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The global economic crisis has struck the energy and oil markets hard. Oil prices have declined, and the intensity of the crisis in the oil market is such that even the recent decisions taken by OPEC to cut crude production rates, and in particular the organization's 19 December 2008 consensus to cut production significantly from the beginning of January 2009, have failed to contain the slide. Had it not been for interruptions in the supplies of Russian natural gas to Europe and the severe cold winter in that region, one could have expected even lower oil prices.

This economic crisis will not last for ever. However, the notion of guaranteed supplies of energy is a strategic and long-term issue, which has been pursued by the industrialized countries permanently ever since the 1970s. The experience of the past several years, before the emergence of the recent economic crisis, suggests that future energy crises will be serious and unavoidable. The upward trend of global prices of crude in recent years, before the current crisis, was a result of such factors as supply and demand imbalances and in particular a shortage of supply capacity .

Forecasts reveal that, in the long run, huge investments need to be made in the energy and oil sector. The International Energy Agency (IEA), in its latest World Energy Outlook reports that was released in late 2008, estimates this figure at $26 trillion within the next 20 years, that is the 2009-30 period, of which at least 40% should be injected into the world's oil and gas sectors. At current prices and under circumstances where a huge crisis has struck financial markets and there is a shortage of credit, such huge amounts of investment are neither feasible nor practical. Many plans and projects have been suspended, and there has been a great degree of concern expressed at the majority of recent energy conferences worldwide about the future of global supplies of energy, should prices continue to fall. This concern is more evident in the consuming countries, which lack energy resources and are importers of oil and gas. The global price of crude in fact serves as an index of energy prices, an index which is influential on investments in the field of energy. Hence, such a concern is likely to affect all investments in the energy sector .

On 19 December 2008, an important conference was arranged in London on the invitation of the British premier. That conference was attended by the officials of the member states of the IEA, OPEC ministers and officials of the International Energy Forum ( MEES , 5 January). The major concern raised at that conference was over the question of investment in the energy sector and the potential for disturbing future demand for oil. The organizers of the conference had called on Cambridge Energy Research Associates (CERA) to present a report on the effects of the international economic crisis on oil market. CERA's report centered on investment in the field of energy and raised the concern that, at current oil prices, there will be no incentive for sufficient investment. The results would be clear – as soon as the global economic crisis fades off and the world returns to a period of economic stability or blossoming, a shortage in energy and crude oil production capacities will grip the world. The report by CERA made clear the requirement that oil price swings should be restricted.

An earlier forum that was organized in the Ukraine in November 2008, addressing the security of energy in the European states and the Caspian Sea region, concentrated on similar concerns. The deputy secretary-general of the Energy Charter [ Ambassador Vladimir Rakhmanin] expressed concern about the future energy crisis and sharp changes in the price of oil. He stated that a continued downtrend of oil prices would disturb current investments and may entail a halt in the already-planned investments, which would be crucial in the coming decade.

Cancellation or any delay in energy investments will expose the security of supplies and the world economy in general to grave risks. Daniel Yergin, distinguished energy expert and Chairman of CERA, in his short article entitled ‘What Would Low Oil Prices Mean to the World', published in the Financial Times in November 2008, expresses concern that the energy policies of the new US administration, which are mainly based on maximum energy optimization and efficiency and development of new energies and cutting off dependence on imported oil, are doomed to failure at present oil prices.

Amidst all these developments it appears necessary that OPEC should review its policies. OPEC's track record in similar periods of oil price weakness reveals that, as long as the crisis continues, the organization will attempt to prevent further price drops through maintaining control on production and specifying production ceilings for each member state. However, the question which remains unanswered is whether or not a similar policy should be pursued at all times and under all circumstances.

In fact, OPEC's production control mechanism, that is intended to prevent oil prices from further declines and to maintain investments in the energy sector, serves the interests of the entire global community. But OPEC should not be left alone in this fundamental task. Neither should it have to withstand negative propaganda and psychological pressures. Ever since the 1970s, the leaders of the industrialized states have become used to attributing many of their economic problems and shortcomings to OPEC's performance, an approach which continues to this date. Although some western managers and experts who are well aware of the problems associated with energy may, in private, view OPEC's measures positively, they join others in keeping on accusing OPEC and its member states. Nor is it advisable for OPEC to cut production and leave its market share to non-OPEC producers of oil. If a likely crisis in the future of energy is a global concern which requires global cooperation, both the main consumers of energy, who make huge benefits from taxes they levy on oil products, and producers of oil should cooperate insofar as production cuts and price control are concerned. After all, consumers' oil incomes well transcend those of the producers.

Even under conditions when oil prices were rising on a daily basis in recent years, OPEC member states frequently gave assurances to consumers that, if necessary, they would increase production, thus psychologically controlling the market situation in favor of consumer countries. If it were the case that the market and consumers saw the realization of all the potential bottlenecks that threatened the production of oil, while at the same time saw that OPEC's surplus production capacity had fallen to approximately zero, oil prices would have climbed well above the record highs of $147/B in July 2008. Yet, while these conditions did not occur, OPEC was the target of accusations.

Oil markets and prices need a regulator. Excessive growth of oil prices worldwide can put the world economy into trouble, while very low or falling oil prices can disturb the industrialized states' energy security policies that would create future energy crises. OPEC has so far managed to regulate and contain oil price fluctuations, otherwise the host of factors affecting oil prices, to which reference had been made in CERA's report, would intensify oil and energy market problems way beyond what is being observed today.

As regards investment in the oil and gas upstream sector, only upstream projects in the OPEC member states are economically feasible at current prices. CERA's report indicates that, at crude prices of under $50/B for WTI, new oil investments will be economically feasible only in the Middle Eastern member states of OPEC and in some oil fields in China. Under conditions when oil investment in other regions of the world is not economically feasible, industrialized states expect OPEC member countries to make huge investments in their upstream oil industries and cooperate with international oil companies.

The industrialized states are certainly aware of the fact that oil and energy are inseparable constituents of the world economy and any halt in oil projects would intensify economic recession worldwide. In such a case, many of the manufacturers and suppliers of oil equipment and services will lose their jobs. Very low oil prices will weaken the purchasing power and demand of the oil exporting countries for the products and services of the industrialized states. That too, will provide for intensified levels of economic recession worldwide.

How can OPEC member states be expected to invest their limited financial resources in huge oil projects and guarantee supply of energy to the industrialized states in the post-crisis period, under circumstances when OPEC oil incomes are dwindling and global demand for crude and oil products is shrinking? A cartel-oriented approach would suggest that in these conditions, OPEC should refuse to invest its resources in the development of its oil production capacities and instead adopt the policy of self restraint and remain in expectation of the day when crisis is over and it could sell its oil at higher prices.

In the world of energy interdependency, the only solution to prevent the occurrence of future energy crises is, as Vladimir Rakhmanin, Deputy Secretary-General of the Energy Charter, put it: “There should be a selected win-win option and not a winner-loser one to the detriment of OPEC member states.”

OPEC member states have proved that, in their oil policy making, they have refrained from just thinking of their own interests. However, international cooperation is required if the world expects OPEC to develop its production capacities in order to be able to meet future world demand for oil. And regarding the regulation of oil market and price swings, again OPEC should not be left alone. All producers of oil, including OPEC and non-OPEC, should negotiate and examine the situation with the member states of the IEA as major consumers of oil.

In view of the strategic role the Islamic Republic of Iran plays within OPEC, as one of the founders of the organization and as OPEC's second largest producer of oil, it is evident that the managers and experts in charge of the industry should study and adopt proper policies and follow up on those policies within OPEC.

This article implies that OPEC is, more than ever, in need of reviewing its policies and devising a long-term strategy. Perhaps this is now the best opportunity for OPEC to demand a reasonable and fair interaction between producers and consumers of oil (OPEC or non-OPEC). Through setting its oil diplomacy in motion and persuading the OPEC member states collectively, the Islamic Republic of Iran can organize a realistic wing that would follow up the real interests of the member states. Otherwise, perhaps the Islamic Republic of Iran would need to reconsider its membership of OPEC.

Gholamhossein Hassantash is Vice President of the Iranian Association for Energy Economics (IRAEE). Petroleumworld not necessarily share these views.

Editor's note: This article was originally published by Middle East Economic Survey (MEES) on 20/04/2009, VOL. LII, No 16. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld News 04/26/ 08

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