OPEC head says to fight recession, cut energy taxes, not oil prices

Bob Williams
Executive Editor
Oil & Gas Journal

BUENOS AIRES, Oct. 23 -- A cut in petroleum taxes is a better short-term cure for the looming global recession than a cut in crude oil prices, the president of the Organization of Petroleum Exporting Countries told the World Energy Congress in Buenos Aires Tuesday morning.

Chakib Khelil, who also is Algeria's Minister of Energy and Mines, made the claim in a question-and-answer session following presentations at a WEC panel on oil and gas price volatility.

Panelists acknowledged an outlook for even greater oil price volatility in the wake of geopolitical and economic uncertainties following the Sept. 11 terrorist attacks on the US and subsequent US-led military campaign.

Other panelists dealt with the outlook for natural gas price volatility, particularly the role of liquefied natural gas trade growth in that outlook.

OPEC, price volatility
In response to questions concerning OPEC's support of an oil price band target and its influence on recessionary trends, Khelil mounted a vigorous defense of OPEC's strategy in part by attacking high petroleum taxes in the consuming countries, particularly those in Europe.

Noting that petroleum product taxes can be as high as 80% in the consuming countries, Khelil estimated that the consuming nations capture as much as $1 trillion/year in revenues from petroleum taxes compared with the $250 billion/year OPEC nations earn from crude oil sales.

"Simply instituting a 10% decrease in petroleum taxes could bring $100 billion into the pockets of consumers," he said. "This would immediately help to boost economic growth."

Khelil claimed that the fiscal and monetary policies of nations are what really determine the level of economic growth, not the level of oil prices.

He insisted that OPEC is in favor of oil price stability and that a target price of $25/bbl -- roughly the median point in the group's official price band target of $22-28/bbl -- is acceptable to both producers and consumers.

Such a price level is going to help all nations -- not just OPEC -- develop new sources of oil production and to help spur the development of renewable sources of energy for the future, Khelil said, adding, "And that sort of competition is good -- it is something the world needs, and we [in OPEC] support that."

Noting that the tradition of regulating oil prices was in place long before OPEC was created, Khelil observed that the price increases instituted during the 1970s actually had a positive impact by increasing global energy efficiency by 50%.

The OPEC chairman bristled at the notion that the group's defense of a targeted price band was somehow inappropriate in light of the worsening world economy: "If [support of a] price band is not acceptable when oil prices went down, why was it then acceptable when oil prices were $35/bbl?"

Considering the likelihood that a global recession would be short-lived, Khelil cited OPEC estimates that world growth in energy demand would soon rebound to the levels of 3-4%/year.

"Who then is going to take charge of the cost of maintaining spare [oil production] capacity?" Khelil asked, in reference to some OPEC nations' practice of maintaining a level of spare production capacity as a cushion against oil supply disruptions and their resulting oil price shocks.

Consuming nations' stance
The consuming nations' propensity for taxing petroleum consumption at high rates actually serves to moderate oil price volatility, International Energy Agency Executive Director Robert Priddle said, in following up on Khelil's remarks.

While noting that the tax components of petroleum product pricing vary widely among the consuming nations, Priddle said, "High taxes actually diminish the effects of price volatility to the consumer. ... In 2000, the tax component share of the final price of oil to consumers actually fell."

Priddle said he could understand the oil exporting nations' "resentment" of high tax levels, because they represent "a transfer of wealth within a country vs. a transfer of wealth between countries."

Noting that the long-term implications of the Sept. 11 terrorist attacks on the US are still uncertain, the top energy official of the Philippines -- a nation heavily dependent on oil imports -- said that his government views the US-led military campaign against Afghanistan and Osama bin Laden as a 1-2 year conflict, with ominous overtones for the global economy.

"This will put OPEC in a serious bind between balancing price stability and the prospect of 2 years of economic slowdown," Philippines Energy Sec. Vincent S. Perez said.

Gas outlook
The impending surge in growth in global LNG trade will benefit from and ultimately help to moderate gas price volatility in the future, according to Carlos Kempff Bruno, Bolivia's minister of economic development.

New gas exporter Bolivia is focusing on the prospects for Bolivian LNG exports to the US and Mexico, in addition to its current pipeline gas exports to Brazil.

Repsol-YPF SA, BG Group PLC, and BP PLC this year launched a study of exporting gas from Bolivia's Margarita field via a two-train LNG plant built on Chile's coast to a regasification plant proposed for Baja California (OGJ, July 16, 2001, Newsletter, p. 8).

Kempff Bruno projected that LNG world trade will grow largely in response to gas prices projected to average $3.50-4.50/Mcf for the next 15 years.

While noting that LNG markets currently are strongly influenced by crude oil and oil product prices, Kempff Bruno said the burgeoning LNG trade will create a firm foundation for a global spot gas market.

"As the use and trade of natural gas continues to grow, there is a challenge to develop appropriate price mechanisms to help facilitate the international trade of LNG," he said.