On 20 July 2000, the Secretary General of Organization of the Petroleum Exporting Countries, Dr. Rilwanu Lukman made a speech in Caracas, Venezuela. Here is the full text of that speech.
Distinguished Guests, Ladies and Gentlemen, May I start by thanking the organizers of this Seminar for the Media on the Second Summit of OPEC Heads of State, for inviting me to speak here in the impressive surroundings of the Central Bank of Venezuela. It is truly a pleasure and an honor for me to address you today on the subject of "OPEC: Past, Present and Future Perspectives.
This year not only marks the beginning of a new century and a new millennium for mankind; it is also a very important milestone for OPEC. As you all know, the Organization will be celebrating it's 40th Anniversary in September, and we will be marking the occasion with the Second Summit of OPEC Heads of State, here in Caracas.
This will be only the second such event in the organization’s history, the first one having been held in Algiers in 1975, when OPEC was just 15 years of age -a mere teenager, in fact! And those of you who have children will know what I mean when I say that teenagers are a handful!
Well, if OPEC at the tender age of 15 could be considered a rebellious teenager, I am happy to say that now, as its 40th birthday approaches, the Organization has gained the maturity and responsibility that comes with the age.
Thus, it is very appropriate at this time for both OPEC and the oil and gas industry as a whole to look back at the achievements and shortcomings of past years and to define their respective roles in a new era, in the light of the challenges that lie ahead.
Ladies and Gentlemen,
OPEC's 40-year history is well-documented and doubtless familiar to most of you, but I don not wish to dwell on events that took place in a bygone era and that were developed by the international situation of the time. I wish instead to start from a more recent vantage position, examining events directly relevant to the situation in the international oil market today and in the future.
In this way, I will examine the events of the last three years or so, and the role played by OPEC in them. Afterwards, I will consider the issues that the oil businesses are facing at the beginning of this new millennium and how they could reinforce he industry as a whole. I will also discuss how these changes will affect OPEC and how the organization is planning to respond.
Having examined all these subjects, I believe that we will be in a better position to see what lies ahead for the international oil industry in general and the OPEC in particular.
The Oil market 1997-2000
Over the last three years, international oil prices have been on a real roller-coaster ride, somewhat reminiscent of other difficult periods for the industry throughout the last three decades.
What I want to stress here is that OPEC's desire to stabilize the market encompasses taking action when prices are either so low or so high that they threaten to damage the global economy, not just when they are low. Let's look at what this has meant in practice over the past three years.
In mid-1997, the average price of the OPEC Basket was between $17 and $18 a barrel, where it had been steady for several months down from the highs seen in 1996, but at a comfortable level nonetheless.
Then the Asian economic crisis struck. Late in 1997, the Basket price began to fall. It reached $16,84 a barrel in December 1997, down a full two dollars from $18,84 the previous month.
Who could have guessed at the time that this would become a steep, prolonged decline triggering one of the most serious price crashes in the entire history of the oil industry? Just one year later, in December 1998, the price had fallen to its trough on the cycle, under $9,50 a barrel.
But if the price collapse of late 1997-1998 was difficult enough to forecast, which could possibly have seen in advance the astonishing price recovery of 1999-2000? The upswing was triggered by the combined efforts of OPEC Member Countries and some key non-OPEC producers, who agreed in March 1999 to remove 2.1 million barrels a day from the market, after two earlier rounds of cuts did not have the desired effect.
Taken together, three rounds of cuts - two in 1998 and one in 1999 - meant that OPEC and non-OPEC producers had combined their efforts to remove a total of 5.3 million barrels a day of production from the market.
By December 1999, due largely to this effort, the OPEC Basket price had reached $24,77 a barrel, although it should be noted that the average price for the whole of 1999 stood at a more modest $17,47 a barrel.
Nevertheless, the psychology of the market had completely swung around from that of one year earlier and in March this year, as OPEC gathered in Vienna for its regular Meeting, there were loud calls from the consuming countries for OPEC to increase output. As international oil prices climbed over higher, the clamor grew louder for OPEC to act to take some of the heat out of what was perceived to be an increasingly tight market.
OPEC's response was, I think we can safely say, both balanced and prudent. In March this year, nine of the eleven Member Countries agreed to roll back the previous round of output cuts, while the other two Members who did nor sign the agreement, Iran and Iraq, also said that they would increase production.
At the same time, the Organization took the opportunity to strongly remind the oil consuming countries of what has been saying for many years...That high end-user prices for products such as gasoline are NOT the result of a shortage of crude, but the direct consequence of the frankly extortionate tax burden imposed on oil products by the governments of those same countries.
What OPEC is keen for everybody to realize is that while we acknowledge that the price of crude is one element in product prices, it is relatively small one when compared with the other elements, principally taxation levels. A very clear distinction therefore needs to be drawn between high crude prices, which are largely the result of excessive taxation in consuming countries over which OPEC has no control.
In recent months, we have heard many voices calling for OPEC to raise output in order to bring down prices and help combat the threat of inflation. Yet what the Organization is being asked to do is to adopt a simplistic approach to a complex problem. It is true that crude prices have been high of late, but so have product prices -especially the price of gasoline.
Increasing output can help moderate crude prices, but it cannot influence product prices to anything like the same extent, if at all. The responsibility for getting product prices down to more moderate levels lies clearly with those countries whose high taxation levels are the prime reason for high product prices.
This is especially true if the consuming countries are genuinely concerned that the high energy prices might trigger global inflation for it is the cost of products like gasoline, not the cost of crude oil, that hits consumers where it hurts -in the pocket.
Nevertheless, I am glad to say that OPEC's message is now getting through. In some of the countries with the highest tax burdens, such as the United Kingdom, a public debate is now raging in the media over the high levels of taxation. The end users, after having been fleeced for so many years by their governments are at last rising up and expressing their anger. And that is how it should be.
It is a healthy, vigorous debate, and one that OPEC will continue to encourage.
OPEC has demonstrated clearly that it is fulfilling its side of the bargain with the decision at this last Meeting in June, to increase production by another 708.000 barrels a day and by the announcement made on top of that if prices remain at current levels.
When this decision is implemented, it would mean that OPEC has increased output three times this year already by a total of over 2.9 million barrels a day. In addition, our non-OPEC partners have also relaxed their production restrictions to the tone of several hundred thousand barrels a day.
However, as I said before, while these output increases should help reduce upward pressure on crude prices, product prices will remain high unless the consuming countries fulfill their part of the bargain. OPEC cannot be successful if it acts alone. It is doing its bit to help moderate crude prices by increasing output -now it is up to the consuming countries to play their part and take action to cut taxes on products.
What drives the price roller-coaster?
Ladies and Gentlemen,
That wraps up my overview of recent events in the oil market, and as you have seen, it can only be described as a stomach-churning roller-coaster ride. But please don't unfasten your seat belts just yet! I want to dig a little deeper and see if we can figure out what is driving the roller-coaster. What makes prices swing so wildly? If we can understand that, then we will eliminate such wild fluctuations in the future.
A number of factors, many of them unforeseen, combined to spark the price collapse of late 1997-98. These included the economic crisis that swept across Asia, the ensuing reduction in oil demand unusually in warm winter weather and high levels of stocks in the consuming countries.
The crushing downward pressure on prices that resulted affected everyone in the industry. In 1998 alone, OPEC Member Countries lost something in the range of $50-60 billion in oil revenues and had to take drastic cuts in their spending programmers.
Meanwhile, outside OPEC, oil companies had to drastically cut their investment programmers and some resorted to mergers and consolidation, in order to combine assets and adapt to what at the time was though to be a permanent new reality. As a result of the wave of mergers, the list of oil majors may have become shorter, but their names are all much longer -ExxonMobil, BP Amoco Arco, Total Final Elf, and so on!
So what caused the oil market to rebound so sharply? What drove prices back up to stratospheric heights in the first half of this year after they had been so low for so long? As I noted earlier, the efforts made by OPEC and non-OPEC producers to better balance supply and demand played a key role. Market fundamentals are still important, even in this age of high-risk speculation and round the clock trading.
In addition, such factors as crude and product stock levels, new environmental regulations, the weather, market psychology, and so on, all play a role. OPEC has very little, if any, ability to influence such factors.
And let me reiterate: the main cause of the high prices the end-user pays for products like gasoline has very little to do with the oil market and everything to do with taxation.
( petroleumworld )
© 2000 Mena Report (www.menareport.com)
