talks, also slated to coincide with the ministerial meeting at Osaka.

OPEC linchpin
Calderòn said that OPEC, with 76% of the world's proven oil reserves, will continue to be the linchpin in global oil supply, both as the key supplier of the incremental barrel and as the key to market stability.

"The assumption made in the latest (OPEC Secretariat oil market forecast) reference case is that the OPEC basket will remain within the declared price range of $22-28/bbl in nominal terms, for the rest of this decade, and grow with inflation thereafter," he said in prepared remarks.

"These prices reflect a number of important perceptions of the emerging market: First, the confidence that sufficient oil will be made available, both by OPEC and non-OPEC producers, thereby avoiding strong upward pressures on the price of crude; and second, that this oil price is consistent with a stable market but is not high enough to generate large quantities of additional non-OPEC oil."

Supply-demand outlook
Calderòn cited OPEC's expectation of a strong expansion in oil demand, based on estimated global economic growth of 3.3-3.5%/year over the next 2 decades.

He pegged world oil demand growth as rising to 89 million b/d by 2010 and over 106 million b/d by 2020 from 76 million b/d in 2000; More than two thirds of this increase will come from China and other developing countries, he noted.

On the supply side, non-OPEC oil supply will continue to rise to 2010, with North Sea declines more than offset by increases from Russia and the Caspian Sea region. During this time, OPEC's market share will remain flat. But non-OPEC growth will slow to an increment of only 18% in the following decade, while OPEC will be called upon to supply 53 million b/d to the market by 2020, a jump of 76% from 2000 levels.

But Calderòn warned of several obstacles to arriving at this projected supply-demand balance smoothly:

-- The competition for capital to expand productive capacity in OPEC nations, given the fourfold greater per-barrel investment in non-OPEC nations.
-- The increasing tax burden on oil products and its subsequent crimp on oil demand.
-- The growing impetus—even without US participation—of the Kyoto Protocol on Climate Change.

IEA view
Priddle concurred with Calderòn that fossil fuels will continue to dominate the world's energy supply for decades to come and that OPEC's share of world oil supply will grow.

But he added, "Security of demand for producers depends critically on sustaining buyer confidence, which means maintaining security of supply."

Priddle pointed to OPEC's own repudiation last year of Iraq's call for the use of oil supplies as a weapon against supporters of Israel in its conflict with Palestine: "The best comment made about that proposal came from the Saudi oil minister, who said, 'Oil is not a weapon; oil is not a tank.'"

And, Priddle added, "There will be no tanks on the lawn in Osaka."

The joint IEA-OPEC dialogue today is open and frank, Priddle noted, citing their current cooperation, along with other bodies, on a joint exercise to improve the quality of data on oil supply, demand, and stocks.

He said there would soon be an announcement regarding the creation of a permanent secretariat to ensure the continuation of a dialogue between producers and consumers.

Price dispute
Priddle took issue, however, with OPEC efforts to manage oil prices.

He acknowledged that "higher prices are needed that are enough to bring on new supply, but not so much as to choke off demand."

He expressed special concern over OPEC's efforts to seek to "engage other producers in market control," while noting that Norway and Russia since have disassociated themselves from that effort.

Priddle said he believes in the necessity to set oil prices at a level sufficient to replace production, but "We can't have a cartel setting prices according to the producers' needs for revenues.

"Markets aren't supposed to work that way."

Looking ahead to the OPEC ministerial meeting and wide speculation that the group may not boost production in response to concerns over fourth quarter oil supply, Priddle said, "OPEC is setting itself a market management task at the expense of becoming a marginal supplier."

Supply threat
Peppered with questions about the prospect of a US-led effort to oust Iraqi President Saddam Hussein, both officials gave their assurances that OPEC will have no problem filling any foreseeable supply shortfall.

Priddle rejected the notion of using IEA country stocks to curb price spikes, reminding that those strategic stocks would be placed on the market only in the event of an actual shortfall of oil supplies.

"If there's a problem, the producers should be the first to try to solve it."

While acknowledging that some consuming countries have, in fact, drawn down emergency stocks to curb price spikes, Priddle said, "Our advice to those members is: 'Don't do it.' We don't believe markets work that way."

While neither official would speculate on what oil prices might do in the event of a regime change in Iraq, Priddle acknowledged the current market psychology, or war premium, that has built several dollars per barrel into the price of oil.

And his response to a query about some speculation—assuming no widening of the conflict—that a postwar, Saddam-free Iraq might in fact result in lower oil prices was:

"I can't quantify it, but you might take note of the fact that the forward price of oil is below today's price."