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TheInternationalEnergyForumTwentyyearsofproducer-consumerdialogueinachangingworld

BassamFattouhandCobyvanderLinde

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Title: TheInternationalEnergyForum, Twentyyearsofproducer-consumerdialogueinachangingworld

Authors: BassamFattouh,OxfordInstituteforEnergyStudies(OIES) CobyvanderLinde,ClingendaelInternationalEnergyProgramme(CIEP)

Copyright: IEF

Year: 2011

Publishedby: IEF,Riyadh,SaudiArabia

Editing: DeborahSherwood

Layout: JumanaHouse,Riyadh,SaudiArabia

InternationalEnergyForum

FromitshumblebeginningsinParisin1991theglobalproducer–consumerdialogueonenergyhasdevelopedthroughtheInternationalEnergyForum(IEF)sothatitisnowtheworld’slargestgatheringofEnergyMinisters.IEFCountriesaccountformorethan90%ofglobaloilandgassupplyanddemand.InadditiontoIEAandOPECcountries,transitstatesandkeyenergyplayers,includingBrazil,China,India,Mexico,RussiaandSouthAfrica,participateintheForum.

ThemagnitudeanddiversityofthisengagementisatestamenttotheIEF’spositionasaneutralfacilitator.ThroughtheForumanditsassociatedevents,IEFMinisters,theirof�icials,energyindustryexecutives,andotherexpertsengageinadialogueofincreasingimportancetoglobalenergysecurity.Thetwists,turnsanddevelopmentsofthe20yearhistoryofthedialoguearedocumentedhereinthiscommemorativepublicationco-authoredbyBassamFattouhandCobyvanderLinde.

Thecontentofthisbookisthefullresponsibilityoftheauthors.Theydonotnecessarilyre�lecttheviewsoftheInternationalEnergyForum,theOxfordInstituteforEnergyStudies,theClingendaelInternationalEnergyProgrammeoranyoftheirmembers.

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Contents

Chapter1: TheFrameworkoftheProducer-ConsumerDialogue .......................................................7 Introduction ................................................................................................................................................................ 7 TheConditionsfortheProducer-ConsumerDialogue ............................................................................. 8 AsymmetriesinDependencyonaStrategicCommodity ........................................................................ 9 TheEnergyProblem..............................................................................................................................................10 SupplyDisruptionsandSupplySecurityConcerns..................................................................................11 TheInvestmentProblemandSecurityofDemand ..................................................................................12 PriceInstability .......................................................................................................................................................13 EnergyTaxationandSubsidies.........................................................................................................................15 TheClimateChangeAgenda ..............................................................................................................................16 Interdependency....................................................................................................................................................17 TheOilMarket..........................................................................................................................................................18 TheProducer-ConsumerDialogue................................................................................................................19

Chapter2: ShiftingWorlds ............................................................................................................................. 21 Introduction ..............................................................................................................................................................21 CountriesAlwaysBalanceandRe-balance ..................................................................................................22 Perception..................................................................................................................................................................23 TheBrettonWoodsGovernanceSystemandOil.......................................................................................24 TheStructureoftheOilMarketinthe1950sand1960s ......................................................................25 ThePre-1973Not-So-HomogeneousWorldandOil................................................................................28 InternationalSysteminFlux..............................................................................................................................30 AYearofConfrontation........................................................................................................................................32 HardTransition .......................................................................................................................................................34 ManagingOilMarketsandMoneyIncome ..................................................................................................37 TheRestructuredOilValueChainAfter1978 ............................................................................................39 OPECProductionPolicyinaDepressedOilMarket.................................................................................40 Conclusion .................................................................................................................................................................41

Chapter3: ShiftingRelations......................................................................................................................... 43 Introduction ..............................................................................................................................................................43 Non-OECDCountries’Perspective...................................................................................................................44 ConfusioninOECDConsumerCountryRelations ....................................................................................45 MaintainingProducerUnity...............................................................................................................................50 NationalversusInternationalGovernance..................................................................................................51 MaintainingCohesion ...........................................................................................................................................53 Conclusion .................................................................................................................................................................55

Chapter4: FromConfrontationtoCooperation ...................................................................................... 57 Introduction ..............................................................................................................................................................57 The1990-1991GulfWarandtheResponsetotheSupplyDisruption ...........................................57 TheIsfahanOilConference.................................................................................................................................60 TheParisEnergySeminar...................................................................................................................................61 OilMarketDevelopmentsandtheDialogueinthe1990s.....................................................................63 TheProducer-ConsumerDialogueandthe1998AsianFinancialCrisis........................................65 Conclusion .................................................................................................................................................................68

ColourPlates............................................................................................................................................................ 69

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Acknowledgments

Inthecourseof theresearch,wehavebeenabletodiscusswithcertainpeople involved intheproducer-consumerdialogue.Someofthesepeoplewereinvolvedintheearlybeginningsofthedialogue;otherswereinvolvedinthelateryears.Weareverygratefulthattheywerewillingtosharetheirinsightswithus,helpingustoputthisstoryofoilconsumerandproducerrelationstogether.Theymadethepaperaccountsofmeetingscomealiveandleftuswiththeimpressionofgreatpersonalinvolvementinmakingthedialogueasuccess.Althoughwedonot refer to thesepeople byname, it is clear that theproducer-consumerdialogue, or theInternationalEnergyForumasitisnowcalled,hasreliedheavilyonthecon�idenceofthesepeopletomakeitworkandbringtheIEFtowhereitistoday.

Chapter5: The2000s-ShiftsinInterestsandtheInstitutionalisationoftheIEF ..................... 85 Introduction ..............................................................................................................................................................85 ShiftinInterests ......................................................................................................................................................86 TheInstitutionalEvolutionoftheIEF ..........................................................................................................88 TheInstitutionalisationandFormalityoftheDialogue.........................................................................95

Chapter6: OilMarketDevelopmentsinthe2000sandtheContentoftheDialogue ................. 97 ShiftsinGlobalOilDemandDynamics .........................................................................................................97 FutureOilSuppliesandtheInvestmentChallenge ..................................................................................99 TheInvestmentIssueandtheProducer-ConsumerDialogueinthe2000s...............................103 Investment-RelatedTopics ..............................................................................................................................105 ChangingIndustryStructures:TheNOC-IOCRelationship ...............................................................106 TheIOC-NOCandProducer-ConsumerDialogue .................................................................................108 TechnologyandtheClimateChangeChallenge .....................................................................................109 EnergyPoverty .....................................................................................................................................................112 NaturalGasandtheProducer-ConsumerDialogue..............................................................................113 Conclusion ..............................................................................................................................................................116

Chapter7: OilMarketDevelopmentsin2008,TheYearofTwoHalves........................................119 Introduction ...........................................................................................................................................................119 TheJeddahEnergyMeeting ............................................................................................................................120 TheFinancialCrisis,theOilPriceCollapseandtheLondonEnergyMeeting ...........................122 FinancialCrisisandtheContentoftheProducer-ConsumerDialogue........................................124 FinancialMarketsandOilPriceBehaviour ..............................................................................................124 TheInvestmentIssue.........................................................................................................................................127 TheYears2009-2010:RecoveryandStabilisation ...............................................................................127 The2008-2009OilPriceCycleandtheProducer-ConsumerDialogue .......................................129 Conclusion ..............................................................................................................................................................131

Chapter8: TheRoadAheadfortheProducer-ConsumerDialogue................................................133

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CHRONOLOGYYEAR EVENT HOST CO-HOST

2012 IEF13-13thInternationalEnergyForum &5thInternationalEnergyBusinessForum Kuwait Algeria&Netherlands

2010 IEF12-12thInternationalEnergyForum &4thInternationalEnergyBusinessForum Mexico Germany&Kuwait

2008 IEF11-11thInternationalEnergyForum &3rdInternationalEnergyBusinessForum Italy India&Mexico

2006 IEF10-10thInternationalEnergyForum &2ndInternationalEnergyBusinessForum Qatar China&Italy

2004 IEF9-9thInternationalEnergyForum &1stInternationalEnergyBusinessForum Netherlands Iran&Norway

2002 IEF8-8thInternationalEnergyForum Japan Italy&UAE

2000 IEF7-7thInternationalEnergyForum SaudiArabia Japan&Netherlands

1998 IEF6-6thInternationalEnergyConference SouthAfrica Qatar&UK

1996 IEF5-5thInternationalEnergyConference India Brazil&Norway

1995 IEF4-4thInternationalEnergyConference Venezuela EC&Russia

1994 IEF3-3rdInternationalEnergyConference Spain Algeria&Mexico

1992 IEF2-MinisterialWorkshop Norway Egypt&Italy

1991 IEF1-MinisterialSeminar France Venezuela

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Introduction

The storyof oil ismany-faceted: from thepolitical to the socio-economic and the cultural.Oil has been an essential element of post-World War II global economic expansion. Thegrowthoftradeandthewiderdistributionofwelfareamongnations,aswellasthegrowthofinternationalcompaniesintermsofturnoverandnumberofcountriesinwhichtheyhavebeenactive,arerootedintheoiltrade.Oilcreateslargeeconomicrents,whicharecontestedbetweenproducingandconsumingcountries,andamongthevariousotherplayersactiveinpartsof thevaluechain,eachwanting tocaptureashare.Thesizableeconomicrentshavebeenaprizedeemedworth �ighting for, farbeyond thenormalcompetitionamongmarketplayers. They have guaranteed persistent involvement by governments everywhere, eitherasproducersor taxcollectors.Assuch, theyhavemadepoliticalpower formationasteadyfeatureoftheinternationaloilbusiness.Themixtureofinternationaleconomicsandpoliticsiswhatmakestheoilstorysuchaninterestingone.Itrequiresmarketplayersandgovernmentstomanagevariousdynamicprocessestakingplaceatthesametime.Althoughattimesthereis con�lict, various forms of cooperation have characterised the oil industry from its earlybeginnings.

During theperiod from2002 to2008, theoilmarketunderwent its longestperiod todateofsustainedprice increases,reachingpeaksnotseenbefore.Thisboom,whichendedwithaspectacularcollapseoftheoilpricetowardstheendof2008,capturedpublicandpoliticalattentionandraisedconcernswithinbothmajorconsumingandproducingcountriesabouttheadverseeconomic,politicalandsocialconsequencesofsuchviolentpriceshifts.Ithasalsorevivedtheinterestintheproducer-consumerdialogueasoneofthechannelstomitigatetheadverseconsequencesandcostsofoilpriceinstability.

Theideaofasystematicproducer-consumerdialogueisnotnew,however.Itemergedinthe1970saspartofageneralreorganisationintheglobalpoliticalandeconomicorderandenergymarkets,transformingthepoliticalandeconomicstructurewithinindividualcountriesaswellaspowerbalancesandrelationsbetweencountries.Thedialogueemergedagaininthewakeofthe�irstGulfWarintheearly1990s,whenconsumersandproducersrecognisedtheirjointinterest in the stabilityof theoilmarketandgainedgreaterawarenessof - and sensitivitytowards-eachothers’interests.Sincethenthedialoguebetweenconsumersandproducershasevolvedtobemoreall-encompassingandmoreinstitutionalisedthaninitsbeginnings.

Thearrivalofnewconsumersfromdevelopingandemergingeconomies,mainlyfromAsia,hasunleashednewdynamicswhichhavehadprofoundimplicationsforoilmarketdynamics,

Chapter1:TheFrameworkoftheProducer-ConsumerDialogue

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trade �lows, energy policies and consumer-consumer, consumer-producer and producer-producerrelations.Rapidurbanisationanddramaticimprovementsinincomelevelsinthesecountrieshaveresultedinlargesectionsoftheirpopulationsclimbinguptheenergyladderandincreasingtheirconsumptionofmodernfuels.Theriseofnationaloilcompanies(NOCs)withinbothproducingandconsumingcountries, andparticularly their investmentpoliciesandassetacquisitionstrategies,hasaddedanewdimensiontoproducer-consumerrelations.

The existing international organisations such as the Organization of Petroleum ExportingCountries (OPEC) and the International Energy Agency (IEA), whose roots can be tracedtodevelopmentsandeventsinthe1960sand’70s,havenotbeenabletoaccommodatetheincreasingimportanceoftheenergyinterestsofthesenewcomers.Forthelatter,theproducer-consumerdialogue,nowknownastheInternationalEnergyForum(IEF),hasbecomethemainplacetoaddressinternationalenergyissues.

Inthis introductorychapterwewishtoplacetheproducer-consumerdialogueinageneralframeworkinrelationtotheenergyproblem.Thisframeworkhelpsustoexplainwhy,despitethevastchangesthathavetakenplaceinthewaytheenergyindustryisorganised,cooperationbetweencountriesremainsanimportantfeatureofmoderninternationalenergymarkets.

TheConditionsfortheProducer-ConsumerDialogue

The underlying basis for any dialogue between producers and consumers rests on thefollowingconditions.First, the commodity inquestionmustbeofa ‘strategic’nature,withbothproducersandconsumersbeingdependentonit,thoughthedegreeofdependencydoesnotalwayshavetobesymmetrical.Second,bothproducersandconsumersmustrecognisethatanenergyproblemexistsandthattheproblemaffectsbothparties,ifnotinthesameway.Third,allpartiesneedtorecognisethattheenergyproblemiscausedbytheirownactionsandpoliciesaswellasthoseoftheotherpartyandthatnoneofthepartiescansolvetheenergyproblemonitsown.Inotherwords,anysolutiontotheenergyproblemmustemphasisetheimportant element of interdependency. Fourth, the belief must exist that because marketforcescannotalwayssolvetheenergyproblemand/ordealwithallofitsconsequencesinaneffectivemanner,marketforcesshouldbesupplementedbynon-marketmechanisms.Theseshouldre�lectbothproducerandconsumerinterestsandshouldthereforebediscussedand,ifpossible, implemented jointlyor incoordination.Thesemechanismscan improvemarketoutcomesandyieldbene�itstobothparties.

Iftheaboveconditionsaresatis�ied,bothpartiesmayhavetheincentivetoseekcooperation.Thiscooperationmaytakeoneofmanyforms,rangingfromformalandbindingmultilateralagreementstosofterformsofcooperation.Theproducer-consumerdialoguefallsunderthelattercategory.Thedialogueisnotstaticbuttendstoevolveovertimedependingonmanyfactors,includingtheperceptionsoftheseverityoftheenergyproblem,themarketconditionsatthetimeandtheparties’successinbuildingtrustandenhancingtheirunderstandingoftheotherparty’spositionthroughouttheprocessofthedialogue.

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AsymmetriesinDependencyonaStrategicCommodity

Despite its relative retreat in the energy mix in the past decade, oil remains the world’smainsourceofprimaryenergysupplies,followedbycoalandnaturalgas(Figure1.1).Thispre-eminent position follows from crude oil’s physical characteristics.1 As a liquid fuel, oilattractslargetechnicaleconomiesofscaleinthevariousstagesofproduction,transportandmarketing.Intermsofweightand/orvolume,oilhasthehighestenergycontentofallfuels,including gas and coal. Crude oil is also a global commoditypar excellence. Crude oil andre�inedproductsarethemostwidelytradedphysicalcommodities,intermsofbothvolumeandvalue.2Thetransportandaviationsectors,thelifelinesofanymoderneconomy,arestillalmosttotallyreliantonre�inedproductsfromcrudeoil;nootherfuelshavebeenabletomakeanysigni�icantprogress.

Figure1.1:FuelSharesoftheWorld’sTotalPrimaryEnergySupply(2008)

Givenitsdominantpositionintheglobaleconomy,consumersconsideroiltobeastrategiccommodity. This is clearly re�lected in the various policies and initiatives implementedaroundtheworld.Consumingcountriesaimtosecureoilsuppliesataffordablepriceswhileatthesametimereducingtheiroildependencythroughenergyconservationmeasures,thepromotionofrenewablesourcesofenergyandalternativefuels,andthebuildingofstrategicstocks to counteract supplydisruptions. Fromaproducers’perspective, theoil sector is attheheartofdomesticeconomic,politicalandsocialdevelopments,aswellasofinternational

1Frankel,P.(1946).TheEssentialsofPetroleum.Chapman&Hall,London.2Stevens,P.(2005).“OilMarkets”.OxfordReviewofEconomicPolicy,Vol.21,No.1,pp.19-42.

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economic and political relations. Despite efforts to diversify their economies away fromhydrocarbons,theoilsectorremainstheengineofeconomicgrowthanddevelopmentinmostproducing countries. Oil exports generate the bulk of the foreign revenue needed tomeetproducers’ import requirements. They also generate the bulk of the government revenuesneededtoimplementkeydevelopmentalandsocialprojectsandtodiversifyandindustrialisetheireconomiestoachievesustainableandstableeconomicgrowthandtocreateemploymentopportunitiesforthehundredsofthousandsofworkersenteringtheirlabourmarketseachyear. Given the dominance of the oil sector in their economies, producers aremuchmorevulnerabletoepisodesofoilpriceinstabilityandtoprotracteddeclinesinoilprices,especiallyascomparedwiththemorediversi�iedeconomiesintheOECD.

TheEnergyProblem

Thestartingpointforanydialogueistherecognitionthatenergyrelationsbetweenproducersandconsumersand/orunregulatedcompetitiveenergymarketsmayraisecertainconcernsandissuesthataffectandareofinteresttobothparties.Whiletheseenergyissueshavemanyfacets, the historical and current evolution of the producer-consumer dialogue has beendriveninlargepartbyeventsintheoilmarketsuchassupplydisruptions,andpriceshocksand counter-shocks.Thus, to a large extent, the energy issues thathavepushedproducersandconsumerstopursuecooperationare, inessence, ‘oil issues’or ‘oilproblems’,althoughlately,naturalgashasbeenaddedtotheagenda.Sothequestionthenbecomes:Whatarethenature and themain featuresof theoil problem?Alternatively,what typeof challengesdoenergyrelationsandthecurrentfunctioningoftheoilmarketposeforbothproducersandconsumers?

Oilcreateslargeeconomicrents.Thedistributionofrentsbetweenproducersandconsumersisasourceoftension,aseachofthepartiestriestomaximiseitsshareoftherentsthroughadjusting crudeoil prices and taxesonpetroleumproductsor capturing rents in a certainpartof thevaluechainthroughregulation.Seenfromthatperspective, theproblemofrentdistributionbecomesazero-sumgame,whichleaveslittleroomforcooperationordialoguebetweenoilproducersandconsumers.

However,bothpartiesrecognisethatthedialogueshouldnotbeaboutbargainingaboutpricelevelsandwhoshouldgetwhatfromanoilbarrel.Thereisanimplicitagreementthatthesecontentiousissuesarebestaddressedbytheoilmarketthroughtheusualforcesofsupplyand demand and the market pricing mechanism. Thus, the producer-consumer dialogueisnot centredon setting anoil pricewhich is fair and appropriate forbothparties or ondevisinginstitutionalmechanismstomanagetheoilpricewithinanarrowband.Instead,thefocusofthedialoguehasbeenonexploringwaysandmechanismstoenhanceandensureasmoothoperationoftheoilmarketthroughavarietyofmeans.Theseincludeimprovingoilsupplyanddemandresponses,ensuringsmoothinvestment�lowsintothesector,reducinguncertainty by enhancing transparency both in consuming countries’ and producers’policies,byenhancingdatatransparency,andbyexchanginginformationonaregularbasisand making sure that through appropriate regulations the oil market is not destabilisedthroughmanipulationorspeculative�inancial�lows.Asdiscussedbelow,theoilmarkethasspecial featureswhichdonot always ensure a smooth adjustment process in response toshockswhichmayimposerealcostsonbothproducersandconsumers.Sincethedialogue

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is not centred on bargaining about price levels and rent distribution, producer-consumercooperationshouldnotbeviewedasazero-sumgamebutagameinwhichbothpartiescanachieve potential bene�its through cooperation, and in some instances through joint andcoordinatedinitiatives.

Producersandconsumers’oilconcernshavemanyinter-relateddimensionsandhavebeenshapedby some spectacular events in the oilmarket such as the 1973 and1979oil priceshocks, the1986counter-price shocks, theGulf crisisof1990-1991, the collapseof theoilpricein1998-1999intheaftermathoftheAsian�inancialcrisisand,mostrecently,the2002-2009pricecycle.Whileeachoftheseeventshasitsunderlyingcausesandcharacteristics,itispossibletoidentifytheoilproblemorchallengeintermsofthefollowingfeatures:supplydisruptions and security of supply, the cyclicality of investment and security of demand,episodesofpriceinstability,end-consumersubsidiesandthetaxationofpetroleumproducts.Theclimatechangechallengeaddsafurtherdimensiontotheoilproblem.

SupplyDisruptionsandSupplySecurityConcerns

Onedimensionoftheoilproblemrelatestoconsumingcountries’concernsaboutthesecurityofoilsupplies.Attherootofsecurityconcernsistheconceptof ‘oildependency’.Crudeoilreserves are found and extracted in regions other than those inwhich they are primarilyconsumed.Asmallgroupofcountries,predominatelyintheMiddleEastandNorthAfrica,areendowedwiththebulkoftheworld’sprovenconventionaloilreservesandareresponsiblefora largeshareofglobalproductionand international trade inoil.Yetoil consumption isdominated by just a few countries/regions: in 2009 the United States (US), the EuropeanUnion(EU),Japan,IndiaandChinawereresponsibleforaround60%oftheworld’stotaloilconsumption,withtheUSaloneaccountingfor22%ofglobaloilconsumption.Althoughsomeconsumingcountriessuchas theUSarealso importantoilproducers,domesticproductionaccountsforpartoftheirconsumptionand,consequently,thesecountrieshavetorelyonoilimportsto�illthegap.Theunevendistributionofcrudeoilreservesandthefactthatdeliveringre�ined products to end consumers involves a long supply chain give rise to an industrialstructureandinfrastructurewhichextendsacrosstheglobeandtostronginterdependencyinenergytrade.

Oildependency,however, isnota suf�icient conditionas toelicit energysecurity concerns,particularlynotinaworldthatstrivesforfreetrade.Relyingonoilimportswouldnotconstituteasourceofconcernifoilweretobeguaranteedto�lowsmoothlyfromsurplustode�icitareas.Thus, inaddition tooildependency,anunderlyingconcern is thatoil �lows fromexportingto importing nationsmay be subject to disruptions. Such disruptions anddislocations canoccuratanysegmentoftheverylongoilsupplychain,whichincludesre�ining,internationalandlocaltransport,storageanddeliveryfacilities.Disruptionscanalsobecausedbyalargenumberoffactors,includingtechnicalfailures,weather-relatedeventssuchashurricanesandstorms,labourstrikes,terroristattacksonoilfacilities,civilstrifeinproducingcountries,warsinvolvingoilexporters,internationalcon�lictsbetweenproducersandconsumers,revolutionsandregimechanges that restrict theexport capabilityof someproducers,andadeliberateaction by one or a group of exporters to restrict their oil supplies to certain consumingcountries.Disruptionscanalsoariseiflackofinvestmentincertainsegmentsoftheoilsupplychainresultsinglobaloilsupplyfallingshortofoildemand.

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Althoughdisruptionstendtoreceivewidemediacoverage,theimpactofdisruptionsonpricesandshort-andlong-termproductivecapacityisnotuniform.Somedisruptions,suchasthosecausedbytechnicalfailures,occuroftenbuthavelimitedimpactonglobaloilsuppliesandonlong-termproductivecapacity.Disruptionssuchas thosecausedbynaturaldisastersoccurinfrequently, but their impact onoil supplies andprices canbe signi�icant in the short- tomediumterm.Somedisruptionscausedbyeventssuchascivilunrestinproducingcountriesorinternationalcon�lictoccurlessregularly,buttheymayhavebothshort-termandlong-termeffectsthroughtheirimmediateimpactonoilsuppliesandhenceonoilpricesandproductivecapacity.Itistheselatterformsofdisruptionthatraisemajorsecurityconcernsinconsumingcountriesandconstitutethemaindriverbehindsomeoftheirenergypolicies.

TheInvestmentProblemandSecurityofDemand

Thedynamicsofsupplyanddemandintheoilmarketmayalsoresultinmarketdislocations,withconsiderableimpactonoilsuppliesandprices.Intheworstpossiblescenario,globaloilsupplymayfallshortofglobaloildemandduetoinsuf�icientinvestmentinnewproductivecapacity.Giventhelonggestationlagsininvestmentsintheoilsector,mostoftheadjustmentoccurs throughprice increases.Newoil supplies, the entry of competing fuels, and/or thedevelopmentofef�iciencymeasurescannotactasimmediateadjustmentmechanisms.

Adjustmentthroughsharppricechanges,however,canimposehighcostsonbothproducersand consumers. Declines in oil demand associated with economic slowdowns can resolveinvestment bottlenecks andmay even create spare capacity in the system. Spare capacityandanenvironmentoflowoilpricescan,inturn,discourageinvestmentintheoilsector.Thedisincentivetoinvestthencreatestherootsofthenextoilpriceshockonceoildemandrecovers.Inotherwords,theadjustmentmechanismintheoilmarketisfarfromsmooth:theoilmarketcanwitness long periods of surplus capacity followed by periods of shortages of capacityrelativetodemand.Furthermore,thesealternatingstatesoftheoilmarketaffectinvestmentdecisionsand,hence,futuresupplyavailabilityandlong-termproductivecapacity.

Thisfeatureofcyclicalityiscommontootherindustriesaswell,buttherearethreespecialfeatures thatdistinguish theoil industry fromother industries.First, the fact that reservesare unevenly distributed creates an important asymmetry in the oil market. In countriesthatcontainthebulkofprovenoilreserves, thedecisiontoextractanddevelopreserves isin thehandsof governments or state actors.Thishas important implications, asdecisionsaboutwhetherandhowmuchtoinvestareaffectedbyeconomicandpoliticalfactorsandbyeventsbothinsideandoutsidetheoilmarket.Theoilpriceisoneofthevariousdeterminantsof investment. Others include uncertainty about trends in long-term oil demand, politicalimpedimentssuchassanctions,civilstrifeorinternalcon�licts,therelationshipbetweentheowneroftheresourceandthenationaloilcompanyresponsibleforexploitingthesereserves,thetechnicalandmanagerialcapabilityofthenationaloilcompany,thedegreeofaccesstoreservestoforeigninvestors,andthepetroleumregimeandthe�iscalsystemthatgoverntherelationshipbetweennationalandinternationaloilcompanies.Ofthesefactors,uncertaintyaboutlong-termoildemandreceivesspecialimportanceintheproducer-consumerdialogue.It is often argued that the policies of consuming governments, both implemented andannounced,andeitherdrivenbyenergysecurityconcernsortheclimatechangeagenda,playanimportantroleininducinguncertaintyaboutlong-termtrendsinoildemand.Thus,inthe

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faceofcallsfor‘securityofsupply’,producershavecoinedtheconceptof‘securityofdemand’.Fromaconsumers’perspective,theissuesofaccesstoreservesandthecapabilityofNOCsinproducingcountriestoef�icientlydeveloptheirreserves,andtodosoinatimelymannertomeetfuturedemand,remainparamount.

Inrecentyears,manyoil importers,suchasChina,KoreaandIndia,havealsobeenkeentodeveloptheirownNOCs.TheseNOCsareeagertoincreasetheirinternationalinvestmentandacquireoverseas assets to securenewsourcesof oil supply, althougha similar attemptbyJapaninearlierdecadeswasnotsosuccessful.Sincetheyarenotdrivenonlybytheobjectiveofmaximisingshareholders’value,asprivateinternationaloilcompanies(IOCs)are,theyarelikely tobe �lexible innegotiating contractswithNOCs inoil-exportingcountriesand theirgovernments.Furthermore,theseNOCsmaybene�itfrominterstateconnectionsandthusgainbetteraccessonthebasisofamoregeneralagreementbetweenthetwostates.Forinstance,itisoftenarguedthattheChinesegovernment’sresourcediplomacyenabledthecountry’sNOCstoacquireassetsallovertheglobe,particularlyinAfrica.Partofitssuccessinacquiringassetsabroad has been the willingness of Chinese NOCs to undertake large-scale infrastructureprojects such as roads, schools and hospitals to facilitate foreign involvement and energyinvestments. The entry of consumerNOCs adds a new dimension to energy relations, notonlybetween theseNOCsand their counterparts inproducing countries,but alsobetweenconsumingcountries.

Second,oilprojectshavelonggestationperiodsandcanbesubjecttodelays.Thesedelaysdonotonlyoccurbecauseofthesizeoftheprojectsandthelargecapitaloutlaysinvolvedbutcanalsobedueto issuessuchasaccesstoreservesandthecomplexityof thenegotiationsbetweeninternationaloilcompanies,nationaloilcompaniesandtheownerofreservesinboththepre-andpost-investmentstages.Therelationshipbetweentheinvestorandtheownerofthereservesisaffectedbyoilpricedevelopments,butequallyimportantly,itaffectsoilpricebehaviourthroughtheinvestmentchannel.

Finally,producers’investmentdecisionsaffectthemarketstructureinafundamentalway.Highoilpricesdon’tnecessarilyinducegovernmentsofproducingcountriestoincreaseinvestmentandproductivecapacity,asthereareotherfactorsthatenterintotheirinvestmentdecisions.Incontrast,acombinationofhighoilpricesandlimitedaccesstoreserveshaspushedmanyoilcompaniesinconsumingcountriestoexplorenewfrontiers,suchastheexploitationofoilreservesindeepandultra-deepwaters,aswellasoptionsforthelarge-scaledevelopmentofunconventionalresourcessuchasoilsands,bitumen,shaleoil,CoaltoLiquid(CTL)andGastoLiquid(GTL),extraheavyoilandbio-fuels.Theeffectofsuchinvestmentdecisionsisthatintheoilmarket,thecheapestoilreservesarenotnecessarilydeveloped�irst,allowingfortheco-existenceofbothhigh-costandlow-costproducers,withimportantconsequencesfortheprocessofoilpriceformation.

PriceInstability

Anotherrelateddimensionoftheenergyproblemispriceinstability.Withthis,itisimportanttodistinguishbetweenvarioustypesofpricemovements.Producersandconsumersarenotusuallyconcernedwithinter-dayorintra-dayvolatilitypersebutratherwithsharpoilpriceswings.Thetwoconceptsaredifferent.Forinstance,theoilpricecanoscillatewithinanarrow

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range,butwithin that range theoilpricecouldexhibithigh inter-dayor intra-dayvolatility.Theimpactsandcausesofthevariousformsofpricemovementsarealsodifferent.Nationalandinternationaloilcompaniesdon’toftengivemuchconsiderationtointra-dayorinter-daypricevolatilitywhenmakingtheirdecisionsonwhethertoinvest.Thisisincontrastwithsharpprice cycles inwhichpeakand troughpricesattainedduringprice swingsoften impact thebehaviourofkeymarketplayers,oildemand,andlong-terminvestmentplansbyincreasingthedegreeofuncertainty.Oneshouldalsodistinguishbetweenthecausesofvolatilityandthoseofsharppriceswings.Oilpriceswingsoftenre�lectchangesinfundamentalfactorssuchassupplyanddemandshocks,periodsofunderinvestmentormajor transformations in theoil supplychain. Such fundamental factors, however, cannot fully explain short-term price volatility,whichisoftencausedbythearrivalofnewinformationordatareleases,someofwhicharenotnecessarilydirectlyrelatedtotheoilmarket.

The price instability is linked to a fundamental feature of the oilmarket, namely thewiderangewithinwhichtheoilpricecanclear.Thelowerboundaryoftherangeissetbythecost�loor of oil production in keyOPECmember countries,while the upper boundary is set bytheentryofoilsubstitutesand,morerecently,bythebehaviourofmarketparticipantsinthe�inancialmarkets.Whenthemarketischaracterisedbyexcesssupplies,asitwasin1998,theoilpricetendstomovetowardsthelowerboundary.Atlowoilprices,productioncapacityisnotimmediatelyshutdown,andconcernsaboutsecurityofsuppliesdon’temergeintheshortterm.However, in themedium- to long term,sustainedperiodsof lowoilpricesunderminesecurityofsuppliesinat leastthreeways.First,asustainedperiodof lowoilpricesinducesa cycle of underinvestment in the oil sector, affecting the availability of future oil supplies.Second,sinceoilrevenuesstillconstitutethemainsourceofproducers’exportrevenuesandgovernmentexpenditure,asustaineddeclineinoilrevenuescausedbylowoilpricesrepresentsamajorthreattoproducers’political,economicandsocialstabilityandhencetheirlong-termcapabilitytosupplyoilandundertakethenecessaryinvestmentintheoilsector.Finally,lowoilpricescaninducedemandgrowthbothinproducingandconsumingcountries,underminingtheconservationandclimatechangeagenda.Inaddition,theycanunderminethepromotionof renewable sources of energy and alternative fuels, which become uneconomical at lowoilprices.Theseeffectscanbecounteractedby increases indomestic taxationofpetroleumproductsandsubsidies,butsuchactionsraiseseriousissuesconcerningthedistributionofoilrentsbetweenproducersandconsumers,asdiscussedbelow.

Whenthemarketischaracterisedbyexcessdemand(ex-ante),substitutesandadjustmentsindemandpatternscannotplaceacapontheoilpriceintheshortterm.Instead,intheabsenceofsparecapacity,mostofthemarketadjustmentislikelytooccurthroughsharpincreasesinoilprices.Whilethisleadstoanimmediateriseinproducers’revenues,sustainedperiodsofhighoilpricescanunderminesecurityofoildemandbyencouragingsubstitutesandunconventionalsupply sources to enter themarketenmasse andby inducing apermanent reduction inoildemandthroughpriceeffects,anti-oilpoliciesorstructuralchangesinconsumerbehaviour.

Thus,bothproducersandconsumershaveaninterestinkeepingoilpricesstablewithinarangewhose lowerboundary isnot ‘too low’or theupperbound isnot ‘toohigh’.However,viewsdifferonwhat‘toohigh’and‘toolow’meanandwhetherthisstabilisationshouldbelefttothemarketorwhetherthemarketshouldbesupplementedbymechanismstostabilisetheoilpricewithinapreferredpricerange.

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EnergyTaxationandSubsidies

Another dimension to the energy problem relates to the distribution of rents betweenproducers and consumers and the subsidies and taxes on energy. Taxes and subsidies candivertdemandandsupplyindirectionsthataredesiredatthenationallevelofproducingandconsumingcountries,butbecauseenergyistradedinternationallycanalsohaverepercussionsontheenergypoliciesandsectorsofothercountries.Inthe1980s,IEAmemberstatepolicies’diverteddemandawayfromoilinthepowersectorandstimulateddemandforotherfuels,suchascoal,whileoildemandinmostOECDcountries,particularlyinthetransportationsectorwasrestrainedbyarelativelyhighexcisetaxontheconsumptionofpetroleumproducts.Demandforpetroleumproductsishighlyinelasticduetolimitedsubstitutes,whileitsconsumptionisassociatedwithnegativeexternalitiessuchasairpollutionandadversehealtheffects.Thus,taxesonpetroleumproductsarealsoperceivedtobeanef�icientwaytoraiserevenuesforconsumingcountriesandtocorrectfornegativeexternalities.3Sincetaxesrepresentalargeportionofthepriceofpetroleumproductsatthepump,aonedollarriseininternationalcrudeoilpricesisassociatedwithlessthanonedollarincreaseinthepriceofpetroleumproducts,and thus, like subsidies, taxationweakens the demand response of petroleumproducts tochangesincrudeoilpricesininternationalmarkets.

Inmore recent times,manyOECDcountries are stimulating renewable energies aspart oftheirclimatechangepolicies,oftenthroughacombinationofsubsidiesandtaxes,tochangethecompositionoftheirenergymixtoonewithalowercarboncontent.Thesepolicymeasureschangethedistributionofrentsinthevaluechain,forinstanceofoil,whilealsoredistributingthese rents among the various fuels. Such policymeasures impact demand and supply forcertainfuels,andobviouslycanalsohaveimplicationsfortherelationsamongproducersandconsumers.

OilsubstitutionpoliciesarenotonlylimitedtoOECDcountries.Forinstance,whileChinahasfallenbehind in the combustion engine technology, it is determined tobecomea leader inelectricvehicle technologywith theobjectiveofcreatingaworld-leading industry.China ispromotingtheelectricvehiclethroughintroducingplanstograntconsumerstaxcreditsontheirpurchaseofelectricvehicles,offeringsubsidiestotaxi�leets,andencouragingcitiestosetupelectriccarchargingstations.Thegovernmenthasalsodispersedresearchsubsidiesforelectriccardesigns.Sincemostoftheseelectricvehicleswillbepoweredbycoal-�iredpowerplants,theentryoftheelectricvehicleatalargescalemeansanindirectpenetrationofcoalinto the transport sector. Similarly, thewideradoptionofCNGcars alsomeansan indirectpenetrationofnaturalgasintothetransportsector.

Securityofsupplyconcerns inOECDwere themaindriverof thesepoliciesbutresulted insecurityofdemandconcernsforproducingcountries.Fromaproducers’perspective,taxeson

3 TaxationofpetroleumproductsandoilsubstitutionpoliciesarenotonlylimitedtotheOECD.Formanynetimportersindevelopingcountries,taxesonpetroleumproductsconstituteamainsourceofgovernmentrevenue,rangingfrom7%to30%oftotalgovernmentrevenues.Furthermore,manyemergingeconomiesarepursuingpoliciesaimedatimprovingtheef�iciencyinthetransportsector.Gupta,S.andW.Mahler(1995).“TaxationofPetroleumProducts:TheoryandEmpiricalEvidence”.EnergyEconomics,Vol.17,No.2,pp.101-116.

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petroleumproductsarediscriminatoryandtendtodampenoildemandgrowth,reducingitsshareintheenergymixinthelongterm.Equallyimportantly,theyraiseadistributionalissue,asthroughtaxation,consumingcountriescancapturepartoftherent–inmostcaseslargerthan the share extracted by producers themselves. Furthermore, oil substitution policiesthrough regulations, incentives, subsidies, taxation, moral suasion, and/or combination oftheseinstrumentsinducea largedegreeofuncertaintyandthreatenlong-termoildemand.Although in theshort-run the impactof suchgovernmentpolicieswillbemarginal, fromaproducers’perspective,theireffectsonoildemandarebothcumulativeandirreversibleandhencecannotbeignoredinthelongterm.

Thecounterpartofproducers’complaintsabouttaxationofpetroleumproductsisconcernsaboutenergysubsidies.Subsidiesofferprotectionagainsttheimpactofhighenergyprices,andasaresultconsumershavenoincentivetoadjusttheirconsumptionpatterns.Thus,suchsubsidies encourage the consumption of energy including petroleumproducts, natural gasandelectricityabovethelevelsdictatedbyunregulatedprices.4Overtimethismaystraintheexportcapabilitiesofproducers,whendemandcontinuestorisefasterthansupply.Subsidiesmay also undermine the climate change agenda and sustainable development. Therefore,manycallshavebeenmadefortheabolishmentofenergysubsidiesinordertoreduceworldgreenhousegasemissionsandtoachievesustainabledevelopment.InthePittsburghSummitofSeptember2009,theG20leadersagreed:

Tophaseoutandrationaliseoverthemediumterminef�icientfossilfuelsubsidieswhileproviding targeted support for the poorest. Inef�icient fossil fuel subsidies encouragewastefulconsumption,reduceourenergysecurity, impedeinvestmentincleanenergysourcesandundermineeffortstodealwiththethreatofclimatechange.

This isa largetask formanycountries -producingandconsumingcountriesalike-aswasshownintheWorldEnergyOutlook2010,whichofferedanestimateoffossilfuelconsumersubsidies. In the top ten subsidising countries, both producers and consumers wererepresented,whilethelattergroupconsistedmainlyofemergingeconomies.

TheClimateChangeAgenda

Recentconcernsabouttheimpactoffossilfuelsontheenvironmentaddfurtherdimensionstotheoilproblem.Nowadays,manymajorconsumingcountriesconsiderclimatechangetobea security issuesimilar to thatofenergysecurity.Environmental concernsdominateallstagesoftheoilchain, fromproductiontoconsumption. Intheproductionphase,thereareenvironmentalconcernsaboutissuessuchastheaccesstowildernessareas,thearctic,deepoffshorereserves,the�laringofassociatedgas,andaccidentsandspills.Inthetransportphase,thereareworriesaboutpipeline leakagesand tankeraccidents. In theconsumptionphase,thereareconcernsaboutpollutionandhealtheffectsofburningpetroleumproducts.As inotherpartsoftheworld,producersarebecomingincreasinglyconcernedaboutthepotentialeconomicandsocialimpactsofclimatechangesuchaswatershortages,landdegradationandrisingsealevels.Butforproducers,climatechangehasanadditionaldimension,asitaffectsthemarketforfossilfuels,whichconstitutesthemainsourceoftheirincome.Producersfearthat

4 IEA,WEO2010.

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taxationpoliciesandsubsidesforalternativesourcesofenergysuchasrenewables,nuclearandethanolcanlimitthegrowthorevenreducethesizeoftheoilmarketinthelongterm.

Interdependency

Therecognitionthatanenergyproblemexistsdoesnotnecessarilyimplythatproducersandconsumerswillseekcooperation.Animportantconditionforcooperationisthattheinterestsof bothparties are interdependent in at least three respects: �irst, that bothparties face acommonenergyproblem;second,thattheactionsofonepartytoaddresstheenergyproblemcanunderminethe interestsof theotherparty;andthird, thatnoneof thepartiesbelievesthatitispossibletosolvetheenergyproblemoratleastalleviatesomeofitsconsequencesbypursuingpoliciesindependentlyoftheother.

The interdependencybetween theplayers in theoilmarketcannotbeoveremphasised.Allpartieshaveaninterestinensuringthatoilcontinuesto�lowsmoothlyfromde�icittosurplusareas.Furthermore,thesupplychainfromtheproducertotheultimateconsumerisquitelong,anddisruptionsandbottleneckscanoccuratanypartofthesupplychainwithrepercussionsfor the global crude oil market. Disruptions can occur both in importing and exportingcountries.Whileoilproducerscontrolthebulkoftheupstreammarketsegment,importantpartsoftheindustry,suchasthere�iningandmarketingofpetroleumproducts,areunderthecontrolofplayersinconsumingcountries.Finally,oilpriceinstabilityaffectsbothparties,withproducersbeingmorepronetoperiodsofpriceinstability.

Anotheraspectof interdependencyisre�lectedinthefactthatconsumers’concernsalwayshave a counterpart in producers’ concerns. For instance, consuming countries’ policiesregarding enhancing energy security and the climate change agenda, such as promotingrenewablesorraisingtaxes,increaseproducers’concernsaboutthefuturesizeofthemarketfortheirmainproduct.Consumingcountries’continuouscallstoincreaseinvestmentintheoilsectoroftentranslatesintoproducers’fearsthattheincreaseinadditionalcapacitywillnotbemetbyanincreaseindemand,placingdownwardpressureonoilpricesanddivertingfundsaway from social and economic projects. Consuming countries’ policies to substitute awayfromoil increasesuncertainty aboutdemandand increases the reluctanceofproducers toinvestintheircapacity.Inturn,decisionsbyproducingcountriesnottoinvestintheoilsectorduetodemanduncertaintyorotherdomesticandinternationalconstraintsincreaseconcernsinconsumingcountriesaboutthefuturesecurityofoil�lows.5

The �inalaspectof interdependencyrelates to the ideathatnoneof thepartiescanbelievethatitcanaddresstheoilproblemonitsownthroughpursuingindividualpolicies.Ifanyofthepartiesthinkthatnationalpoliciesareeffectiveintacklingtheenergychallenge,thenthispartywillnot seekcooperation.Thus, theproducer-consumerdialogue ispremisedon thebeliefthatsomeproblems,suchasclimatechangeortheinvestmentchallenge,requiresomeformofcommon-oratleastcoordinated-policyresponses.

5 Harks,Enno(2010).“TheInternationalEnergyForumandtheMitigationofOilMarketRisks”,in:GlobalEnergyGovernance,TheNewRulesoftheGame.Golthau,A.andJ.M.Witte(eds.),pp.247-267.BrookingsPress,Washington,DC.

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TheOilMarket

Even if producers and consumers do not automatically seek cooperation to address theenergyproblem, it canbeaddressedbyothermechanisms.Themostobviousand in facttheonlyexistingmechanismnowadaysisthemarket.Overtheyears,theinternationaloilmarkethasdevelopedintoacomplexsetofphysicaland�inancialmarketsinwhichvariousparticipantsinproducingandconsumingcountriesareabletotransact.Throughtheforcesofsupplyanddemandandthroughpriceadjustments,theoilmarketcansurviveepisodesof ex-ante excess demand and provide the signals necessary to induce investment in theoilsector.Episodesofoilpriceinstabilitycanoccur,butthehighlyliquid�inancialmarketsprovideparticipantswiththemeanstowithstandthevariouspriceshocks.

Anunderlyingpremisebehindtheproducer-consumerdialogueisthattheoilmarketneedstobesupplementedbyothermechanismsandthatthesecanimprovemarketoutcomes.Thisraisesthefollowingquestion:Whataresomeoftheaspectsoftheoilproblemthatcannotbeaddressedbytheusualadjustmentmechanismsofthemarket?Theanswerseemstobethatwhile themarketadjusts tovariousevents,priceadjustments canbe sharpat timesimposinganunnecessarycostonproducersandconsumers.Furthermore,thereisabeliefthatthemarketcannotgeneratethenecessarysignalstosmooththeinvestmentcycleintheoilsector.SomearguethatOPECandconsumingcountries’policiesdonotallowthemarkettooperatefreely,givingrisetosomesortof‘marketfailure’whichneedstobeaddressedbyenergypoliciesand/orproducer-consumercooperation.

Oneaspectoftheoilproblemrelatestodisruptionscausedbypoliticalevents.Themarketadjuststosuchdisruptionsthroughsharppriceincreasesandsometimesthroughachangein contractual agreements. In such events, buyerswho are concerned about securing oilsuppliestendtoincreasetheirprecautionarydemand,causingpricestojumphigherthanwhat is justi�ied by the reduction in supplies. Sharp adjustments in the oil price are notdesirable,andsoconsumersandproducerstrytoavoidsuchshocks.Sincethesedisruptionsare driven by political events, the producer-consumer dialogue cannot resolve suchproblems.Governmentpolicy,however,canmitigatesomeoftheeffectsofdisruptions,eitherthroughmaintainingcertainlevelsofsparecapacityinproducercountries,holdingstrategicreservesinconsumingcountries,orboth.Itisverydif�iculttohaveinternationalagreementson the level of spare capacity that shouldbemaintainedbyproducing countries and thevolumeofstrategicreservesthatshouldbeheldbyindividualgovernments.Nevertheless,the producer-consumer dialogue could help in some areas, such as coordinating effortsregarding the timing of the �illing and releasing of strategic stocks, the composition ofstrategicreserves,anddesigningrulesthatgoverntheuseofsparecapacityandoilstocksincaseofdisruptions.

Another area in which the producer-consumer dialogue may improve market outcomesis smoothing the cycle of investment. Oil prices have often been highly volatile, blurringthedistinctionbetween transitory andpermanentpricemovements.As suggested in theliteratureofinvestmentunderuncertainty,giventhelargeinvestmentoutlaysinoilprojectsandtheirreversiblenatureoftheseinvestments,theoptiontowaitisquitevaluable.Thisis complicated by the fact that policies in consuming countries can contribute further tothedegreeofuncertainty.On theotherhand, in consuming countries thereare concerns

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aboutissuessuchasaccesstoreserves,thecapabilityofnationaloilcompaniestodevelopthesereservesandinternalpoliticalfactorsthatmaypreventinvestmentintheoilsector.Suchfactorsrestrictthecapabilityofsomeproducingcountriestoexploititsreservesandincrease itoilexports ina timelymanner.Theproducer-consumerdialoguemay improvemarketoutcomesby improving the investmentclimate in theoil industryand facilitatingthe �low of information between parties. For instance, exchanging information on issuessuch as future investment plans in producing countries and oil substitution policies inconsumingcountriesmayhavetheeffectofreducingthedegreeofuncertainty,creatingamoreconduciveenvironmentforinvestmentintheenergysector.

Theoilmarketstructureinwhichbothlowmarginal-costproducersandhigh-costproducerscoexistimpliesthatpricescanclearwithinawidepricerange.Marketforcesrarelypushtheoilpricetowardsthelowestboundary,asOPECproductioncutsmaysucceedinplacinga�loorontheoilprice.Marketforcescanpushpricestowardstheupperboundary,butactionsfrombothproducersandconsumersandsupply/demandadjustmentoftenpreventtheoilpricefromstayingattheupperlimitforalongperiodoftime.Inamarketstructureinwhichtheoilpriceoftenlieswithinanimplicitrange,theproducer-consumerdialoguecanprovideasignallingmechanismwhichcanmovethemarkettowardsapreferredpricerangethatisconducivetoinvestment.

TheProducer-ConsumerDialogue

Doestheproducer-consumerdialogueconstituteaneffectivemechanismtoaddresssomeoftheaspectsoftheenergyproblem?Atoneextreme,thereistheviewthatinthepresenceofaverywell-developedoilmarketthereisnoneedfortheproducer-consumerdialogue.Theoilmarketcanaggregatetheinterestsandexpectationsofallmarketplayersandis�lexibleenoughtoself-adjusttothevarioustypesofshocksandgeneratethenecessarysignalstoensuresmoothinvestment�lowsintheoilindustry.Attheotherextreme,thereistheviewthatthevariousoilpriceshocksandcounter-shockssincethe1970sandthesharpcyclesofinvestmentareclearevidencethatthemarketadjustmentmechanismsarenoteffectiveindealingwithmanyaspectsoftheoilproblemandthatrelyingsolelyonmarketmechanismscanbecostlyanddisruptive.Mostconsiderthetruthtoliesomewherebetweenthesetwoextremes: the producer-consumer dialogue and themarket do not need to exclude eachother.Theproducer-consumerdialogueisnotintendedtoreplacethemarket,butrathertosupplementitsrole.Thedialoguecanprovideaplatforminwhicheachpartybecomesmoreawareoftheotherparty’sconcerns.Italsoprovideseachofthepartieswiththeknowledgeof the impactof theirpoliciesonthepoliciesanddecisionsof theotherparty.Adialoguecancreatetrustandcon�idenceinthegeneraldirectionofinternationaleconomicrelations,whichhelptosmooththeexpectationsaboutinvestmentdecisions.

Whiletheproducer-consumerdialoguecan,inprinciple,supplementandimprovemarketoutcomes,thisisnotaforegoneconclusion.Thisdependsamongotherthingsonthecontentofthedialogue,theinterestsoftheparties,andtheinitiativesthatproducersandconsumersproposeandimplement.Itispossibletohaveaproductiveandpurposefuldialoguewithaclearagendaandobjectives.Butitisalsopossibletohaveadialoguewhichisneitherusefulnorfocusedonthereal issues:dialogueforthesakeofdialoguejustbecausebothoroneofthepartiesthinkitisdesirable.AsMabro(1991)notes,thedialogueis“nothingbutan

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exerciseinexplorationwhichcanleadtodifferenttypesofdiscoveriesortonone”.6So,hastheproducer-consumerdialogueoverthepasttwentyyearsresultedinany‘discoveries’?Weleavetheanswertothisquestiontolaterchapters.But�irst,itisimportanttoplacetheframeworkprovided in this chapter in itshistorical context and to analyze thepolitical andeconomiccircumstancesthathaveledpartieswithverydiverseintereststopursuecooperation.

6 Mabro,R.(1991).ADialogueBetweenOilProducersandConsumers:TheWhyandtheHow. OxfordInstituteforEnergyStudies,SpecialPaper2,p.23.OIES,Oxford.

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Introduction

Veryoftenweperceivedevelopmentsintheworldthroughalensthatnarrowsratherthanwidens our perception. Narrating the oil story often leads to highly politicised reportsabout the clash between producing and consuming countries over price and productionlevels, access to reserves andmarkets, and the fear of usingoil as a politicalweapon. Ininstitutionalterms,thisconfrontationwasepitomisedbythecreationoftwoorganisationswhich represent the twosidesof theoil concerns: the IEA,whichpooled the interestsoftheindustrialisedoil-consumingcountriesafter1973,andOPEC,whichhassoughtstableincomefromoilsincethe1960sfortheoil-producingcountries.Forasubstantialnumberofyears,thesetwoorganisationsnotonlyrepresentedtheproducingorconsumingcountryinterests,buttheyalsoembodiedthemistrustamongcountrieswhichwasrampantinthoseyears.Thedramaticchangeingovernanceoftheinternationaloilmarketcameamidstheateddebates about the so-called North-South relations andmounting international economicimbalances.7These imbalancescausedmanygeopoliticalandgeo-economic tensionsandpreventedaswiftcooperativesolutionfromcomingabout.Itisclearthatthesharingofrisksandbene�its in the internationaleconomywasasmuchadebatethenas it isnow.Widerinternationaleconomicissues,bothtradeandmonetaryrelated,easilyintertwinedwiththeinternationaldiscussionsaboutenergyingeneral,andoilinparticular,nowandinthepast.

Theevolutionoftheproducer-consumerdialogue,asthediscussionspriortothenamingoftheInternationalEnergyForum(IEF)werecalled,showsthevastchangesininternationalrelations – particularly economic relations – that have taken place since 1973. Thesechanges concernnot only the relations betweenoil-producing and -consuming countriesbutalsototherelationsamongthesecountriesandthewayinwhichtheoilcompanies-newandold,privateandpublic-interact.Moreover,itisinthisperiodofregulatorytransitionthatthefoundationswerelaidforthefurtherglobalisationoftheworldeconomy,includingtheinternationaloilmarket,butalsofornewstructuresofinternationalcooperation,suchastheG-7/8and,later,theInternationalEnergyForum.

Chapter2:ShiftingWorlds

7 Scott,Richard(1994).TheHistoryoftheInternationalEnergyAgency1974-1994,IEATheFirst20years,Vol.1,OriginsandStructure.OECD/IEA,Paris,pp.32,http://www.iea.org/textbase/nppdf/free/1990/1-ieahistory.pdf.

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CountriesAlwaysBalanceandRe-balance

The often political orientation of the oil story’s narration prevents a closer look at thecon�lictingviewsand interestswithin certaingroupingsofplayers,whether thegroupofIOCs, consuming countries or producing countries. These discussions are not limited tooil alonebut are often seenby the variousplayers in the context of their geopolitical orinternationaleconomicpositionsorambitions,oftenre�lectingideologicaldifferencesaboutorganisationanddistribution.TheIEAcountries,forexample,areneitherhomogeneousintheir political systems nor in their domestic socio-economic organisation, despite theirgroupingasmarketeconomies.Inmanycountries,thestatehasplayedandcontinuestoplayanimportantpartintheeconomyasaproducer.Thedomesticorganisationoftheeconomydoesnotpreventgroupingsfromfunctioningalongcertain(geo-)politicallines.

Countries often function in alliances because they are tooweak in certain areas to exertpower on their own and because cooperation can increase the bene�its. The strength ofthesealliancescanvaryaccordingtosubject,dependingontheextenttowhichthenationalinterests are served. Sometimes we see leader-follower types of cooperation, but moreoftenthannotleadershipiscontestedwithinthegroup.Forexample,sometimestheleaderis forced to allocate suf�icient bene�its to all participants in the cooperation tomake analliancework.Yetwhenthedistributioncostsbecometoolargefortheleaderorleadersandpartnersareunwillingtosharethesecosts,theymightloseinterestinsatisfyingtheneedsof smaller coalitionpartners. Thedynamics of satisfying theperceivednational interestswithinacertaingroupingof countries is important for theconsistencyof thegroupovertime.Veryoften, countriesparticipate in inter-governmental organisations inwhich theycanoperateinaccordancewiththeirnationalinterestsandbowoutofdecision-makingthatrunscountertotheirinterests.Yetwhenasuf�icientnumberofcountriesdecideonacertainapproach,theoptiontobowoutcanbecostly.

AnargumentsimilartothatoftheIEAcountriesalsoholdsforOPECcountries.TheOPECmemberstates,too,varyinpoliticalsystem,socio-economicorganisationandimportanceofoilintheirdomesticeconomies.Inseekinganationaloptimaloutcome,thesedifferencesmust lead to compromises in negotiating a coordinated production policy for OPEC as awhole.Theabilityofthestrongestcountriesinagrouptosharethebene�itsofcooperationisimportantinordertoremainconsistentinimplementation.However,forstrongercountriesorleaderstoremaininterestedincooperation,theweakercountriesinagroupmustalsobeaccountableforthecostofcoordination.Theeffectivenessofcooperationcanvaryovertime.InthecaseofOPEC,con�lictsbetweenindividualmemberstatestemporarilyweakenedtheorganisationbutdidnotleadtoitsdemise.Likeinotherinternationalorganisations,whentheneedamongthememberarose tocooperate increased, thesedifferencescouldbesetasideorovercome.

Coordination, competition and collusion can play an important role among companiesas well as nations, depending on the phase of market development.8 The internationalcompanies operated oil consortia in the Middle East, which required them to manageproduction among themselves. Under the Red Line Agreement, these international

8 DeJong,H.W.(1996).DynamischeMarkttheorie.StenfertKroese,Leiden.

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companies had actually formed a cartel.9 In other instances, companies operate in jointventures, implying competition inonemarket and cooperation inothers.The stabilityofthevariousformsofcooperationvaries,dependinginpartonmarketsharetheyrepresentandgovernmentactiontobreakupcooperation.Itisimportanttonotethatineachoftheperiodsofcoordinationorcollusion,thecompetitivefringemanagedtoreducethemarketpowerofthecompanies.10

Perception

Inournarrativesaboutoil,perceptionplaysaveryimportantrole.ForaverylongtimeOPECmeetingswererelated,inmanyWesternpeople’seyes,tothequestionsofifandwhentheywouldagainuseoilasapoliticalweapon,whileitwastheOrganizationofArabOilProducingCountries(OAPEC),whichhadbeenresponsible for theembargo.Eventhough insidersarefullyawareofsubtledifferences,othersarenot.WhenfearsofapoliticalactonthepartofOPEChad�inallysubsidedinthelate1990s,theseWesternfearswereeasilytransposedontoRussiawhenitembarkedonarenationalisationofitsenergysectors.

Apparently, therearemanyshadesofgreywhenitcomestogroupingthevarious intereststogether. Very often, the history of oil relations has appeared to be framed in a certain,sometimesundisclosed,fashion,whichhasledtoonlythemainstreamideasofthemainactorsordominantgeopoliticalgroupingbeingrepresented.Seenfromanotherplayer’sperspective,thenarrativeoftenchanges.Perceptionalsoplaysanimportantroleingeopoliticalpositioningbecausecountriescanperceivetheirsecurityornationalinterestsinacertainway,whileotheractorsseetheirroleandpositioninservingthenationalinterestsinanotherway.11Intheoilnarrative,theColdWarandthesupport–orlackthereof–oftheliberaldemocraticmarketapproachhaveplayedanimportantroleintheinternationalpoliticalexchangesbetweentheparties,eachframingeachotherinacertainmannerandactingontheseperceptions.

Inthischapter,“ShiftingWorlds”,whichcoverstherun-uptotheproducer-consumerdialogue,it is important tounderstand thecircumstanceswhich led to the �irstandsecondoilpricecrisesinthe1970sinordertocomprehendtheaftermathintermsofcon�lictandcooperation.Thesecircumstanceswerenotlimitedtochangingoilrelationsalonebutalsoinclude,amongother things, decolonisation and the vast changes taking place in the monetary relationsamongcountries.Theemergenceofagroupofnewlyindependentcountriesthatquestionedthe economic system of distribution of economicwealth in theworld slowly changed theinternationalpoliticallandscape.Atthesametime,newstrategiestodevelopexportorientationasopposedtoimportsubstitutionhelpedsomecountriesintheearly1970stoimprovetheireconomicpositions.Lastbutnotleast,alsothetransatlanticrelationshipbetweentheUSandtheEuropeancountrieswaschanging.

9 UnitedStatesSenate,TheInternationalPetroleumCartel,StaffreporttotheFederalTradeCommissionsubmittedtothesubcommitteeonMonopolyoftheSelectCommitteeonSmallBusiness,WashingtonD.C.,22August1952.

10VanderLinde,Coby(1991).“DynamicInternationalOilMarkets:OilMarketDevelopmentsandStructure,1860-1990”.StudiesinIndustrialOrganization,Vol.15.Kluwer,Dordrecht/Boston.

11Wendt,A.(1992).“AnarchyisWhatStatesMakesofIt:theSocialConstructionofPowerPolitics”.InternationalOrganization,Vol.46,pp.391-425.

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TheBrettonWoodsGovernanceSystemandOil

ThepoliticalandeconomicimportanceoftheUSasaworldpowerwasexempli�iedbyitsstrongsayintheinternationaleconomicgovernanceofthattime.Exchangeratesbecamestablebutadjustable and were pegged to a gold-dollar standard, administered by the InternationalMonetaryFund(IMF).ItcreatedaworldeconomyfocusedontradewiththeUStomaintaintheexternalbalance,whileUScompanies increasinglygainedaccess tomarkets (mainly inEurope)throughdirectinvestments.Thedollarbecameakeycurrencyintheworld,at�irstbecauseothercurrencieswerenotyetconvertible,andlaterbecauseofitsassumedsystemicstability.Muchoftherawmaterialsandenergytradewasconductedindollars.

The wider international economic governance was organised through the BrettonWoodsinstitutions,theIMF,theWorldBankandtheGeneralAgreementonTariffsandTrade(GATT),a forerunnerofaworld tradeorganisation(WTO) thatonlymaterialised in the late1980s.TheBrettonWoodsinstitutionsandGATTwerethemainproponentsofthepost-WorldWarIIgovernancesystemtopromotefreetradeandstableexchangerates.Atthesametime,theUnitedNations(UN)promotedself-determination,acceleratingthede-colonisationprocess.Fortheoldcolonialpowers,thisprocesswaspainfulandreducedtheircontrolovercertaincrucialeconomicsectorsandtrade�lows.Inthe1960stheprocessofpoliticalemancipationwasfollowedbytheambitiontoachievemoreeconomicindependenceandnationalcapitalformation.InLatinAmerica,andlaterfollowedbydevelopingcountriesinotherregions,thisledtoimportsubstitutionpoliciesinanattempttodevelopfrombeingrawmaterialexportersinto�inishedproductproducers.Multinationalorinternationalcompanies,withtheirpractisesoftransferpricingandtaxadvantagesintheirhomecountries,wereincreasinglyfrowneduponindevelopingcountries.Inmanycountriesgovernmentsattemptedtoreplacethesecompanieswithnationalcompanies.SomeAsiancountries,endowedwithcheaplabourratherthanrawmaterials and/orenergy, insteadbegan to industrialise throughexportpromotionpolicies.InEurope, theEuropeanEconomicCommunity(EEC)was founded, inpartwith theaimtoimprovetradeandwealth.Rapidgrowthofworldtradeandeconomicgrowthaccommodatedthemanychangestakingplaceintheorganisationstructureoftheworldeconomy.

The structure of the world economy was asymmetrical, however, and despite the rapidgrowthoftrade,itsbene�itsweremostlyconsumedinafew,mostlyindustrialised,countries.Moreover, theprogress of countries developing froman agriculturally-based economy intoanindustrialisedcountrywasmoregradualthanbe�ittedtheambitionsoftheinternationalcommunity.Particularly thenewly independent,mostlydeveloping,countrieshaddif�icultytranslating theirnewpolitical standing intoaneconomic takeoff.12This created frustration

12RaulPrebischwasDirectoroftheEconomicCommissionforLatinAmerica.In1950,hepublishedastudycalledTheEconomicDevelopmentofLatinAmericaanditsPrincipalProblems,alsoknownastheSinger-Prebischthesis.Inthisstudy,heexplainedthedeclineinthetermsoftradebetweenindustrialisedandnon-industrialisedcountries.Developingnationshadtoexportmoretogetthesamevalueofindustrialexports,implyingthatallofthebene�itsoftechnologyandinternationaltradewouldaccruetothecentreratherthantheperiphery.Heclaimedthatfreetradewouldnotbeabletoclosethedevelopmentgapbetweendevelopedanddevelopingcountries,inspiringtheimport-substitutionpoliciesofmanyoftheGroupof77countries.

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withtheUNgovernancesystemandcriticismoftheskewedeconomicorderintheworld.Thediscussionabout the internationaleconomicorder isalsore�lected in thediscussionaboutgovernanceintheinternationaloilmarketofthattime. IntheUNGeneralAssemblyandinUnitedNationsConferenceonTradeandDevelopment(UNCTAD),developingcountrieswerebecomingmoreandmorevocalindemandingachangeintheinternationaleconomicorderwheneventheinward-lookingeconomicstrategiesdidnotbringsuf�icientdevelopment.

TheStructureoftheOilMarketinthe1950sand1960s

While international sectors and markets were undergoing rapid change everywhere, thestructureoftheoil industryinthe1950sand1960sremainedlargelyaremnantoftheoldworld order. The international oil companies had obtained their large concessions in the1930sbutonlystartedtoexploittheseconcessionsafter1945.Theconcessionsweredividedamong a small group of oil companies of both European and American origin, creating anetwork of consortia. The consortia were interested in supplying both the European andAmericanmarketswiththeirnewoil,butvestedinterestskepttheAmericanmarketdif�iculttoaccess.TheimmenseoilreservesoftheMiddleEastdid,however,greatlyaddtothestrategicimportanceoftheregion.

DevelopmentsintheMiddleEastplayedade�iningroleinthedevelopmentoftheinternationaloilmarket and the governance structures that emerged after 1973, just as Venezuela hadplayedan importantrole in the1950s inconvincingtheproducingcountries in theMiddleEasttocooperateintheirnegotiationswiththeIOCs.TheMiddleEastwasbothincreasinglyimportantforitslocation,atthesoftunderbellyoftheSovietUnion,bridgingthenavalandlandroutesbetweenEuropeandAsia,andforitsvastenergyresources.Moreover,thepoliticalmakeupoftheMiddleEastandNorthAfricahadbeenin�luxsincethedemiseoftheOttomanEmpire,withthesubsequentMandatePeriodendingwiththeyoungnationstryingto�indtheirdirectioninapoliticallycontestedregion.Nationbuildinginthediverselypopulatedregionwasdif�icultformostofthenewlyindependentcountries,particularlywithintheboundariesofpreviouslyadministratedconstructsoftheOttomanEmpireandtheMandatePeriod.Thecountries were also the theatre of a tug of war over geopolitical spheres of in�luence, asevidencedbytheeventsinIranin1953andthedealingsoftheUS,FranceandtheUKwithEgypt.Internalandregionalcon�lictswereextensiveinthe�irstdecadesofnationhood,withleadership challenges, competingminorities andbattles over secularisation, inter-religiouschallengesandtheseveranceofthelastcolonial links.Thepost-wardevelopmentoftheoilindustryintheregionhastenedchangeinmanyofthecountries.13WiththedecliningrolesoftheUnitedKingdom(UK)andFranceintheregion,theArab-Israelicon�lictincreasinglydrewthegeopoliticalinterestoftheUS,particularlywhentheSovietUniongainedmorein�luenceintheregion.

Withtheworldeconomyrapidlymodernisingandadoptingthenewoil-basedtechnologiesfromtheUS,theimportanceofoilasabasicinputintheeconomybecamelargeandwidespread.

13Shwadran,Benjamin(1956).TheMiddleEast,Oil,andtheGreatPowers.AtlanticPress,pp.435-445.London.

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TheexpansionoftheEuropeanandJapaneseeconomieswasfuelledbytheeasyaccesstolow-costoil�lows.Althoughsomeconsuminggovernmentscontinuedtoprotectthecoalsectorsintheirowncountries,theswitchfromcoaltooilintheenergymixwasimpressive.Veryoften,oilwassuppliedtocertaineconomiesfromonetothreesourcecountriesonly,increasingthestructural importdependence.Thisbecamemoreproblematicafter theclosureof theSuezCanal in1967.Therapidexpansionof largeoil tankers,enabling themtosupplycountriesdespitethelongerroutearoundtheCape,largelysatis�iedthegrowingconcernsaboutsecurityofsupply.Theinternationaloilcompanieshadproventheirreliabilityasmarketmanagersandsecurityofsupplyproviders.Yetthechangingrelationsintheworldeconomyanddiscussionsabout the international economic orderdidnot escape them.As timeworeon, security ofsupplybecameanincreasinglyimportantfeatureofconsumercountries’policyagendas.

Developments in the US energy economy were somewhat different from those in Europeand Japan.14The roleof theUSmustbe seen in thecontextof the fact that it isnotonlyalarge consumerofoil but also a largeproducerwhichhas alwaysharboured the entireoilvaluechainwithinitsjurisdiction.ManyoftheUSpolicydecisionsweredirectedtowardthedomesticmarketbutdid,nonetheless,impactdevelopmentsintherestoftheworld.Thiswasnot only true for issues related to the energymarket but also formonetary and economicpolicies.ThestructureoftheAmericanoilindustrywasdifferentfromthatintherestoftheworld,inparthelpedbythesubsoilownershipstructure,thematurityofthesector,andanti-trust legislation.Manysmalleroilcompanieswere involved inallpartsof theAmericanoilvaluechain.Increasingly,theinternationaloilcompaniessourcedtheAmericanmarketfromthecheaperresourcesintheMiddleEastandVenezuela.Thesizeofthesereserveshadmadethecompaniesextremelycrude-rich.WithouttheprotectionoftheGulfPlussystem15,thesesuppliesrapidlygainedmarketshare.Concernsaboutimportdependencybegantosurface,aided inpartby thegrowingprotestationsof the smalleroil companies.Thedebateaboutpromotingdomesticoilproductionorimportingoilfromabroadwastemporarilydecidedinfavourofthedomesticindustryin1958,whenmandatoryimportcontrolswereestablished.TheimpactofAmericanenergypoliciesondevelopmentselsewherehasalwaysbeenlarge.Inthiscase,itcreatedasurplusontheinternationalmarketanddecliningoilprices,whichin turn led to OPEC’s foundation in 1960. The seeds for the emergence of competing oilgovernanceweresown.

Until the late 1950s, the international oil industry outside the United States, Canada, theUSSRandChinahadbeencharacterisedbythedominantpositionofthelargemultinationaloil companies known as the Seven Sisters, or the ‘majors’. The host governments did notparticipate in theproductionorpricingof crudeoilbut actedonlyas competing sellersoflicensesoroilconcessions.Inreturn,hostgovernmentsreceivedastreamofincomethroughroyaltiesand incometaxes.Eachof themajorswasvertically integratedandhadcontrolofupstreamoperations(exploration,developmentandproductionofoil)16and,toalesserbut

14Adelman,M.A.(1996).“TheGenieoutoftheBottle:WorldOilSince1970”.TheMITPress,pp.41-64.Cambridge,MA.

15ibid.16In1950themajorscontrolled85%ofthecrudeoilproductionintheworldoutsideCanada,theUS,SovietRussiaandChina.Danielsen,A.L.(1982).TheEvolutionofOPEC.HarcourtBraceJovanovitchPublishers,NewYork.

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stillsigni�icantextent,ofdownstreamoperations(transportation,re�iningandmarketing).Atthesametime,theycontrolledtherateatwhichcrudeoilwassuppliedtothemarketthroughjointownershipofcompaniesthatoperatedindifferentcountries.Theverticalandhorizontallinkagesenabledthemultinationaloilcompaniestocontrolthebulkofoilexportsfromthemajoroil-producingcountriesandtopreventlargeamountsofcrudeoilfromaccumulatingin thehandsof sellers, thusminimising the riskof sellershaving to compete todisposeofunwantedcrudeoiltoindependentbuyersandpushingpricesdown.17

Untilthemid-1970stheoilpricingsystemassociatedwiththeconcessionsystemwascentredontheconceptofa‘posted’price,whichwasusedtocalculatethestreamofrevenuesaccruingto host governments. Spot prices, transfer prices and long-term contract prices could notplay such a �iscal role. The vertically and horizontally integrated industrial structure oftheoilmarketmeantthatoil tradingbecametoa largeextentaquestionof inter-companyexchangewithno freemarketoperatingoutside these companies’ control.This resulted inanunderdevelopedspotmarket.Transferpricesusedintransactionswithinthesubsidiariesofanoilcompanydidnotre�lectmarketconditionsbutweremerelyusedbymultinationaloil companies tominimise theirworldwide tax liabilitiesby transferringpro�its fromhigh-tax to low-tax jurisdictions. Because some companies hadmore crude oil than they couldprocesswithintheirownverticallyintegratedoperation,whileothershadtopurchaseoilfortheirdownstreamoperations,i.e.werecrudelongorcrudeshort,transactionsusedtooccurbetween themultinationaloil companieson thebasisof long-termcontracts.However, thepricesusedinthesecontractswereneverdisclosed,asoilcompaniesconsideredthispieceofinformationtobeacommercialsecret.Oil-exportingcountrieswerealsonotparticularlykeenonusingcontractprices,asthesewereusuallylowerthanpostedprices.Thus,thecalculationsof theroyaltyand incometaxperbarrelofcrudeoilgoing to thehostgovernmentshadtobebasedonpostedprices.Beinga�iscalparameter,thepostedpricedidnotrespondtotheusualmarketforcesofsupplyanddemandandthusdidnotplayanyallocationfunction.18Themultinational oil companieswere comfortablewith the systemof postedpricesbecause itmaintainedtheiroligopolisticposition,anduntilthelate1960sOPECcountriesweretooweaktochangetheexistingpricingsystem.

Theoilpricingsystemandthesupplymanagementoftheinternationaloilcompaniesinthelate 1950s to the early 1970s, organised by theMiddle East consortia19, was increasinglyquestionedinthecapitalsoftheproducingcountries.Theywereconcernedaboutoilincome

17EdithPenrose(1968).TheLargeInternationalFirminDevelopingCountries:TheInternationalPetroleumIndustry.Allen&Unwin,London.

18Mabro,Robert(1984).“OnOilPriceConcepts”.WPM3,pp.6-16.OIES,Oxford.19ThefollowingIOCsareoftenreferredtoastheSevenSisters:Exxon,Mobil,Texaco,Gulf,Chevron,BPandShell.EachofthesecompaniestookpartintwoormoreconsortiaintheGulf.SaudiAramcowasownedbytheAmericancompaniesExxon,Chevron,MobilandTexaco,whiletheIraqiPetroleumcompany,IPC,wasamoreEuropeanaffairwithBP,ShellandtheFrenchCFPasitsmainshareholdersandExxonandMobilassmallershareholders.BPandGulfjointlyownedKuwaitOilCompany(KOC).Allcompanies,includingCFP,heldsharesinIranianoilafter1953.ThecompaniesoftheEmiratesandQatarre�lectedthesameownershipstructure.In1972,thesesevenlargestcompaniesowned23.7%oftheexplorationareasintheworld,represented67.3%ofworldprovenreservesandwereresponsiblefor70.9%ofworldoilproduction.Evans,J.(1986).OPEC,itsMemberStatesandtheWorldEnergyMarket.Keesing’sReferencePublication.Longman,Harlow.p.24.

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stability which, due to the relatively low oil prices, was mainly dependent on volume. Inaddition,itwasbecomingclearthatmanagementofpoliticalrelationswascausingafurtherdistributionofthecoststoaccommodatethemarket.Forinstance,inthe1960swhensuppliesfromNorthAfricaandelsewhereneededtobeaccommodatedinthemarket,theexpansionofproductioninKuwaitandIraqwaskeptbelowworldproductiongrowth,whileproductionfromIranandSaudiArabiawasallowedtogrowmore.Thisre�lectednotonlythestrengthoftheIOCsbutalsotheirpoliticalandeconomicimportancetoUSforeignpolicy.20

Fromthe1950sonward,thechanginginternationaloilmarketandchangingpoliticalsituationincreasinglyledtoadifferentorganisationoftheoilvaluechain.Thecompaniesbegantoswitchtheirinvestmentsinthedownstreampartofthevaluechain,i.e.re�iningandpetrochemicals,fromclosetocrudeproductionfacilitiestothoseclosetothemarket.Theimplicationwasthatoilproducingcountriesbecamecrudeoilexportersratherthanexportersofsemi-�inishedorenduseroilproducts.Thelogicofthisnewstructureoftheoilvaluechainwaslinkedtothegreaterdemand forawiderarrayofoilproducts,makingcrudeoil transportcheaper thanthe earlier oil product shipments of before. In addition, some oil-importing countries alsowelcomedtheswitchfromre�ineriesclosetotheoilsourcetomarketre�ineriesforreasonsofbalanceofpayment.For thecompanies themselves, theeconomic logicofsuchachangein the location of the various parts of the value chainwas enhanced by the trade policiesof consumingcountriesand theirowngrowingreluctance tocommit investmentcapital tocountriesundergoinglargepoliticalchanges.

Thepost-war organisation of the oil value chain increasingly re�lected the impact of tradeand investment policies by governments, company investment strategies and political andeconomicuncertainties.Forinstance,thefoundationin1958oftheEEC,acustomsunion,wasafurtherimpetusforthecompaniestogeographicallyre-arrangetheoilvaluechain,whilealsoJapanpursueditsowntradeandindustrialpoliciesalongtheselines.

ThePre-1973Not-So-HomogeneousWorldandOil

The relations between producing and consuming countries had already radically changedwhen, in the 1970s, most producing countries of OPEC nationalised their oil sectors andreplaced the international oil companies (IOCs) with their national oil companies (NOCs)asthemainoperators.Untilthen,theverticallyintegratedinternationaloilcompaniesoftheUnitesStatesandWesternEuropehaddominatedtheentirevaluechain, frompittopump,andtogethertheyweredefactotheworld’soilmarketregulatorsandbalancers.Inthisroletheynotonlymanagedsuppliesfromvarioussourcesaroundtheworldbutalsoincomeandin�luence.

TheIOCsperformedthistaskwithacquiescencefromtheirhomecountries,mostimportantlytheUSandtheUK,whowerethedominantpowersintheMiddleEast.YettheAnglo-SaxondominantpositionintheMiddleEastandtheoilsectordidnotgounchallenged.Franceand,

20Alnasrawi,Abbas(1985).OPECinaChangingWorldEconomy.JohnsHopkins,Baltimore/London.Roncaglia,Alessandro(1985).TheInternationalOilMarket.Basingstoke/London.ØysteinNoreng(2006).CrudePower,PoliticsandtheOilMarket.I.B.Tauris,London.

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toalesserextent,Italy,hadalsobeeninterestedindevelopingoilassetsfortheirNOCsbuthadlargelymissedoutinthepre-WWIIconcessionroundsandwerelaterunabletogainsubstantialentry.TheFrenchandItaliancompaniesremainedcrudeshort,andwhenNorthAfricanoilwasdevelopedinthe1960s,thedecolonisationprocesspreventedthemfromtranslatingthispositionintodecisiveequity.Moreover,theNorthAfricanconcessionareaswerealreadymuchsmallerinareathanthevastareasintheGulfregion,andthenumberofcompaniescompetingfor theseconcessionswasmuch largerdue to the internationalexpansionof theAmericanindependents.YetdespitethegrowingEuropeanmarket,theinternationaloilcompanieshadtoaccommodatethenewsupplies.TheassetsintheMiddleEastandVenezuelamadeupthelion’sshareofthecompanies’upstreamassets.DuetothemorecompetitivemarketstructureintheUSascomparedtotheinternationalmarketstructure,andtheincreasingshareofnon-consortiumoilontheinternationaloilmarketinthe1960s,thecompaniesexperiencedmoredif�icultyinmanagingthevastresourcesofthesecountries.Thecompanieshadbecometheswingproducers in the internationalmarket,whilepressure fromthehostgovernments toincreaseincomefromoilwasmounting.Thesetwotaskswereincreasinglydif�iculttocombine,withoutdenyingincomegrowthtooneortwooftheGulfcountries.Thus,theperiodofIOCgovernancewascertainlynotwithoutbusinessandpoliticalrivalry,and,moreimportantly,thechallengestotheIOCgovernanceoriginatedinconsumingandproducingcountriesandfromprivateandnationalcompaniesalike.

Thedominanceofasmallnumberofinternationaloilcompaniesoflarge,low-costoverseasassets in oil reserves and production, mainly in the Middle East, and the ability of thesecompaniestosupplytheinternationalmarkets,madetheseIOCsuppliesanimportantfeaturein the security of supply of the oil-importing industrialised countries. In some countries,theIOCsalsohadstronglydevelopeddownstreamsectors(forinstance,theUS,theUK,theNetherlandsandGermany),butmoreoftenthannot,theyhadtosharethedownstreammarketinconsumercountrieswithdomesticNOCs(forinstancewithFrance,Italy,JapanandSpain).Aspricetakers,theseNOCswerealwayslookingtodiversifyawayfromIOCsuppliesandwere,after1973,the�irsttoseekopportunitiestodealwithproducercountryNOCs,whilecountriesthatreliedmoreontheverticallyintegratedactivitiesoftheIOCsweremorereluctanttodoso.Thesedifferencesinmarketorganisationamongconsumercountriesalsoplayedanimportantroleinthepost-1973oilrelationsandtheinstitutionalmake-upofenergyrelations.

TheUS,althoughanimportantoilproduceritself,wascomfortablewiththeabilitytoin�luenceoil�lowsandinthe1950sfacilitateditslargeoilcompaniesinmanagingthemountingpressuretoshareincomewiththeproducingcountries.ParticularlythespecialrelationshipwithSaudiArabiaand,after1953,withIran,placedoilcentrallyinthespecialsecuritypolicyoftheUS,aspartoftheColdWarstrategyandaspartoftheUSinternationaleconomicstrategytoopenupmarketsforAmericanproductsandcapital.Largelyforthisreason,theUSalsoadvocateddecolonisation, breaking the economic hold of the traditional powers over resources andmarketswhileconvincingthenewrulersoftheadvantagesofparticipating inthenewfreemarketregime.ThecreationoftheBrettonWoodsinstitutionswerepartandparcelofthisfreemarketstrategy,andthedominantpositionoftheUSdollarasacrucialcurrencygreatlyhelpedtheUStogainaccesstonewmarketsandtienewlyindependentcountriesintothenew

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regime.TheconvertibilityofthedollarandthefactthatallothercurrencieswerepeggedtoitcreatedacentraleconomicandmonetaryrolefortheUSinthepost-WWIIworld.21

Intheemergingpost-colonialworld,traditionalandnewproducingcountries,wishingtotakemorecontroloverthedirectionoftheircountriesandeconomies,inevitablychallengedthisregulatoryroleoftheinternationaloilcompanies.WhentheIOCswerechallengedintheearly1970storelinquishcontroloveroilreservesandproductionbythegrowinggroupofOPECcountries, the international oilmarket and the relations among producing and consumingcountriesenteredintoanewphaseofdevelopment.

InternationalSysteminFlux

In aworld inwhicheconomicprogress is so closely related to the availability of relativelylow-costoil,anythingperceivedtoobstructthisavailabilitywillleadtopoliticalcon�lictandattemptstoreducetheimpactofthechange.Butthepoliticalresponseisnotalwaysrelatedtotheeconomicresponseorimpact.Inthe1970s,thepoliticalresponseresonatedforyearsafterthecrisis,whereastheoileconomyadaptedrelativelyquicklytothenewcircumstances.Forinstance,the1970soilpriceincreasesbroughtaboutvastchangesintheenergymixofmanyimportingcountries,whileatthesametimeitpropelledpreviouslyuneconomicaloilreservesintothemainstreamoilmarketdevelopments,creatingnewvaluefortheseeconomies.Still,thepoliticalresponseremainedlargelyfocusedonreducingtheimpactofthepowershiftinfavourofproducingcountriesasaresultoftheoilcrisis.

Moreover, the substantial changes in consuming countries’ economic structures weremerely hastened by the change in the relative price of energy. Already in the late 1960sand early 1970s, many companies saw that rising turnover was not translated in risingpro�its,andtheyincreasinglystruggledwithescalatingcosts.Theirmarketswerematuring.The subsequent increase in energyprices, combinedwith the communication andprocesstechnology developments allowing formore decentralised production processes, provokedalargechangeintheorganisationofproductionandtrade.Inordertomanagethenewcostand reward structures, energy- and labour-intensive parts of the production chain wererelocatedelsewhere,alsobene�itingfromthenewexport-orientedpoliciesofsomedevelopingcountries.

The shockwith the oil embargobyOAPEC against theUS and theNetherlands (and someother countries) and the production cuts by OPEC in themidst of the 1973-74 crisis are

21WhiletheUSwasabletofocusitseconomicandmonetarypolicyondomesticissues,allotherparticipantsoftheBrettonWoodssystemwereforcedtodisciplinetheireconomiesinaccordancewiththeexchangerateregime.Theywereresponsibleforstayingwithinacertain�luctuationmarginofthedollar.Ofcourse,theassumptionwasthatinorderforthedollartoful�ilthiscentralrole,theUSwouldmaintainasurplusbalanceofpaymentsinorderforthedollartoremainahardcurrency.Italsorequiredvastamountsofdollarreservesforcurrencyinterventionsbynon-USparticipants,forcingtheireconomiesintoamouldrequiringtradesurpluseswiththeUS.SeeEichengreen,BarryandPeterKenen,(1994).“ManagingtheWorldEconomyundertheBrettonWoodsSystem:anOverview”,in:ManagingtheWorldEconomy,FiftyYearsafterBrettonWoods.PeterKenen,(ed.).InstituteforInternationalEconomics,Washington,DC.

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understandable from the perspective of the post-war efforts toward free trade and theeradicationofharmfultradepolicies.BothfreetradeandtheexchangeratesystemofBrettonWoodsservedastheunderpinningofaworldeconomythatwasbecomingmoreandmoreintegrated. Trade and, later, foreign direct investments were seen as important tools increating interdependenciesandpreventingcountries fromresortingtoharmful(economic)nationalism.Howeverbenevolentthelong-termintentionsofthepost-wareconomicstructurewere,inrealitythismarketsystemhaddif�icultyindealingwiththestructuralinstitutionalinequalitiesinheritedfromthecolonialera.Theasymmetriesineconomicdevelopment,i.e.knowledge, capital, assets base and economic institutions, prevented developing countriesfrom quickly reaping the bene�its of this system. Moreover, their bargaining position wasweak.Althoughthetheoryofthefreetradesystemwasappealing,thestructuralinequalitiesappearedtobeemphasisedratherthanrepairedinthissystem.22

Againstthebackgroundoftheincreasingfrustrationofdevelopingcountries,thesofttransitiontoapost-colonialpolitical andeconomicsystemwas thereforemoreproblematic thanhadbeenforeseenbytheindustrialisedcountries.InitiativessuchastheDecadeofDevelopmentinthe1960sdidnotbringaboutenoughchangetopreventamoreconfrontationalpositionfrombeingadoptedbydevelopingcountries.Theysawtheirlackofeconomicsovereigntyasanobstacletobeingabletomakeabetterbargainregardingtheirintegrationintotheworldeconomy.Their early attempts to improve their positions through import substitutionhadfailed,and in the late1960s theyrenegotiated theirre-integration into theworldeconomythroughthevariousrelevantinstitutions.23Theoilindustryhadalsobeenviewedwithdismaysince the 1950s, and although some progress had beenmade with regard to income, theproducingcountriesremaineddissatis�iedwiththeirlackofsayoverincomefromoil.ItwasalsothroughtheactionsoftheincomingleaderofLibyathatmajorchangesinthesovereigntyover oilwere achieved by deftly playing out the interests of the IOCs against those of theAmericanindependents.24TheTripoliandTeheranAgreementsof1970and1971markedanimportantchangeinthebargainingpositionsoftheoil-producingcountries.Thealreadytightoilmarketsandtheturmoiloflate1973andearly1974removedthelasthindrancesfromtheoil-producingcountries’takingfullcontrolovertheiroilreservesandproduction.

Fordevelopingcountriesaroundtheworld,thesuccessofthesecountriesintheirabilitytodetermineanewbargaining regimewasof greatpolitical importanceand reachedbeyondoil. Apart from immediate security of supply concerns, the rebellion of the oil-producingcountriesagainst the IOCs’ governancewasofgreatgeopolitical andeconomicconcern fortheUS and the otherOECD countries, precisely because the rami�ications reached beyondoil issues.Moreover, itnotonly challenged the IOCs’bargainingpower in the internationalsystembutalsounleashedadiscussionaboutthecostsandbene�itsofthisnewbargainamongthemselves.

22Singer,H.W.(1989).“TermsofTradeandEconomicDevelopment”.EconomicDevelopment,pp.323-333;TheNewPalgrave.Eatwell,J.,M.MillgateandP.Newman(eds.).

23UNGeneralAssembly,UNCTAD,GATT.24Odell,P.(1986).OilandWorldPower:AGeographicalInterpretation,PelicanBooks;Yergin,Daniel(1991).ThePrize:TheEpicQuestforOil,MoneyandPower.Simon&Schuster;Sampson,Anthony(1975).TheSevenSisters:TheGreatOilCompaniesandtheWorldtheyShaped.VikingPress,NewYork.

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Thuswhileinthe1960sotherdevelopingcountriesweredevisingpoliciestoincreasetheaddedvalueoftheirexports,oil-producingcountriesdidnotseemuchstructuralchangehappeningintheireconomies.Theglobalpoliticalatmosphereandtheeconomiclogicoftheinternationalarrangementswerechanging,however-notleastbecausetheBrettonWoodsinstitutionswerealso challenged in the early 1970s.25 Discussions about a new international economic orderunderlined the new atmosphere26, and many believed that the economic dominance of theOECD-countrieswouldbereplacedbyasysteminwhichdevelopingcountriescouldclaimmoregovernance.

AYearofConfrontation

AftertheTripoliandTeheranagreementsof1971and1972,whichprovidedtheoil-producingcountrieswithmorecontroloverthedevelopmentoftheiroilindustries27,theimpatiencewiththeoilcompaniesgrew.Inthesummerof1973theyofferedasmallerpriceincreasethanwasneeded,with theaimof stopping theerosionof thepurchasingpowerofabarrelofoil.Thedepreciationofthedollar,thecurrencyinwhichoilwastradedandrisingin�lationaroundtheworldhad contributed to theproducing countries’ desire to increasenominal oil prices andmaintaintherealpriceofoil.WiththeIMF–themaininstitutionfordisciplininginternationaleconomicrelations–ratherindisarray,thesensitivity,particularlyintheUS,regardingtheimpactoftheexchangeratecrisisontheinterestsofothercountrieswassmall.Perhapsthisinternalfocuswasexacerbatedbytheon-goingUSdomesticpoliticaldif�icultiesoverracialrelations,theVietnamWarandtheWatergatescandal,althoughitisalwaystheprerogativeoflargepowerstoactoutofself-interest.Thecountry’smainconcernsweretoreadjustitscompetitivepositioninrelationtoitstradingpartnersinEuropeandtomanagein�lation,whichwasalreadyrising,whilemaintaining the recent domestic socio-economic bargain. Rising oil priceswere to beavoided.Moreover, theUSwasconcernedwithdevelopments intheAtlanticCommunityasaresultofEuropeanintegration.FortheUS,1973startedoutasthe‘YearofEurope’withtheideatoreinvigoratetherelationshipwiththeenlargedEuropeanCommunity,butinsteadhadtofocusonovercomingtheincreasingdif�icultiesinthetransatlanticrelationship.InhisPilgrimsSpeechinDecember1973inLondon,Kissingerremarkedthat:

Europe’sunitymustnotcomeattheexpenseofAtlanticcommunity,orbothsidesoftheAtlanticwillsuffer.ItisnotthatweareimpatientwiththecumbersomemachineryoftheemergingEurope.Itisratherthetendencytohighlightdivisionratherthanunitywithuswhichconcernsus.28

TheUSwasconcernedthatthegrowingdisparityamongtheOECDcountriesaboutsecurityand

25Williamson,JohnandC.RandallHenning(1994).“ManagingtheMonetarySystem”,in:ManagingtheWorldEconomy,FiftyYearsafterBrettonWoods.Kenen,Peter(ed.).InstituteforInternationalEconomics,WashingtonDC.

26Dolman,A.J.(1976).ReshapingtheInternationalOrder:areporttotheClubofRome,Tinbergen,J.(coordinator).NewYork,Dutton.

27Johany,AliD.(1982).“OPECandthePriceofOil:CartelizationorAlterationofPropertyRights”,in:OPEC:TwentyYearsandBeyond.ElMallakh,Ragaei(ed.).Westview/CroomHelm,BoulderCO/London.

28Kissinger,Henry,TextofAddressbyKissingerinLondononEnergyandEuropeanProblems,NewYorkTimes,December131973.

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economicissueswouldcomeatacosttotheirrelationandwealth,whileeventsin1973begantorapidlyunfold.29Naturally,repairingtherelationshiptooksometime.

Therelativelylowoilpricesofthe1960sstimulatedoildemandaroundtheworld,andAmericanoilimportshadalsobeensteadilyincreasing.Investmentsinnewcapacityinthelate1960shadfailedtokeepupwithrisingdemand.Between1965and1973,globaldemandforoilincreasedatafastrate,withanaverageannualincreaseofmorethan3millionb/dduringthisperiod.30MostofthisincreasewasmetbyOPEC,whichmassivelyincreaseditsproductionfromaround14millionb/din1965tocloseto30millionb/din1973.Duringthisperiod,OPEC’sshareinglobalcrudeoilproductionincreasedfrom44%in1965to51%in1973.Otherdevelopmentsintheearly1970s,suchasLibya’sproductioncutbacksandthesabotageoftheSaudiTaplineinSyria,furthertightenedthesupply-demandbalance.Althoughnewre�inerycapacitywasunderconstruction,productmarketswereunderpressure.Tightenedoilmarketconditionscreatedastrongseller’smarketandsigni�icantlyincreasedOPECgovernments’powerrelativetothatofthemultinationaloilcompanies.

In September 1973, OPEC decided to reopen negotiationswith the companies to revise theTehran Agreement and seek large increases in the posted price. The American IOCs wereinstructedtonegotiateforonlyaminimalpriceincrease31,whiletheproducingcountrieswerehoping for reparations of past real oil price slippage. The producing countries felt shunnedandnegotiationswerestill trundlingalongwhenhostilitiesbetweenEgypt,Syriaand JordanandIsraelbrokeout inOctober1973.All the frustrationofearlieryearscametoahead inageopoliticalclimatethatwasalreadyrestive.On16October1973,thesixGulfmembersofOPECunilaterallyannouncedan immediate increase in thepostedpriceof theArabianLightcrudefrom$3.65to$5.119.On19October1973,membersofOAPEClessIraqannouncedproductioncutsof5%of theSeptembervolumeanda further5%permonthuntil ‘the totalevacuationof Israeli forces fromallArabterritoryoccupiedduring the June1967war iscompletedandthelegitimaterightsofthePalestinianpeoplearerestored’(quotationsinoriginal).32OAPEC’sannouncementtoembargotheUSandtheNetherlandsatthestartoftheOctoberwarin1973later extended to include Denmark, Portugal and South Africa, and the production cuts topressureIsraelinwithdrawingfromtheWestBankandGazawerethepoliticalresponsetothemounting frustration in theMiddleEast. InDecember1973,OPECraisedthepostedpriceoftheArabianLightfurtherto$11.651.Asaresult,oil-producingcountriessawtheiroilincomeexpand beyond their expectations. Equally important, for the �irst time in its history, OPECassumedaunilateralroleinsettingthepostedprice.33Beforethatdate,OPEChadonlybeenabletopreventoilcompaniesfromreducingthemandactedmoreasatradeunion.

29Onlyrecently,hemadesimilarremarksabouttheevolvingrelationofChinaandtheUSpointingoutthatthetwocountriesshouldtakecarenot“analyzingthemselvesintoself-ful�illingprophecies”andthat“con�lictisnotinherentinanation’srise”.Boththen(inthe1973speech)andnow,heemphasisedthatcooperationimpliessubordinatingnationalaspirationstoavisionofaglobalorderandthatitisimportanttomaintainafocusonwhatunites.Kissinger,Henry,“AvoidingaU.S.-Chinacoldwar”,in:TheWashingtonPost,14January2011.

30BPStatisticalReviewofWorldEnergy2010.31Sampson,A.(1975).32Skeet,Ian(1988).Twenty-FiveYearsofPricesandPolitics.CambridgeEnergyStudies,Cambridge.33Terzian,Pierre(1985).OPEC:TheInsideStory.ThirdWorldBooks,Distributor,BiblioDistributionCenter.

34

HardTransition

Theoil price crisis of 1973-74wasonewithmanydimensions; it not only redesigned theenergygovernanceintheworldandchangedthedynamicdriversintheoilvaluechainbutalsohadwiderimplicationsforinternational(economic)relations.Fromaneconomicperspective,the oil price increases implied that the oil-consuming countries immediately faced higherin�lation and growing trade de�icits due to the short-term inelasticity of oil demand. Also,concernsaboutrecyclingtheoildollarsbackintotheinternational�inancialsystemwerelargebecauseofthelowabsorptioncapacityofmostoftheproducingcountriesandthesheersizeofthetransferofwealthinsuchashortperiodoftime.Theinstitutionalstructureformanagingsuch imbalanceswas,however, incomplete,particularlyafter thebreakdownof theBrettonWoodsexchangeratesystem.TheongoingdiscussionsaboutrestructuringmonetaryrelationsamongtheOECDcountries34gainedanotherdimensionwhentheoilpricecrisisunfolded.Thelargetransferofwealthasaresultoftheoilprice increasesandtheasymmetric impactonoil-consuming countries further complicated thesediscussions. Particularly thedevelopingoil-consumingcountrieswereseverelyaffected,butalsothebalance-of-paymentdif�icultiesofindustrialisedcountrieswerelarge.Themonetaryconsequencesoftheoilpricecrisisstoodatthecradleofthemoderninternationalcapitalmarketsasweknowthemtoday,whiletherelationbetween thedollar andoil pricesbecamea recurring featureon the internationalagenda.35

The route to oil-dollar recycling could have been the IMF, which was designed to handlebalanceofpaymentsurplusesandde�icits.Thesheersizeofthetransfersbetweenconsumingand producing countries and the political tensions that had accompanied OPEC’s decisionto increase prices prevented such a solution from coming about quickly. In 1975, at theRambouillet Summit ofNovember15-17, theUS, theUK,Germany, France, Japan and Italy�inally made some headway in restructuring monetary relations, including enlarging thequota,accommodatingtheshiftineconomic�lows.36YettheproposedchangesallowedtheUStomaintainitsblockingvoteondecisionsinthegoverningboard.Thesechangeswerelaterlaiddown in thenewamendmentsof the IMFaccords in1976.Thepositionof the leadingmembersoftheIMFtomaintaincontrolovermonetarypolicycanbeexplainedinpartbythefactthatsomeofthemwereinitiallynotconvincedthattheoilpriceincreasewasstructuralandthoughtthatitwouldrequireastructuraladjustmentofthequota.Butastimeworeon,theirbeliefthattheoilpriceincreasewasunsustainableprovedtobeunfounded.TheabilityofOPECtoaccommodatelowerdemandwithlowerproductionsurvivedthepoliticalpressureofthattime,althoughtheerosionoftherealoilpricestrainedsomeproducingcountries’�inances.ThepositionofsomemajorOECDcountriescanalsobeexplainedbygeopoliticalmotivestostayinthemacroeconomicdrivingseatandanunwillingnesstoaccept-oraslownesstoadaptto-thenewcircumstancesintheworld.Intheend,theIMFdidnotplayacentralroleinoil-

34Dam,Kenneth(1982).TheRulesoftheGame:ReformandEvolutionintheInternationalMonetarySystem.UniversityofChicagoPress.

35 Koopman,Georg,KlausMatthiesandBeateReszat(1989).OilandtheInternationalEconomy,LessonsfromTwoPriceShocks.TransactionPublishers,NewBrunswick/Oxford.

36 EconomicSummitatRambouillet,France,16-17November1975,in:ForeignRelationsoftheUnitedStates,1969-1976,VolumeXXXI,ForeignEconomicPolicy1973-1976,pp.386-452.

35

dollarrecyclinginthe1970s.Inarestrictedrole,onlyaspecialIMFoilfacilitywassetup,andsome individualOPECmember statesprovidedbilateral assistance toparticularlyhardhitconsumingdevelopingcountries,butmostofthesurpluseswererecycledelsewhere.

Duetotheinstitutionaluncertaintiesimmediatelyaftertheoilcrisis,alargeshareoftheoilincomefounditswaytotheeuro-dollarmarket,whereitwasplacedinrelativelyshort-term3-monthfacilitiesandrolledover.Inthespaceofacoupleofmonths,theinternationalprivatebankssawthisrelativelysmallinter-bankmarketswelltomuchlargerproportionswhentheybecamethemainchanneltorecycleoil-dollars.Yettheinternationalprivatebankshadtomakethiscapitalworkfortheminordertomaketheinterestpaymentstotheproducingcountries.Immediately,itbecameclearthattherewouldbeamismatchbetweentheshort-termfacilitieswithwhichitwasplacedandthedurationforwhichlenderswerewillingtoborrow.Moreover,the appetite in the relatively ‘safe’ OECD countries for borrowing had shrunk and manycompanies, with better communication and production techniques, began to disinvest inOECDcountriesandmovethelabour-andenergy-intensivepartsoftheirproductionchaintoother,lowercost,countries.

Developing countries, with their recent switch to export-oriented strategies, found in theeuro-dollarmarketthesourceofcapitalthattheyhadcravedinthepastbuthadbeenunabletoaccess.TheyhadreliedontheBrettonWoodsinstitutionsto�inancetheirindustrialisationeffortsbuthaddislikedthestrictgovernanceattachedtotheseloans.Yettheyrequiredlongercapitalinvestmentsthantheeuro-dollarmarketcouldprovide.Theinternationalprivatebankssolvedthemismatchintimeandriskinessofthelargeloansinprovidingtheirfour-yeardollarloanstovariableinterestrateslinkedtotheLondonInterbankInterestRate(LIBOR).Oftenthebankstriedtospreadthesubsequentsovereigndebtriskbyparticipatinginloanconsortiaandaskingforgovernmentguarantees.Thedevelopingcountriesthusbecameexposedtobothanexchangeandaninterestrateriskinatimeoflargesystemicuncertainties.

Inthemeantime,worldin�lationsoared,inpartbecauseofpoliciesto�inanceexternalde�icitsrather than adjust the economies to the structurally higher oil prices, and in part becauserecyclingwasmoresuccessfulthanhadbeenanticipated.Withthein�luxoftheoilmoniesintotheeuro-dollarmarket,interestrateswereverylow,andoil-producingcountrieswerequicklymadeawarethatfromthenontheywouldhavetomanagevaluebothinandabovethegroundasanewfeatureoftheiroilindustrymanagement.

Governmentde�icitsinoil-consumingcountriesincreasedinthe�irstfewyearsaftertheoilprice increase, and demand for oil stagnated in the OECD countries. The restructuring oftheeconomyandtheemphasisonpolicies todiversifyawayfromoilradicallychangedtheoutlook for investment in thevariouspartsof theoil value chain. Surplus capacity existedthroughoutthevaluechain,duetodepresseddemandandthelongleadtimesoninvestments.Astimeworeon,OECDcountriestranslatedthehigheroilpricesintheirexportprices,butdeveloping countries had dif�iculty doing so because their exports were still mainly rawmaterials.37Aslongasrealinterestrateswerelow,theinternationaleconomicsystemseemedtoadjusttothenewsituation,butwhenoilpricesincreasedasecondtime,in1978-79,due

37Koopman,Georgetal.(1989).

36

topoliticalturmoilinIran,OECDeconomicpolicieschanged.Althoughthepriceincreaseof1978-79waslessstructuralandwaslaterreferredtoasthepriceofa‘panicbarrel’,thepolicyresponsewasde�inedbystructuraladjustment.The levelof in�lationwas toohighand theexternalimbalanceswereagaintoolargeto�inancethede�icits,andausteritypoliciesbecamewidespreadthroughouttheOECD.

WithastrictUSmonetarypolicy,in�lationwasbroughtbackundercontrol,andrealinterestrates soared, much to the detriment of oil-consuming developing countries, who saw theinterest rates on their dollar loans rise and their own currencies lose value against thedollar.Almostimmediatelytheybegantoexperiencedif�icultiesinservicingtheirloans.The1980swere,forthem,atimeofperiodicaldebtrestructuring.Onlywiththeoutbreakofthedevelopingcountries’debtcrisis in1982andthesystemicdangerthesedebtsposedtothelargeinternationalprivatebankswastheIMFreintroducedasthemainmonetaryinstitution.For the remainderof the1980s, thedebt crisishamperedeconomicdevelopment inmanydevelopingcountriesinLatinAmericaandAsia.Onlyinthelate1980s,withtheBakerand,later,Bradybonds,weretheafter-effectsofthe1970soilcrisesandthehandlingofrecyclingdigested.

Themonetary implicationsof theoil crisisof1973-74and1978-79were far-reaching: themorestructuredinternationalcapital�lowsoftheBrettonWoodserahaddevelopedinto�lowsonthelargelyunregulatedprivateinternationalcapitalmarkets.Withitcametheprivatisationofrisksassociatedwithinternationalcapitaltransactions,althoughthesystemicriskswereleftwiththegovernments.Foroil-consumingdevelopingcountries,theoilcrisis,heraldedasanimportantresettingofthepost-colonialbargainingposition,leftthemwithstrictergovernancefromtheIMFandWorldBankthanbefore.Moreover,therestructuringoftheirdebtswasusedtoenforcecompliancewiththenewinsightsoftheso-calledWashingtonconsensus,inwhichliberalisationofboth the tradeandcapital accountwaskey.This integrationofdevelopingcountriesintotheinternationalmarketeconomywasthe1980s’answertothehardtransitionofthe1970s.CompaniesbasedinOECDcountrieshadrespondedtothe1970sreshuf�lingofrelativeprices intheworldandtheinternationalisationofcapitalmarketsbyrestructuringthe organisation of their production chains to secure the new ef�iciencies.38 They neededunhinderedaccesstomarkets,resourcesandcapitaltoescapethematurityoftheirdomesticmarkets. In the space of a couple of years, labour-intensive industries had disappearedfromtheOECDcountriesandwerereplacedbymoreservice-orientedsectors.Thisshift inthecompositionofGDPnotonlyreduced theenergy intensityof theseeconomiesbutalsoallowedforapartialmoveawayfromoil.Coal,nuclearandnaturalgasgainedprominenceinelectricitygenerationandindustry.Theinternationalisationofproductionandcapitalandtherestructuringofdevelopingcountries’debtsalsostreamlinedthediscussionabouteconomicgovernance among the OECD countries, particularly when the EU countries managed tomaintaintheirexchangerateregimeandJapangaveupitsmanaged�loatagainstthedollarinthemid-1980s.

38 Dicken,Peter(2007).GlobalShift:MappingtheChangingContoursoftheWorldEconomy.SagePublicationsLtd.,London.

37

For producer governments, the international economic developments also had largeimplications.Theirgoal to increaseandstabilise their real income fromoilwas lost in thechaotic economic governance prevalent after 1973. In the years to follow, nominal priceincreasescouldnotkeepupwithin�lation.ProducingcountrieswithalowabsorptioncapacityhaddifferentproblemsthanOPECcountries,whichhadamoresubstantialabsorptioncapacity.Almostimmediately,thesuccessof1973-74ledtointernalgovernanceproblemsinOPECandshowedthediversityofitsmembership.Theseproblemscentredonthedistributionofincomeamong thememberstates, anoften-recurring theme in theyears thereafter.Theallocationof risks andbene�its in thenewgovernance systemcentredon the levels of productionofthememberstates, thepricesystemlinking theOPECcrudes to themarkercrude,andtheroleofthedollarinoilpricing.SomegovernmentshadalsoraisedexpectationsamongtheirpopulationsforaquickanddecisivespurtinwelfareonthebackofthepoliticalvictoryovertheIOCsandtheOECDcountries.Thefallinrealoilprices-butalsothecomplexityofquicklyramping up investments in the uncertain economic environment - quickly frustrated thedeliveryofthesepromises.Althoughthereshuf�lingofcontroloverreservesandproductionhadsucceeded,themonetarydevelopmentschallengedtheirabilitytomanagetheireconomicsovereigntyinadifferentmanner.

ManagingOilMarketsandMoneyIncome

Foroil-producingcountries,theaimtostabiliseoilpricesandsecureastableoilincomehadproventobeverydif�icult.Theeconomicdif�icultiesinthemainmarket,theOECDcountries,hadarrestedgrowthofoildemand.Moreover,thedecisiontoreplaceoilinpowerstationswithcoal,nuclearandgaschangeddemandforoiltothewhiterendofthebarrel.TheOPECcountrieswerethusconfrontedwithlowoildemandgrowthintheirmainmarket,adepreciationofthedollarandadeclineinthevalueoftheiroilincome,whichcouldnotbecompensatedbythelowrealinterestrates.Atthesametime,theybeganinvestingintheirowneconomies,mainlyinre�iningandpetrochemicals.Theoversupplyinthesemarketswaslarge,however,becauseasizablecapacityhadbeenunderconstructionfrombeforetheoilpriceincreaseandcameonstreamwhenthemarketshadchanged.Largebarrierstotradefortheseproductspersistedintothelate1980s,whentherationalisationofthesectorwascompleted.

The performance of these investmentswas further underminedwhen oil prices had to besupportedbyproductionreductionpolicies.Thedistributionofproductionquotatostabilisethemarkethadalreadybeendif�icult in the1970s,bringing to the fore the largediversityamong theOPECmember states. The swelled ranks ofmember states consistedmainly ofrelativelysmallproducersandproducerswithahigherabsorptioncapacitythantheMiddleEast Gulf producers. It was the Middle East producers that were called upon to reduceproductionandmanageworldsupply.Thegrowthintheirbuffercapacityinthe1980stesti�iestothiscostlyrole.Atthesametime,thedecisiontostabilisetheoilpriceatafairlyhighlevelunlockedpreviouslyuneconomicresourcesin,forinstance,theNorthSeaandAlaska,whichincreasinglycompetedformarketsharewithOPECproducers,whowerealsoembroiled indiscussions about balancing the quality of crudes and the price compared to the markercrude.Distributingtherisksandbene�itsofbeingthemainoilmarketgovernanceproviderafter1973hasproventobemoredif�icultforanorganisationofcountriesthanithadbeenforagroupofcompaniesinthe1960s,inpartbecausemorepoliticswasintroducedthanhadalreadyexistedinoilmarketgovernance.

38

If lack of investment capital had been holding the development of their economies backbefore1973,theabundanceofcapitalwasalmostasdif�iculttomanagefromtheperspectiveof development and monetary stability. Although developing the oil value chain in theireconomies was logical, the performance of these investments was slow to manifest. Thiswaspartlyduetothepartialreversalofthevaluechainorganisationfromre�inerieslocatedclosetothemarketbacktoclosetothelocationofcrudeoilproductioninaninternationalmarketalreadysufferingfromovercapacity.Dependingonthestrategyincertainmarkets,theIOCsthatmaintainedaninternationalmarketfocuswereinterestedinjointventuresintheproducingcountrieswhilerationalisingtheirowndownstreamcapacitiesintheOECD.Afterthenationalisationofreservesandproductionofthe1970s,IOCslikeExxon,ChevronandShellengagedinbackwardintegrationinnewoilprovinces(NorthSea,Alaska)andinreorganisingtheir downstream operations to re�lect their new market positions. Other US companiesinitiallywithdrewontheirhomemarkets,whileBPwasfocusedonboththeAmericanmarketandtheNorthSea.Somecompanies,bothintheUSandinEurope,werealsoproponentsofprotectionoftheirdownstreammarketsforthisnewcompetitionfromproducingcountries.

In Saudi Arabia, the downstream sector also suffered from OPEC’s oil production policybecausethepetrochemicalsectordependedonassociatedgasforfeedstock.OPEC’sdecisiontoattempttostabiliseoilpricesatthehigh1979levelrequiredsubstantialcutsinoilproductionandsubsequentlyreducedthesupplyoffeedstock.Furthermore,thedevelopmentofsimilarprojects inneighbouring countries led tooversupply in thenewoil-related industries.Theoversupply in international airports, shipyard docks for large oil tankers, re�ining, etc.emphasisedthelackofcoordinationintheseeconomicdevelopmentplansandunderminedtheir initial performance untilmore coordinationwas introduced and oversupply in othermarketswasworkedaway.39Regionalcompetition intheGulfwasgreatandwaspoliticallydriven,particularlyaftertheIranianrevolutionandthesubsequentoutbreakoftheIran-Iraqwarinthe1980s.

The investment of oil income in the domestic producing economieswas both complicated- due in part to gaps in infrastructure and to labourmarket rigidities - and slow in termsof changing the economic structure of the countries. The dependence on oil income hadgrown substantially since 1973 and persisted when the new investments were slow inshowingpro�its.Throughoutthe1980sand1990s,thedependenceofOPECmemberstatesonoil incomewasveryhigh,particularlyascomparedtocountriessuchas theUS, theUK,NorwayandRussia,whichhadmuchmorediversi�ied industrialbases.40Therelatively lowabsorptioncapacityinsomeproducingcountriesalsopreventedsomeoftheoilincomefrombeinginvestedinthedomesticeconomyandwaseitherinvestedincompaniesintheUSandEuropeorinportfolioinvestments.Intheearly1980ssomeindustrieshaddif�icultyraisingcapital to restructure their businesses. Capital from oil-producing countries was availablebutoftencreatedpoliticalproblems,andholdingswere,moreoftenthannot,limitedto22-24%.Theinvestmentsinmarketre�ineriesintheUSandEuropeencounteredinitialadversegovernmentresponseswhentheKuwaitOilCompany(KOC),SaudiAramcoandPetroleosdeVenezuela,SA(PDVSA)begantoinvestinforwardintegrationtosecuremarketsfortheiroil.

39Noreng,Øystein(2007).40Treisman,Daniel,“RethinkingRussia:IsRussiaCursedByOil?”in:JournalofInternationalAffairs,Vol.63,no.2,Spring/Summer2010,pp.85-102.

39

Theoppositionthattheyencounteredwaslargelypoliticallystrategicinnatureandre�lectedthe fear foreigngovernmentshadofbecomingdependenton foreign state-held companiesasopposedtoforeignprivatecompanies(whoseheadof�iceswereintheOECD).State-heldcompanies, itwas feared,would not act in the interest of security of supply or help theseconsumingcountriestoachieverelativelyinexpensiveenergyprices,twomaingoalsoftheirenergypolicies.

TheRestructuredOilValueChainAfter1978

The1973crisismadepainfullyclearthattheoilgovernanceofthepreviousdecadeshadcometoanend.InitsplacecameanemboldenedOPEC,representingthenetoil-exportingcountries,which,with itsproductionpolicies, could in�luence crudeoil prices and �lowsbut also theexternalbalanceofimportingcountries.Nationaloilcompaniestookovertheexploitationofcrudeoilreserves.Initially,theIOCshadmaintainedaprivilegedroleintradingthisoilandthuswerealsoabletorestructuretheirrelationswiththehostcountrygovernments,butafterthesecondpriceincreaseof1978-79thistradingprerogativeoftheIOCswasseveredandoilfound itsway to themarketdirectly.With the terminationofmany long-termoil contractsduringandafterthesecondpriceincreaseandtheintroductionofshorter-termoilcontractsorspotmarketoilcontracts,theverticallyintegratedmodelbecamelessprominent.AlthoughIOCs began to develop oil resources elsewhere, they never returned to their crude-richpositionsofthepreviousdecades.Insteadtheysourcedtheirdownstreamoperationswithamixtureoftradedandequityoil,basedonmarketprices.

ThenationalisationofcrudeoilreservesandproductionstimulatedtheIOCstoconcentratetheirnewupstreaminvestmentsin‘safe’countries,i.e.,wheretheriskofappropriationwassmalltonegligent.TheyreplacedthisoldriskwiththeriskofdevelopingfrontieroilinOECDcountries.ThedevelopmentofnewoilinAlaskaandtheNorthSeaplayedanimportantroleintherecoveryofmanycompaniesassigni�icantmarketplayers,helpingthemtoregainsomeoftheirmarketpowerintheratherstagnantoilmarketofthelate1970sand�irstpartofthe1980s.ThepricepolicyofOPEChelpedtheminthisstrategybecauseitprovidedthemwithamoreor lessguaranteedminimumpricewithwhichtheycouldmaketheirbusinesscasefor developing thismore expensive oil. Once this oil cameon stream, it began to competeformarketsharewithOPECoil,actingasOPEC’scompetitivefringe.Asaresult,someOPECmemberstateshadmountingdif�icultiesadheringtotheOPECpolicies,particularlybecausenosolutionwasfoundastotheproperpricespreadtotheadministeredOPECcrudes.

TheIOCsalsobeganaprocessofconsolidation:purchasingoilreservesonWallStreet,inparttorebuildtheirportfolioinadditiontodevelopingnewoilprovinces.SomeoftheIOCs,althoughstricken by the sudden loss of their very pro�itable assets in OPEC countries,managed tosurviveandrebuiltthecompanyactivities,whileothersweretakenover.Newbusinessmodelsbegantosurfacebasedontheirstrongpositionsinthedownstreamanddistributionpartsofthevaluechainandtheirabilitytogenerateknowledgeandcapitaltodevelopmorecomplexupstreamprojects.SomeofthelargeIOCsalsobegantodeveloptheirnaturalgasbusinessesasasecondcoreactivity,particularlywhennaturalgasgainedmoreprominenceintheenergymixofcountries.Mostcompaniesfocusedtheireffortsoncostsavings,theenergyef�iciencyofoperations,technologyandcapital-intensivedevelopments.

40

Yet the overwhelming competitive edge of the IOCs of the 1950s and1960s, based on thethen large and relatively inexpensive opportunity to develop sources of the Middle East,was gone. Companies that had been crude short before 1973 seemedmore able to adaptanddevelopstrongtradingdepartments,ineffectbene�itingfromthelevellingplaying�ield,whilecompaniesthathaddependedsolelyupontheirMiddleEastassetsencounteredmoredif�icultiesininvigoratingtheirbusinessmodels.Althoughthepriceincreaseof1978-79hadboostedmostof thecompanies’balancesheetsenoughtoafford investments innewcrudeoil production capacities, some companies simply did not have the upstream capability toquicklyretool fornewprovinces.Moreover,depresseddemandalsopressured themarginsinthedownstreamendofthebusiness,requiringthesubstantialrationalisationofcapacity.Governmentpoliciesplayedan importantrole in therestructuringofboththere�iningandpetrochemicalpartsofthevaluechain.41

Bythemid-1980sbothoilpricesandthevalueofthedollarhadbeguntoslip,reducingthepressureonthemarginsofthemostef�icientpetrochemicalplantsintheOECD.Furthermore,thechangeinOPECpriceandproductionpolicyallowedSaudiArabiatogainalargershareof OPEC production consistent with their reserve base and subsequently increased theavailability of feedstock. The timewas becoming ripe to restructure this part of the valuechain. When restructuring in OECD markets commenced in the late 1980s, capacities ofsmallerorlessef�icientcompanieswerescrapped,andmarketaccessforthenewcapacityinoil-producingcountriesbecameeasier.Onlywhenovercapacitieswere�inallyworkedawaydidmarketaccessimprove.Insomecases,theNOCsimprovedtheirmarketaccessthroughdirectinvestmentsinthedownstreamsectorsinconsumingcountriesbypurchasing–eitherinjointventureor in full –distressedassetsofoil companies.SaudiArabia,VenezuelaandKuwaittooktheleadindevelopingmarketaccessthroughverticalintegrationinforeignmarkets.Thiswasaresponsetotheincreasingcrisisintheoilprocessingindustryintheircountriesandthedesiretocreatesecurityofdemandfortheiroil.OPECProductionPolicyinaDepressedOilMarket

Thecombinationofoilpriceincreasesinthe1970s,theappreciationofthedollarintheearly1980s, the shift away fromoilpolicies andeconomic restructuring in theOECDcountriesgreatlyreduceddemandforoil.Whennewsuppliesbegantoenterthemarketintheearly1980s,theOPECcountrieswereforcedtoreduceproductionsubstantiallyinordertodefendtheagreedupon(relativelyhigh)pricelevel.Circumstancessurroundingthepriceincreasesin1979-80hadtestedcon�idenceamongOPECmemberstates.Asaresult,thereductionwasmostlybornebySaudiArabia,KuwaitandtheUnitedArabEmirates.Whenmoreproductioncutswereneeded,thecostofhavingstabilisedpricesatahighlevelbecamevisible.

41 IntheUSmarket,alargepartofre�inerycapacitywaswithstand-alonesmallre�ineriesgearedtowardsthelighterendofthebarrel.Thesectorwasmuchmoredispersedamongmanycompanies,someofthemverysmall,whileinEurope,re�inerieswereoftenpartoflargerpetro-chemicalcomplexes(Marseilles,RotterdamandAntwerp)andthemarketwasmoreofanoligopoly.BothintheUSandEurope,authoritiesat�irstprotectedtheirdownstreamsectorsandonlylaterbegantopressurethemtorestructurecapacity.IntheUS,theCleanAirActwaseventuallyastrongmotivationtorestructurecapacity,whileinEurope,theCommissionallowedcompaniestoswapcapacitiestorationalize.Thisalltookplaceinthesecondpartofthe1980s.SeealsoSeymour,Adam(1990).TheWorldRe�iningSystemandtheOilProductsTrade.OIES,WG2.

41

TheIran-IraqwarthatbrokeoutinSeptember1980andlasteduntilAugust1988strainedOPEC’s cohesion at the political level but also effectively removed both crude oil exportcapacity and impending downstream capacity from the market, reducing some of thepressureonboththecrudeandproductmarkets.Managingtheinternationaloilmarketandsatisfyingthenationalpoliticalandeconomicneedsofthememberstateswasverydif�icultwithoutupsettingrelationsamongproducingcountries.Stabilisingthecrudeoilpriceattherelativelyhighpost-1978-79levelwasthusultimatelyverycostlyandnowappearstohavebeenshort-sighted.42Theimpactoftheoilpricedeclineof1986ontheireconomieswasverylarge.

Conclusion

ThepolicyresponseoftheOECDcountries,whichrepresentedthebulkofcrudeoildemandintheworldatthattime,notonlyhelpedtheinternationaloilsectortoabsorbthe1970soilcrisesbut alsodelineated the framework inwhichoil relationswould evolve thereafter. Inadditiontotheirmarketsizeandcapitalformation,theOECDcountrieswereveryin�luentialinthethenexistingmultilateralorganisations.TheassessmentoftheOECDcountriesoftheimpactoftheoilcrisisincludedamixtureofeconomicandpoliticalshort-andmedium-termconcerns, inwhichmaintainingthebalanceofpowerwas important.Theirresponsetothe1973-74 crises had been largely political, while their response to the 1978-79 crisis wasmainlyeconomic.Unwittinglyornot,theinternationalmonetaryrelationswereredesignedasasideeffectoftheoilcrises.Thisresponsewasnotonlyinspiredbythedeedsoftheproducercountries,whichseriouslychallengedOECDsupremacyoverthemarketeconomygovernance,butalsobythemountingwranglesamongtheOECDcountriesovertheevolutionofthatsamegovernance system. The different visions and aspirations about the international politicalandeconomicsystemthathadsurfacedintheearly1970splayedamajorroleinthewaytheconsumercountriesrespondedtotheoilcrisesof the1970sandhow, inadditiontoOPEC,governanceofinternationaloilrelationswaseventuallyshaped.

42SaudiArabiainitiallyresistedincreasingitspricelevelin1980forthisreason,andfollowedthenewOPECpoliciesfrom1982onwards.Alnasrawi,Abbas(1985),pp.83-85.

42

43

Introduction

Withthegrowthoftradeandthepoliticalemancipationofmanynewcountries,theexpectationthattherewouldbeaquickcatch-upintermsofdevelopmentwaswidespread.Thechangingenergyrelationswerepartandparcelofthechangingpoliticalandeconomicrelations.Yetthespeedandthewayinwhichthesechangescameaboutrockedtheinternationalsystemandcreatedarelativelylongperiodofadverserelations.

ThefoundationoftheUnitedNationsanditsmanyorganisationshadcreatedanewsystemofinternationalgovernanceforaworldthatgraduallytookshapefromthe1940sonward.Aworldsystemofnationstates,whichwererepresentedintheGeneralAssembly(GA)oftheUnitedNations, replaced the formercolonial empires.Many issueswerenowdiscussedonaonecountry,onevotebasis,withtheexceptionoftwokeyareasimportantforacountry’srelative power: international peace and security and international economic governance.43Yetthenewlyindependent,mostlydeveloping,countrieshaddif�icultytranslatingtheirnewpolitical standing into an economic take-off. This increasingly created frustrationwith theUNgovernancesystemandresultedincriticismoftheskewedeconomicorderintheworld.WhilepoliticalmomentumwasgrowinginthevariousUNinstitutionstodiscusschangingthegovernancesystem,theperiodofrapidworldtradegrowthandmonetarystabilityhadcometoanend.

Inthe1960s,mountingbalanceofpaymentsand�iscalde�icitsintheUShadweakenedthedollar, the bedrock of the BrettonWoods system. The European countries were, however,reluctant to appreciate their currencies and thus lose the competitive advantage that hadpropelledtheireconomicgrowth,withoutgeneratingsomemorein�luenceingovernance.TheEuropeancountriesmuchpreferredtheUStoabsorbthis‘economicgovernancecost’,althoughtheyhadbene�itedgreatlyfromtheremovaloftradebarriersinthesuccessiveGATTtradingrounds,theexchangeratestabilityandtheavailabilityofcheapenergy,inadditiontohavingbeenabletoremovethe internalbarrierstotrade.Additionally, inthe1960stheEuropeanCommunityhadbegun toorganise its relationswith itsmembers’ (former) colonies in theYaoundé agreement, followed in the 1970s by the Lomé agreements, in effect givingmorebene�itstothesecountriesthanothershadinaccessingtheEuropeanmarketandprovidingeconomicassistance.ParticularlyFrancehadbecomemoreandmoreoutspokenabout the

Chapter3:ShiftingRelations

43IntheUNSecurityCouncil,the�ivepermanentmembers-theUS,France,theUK,RussiaandChina-havevetopower,whileintheIMFandWorldBank,theUSandtheOrganisationofEconomicCooperationandDevelopment(OECD)countrieshaveacontrollingvoteoverIMFpolicy.

44

dominance of the US in the international economic system. The War of Independence inAlgeria, and the attempts to normalise relations thereafter, also had a deep impact on theFrenchforeignpolicyposition.At thesametime, theUSwasalsochallenged in itspositionasleadinggeopoliticalpowerintheUN,andNorth-Southissueswereresoundingmoreandmore loudly inmeetings.44The forcefulnessofsome leaders inresistingUS leadershipwassigni�icantandgainedgroundintheyearsprecedingtheoilcrisisof1973:

Asacloselyrelatedphenomenon, increasingLDCcohesionandmilitancyonthe issueof the control of natural resources.While the difference from previous GAs [GeneralAssemblies]wasoneofdegree,wesawsigni�icanceinthethunderousapplausegreetingthe speechesofBoute�lika (Algeria), SalvadorAllendeandother spokesmen formoreextremepositions;intheresonanceforchargesagainst‘multinationalcorporations’andtheunanimousLDCvoteonpermanentsovereigntyovernaturalresources.45

FromdiscussionsintheUNwelearnthatdevelopingcountriesraisedtheirconcernsaboutuneven economic development in the world at any opportunity. It became clear that thediscussionaboutoilin1973-74waspartofamuchlargerdiscussionabouttheinternationaleconomicsystem.Inmanydevelopingcountries,theoilpriceincreasesof1973wereseenat�irstasapoliticalactinde�ianceoftheNorth’shegemony.

Non-OECDCountries’Perspective

DevelopingcountrieswereenthusiasticabouttheassertivenessofOAPECandOPECintakingcontrolofoil.They initially translated this enthusiasm into theadoptionof a resolution intheUNGeneralAssembly.Inthisresolutionof1May1974theycalledforanewinternationaleconomic order, in which many of their objections to the existing economic systemwerevoiced.46Thisresponseunderlinedhowtheoilcrisiswasembeddedinwiderissuesconcerningeconomicgovernanceanddealtwithunequaldevelopmentandgrowth.Also,manydevelopingcountrieshadnotenteredtheirenergy-intensivephaseofdevelopment,orhaddonesoonlyrecently,andwereinitiallylessconcernedabouttheirenergycosts.Instead,theyweremorefocusedonbroadeningtheimprovementofthetermsoftradetootherresources,whichwouldcompensateforhigherenergyprices,andexpandingsovereigntyovereconomicpolicy-making.ThepoliticalclaimofthedevelopingcountrieswereaidedbyapublicdiscussionabouttheClubofRome’sreportof1972,whichwarnedofgrowingrawmaterialscarcityandfuelledthefearsheldbytheOECDcountriesthatthecartelisationofthesemarkets,theirnationalisation,orboth,wasimminent,andalsolaiddowninareportonReshapingtheInternationalOrder.47

44ForeignRelationsoftheUnitedStates,1969-1976,VolumeV,UnitedNations,1969-1972,Document109.45ForeignRelationsofTheUnitedStates,1969-1976,VolumeE-14,Part1,DocumentsontheUnitedNations,1973-1976,Document1athttp://history.state.gov/historicaldocuments/frus1969-76ve14p1/d1.

46TheDeclarationfortheEstablishmentofaNewInternationalEconomicOrderwasadoptedbytheUnitedNationsGeneralAssemblyin1974andreferredtoawiderangeoftrade,�inancial,commodityanddebt-relatedissues(1May1974,A/RES/S-6/3201);http://www.un-documents.net/s6r3201.htm.

47 Meadows,DonellaH.,DennisL.Meadows,JorgenRandersandWilliamW.BehrensIII.(1972).TheLimitstoGrowth.UniverseBooks,NewYork;Dolman,A.J.(ed.),Tinbergen(coordinator)(1976).ReshapingtheInternationalOrder:AReporttotheClubofRome.Dutton,NewYork.

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Although not immediately, it became clear that other natural resources were not as easilyorganisedintoagroupingoralliancewhichcouldbeleveragedinhigherprices,andalsothatscarcity was not as acute as had been feared. Nevertheless, the uncertainty about scarcity,the loosening grip ofmultinational companies on rawmaterials and themounting politicaldemandsintheUNinstitutionsofthedevelopingcountries,eggedonbytheoilcrisistofurthertheirdemands,absolutelyprejudicedthevariouspoliticalresponsesof the industrialisedoil-consumingcountries.Theearlyenthusiasmoftheoil-consumingdevelopingcountriesbegantofadewhentheireconomies,too,wereimpactedbytheoilpriceincreases.

ThecentrallyplannedeconomiesofChina48andtheSovietUnionandEasternEuropetradingbloc, Comecon, were not dependent on oil imports, and inter-bloc oil trade was based onadministratedpriceswhich re�lecteda �ive-yearaverageof internationaloilprices.Basedonthatsystem,theimpactwouldbedelayedandthepeakspossiblyaveragedout.Fromthe1960sonward,theSovietUnionwasasmallexportertointernationalmarketsandthussawthevalueoftheseexportsincreaseasaresultoftheoilcrisis.Italsocreatedamuchwidergapbetweentheinter-ComeconoilpricesbasedontheBucharestformulaandtheworldmarketprice,raisingSovietinterestinrenegotiatingthissystem.TheavailabilityofcheapenergyfromtheSovietUnionandofcheapcapitalfrominternationalbanksinvolvedinoil-dollarrecyclingenticedtheEasternEuropeancountriestospeedupthemodernisationoftheireconomies.Before long,however,theBucharestpriceformulawasadaptedtofollowworldmarketpricesmuchmorequickly,inanattempttoreversethegrowingroleoftheSovietUnionasamererawmaterialsuppliertotheotherpartnersinthetradingbloc.TheoilcrisisalsohadalargeimpactonrelationswithinthegroupofComeconcountries,somethingwhichisoftenunderestimated.49Forinstance,the1980sgascampaignwasbutoneoftheresultsofthechangesintheenergyrelationsamongtheComeconcountries.Althoughdelayed,theoilpricecrisisalsoledtolargechangesinthefuelmixoftheComeconcountries.

ConfusioninOECDConsumerCountryRelations

The industrialised consuming country front was not as homogeneous as is often assumed,although in the 1980s many of the disparities had softened somewhat.50 The immediateresponsetothe1973oilcrisishadbeentorelyonnationalpolicymeasurestomanagedemand,despitetheexistenceofsomejointpolicyinstruments,andtobegintodiversifyawayfromoil,asevidencedbystatementsbyPresidentNixonandsomeEuropeanleaders.51Theavailabilityofdomesticresourcesobviouslyplayedaroleinthepoliticalresponsetothecrisis.TheUS,althoughimportingoil,wasalsoasubstantialenergyproducer,andthepriceincreasealsoboostedthedomesticoilsector.Forotherconsumingcountries,expansionofdomesticproductionwasnotanimmediateoption,althoughtheshiftinrelativeenergypriceswasalsoforthemanincentivetoexploreotheroptionsintheenergymix.Furthermore,somecountriesimmediatelybegantoengageincountry-to-countrynegotiationstosecuretheiroilimports,whileothersreliedontheabilityoftheIOCstore-arrange�lows.

48 Chinawasself-suf�icientinenergyatthetime,andtheopeningupofitsenergymarketcamemuchlater.

49Gustafson,Thane(1989).CrisisamidPlenty:ThePoliticsofSovietEnergyunderBrezhnevandGorbachev.PrincetonUniversityPress.

50Scott,Richard(1994).pp.32-33,

46

Within the framework of the OECD, cooperation in oil policy had already been initiatedin thewakeof theSixDayWarof1967and includedstrategicoil stocksanddiscussionsaboutoilsharingintimesoftightsupplies.Yetsurprisingly,thisschemewasnotactivatedduringtheoilcrisis.52TheArab-Israelicon�lictandtheoilcrisisexposedthewide-rangingdifferences of opinion among theUS, the European countries and Japan onmany issues.Alsowithin theEC itveryquicklybecameclear thatsolidarityamong thememberstateswouldbethin,alsowithregardtotheembargoontheUSandNetherlands(andlateralsoPortugalandDenmark).53Thiswasnotonlydue todifferenteconomic interests,butalsotopoliticaldifferencesabout theextentofEuropeancooperation, the futureof the trans-Atlanticrelations,governanceoftheeconomyand,lastbutnotleast,relationswiththeArabcountries.

Inparticular,US-Frenchrelationswerestrainedoverbotheconomicgovernanceandsecuritymatters, which were further emphasised during the oil crisis. All sorts of differences,whichhad lingeredbefore,begantosurface in1973.Yet inhis landmarkPilgrimsspeechinDecember 1973 London54, Secretary of State Kissingermade an important outreach55,commentingon relationswith theEuropean countries, and the changing relations in theworld,saying:

Aswelookintothefuturewecanperceivechallengestowhichourrecentdisputesaretrivial.Anewinternationalsystemisreplacingthestructureoftheimmediatepost-waryears.TheexternalpoliciesofChinaandtheSovietUnionareinperiodsoftransition.WesternEuropeisunifying.Newnationsseekidentityandanappropriaterole.Evennow, economic relationships are changing more rapidly than the structures whichnurtured them.We, Europe, Canada and America have only two choices: creativitytogetherorirrelevanceapart.

Hisspeechthenmovedtoenergyrelationsandtheproperresponsetotheoilcrisis,whichhedeclaredwerenotcausedbytheArab-Israelicon�lict,butwhichhadmerelyhastenedtobringout theunderlyingchronicproblemtoanacutephase.Heproposedasa long-term

51www.ena.lu,Searchundertheheading“OilCrisis1973”.52Scott,Richard(1994).P.37.53TheNetherlands,atthattime,homeoftheworld’slargestportandimportantforoilandoilproductsuppliestosurroundingcountries,wasparticularlyhitbytheembargo.Tostrong-armtheECmemberstatesintocooperation,theNetherlandswentsofarastothreatentowithholdoilandoilproductexports,onwhichGermanyandBelgiumdepended,andnaturalgasexports.SeeHellema,Duco,CeesWiebesandTobyWitte(2004).“TheNetherlandstheOilCrisis:BusinessasUsual”.AmsterdamUniversityPress,pp.73-95.

54Kissinger,Henry,NewYorkTimes,13December1973.55ThiswasnecessarysinceanearlierspeechinApril1973abouttheAtlanticrelationshipandtheinclusionofJapanhadledtoconfusionanddismayamongEuropeancountries,whichwerekeenondevelopingpoliticalunity.Workontherenewalofthe‘AtlanticCharter’inthesummerof1973showedhoweverthatrelationsbetweentheUSandFrancewerequicklyunraveling.Pompidou’shealth,WatergateandtheroleoftheFrenchforeignministerJobertincarvingoutastrongpositionforFranceto‘unlocktheYearofEurope’,wereimportantreasonsforthecoolingofrelations.Theseissues,includingtheeconomicones,playedanimportantroleintheresponsetotheoilcrisisanditsaftermath.Kissinger,Henry,YearsofUpheaval,Little&BrownCompany,Boston,1982,ChapterVTheYearofEurope,pp.151-162andChapterXVITroubleswithAllies,pp.700-746.

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solutiontomake‘amassiveeffort’tocreateincentivesforproducerstoincreasesupply,toencourage consumers to use existing supplies ‘more rationally’ and ‘to develop alternateenergysources’.ForthispurposeheproposedthattheUS,Canada,EuropeandJapanwouldcreateanenergyactiongrouptosolvewhathecoined‘theenergyproblem’.Thisproposaltocooperateinthe�ieldofenergyresultedintheWashingtonEnergyConferenceinFebruary1974andthefoundationoftheIEAinNovember1974.

YetthefoundationoftheIEAcameaboutwithsomedif�iculty.ThereweredifferencesbetweenthosecountriesthatwerehometooneoftheIOCs(theUS,theUKandtheNetherlands)andthosethatwerenot(FranceandItaly),whileinaddition,thelevelofimportdependencyanddependenceontransitcountries(GermanyandBelgium)in�luencedgovernmentalresponse.Distrustamongcertainconsumercountries randeep,asdiddomesticpoliticalproblems,for instance in the UK (about EC accession and a coal strike) and the US (Watergate),complicating amore coordinated response. France, while promoting a strategy of broadcooperationwas at the same time, like others, involved inpursuing special relationshipswith OPEC countries. In themany years thereafter, the failure to overcome the nationalinterestsintheearly1970sandthedifferentforeignpolicyapproachesemergingduringtheoilcrisisbecamealargestumblingblocktobeingabletocoordinateenergypolicieswithinthe EU.56 Some of these dif�iculties stemmed from the preference for intergovernmentalcoordination rather than the intra-governmental approach of the EC of that time,whichcouldhavebeenencouragedby thegrowingdistrustovermotiveswhendealingwith thetransatlanticrelations.57

In the course of the step-by-step diplomacy process in the Middle East, conducted byAmerican Foreign SecretaryKissinger, tensions in theECmountedbetween theAtlantic-orientedmember states and the French. According to Kissinger’smemoirs covering thatparticularperiod,YearsofUpheaval, theanimositybetweenhimselfandForeignMinisterJobert surfaced repeatedly.58 The differences of opinion between the French and the

56InaFinalDeclarationoftheCopenhagenSummit:specialannexontheenergycrisis(15December1973)regardingthestrategytoopendiscussionswithbothproducingcountriesandwithotherconsumingcountries,itsays:“TheHeadsofStateorGovernmentcon�irmedtheimportanceofenteringintonegotiationswithoil-producingcountriesoncomprehensivearrangementscomprisingco-operationonawidescalefortheeconomicandindustrialdevelopmentofthesecountries,industrialinvestments,andstableenergysuppliestotheMemberCountriesatreasonableprices.Theyfurthermoreconsidereditusefultostudywithotheroil-consumingcountrieswithintheframeworkoftheOECDwaysofdealingwiththecommonshortandlong-termenergyproblemsofconsumercountries.”(www.ena.luSee“Events,PeriodandRelationswithMiddleEast”).ThewordingrevealsthatseekingcooperationwithproducersisstrongerphrasedthanthesentencereferringtotheinvitationoftheUStoformaconsumeractiongroup,mentionedbyKissingerinhisspeechinLondondaysbeforetheSummit.IntherunuptoandduringtheWashingtonEnergyConferenceEuropeanunityunravelledandtheOECDcountries,exceptforFrance,beganpreparationsintheEnergyCo-ordinatingGroup,whichledtotheIEA.Scott,Richard(1994)),p.46/47.Untiltoday,securityofsupplypolicyhaslargelyfallenoutsidetherealmoftheEU,althoughtheLisbonTreaty(2009)�inallymadeitasharedresponsibility(withnationalgovernmentsofthememberstates).

57“Energievergteenenergie(k)beleid”.Lefeber,R.andJ.G.vanderLinde,in:SEW(6),June1987.58Con�irmedinaninterviewwithDavignon(wholaterchairedtheECGin1974)onhisassessmentofdevelopmentsattheenergyconferenceinWashingtoninFebruary1974.www.ena.lu.See“Events,PeriodandRelationswithMiddleEast”.

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AmericansalsoemergedduringtheWashingtonEnergyConferenceinFebruary1974.59Inhisspeechattheconference,theFrenchForeignMinisterJobertspokeoutagainstanorganisationofonlyindustrialisedconsumercountries,andinsteadstressedtheimportanceofincludingdevelopingconsumingcountriesandproducingcountries60,despitereferencesintheclosingstatementoftheWashingtonEnergyConferenceandintheIEApreamblestocooperationwithproducinganddevelopingconsumingcountries.61Francewasdeterminedthattheoilcrisisshouldbeseeninthewidereconomiccontextandincludeallpartiesinareshuf�lingoftheworldeconomicorder.62TheFrenchpromotedEuropeanleadershipinthesediscussions,butotherstookadimviewof theirapproach,not leastbecauseof theconfrontationalpositiontakenbysomeofthedevelopingcountries,suchasAlgeria,inthemidstoftheoilcrisisandthevaluetheyattachedtothetransatlanticrelation.

TheNetherlandswasparticularlyupsetby the limited support it had received from itsECpartners indealingwith theoilembargoandhad tostrong-armsupport for itspositionasanimportantpointofentryforoilandoilproductstotheNorthwestEuropeanhinterland.63Moreover,itwasalsoamaingassuppliertootherEuropeancountries.TheDutchweredeeplyengagedintrans-Atlanticrelationsandwere,perhapsforthatreason,lessenthusiasticaboutthe French approach. A Dutchman (Van Lennep) was heading the OECD, while the DutchalsoheldcrucialpositionsintheIMF(Witteveen)andNATO(Luns),creatingamuchcloserrelationshipwiththeUSadministrationthanperhapshadbyothercountries.

DespitetheUS-FrenchdifferencesandtheearlydeathoftheFrenchpresidentPompidouinthespringof1974,theWashingtonEnergyConferenceresultedintheestablishmentoftheIEA,undertheaegisoftheOECD.TheIEAwasfasttrackedtostartworkasquicklyaspossible,andinNovember1974theInternationalEnergyProgrammewasadopted,givinghandsandfeettoanemergencyresponsepolicyforthememberstates.64ThenewpresidencyofGiscard‘dEstaingdidnotchangethepositionofFrancewithregardtotheIEAanditdeclinedtojoin.Moreover,the French redoubled their efforts topromotemorewide-rangingdiscussions inwhichoilwouldbepartoftheagenda,too,intheConferenceonInternationalEconomicCooperation.InApril1975,inanattempttoenticeFranceinthroughtheIEA’sbackdoor,theindustrialisedconsumercountriesparticipatedinapreliminaryConferencetotheInternationalEconomic

59SpeechbyJobertattheenergyconferenceof11February1974inWashingtonandthepressconferenceof13February1974.Ortoli,fortheEuropeanCommission,andWalterScheel,ForeignMinisterofGermanyandspeakingfortheECPresidency,alsostressedcooperationwithconsumingdevelopingandproducingcountriesdemonstratingtheEuropeanconcernsaboutwiderinternationalrelations.(Atwww.ena.lu.See“Events,PeriodandRelationswithMiddleEast”).TheconclusionofmostministerswashoweverdifferentfromthatofJobertattheendofthemeeting,whentheyagreedtoparticipateintheECGandthentheIEA.

60TheAmericanshadarguedthatconstructiveproducer-consumercooperationcouldonlycomeaboutwhenconsumerswouldcooperateamongthemselves�irst.ThefactthatOPEChadactedinunityhadconvincedthemthatconsumersalsoneededtobecomeorganise.www.ena.lu.See“Events,PeriodandRelationswithMiddleEast”.Kissinger,Henry(1984),p.920-925;SeeHellema,Duco,CeesWiebesandTobyWitte(2004),pp.214-217.,

61Scott,Richard(1994).pp.45-48.62Odell,Peter(1986).pp.239-244.63Hellema,Duco,CeesWiebesandTobyWitte(2004).64Scott,Richard(1994).

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Cooperation,heldpriortothelargerconferenceofthisnamelaterthatyearinParis.65Inthispreliminary conferenceAlgeria, Saudi-Arabia, Iran andVenezuelaparticipatedonbehalf ofthe producing countries; other developing countries were also present. A failure to reachagreementonoilmattersnotonlychangedthescopeofthelargerconferencelaterthatyear,butalsoclosedthebackdoortoearlyFrenchparticipationintheIEA.France’sparticipationin emergency policieswas then secured through the later adoption of similar EC policies,mimickingmembershipinthisroundaboutmanner.

France’s efforts to discuss the oil crisis in awider international economic context did notstop there. They also organised the very �irst G-7 meeting, which at the time included 6countries:theUS,theUK,Germany,Italy,JapanandFrance.Theyconvened15-17November1975atRambouillet,withtheoilcrisisandrestructuringofmonetaryrelationsdominatingtheagenda.FromthedocumentsofPresidentFord,releasedbytheUSStateDepartment,welearnthatthediscussionsatRambouilletabouttheoilcrisisandtheinternationalmonetarysituationwere surprisingly frank andprofound.66 The atmospherewas constructive ratherthan acrimonious. The change in leadership in some of the leading industrial countriesand the economic situation certainly played a role in this change of temperature. Yet theapproach among the leading industrial countries remaineddivergent,with France focusedonthewider,moresystemic,politicalandeconomicissuesandtheAmericansmorefocusedon speci�ic issueswithin theprevailingpolitical andeconomicarrangements. Interestingly,theotherleadersalsoexpressedtheirpreferencefordialoguewiththeproducingcountries,althoughtheywerealsoawareofthedif�icultiesduetotheantagonisticNorth-Southrelations.Importantly,atthemeetingalsoagreementontheneedtorestructuretheIMFwasreached,althoughittooksometimeforittobe�inalised.Balanceofpaymentassistancefordevelopingoil-consumingcountrieswasalsoagreedupon,reachingouttothisgroupofcountries.

The success of the �irst G-7meetingwas not repeated in the Conference on InternationalEconomicCooperation,whichstartedon16December1975.Toomanyissuesandtoomanyopposing views and positions prevented this conference from producing any substantiveresults,althoughdiscussionscontinuedforanumberofyears.Thediscussionsbetweenoil-producingand-consumingcountriescontinuedaswelluntiltheoilcrisisof1978-79,atwhichtime,intheeyesofconsumingcountries,OPECcountriestookadvantageoftheIranian-Islamicrevolutionbyallowingpricestoincrease.Fromthenon,thedialoguebrokedownduetoalackoftrust.

Thus, the attempts of France to come to a restructuring of the global governance system,includingthatofresourcetradeandmakingtheECafront-runnerinthosedevelopments,didnotreallymaterialise.Thesecondoilcrisisandthesubsequenttighteningofthemoneysupplyin the US and the general atmosphere of economic restructuring changed the focus fromthe international to thenational spheres.TheUSchange ineconomicandmonetarypolicywas instrumental in changing the focusof economicpolicy-making inother countries.TheEuropeancountriesveryquicklydiscoveredthatdivergingeconomicpolicieswereconstrained

65Metzemaeker,L.“DeEuropeseGemeenschapendeenergiecrisis”,in:NieuwEuropa,No1,January1975,pp.52-56.Viawww.ena.lu

66“EconomicSummitinRambouillet,France,15-17November1975”.in:ForeignRelationsoftheUnitedStates,1969-1976,VolumeXXXI:ForeignEconomicPolicy1973-1976,pp.386-452.

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bytheirintegratedeconomies.Francehadtofollowthetightmonetaryandeconomicpoliciesprevalentinothermemberstatesandwasunabletofollowitsownformulainthisnewroundofimbalances.

Also,thecommonenergypolicytowhichtheECmemberstateshadaspiredinDecember1973wassidelinedasaresultofthecon�lictingpolicyapproaches.TheEuro-ArabDialogue,alsopartofthemany-prongedECenergydiplomacyinitiativesoftheECSummitmeetinginDecember197367,alsoquicklypeteredoutwhenoilwasremovedfromtheagenda.TheConferenceonInternational Economic Cooperation, held in Paris on 16 December 1975 and destined toincludeaproducer-consumerdialogue,becamesidetrackedinallsortsofotherdevelopmentissues.In1991,againwiththeactiveinvolvementofFrance,the�irstministerialmeetingofaproducer-consumerdialogue,nowknownastheInternationalEnergyForum,tookplaceintheatmosphereprevalentafterthe�irstGulfWarinwhichconsumingandproducingcountriesrecognisedsuf�icientcommoninterestsinoilmarketstabilitytobewillingtotryagain.

MaintainingProducerUnity

Theeventssurrounding thesecondoilprice increase in1978-79and theeconomic impactstartedaperiodofmoreconfrontationandestablishedadualgovernancestructure,withOPECrepresentingtheinterestsofproducercountriesandtheIEArepresentingtheinterestsoftheconsumingcountries.TheproducingcountriesorganisedinOPEChadbeenstrugglingwiththeimpactofin�lationontheirrealoilincomeinthe1970s.ManyOPECmemberstateshadembarkedonambitiousdevelopmentprogrammes,usingtheiroil incometo leveragetheminto industrialeconomies,andsomehadusedtheiroil reservesascollateral for loans.Thechangingmonetaryrelations-butalsotheshrinkingdemandforOPECoilinOECDmarkets-testedtheirneweconomicpoliciesandtheirrolesininternationalpolitics.

TheNorth-Southdiscussionsalsoimpactedtherelationsamongtheproducingcountrieswhenit became clear thatwinning theoil debatewith the international oil companies and theirhomecountrieswasonething,butwinningstabilityofoilincomewasanother.AcomplicatingmatterfortheproducingcountrieswasthelargedifferenceamongtheOPECmemberstatesin absorption capacity. The economiesof theOPEC countries variedwidely in termsof oilreserves, production capacity, population, institutional make-up, economic developmentandpolitical orientation.They represented a groupof developing countries, someof themnewly independentandnotalwayspoliticallystableat the time. In theperiodbetweenthetwooilcrises,bothIranandIraq,whichwereembroiledinabloodywarduringmostofthe1980s,encounteredinternalpoliticaldif�icultiesandachangeofleadership.Manycountriesstruggledwiththepoliticalabsorptionofthenewriches,insomecasesbecausethepaceofmodernisationwastoofast,leadingtoangeramongmoreconservativeforcesinsociety,whileinothercountriesitwastooslow,leadingtosocialunrest.Adaptationtothenewcircumstancesthuschallengedboththeinternal(mainlyeconomic)policiesandtheexternalpoliciesoftheproducingcountriesinaninternationalcontextthatwasalsohighlyuncertain.

67AnnextotheSummitConferenceFinalCommuniqué,in:BulletinoftheEuropeanCommunities.December1973,No12,pp.11-12.www.ena.lu

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Asaresult,OPECmeetingswereasifinakaleidoscope;everywordandmovemadeadifferenceincapitalcitiesaroundtheworld.Ateachmeeting,theworldpresswasoutinlargenumbers,addingtothepoliticalstresssurroundingtheministerialmeetings.Publicstatementsservedmorepurposesthanoilpolicyalone,whichnodoubtcomplicatedenergydiplomacyfurther,withpoliticiansengagedinbothdomesticandinternationalpoliticalpositioning.Theturmoilsurrounding the OPEC meetings was complete when Carlos, an international terrorist,captured the entire entourage of oil ministers, convening in December 1975 at the OPECheadquartersinVienna.Itshowedthatoiland(international)politicshadbecomecompletelyintertwinedintheheatedatmosphereofthosedays.AlthoughOPECrepresentedproducingcountriesfromSouthAmerica,Africa,AsiaandtheMiddleEast,thedominanceofthelatterimpliedthatthepoliticaldif�icultiesamongArabcountriesandtheArab-Israelicon�lictkeptcroppingupontheoilagenda.Inbothconsumingandproducingcountries,the�irsthalfofthe1970swasclearlyanintenseandchaoticperiodinwhichpoliticalandeconomicbalancingandre-balancingcreatedmassiveuncertainties.

Themigration of oil relations from the economic sphere (both commercial and strategic)solidlyintothestrategicpoliticalspherenotonlyaffectedrelationsbetweenproducersandconsumers,butalsoamongproducers.Oilproducerswithrelativelymodestprovenoilreservesandasubstantialabsorptioncapacitybecameproponentsofhigherprices,theso-calledpricehawks,whileproducerswithsubstantialprovenreservesandlowerabsorptioncapacities,themoderates,preferredpoliciesthatunderpinnedtheirlonger-termoilincomestability.Theseeconomicpositionsandpreferenceswereoftendefendedinpoliticalterms.Theimpactoftheoilpriceincreaseondevelopingconsumingcountriesledtotheerectionofseveraldevelopmentfunds to assist these countrieswith their economic problems. Nevertheless, the economicproblemsofthisgroupofdevelopingcountriesdidcausesomestrainwithintheGroupof77countries,whichhadat�irsthoorayedthechangeintheoilmarketgovernance.Alsohere,thecomplexityoftheinternationalpoliticalandeconomicsituationwasampli�iedbythechangesinexchangeratesandmoney�lows,challengingtherelationsamongoilproducingcountriesandrelationswithconsumingcountriesastimeworeon.

NationalversusInternationalGovernance

Forasubstantialnumberofyears,OPECmeetingscarriedmuchgeopoliticalweight.Ontheonehand,thissignalledtheimportanceofoilandoilpricestotheworldeconomy.Yetontheotherhand,itechoedthenewprojectionofpowerininternationalrelationsbyagroupofdevelopingcountries.68Theintertwiningofgeopoliticsandthenewtaskofrunningtheiroilsectorsinawaythatbothservedtheeconomicdevelopmentoftheircountriesandmaintainedstabilityintheinternationaloilmarketsimmediatelyafter1973-74begantoemphasisethedifferencesinpolicyprioritiesbetweentheOPECmemberstates.ForlargeoilexporterssuchasSaudiArabia,stabilityandprosperityoftheglobaleconomywascrucialasthisensuredhealthygrowthinlong-termoildemand.Forsmallerexporterswitharelativelylargeabsorptioncapacity,suchasAlgeria,securingarobustpriceintheshortertermwasimportant.Thesedifferencesinoilpolicyprioritiescametotheforeintheoilpricecrisisof1978-79,provokedbyproblemsin

68Montgomery,ScottL.(2010).ThePowersthatbe,GlobalEnergyfortheTwenty-�irstCenturyandbeyond,pp.213-240.TheUniversityofChicagoPress.

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Iranianoilproductionandagainintheeventssurroundingtheoilpricecollapsein1985-86.69

DuetoastrikeoftheIranianoilworkersin1978,Iranianexportsquicklydeclined.Japanwasa large importerof Iraniancrudeoilandwas forcedtopurchaseoilontheverysmallspotmarkettosupplementitsdeliveries.Atthetime,mostoilwastradedinlong-termcontracts,ofwhichsomewereacontinuationoftheagreementswiththelargeoilcompanies,andsomeingovernment-to-governmentcontracts.Thespotmarketrepresentedonlyasmallshareoftotaltrade,allowingplayerstobalancedemandandsupply.WiththeIranianexportsindefaultonthelong-termcontracts,Japanbegantopurchaseoilonthisspotmarket,pushingpricesto unprecedented levels.At the same time, due to growing supplyuncertainty caused alsobydiscussion inOPEC, the IEAmembercountriesdecidedto increase thestrategicreserverequirements,temporarilypushingupdemandinanever-tighterinternationaloilmarket.

TheOPEC countries did have surplus capacity to compensate for the lost Iranian capacity.Theway in which this surpluswas offered on the internationalmarket revolutionised oiltrade. Saudi Arabia offered its additional production on the international market at thepre-crisisprices,butothermemberstates increasinglyofferedtheiroilon thespotmarket-at�irstonlytheadditionallyproducedoilbutlatermostoftheiroil.Thedifferenceinpricebetweenthecontractedoilandthespotmarketbecameverylargeindeedandledin1980totheabandonmentof increasinglymoreofthe long-termcontracts forthetemporarilymorelucrativespotmarketdeals.70Thishadaprofoundeffectonoilmarkets,asde-integrationandemergenceofnewplayersexpandedtheexternalmarketinwhichbuyersandsellersengagedintransactionsatarm’slength.Thecrudemarketbecamemorecompetitive,andthemajorityofoilmovedthroughshort-termcontractsorthespotmarket.Priortothesedevelopments,themarkethadconsistedofasmallnumberofspottransactions,usuallydoneunderdistressedconditions,fordisposingofsmallamountsofcrudeoilnotcoveredbylong-termcontracts.

The position of Saudi Arabia to increase production and charge the old price of oil wasfrowneduponbythosememberstatesmoresensitivetoshort-termgainsinoilincome.71TheysawSaudiArabia’spolicyasafrustrationoftheirattempttomaximiseshort-termoilincomeandarguedthatoilwasmovingtowardsthenewequilibriumpricelevel.Theyalsowelcomedthepriceincreasesascompensationforthein�lationoftheyearsbefore.Theadvocatesofpriceincreaseswereallcountrieswithalimitedcapacitytomanageoilincomethroughproductionpolicies.Theearlieroilincomeincreasehadbeenincorporatedintheireconomicplanningandservedasanunderpinningforinternationalbankloans.Thecountrieshadembarkedonanintenseindustrialisationprocessthatwasjustbeginningtogainmomentum.

Saudi Arabia saw the abandonment of the earlier price policy and structure of trade as adanger to their long-termpolicy goals and feared the in�lation of higher oil prices and itsprobableimpactondemand.Withitsrelativelylowabsorptioncapacity,thecountrywasveryconcernedaboutmanagingthevalueofitsoilunderandaboveground,bothintheshort-andlongerterm.Itsholdingsininternationalcapitalmarketsmadeitmoresensitivetomonetary

69Mabro,Robert(ed.)(1986).OPECandtheWorldOilMarket:TheGenesisofthe1986PriceCrisis.OxfordInstituteforEnergyStudies/OxfordUniversityPress,Oxford.

70Hartshorn,J.E.(1993).OilTrade,PoliticsandProspects.CambridgeUniversityPress.71Noreng,Øystein(2006),p.110.

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developments.Also,itwasawarethatifthe‘new’oilpricehadtobedefended,itwouldfallmainlytoSaudiArabiatocutproduction.TheOPECcountriescouldnotagreeonhowbesttorespondtotheIraniancrisisandwere,foratime,dividedoverpriceandproductionpolicy.

Saudi Arabia, producing lower-priced oil at maximum capacity (at the time 10 millionb/d) found out that its substantial production increases were not enough to stabilise theinternationaloilmarketata lowerprice level. In1981itagreedtoadapt itspoliciestothemajoritypositioninOPECandbeganaperiodofseriousproductioncutbacks.Intheyearstocome,regionaltensionswouldde�inetherelationswithinOPEC,linkingMiddleEastpoliticsmore�irmlytooil.

TheUShostagecrisisinIranandthepositiononoilpricesofamajorityoftheOPECmemberstatescreatedanewpoliticalclimate intheUSandamongitsallies: less forgivingandlesscooperativewith regard to oil-producing countries.Moreover, the economic impact of thesecondpriceincreasewaslargeandledtoaradicalre-orientationofmonetaryandeconomicpolicies in the OECD countries. The erosion of trust in consuming countries regardingcooperationwithOPECwasverylargeindeed.Thedevelopedconsumingcountriesbegantopushaheadwithpolicies,changingtheirdependenceonimportedOPECoil,andattemptedtoreducetheshareofoilintheirenergymixes.Fordevelopingconsumingcountries,adecadeofeconomichardshipcommencedasaresultofthesecondoilpriceincrease,thesubsequentre-orientationofmonetarypolicies,highertaxationofpetroleumproductsandoilsubstitutionpolicies.

MaintainingCohesion

OilpoliticswithinOPECveryquicklybecamenotonlyadiscussionabout the internationaloilpricelevel,butalsoaboutthedistributionofincomeamongthememberstates.72Duetothedifference inreserves,productioncapacity,absorptionandpolitics, thecostsofOPEC’sproductionpolicybefellonlyafewmemberstates.SaudiArabia,KuwaitandtheUnitedArabEmirates were themain contributors to OPEC’s growing spare capacity in the 1970s and1980s,althoughothermemberstatesalsoagreedtocapsomeoftheirproductioncapacity.Yetthesecountrieswerealsoamongthosethatcompliedratherlooselywiththeseproductionagreements,redistributingthecostmostlyontothethreeGulfproducers.AlsowithinOPEC,themoreexpensiveoilwasproduced�irst,whiletheoilthatcouldbeproducedwithlowercostshadtostayintheground.ThedeclineindemandforOPECoilandtherelegationofOPECtotheroleofswingproducercreatedeconomichardshipinmanyOPECcountries,particularlywhenNon-OPECoilbegantoencroachonitsmarketshareandundercutOPECprices.73

The OPEC meetings in the early part of the 1980s were de�ined by declining supplymanagementandpriceadjustmentsuntilthelatterpartof1985whenSaudiArabiaclaimedashareofOPECproductionconsistentwith itsof�icialreservebaseand long-termpolicies.ThishelpedtorepositionOPECoilinthemarket,asthenewpolicyimpliedmoreproductionandlowerprices.Loweroilpricesalsostimulateddemandindepressedeconomies,suchasthe European economies and the oil-consuming developing countrieswith debt problems.

72Noreng,Øystein(2006),p.113.73Alnasrawi,Albas(1985),pp.83-85.

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Furthermore,theoilpricedeclinecoincidedwithareorientationofOECDmonetarypolicies.In the Plaza and Louvre agreements, the G-7 countries had agreed in 1985 to depreciatethedollarinacoordinatedintervention.TheeraoftheWashingtonconsensuscommenced,andthe liberaleconomybecamethenewnorm.Thedoubleeffectof loweroilpricesandadepreciateddollarfreedtheworldeconomyfromitslowgrowthpathandhelpedtofurtherrestructuredeveloping countrydebt.But the �lip sideof thispolicywas thatoilproducingcountries, amongwhichwerehalf of theOPECmember states, andwhichhadusedhighlyvaluedoilreservesascollateralforinternationalbankloans,werenowtheworld’snewdebtorcountriesrequiringIMFassistance.

New oil discoveries in non-OPEC countries, helped by OPEC price policies, implied thatsigni�icantamountsofoilbegantoreachtheinternationalmarketfromoutsideOPEC.74Theincreaseinthisoutsidesupplyalsomeantanincreaseinthenumberanddiversityofcrudeoil producers. These producers were setting their prices in line with market conditions,undercuttingOPECprices.Withthecontinueddeclineindemandforitsoil,OPECsawitsownmarketshareintheworld’soilproductionfallfrom51%in1973to28%in1985.

Itbecameclearbythemid-1980sthattheOPEC-administeredoilpricingsystemwasunlikelyto hold for long and OPEC’s − or,more precisely, Saudi Arabia’s − attempts to defend themarkerpricewouldonlyresultinlossofmarketshare,asotherproducerscouldoffertoselltheiroilatadiscounttotheadministeredpriceofArabianLight.Asaresultofthesepressures,thedemandforSaudioildeclinedfrom10.2millionb/din1980tobelow3millionb/dinthesummerof1985.

Forashortperiodin1986,SaudiArabiaadoptedthenetbackpricingsystemtorestorethecountry’smarketshare.75Soonafterward,otheroil-exportingcountriesadoptedthissysteminanattempttoenhancetheirmarketshares.Thenetbackpricingsystem,whichprovidedoilcompanieswithaguaranteedre�iningmarginevenifoilpricesweretocollapse76,contributedtothe1986pricecollapse,from$26abarrelin1985tolessthan$10abarrelinmid-1986.Outofthe1986oilpricecrisisemergedthecurrent‘market-related’oilpricingsystem.Thetransition, however, did not occur instantaneously. In 1987 Saudi Arabia reverted back toof�icialpricingforabriefperiodoftime,butthepositionwasuntenable,asmanyotheroil-exportingcountrieshadalreadymadetheswitchtothemore�lexiblemarket-relatedpricing

74Thisprocessbeganwellbeforethe1970s.TheNorthSeaattractedoilcompaniesstartingintheearly1960s,andthe�irstroundsofleasingwereawardedin1964and1965.In1969,oilwasfoundintheNorwegiansector,andin1970amajor�ind(theEko�isk�ield)wascon�irmed.In1969intheUKsector,Amocofoundsomeoil,butitwasdeemedtobenon-commercial.In1970,BPdrilledtheexploratorywellthatfoundtheForties�ield.Oneyearlater,Shell-EssodiscoveredtheBrent�ield.Itisimportanttonotethatallthesemajordiscoveriesprecededthesigni�icantriseinoilprices.Seymour,A.(1990),TheOilPrice&Non-OPECSupplies,OIES,showsthathalfoftheincreaseinnon-OPECsupplyovertheperiodof1975-85wouldhavematerialisedregardlessofthelevelofoilprices.

75Foradetailedanalysisofthenetbackpricingsystemandthe1986pricecollapse,seeMabro,R.(1986).OPECandTheWorldOilMarket:TheGenesisofthe1986PriceCrisis,OIES3.

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system.ThedateastowhenSaudiArabiaexplicitlyadoptedthepricingformulaisnotclear,butitmighthaveoccurredsometimein1987.77Thisopenedanewchapterinthehistoryoftheoilmarket,whichsawOPEClosecontroloftheadministeredpricingsystemandtransferthepowerofpricingcrudeoiltotheso-calledmarket.

Inthemid-1980sitwasclearthatthepowerprojectionofthe1970s,withoilasaweaponfor redesigning the economic and political power structure in theworld, was incomplete.Other strengths in the economic, political and security sphereswere just as important toestablishingapositionofpower.Yettheimpactofthetwooilpriceincreasesofthe1970shadshownthatcooperationtoincluderatherthantoexcludecountriesintheinternationalsystemwasimportant,andthatgradualchangeisverydif�iculttomanageinaworldwherenational,private and public interests compete for prominence. Despite the change of coursewithinOPEC, the economicdif�iculties of individualmember states and the Iran-Iraqwarde�inedtheirrelationsinthesecondpartofthe1980s.Althoughoildemandbegantogrow,energypolicies - for instance inEurope -preventedaquickreturn topreviousoildemand trends,whiledemandinelectricitygenerationwasstructurallylost.Astheoil-consumingcountrieshaddiscoveredtheimportanceofsecurityofsupplyinthe1970s,theoil-producingcountriesdiscoveredtheimportanceofsecurityofdemandinthe1980s.Thesetwoimportantpillarsofenergypolicybecamethekeytotheinitiativesforclosercooperationinthe1990s.

Conclusion

The result of the vast changes in the oil value chain and oil producer-consumer countryrelationswasthatfrom1973onwardstheIEAcountriesborethecostofsecurityofsupplywiththeirstrategicreserves,whilesomeOPECcountriesborethecostofoilmarketstabilitywith their bufferproduction capacity. Together, thesemechanismsprovided thepost-1973marketwithsecurityventstoovercomeshort-termmismatchesanddisruptions.Previously,thishadbeentheself-regulatedtaskofthemaininternationaloilcompanies.Despitethenewinternationalorganisations,until the late1980s thegovernanceofoilmarket securitywasconductedinof�icialinstitutionalisolationandwasverymuchpartofgreatpowerpoliticsanddramaticshiftsineconomicpolicymaking.Althoughthepotentialstrengthofmorecooperationbetweenconsumingandproducingcountrieswasgraduallyrecognisedinmorecircles,inthe1980s the countrieswere unable to overcome the political and economic differences thatoriginatedinthe1970s.Onlywheneconomicbarriersintheinternalandexternaleconomiesofmany countrieswere removed and developing country debtswere integrated in a neweconomicgrowthmodel, inadditiontosomeimportantgeopoliticalstumblingblocksbeingremoved,suchastheendoftheIran-IraqwarandthefalloftheBerlinWall,didthetimeripenforcloseroilcooperation.

76Itinvolvedageneralformulainwhichthepriceofcrudeoilwassetequaltotheexpostproductrealisationminusre�iningandtransportcosts.Anumberofvariableshadtobede�inedinacomplexcontractincludingthesetofpetroleumproductsthatthere�inercanproducefromabarrelofoil,there�iningcosts,transportationcostsandthetimelagbetweenloadinganddelivery.

77Horsnell,P.andRobertMabro(1993).OilMarketsandPrices,TheBrentMarketandtheFormationofWorldOilPrices.OIES,OxfordUniversityPress,Oxford.

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57

Introduction

The1980slefttheOPECmemberstateswithwidelydifferentoutlooksonhowbesttoreapthebene�itsfromtheeconomicupswingintheglobaleconomy.ThesedifferencescametoaheadinFebruary1990,whenIraqopeneditsnewoilexportpipelinethroughSaudiArabia,onlyto�indthatitcouldnotbesuf�iciently�illedwithoil.TheIran-Iraqwarhadleftthecountrywithhugedebts,andwithoutforeigndirect investmentorasubstantial increaseinoilrevenues,Iraq could not �inance new capacity investments. Overnight, Iraq reverted from a recentconvertasvolumeproducerback intoapricehawk,challengingtheoilpoliciesofmemberstateswithmoreinternationally-orientedandlong-termstrategies.ThemonthsthatfollowedwitnessedarapiddeteriorationofrelationsbetweenIraqandtheotherGulfstates,resultingintheoccupationofKuwaitinAugust1990,despitetheintenseeffortsofSaudiArabiaandotherstomediate.ThegeopoliticalimpactofIraq’soccupationofKuwaitwaslarge,notleastbecause,ifunchallenged,theywouldrepresentabout20%oftheworld’sprovenoilreservesandabout5%ofworldre�iningcapacityinthatyear.Moreover,theythreatenedsecurityofproductionin the neutral zone and in Saudi Arabia. Such a threat to oil securitywas unacceptable tobothproducers and consumers. Immediately, oil from Iraq andKuwaitwasdeniedmarketaccess,whileotherproducers triedveryhardtocompensate for lostsupply tomanagethepriceimpact.Acoalitionofwillingcountries,mainlytheUS,theUK,SaudiArabiaandFranceandforcesfromArabcountriessuchasEgypt,MoroccoandSyria,begantobuildupmilitarystrengthalongIraq’sborderstocontaintherisk.

The1990-1991GulfWarandtheResponsetotheSupplyDisruption

The�irstGulfWardemonstratedtheimportanceofutilisingsparecapacityintimesofcrisis.78AsaresultofIraq’sinvasionofKuwait,some4.5millionb/dweretakenoutoftheoilmarket.ThereweredisagreementswithinOPECmembersastothebestwaytorespondtothisadversesupplyshock.OPECmembers,mostlythosethatdidnothaveanysparecapacityatthattime,opposedanyproductionincrease.ThesewereinfavouroftheIEA’sactivatingitsemergencyresponsemeasuresandreleasingstocksfromthestrategicpetroleumreserves.Others,ledbySaudiArabiaandVenezuela,wereinfavourofboostingoilsupplies.ThesemembercountriesarguedthatsincetheinterruptionofsupplywasinducedbyOPECmembers,andgiventhatmanyOPECcountriesweresittingonlargesparecapacity,theOrganizationshouldstepinandaimtostabilisetheoilmarket.Furthermore,sincedevelopingcountrieshadlittleinventory

Chapter4:FromConfrontationtoCooperation

78Harks,Enno(2010),pp.252-54.

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capacity,andsincetheiroildependencewasmuchhigherthanthatofOECDeconomies,itwasthosecountriesthatwouldsufferthemostfromthesupplyinterruption.

Onthe16thofAugust1990,SaudiArabiacalledforanimmediateextraordinaryOPECmeeting.DespitestrongoppositionfromsomekeymembercountriessuchasAlgeriaandIran,theOPECMinisterialCommitteeconvenedinViennaonthe29thofAugust.ThemeetingwassuccessfulinreachingadealinwhichOPECmembersagreedto“increaseproduction,accordingtoneed”.OPECarguedthatthisdecisionwouldhelptorestatetotheworldthattheOrganization“standsformarketstabilityandregularsupplyofoiltoconsumers”.OPEC’sViennaagreementalsocalledforconsumers“toactivelyparticipateinthestabilisationprocess”.ThereweresomeconcernsamongOPECmembersthatthedecisiontoincreaseoutputwouldcoincidewithIEA’sreleaseofstocks,placingdownwardpressureonoilprices,thoughtherewasnoclearindicationatthattimethattheIEAwascontemplatingsuchamove.DuringtheOPECmeeting,SaudiArabiamadeinitialcontactwiththeIEAtoobtainastatementfromtheconsumerorganisationinresponsetoOPEC’sdecisiontoincreaseproduction.Onthe29thofAugust,theExecutiveDirectoroftheIEA,MrsHelgaSteeg,issuedastatementwhichwelcomedOPEC’sincreaseinoilproductionandnotedthatthe“oilsupplysituationhasnotwarrantedadditionalmeasures,includingrecoursetogovernmentstockpiles”.However,thestatementnotedthattheproposal“foralinkbetweenaproductionincreasebyOPECandgovernmentstockdrawbytheIEA,aswellasforajointmeetingbetweenIEAandOPECMinisters,isnotfeasible,politicallyoreconomically”.Thespeedatwhich this statementwas issued indicates that contacts and channels of communicationbetweenIEAandsomeOPECof�icialsmayhavealreadybeenestablished,perhapswellbeforetheeruptionoftheGulfWar.79Intermsofcontent,thestatementindicatesthatalthoughtheIEAmembercountrieshavetakenpreparatorymeasures80,theypreferredtoshifttheresponsibilityof�illingthesupplygaptoOPEC.

TheGulfWarprovedtobeaturningpointinproducer-consumerrelations.81Itrevealedtheimportanceofaconcertedandcoordinatedglobalresponsetoanadversesupplyshock.OnOctober1,1990 in theUNGeneralAssembly, theVenezuelanPresidentPerezcalled foranurgentmeetingofproducersandconsumersundertheauspicesoftheUNtohelptheworldface“thepoliticalrealitiesofoil”,statingthat“excessive�luctuationsareharmfultoallofus,consumers and producers, and only favour speculators”.82 He proposed that the dialogueshouldstartwithameetingbetweenOPECandtheIEA.Thisechoedanearlierproposalmade

79Inaprivateinterview,PrinceAbdulazizBinSalmanBinAbdulaziz,AssistantMinisterforPetroleumAffairsinSaudiArabia’sMinistryofPetroleumandMineralResources,revealedthatinitialcontactswithIEAweremadeinthelate1980s.Inarecentinterview,DrAlirioParra,aformerEnergyandMinesMinisterofVenezuelabetween1992and1994,revealedthatinthelate1980s,andunknowntootherOPECmembercountries,heinvitedtheExecutiveDirectoroftheIEAforavisittoCaracas.

80Scott,Richard(1994).P.166.81SeeinterviewDr.SubrutoinOPECBulletin3/10,pp.pp.10-15,wherehesaid“Re�lectingontheperiodasawhole(ofhistimeasSecretarygeneralofOPEC),however,IbelievethatthemostimportantdevelopmentwastheestablishmentofcooperationbetweenOPECandtheInternationalEnergyAgency(IEA).Formanyyearspriorto1988andduringtheearlypartofmytimeattheSecretariat,therelationshipwasoneofcatandmouse.Itoftenfeltlikethetwoorganisationswerecrossingswordseverytimetheymet.(…)ThesloganIrememberfromthattimewas‘fromconfrontationtocooperation’.Andthereisclearlyamorecooperativeenvironmenttoday.”

82MiddleEastEconomicSurvey,Vol.XXXIV,No.1,p.A7,8October1990

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intheWorldCommissiononEnvironmentandDevelopmentin1987whichcalledforclosercooperationbetweenconsumersandproducers.At theWorldEconomicForuminDavos in1989, theChairmanof theCommissionand theNorwegianPrimeMinisterGroBrundtlandcalledforaninformal“WorkshopofMinisters”frombothproducingandconsumingcountriestodiscussenergyrelatedissues.83Asapetroleum-exportingindustrialisedcountry,Norwayfeltthatitwasinabridge-buildingpositionbetweenproducersandconsumers.Theconceptofa“workshop”wasmeanttounderscoreinformalityandtoimplythattheinitiativewasnotintendedtoproduceabigconferencethatwouldcreatehighpoliticalexpectationsthatcouldinturnnotbemet.Thesecalls,however,fellondeafears,withimportantconsumersregardingcooperationwithproducersatthepoliticallevelasineffective,giventhewidedivergenceofinterests between the two groups.Norway attached great importance to having theUS onboardforthedialogueprocess,butlaterin1989thenewPresidentBushmadeitcleartotheNorwegiansthattheUSstillhadmisgivingsaboutthedialogue.

In1989,Venezuela’snewPresidentPerezwasconfrontedwitheconomichardshipathome.Unlikeinthe1970swhenhepresidedoverthecountryintheyearsofincreasingoilincome,henowhadtodealwithacountryunderanIMFrestructuringprogramme.Moreover,PDVSAmanagementhadproposedfairlylargeexpansionplansandforwardintegrationstrategiesintheUS.Ifachieved,theseplanscouldpotentiallycreatedif�icultiesinOPECintheabsenceofanexpansioninworldoildemandandasothercountrieswereinterestedinraisingsupplytoboosttheirincome.Perezbegantoaimforinternationalrecognitionforsupplyanddemandissuesby initiatingmultilateral initiatives. Inameetingon thesidelinesof the45thSessionof the UN General Assembly in September-October 1990, Presidents François Mitterrandof France and Carlos Andres Perez of Venezuela provided their political support for theinitiationofthe‘MinisterialSeminar’ofproducersandconsumers,whichwiththehelpoftheNorwegians,ledtothe�irstmeetinginParisin1991.

ForVenezuela,Francewasanaturalchoicetopartnerwith,asFrancecontinuedtobeviewedbymanyOPECmembers as open to such initiatives. France had been amain promoter ofsuchadialogueinthe1970s,andotherEuropeancountrieshadshownconsistentinterestinsuchdialogues.Therelationswithproducingcountriesremained important forFranceandtheEuropeansingeneral,andbasedonthe�irstcontactsinthe1970s,theEUlaterengagedintalkswithOPECandtheGulfCooperationCouncil.Atthesametime,althoughFrancehaddeclinedtojointheIEAwhenitwasinitiallyestablished,theyhadtakenthe�irstinternalstepstoprepareforIEAmembershipin1990andbegantoparticipateinthegoverningboardlaterthatyear.84

Otherproducers’ interest inopeningadialoguewithconsumershasalsointensi�iedduringthe early 1990s. PDVSA,KuwaitOil Company (KOC) and, to a lesser extent, SaudiAramco,hadembarkedonforwardintegrationstrategiesinthemainmarketsfortheiroil.Theyhadpurchased downstream facilities in the US and Europe and were keen to further develop

83Walther,Arne(2007).“DialogueforGlobalEnergySecurity:TheRoleoftheIEF”,in:MiddleEastEconomicSurvey,Vol.50,No.47,19November.

84In1992,Francerati�iedtheagreementtojointheIEA,explainingthelistingoftheof�icialyearofmembership.BecausemembershipoftheIEAinvolvedsigningatreaty,therati�icationtookplacein1992,butFrancehadparticipatedintheIEAgoverningboardsincelate1990.

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theseassetsinanefforttosecuredemandfortheiroil.Therestrictionsonproductionwereincreasinglyseenasanimpedimenttotheirdevelopmentasverticallyintegratedoilcompanies.OtherOPECmember countries,mainly thosewith a smaller oil asset base, debt problemsand/orregionalordomesticpoliticalinstabilities,wereunabletopursueasimilarstrategytosecuredemandfortheiroil.Economichardshipand/orpoliticaldif�icultiesalsoimpededthesecountries’abilitiestoinvestinproductioncapacity,temptingsometoagainconsiderforeigndirect investments tobring theircapacitiescloser topotential.Someproducersconsideredimprovement in relations with consumers through a purposeful dialogue could help increatingcon�idencebetweenpartiesandhenceresult inamoreconduciveenvironmentforinvestmentintheirenergysectors.

TheIsfahanOilConference

Callsfortheproducer-consumerdialoguebegantospreadwidelyduringandintheaftermathoftheGulfWar.InhisaddresstotheannualmeetingoftheIndonesianPetroleumAssociationon16October1990,OPECPresidentMrSadekBoussenacalledforanendtotheconfrontationalbehaviourbetweenproducersandconsumers,proposingthatthetwosidesreachaconsensusonadesiredequilibriumoilpricelevel.HecalledforaninternationalconferencethatincludedOPEC,non-OPEC,IOCsandconsuminggovernmentstobeheldaftertheGulfcrisistodiscusstheoutlookforpricestability.85

IranalsoattemptedtomendfenceswithothercountriesandorganisedaconferenceinIsfahanon27-29May1991entitled‘OilandGasinthe1990s:ProspectsforCooperation’.Themeetingwasattendedbyseniorof�icialsfromproducingandconsumingcountries,includingministersfrom the Soviet Union, Saudi Arabia, Venezuela, Indonesia, Nigeria, the UAE, other seniorof�icialsfromFrance(theDeputyMinisterofIndustry),Japan(anof�icialfromMITI)andChina(theDeputyMinisterfromtheMinistryofPetroleum)andrepresentativesfrominternationaloilcompanies.ThethenIranianoilministerMrAghazadehwasthemaindrivingforcebehindtheIsfahanconference.IranopeneditsoffshoreoilandgassectorforIOCinvestmentsintheperiodaftertheIran/Iraqwarandenteredintonegotiationswithinternationaloilcompaniesfor joint investments. Iran had a very ambitious programme of increasing capacity fromaround3.5millionb/dto5millionb/dby1993,whichcouldnotbeachievedwithoutforeignplayers’involvement.MrAghazadehconsideredthatagenuineproducer-consumerdialoguecould help in creating con�idence between parties and hence result in a more conduciveenvironmentforinvestmentintheoilandgassectors.Moregenerally,oneoftheobjectivesof the Isfahanmeetingwas also to opennew lines of communicationbetween the variousparties,whichhadbeenblockeddue “tomanymisconceptions andmisunderstandings”. InaninterviewjustbeforetheIsfahanmeeting,MinisterAghazadehmadeastrongcaseforthedialogue,statingthatifthetwosidesweretoreachcommonunderstandingaboutoilreservesbelonging to the world and all parties involved being responsible for safeguarding thesereservesandoptimisingtheiruse,then“thiswillcreateastrongreciprocalbondandlaythefoundationsforameaningfulproducer-consumerdialogue”.86TheMinisteralsowelcomedtheFrench-Venezuelaninitiative,arguingthatifthedialogueisorganisedinsuchawaythatboth

85MEES(1990).“BoussenaCallsonProducersandConsumerstoReachConsensusEquilibriumPriceforOil”,Vol.XXXIVNo.4,29October,p.A3.

86MiddleEastEconomicSurvey,Vol.XXXIV,No.34,27May1991

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partiescanachievemutualgains,thenthiscouldpromotereliabilityandstabilityinthe1990sandthedecadesafter.AsimilarmessagecamefromanotherkeyproducerduringtheIsfahanconference.Mr.HishamNazer,SaudiArabia’sMinisterofPetroleumandMineralResources,expressedstrongsupportforthedialogue,statingthat“therecentcrisisintheGulfbroughtintosharp focus theextentof this interdependence,especiallywithreference tooil”. Inhisspeech,helaidthefoundationforanimportantcomponentofthedialogueforyearstocome,stating:

Totheconsumers,securitymeanstheavailabilityofsuppliesatreasonablepricestofostertheireconomicgrowthandcompetitiveness.Thisclearlymeansthattheconsumershaveasharedinterestwiththeproducersinordertogiveasolidfoundationtotheconceptof‘energysecurity’.Totheproducerssecuritymeanscontinuedaccessintothemarketsofoilimportingcountries,thesteadyshareofoilintotalenergyconsumptionoverthelongterm,and fairandstableprices thatallowfor theirsustainabledevelopmentover thelifetimeoftheresource.De�inedthisway,securityisamutualconcernofproducersandconsumers.ItiswhatIhavetermed‘reciprocalsecurity’.87

TheParisEnergySeminar

Thecallsforaproducer-consumerdialoguepropagatedwidespreadreactionsandresponsesandproducedanewmomentumwithinproducingandconsumingcountriesalike.Exploitingthemomentum, in 1991 the governments of France andVenezuela called for ameeting atthe ministerial level between representatives of oil-exporting and consuming countries.In the invitation letters to participants, the organisers emphasised the importance of themeetingespeciallyinthelight“ofthelessonsderivedfromtherecentGulfcrisis,whichhasevidencedthefactthatoilproducersandconsumersaretodaymoreconsciousofthe long-termconvergenceoftheirinterests”.

However, not all of the parties were enthusiastic about the French-Venezuelan initiative.VenezuelaandFrancetriedtogathersupportfortheproducer-consumerdialogueinitiativebybringingonboardkeyconsumingcountries.InMay1991,USPresidentGeorgeBushrejectedtheproposalbytheVenezuelanPresidenttoconductmultilateraltalksbetweenoilconsumersandproducers.TheUSobjectiontothedialoguewasthree-fold.First,adialoguewithalargenumberofcountrieswasunlikelytoproduceanymeaningfulresults.Second,multilateraltalkswithOPECwouldeventually lead todiscussionsonproductionandprices.TheUSmade itclearinthevariousministerialconferencesthatitsgovernmenttakesnoviewonoptimal,fair,orjustoilpriceandproductionlevels,asitbelievesthatpriceandproductiondecisionsarebestlefttomarketforcesresultingfromtheindividualactionsofproducersandconsumers.Finally,inthe�ieldofenergyrelations,theUShasalwaysfavoureddirectbilateraltalkswithitsmajorsuppliers.Intheend,however,theUSdidobservethemeetingatarelativelyjuniorlevel,afterassurancesthatissuesofpricesandproductionwouldremainofftheagenda.

The IEAalsoseemed tobeuncomfortablewith thishigh-levelpoliticaldialogue. Instead, itoptedtoorganiseanannualTechnicalMeetingofExpertsfrombothproducingandconsuming

87Nazer,Hisham(1991),“TheInterdependenceofProducersandConsumersintheOilMarket”,Vol.XXXIV,No.35,3June.

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countriesasa‘con�idence-building’gesture.The�irstsuchmeetingwasheldinFebruary1992andcontinuedwellintothe1990s.

SaudiArabiaparticipatedat theParisEnergyMeeting, but also at a junior level.Given thekeyrole itplayedinstabilisingoilmarketconditionsduringtheGulfWar, theKingdomfeltthatitshouldhavebeengivenamoreprominentroleinthepreparationfortheParisEnergyMeeting.AsforotherOPECmembers,theyalsodidnotplayaleadingroleinthedialogue,withlittlecoordinationtakingplaceamongthememberstates.Inmanyinstances,someministersregarded themeeting as an opportunity to detail their countries’ hydrocarbon sector andinvestment opportunities. In contrast, consuming countries were better focused, raisingissuessuchasaccess,transparency,energysupplysecurityandtheroleofmarketsinoilpricedetermination.

The �irstmeeting tookplace inParis on the1st and2nd of July1991withFrance as a hostandVenezuelaasaco-host.Inpreparationfortheseminar,theorganiserscontactedNorwayas a potentially collaborative participant, which re�lects Oslo’s important role played inorganising the �irst meeting.88 Twenty-�ive countries and nine international organisationsparticipatedinthismeeting.89Theagendawasverybroadandcoveredmanyaspectsoftheoilmarket, includingissuessuchasthemajoruncertaintiesofthe1990sandtheir impactsoninvestment,thefunctioningofthefuturesmarket,andwaystoenhancethetransparencyandthesmoothfunctioningofthemarket.Theagendaalsofocusedonindustryissuessuchascooperationbetweenthedifferentcomponentsoftheindustry,thechallengesin�inancingpetroleuminvestments,andthedegreeofintegrationbetweentheupstreamanddownstreamcomponentsanditsimplicationonsecurity.Environmentalissuesalsofeaturedhighlyontheagenda,andissuessuchasthefutureroleofoilinthesocialandeconomicdevelopmentsandwhetheroilcouldbecomeacleanersourceofenergywereraised.

Giventhebroadagenda,thediversityandcomplexityoftheissuesraisedandthelowinterestshownbykeypartiessuchastheUS,theUK,JapanandSaudiArabiainthedialogue,the�irstmeetingachievedlittleprogressonresolvinganyofthekeyissues.Nevertheless,theFrenchSummaryoftheSeminarresultspointstoconsensusonafewbroadissues,suchastheneedtostrengthenthemarketsoitcanfunctioninapropermanner,andtoimprovetransparencyso individual players can base their investment and purchasing decisions on accurateinformation.Therewerealsocallsforcountriestocommittotheprinciplesofpredictabilityandcontinuity“inordertoensurethatthemarketfunctionproperlywhileatthesametimecreatingastableenvironment”.TheParisSeminaralsohighlightedthehighdegreeofenergyinterdependencewhich“dictatesaconcreteandpragmaticapproach”forcooperationinmanyareas,suchasraisingproductioncapacity,theutilisationofstocksandthestrengtheningoftheintegrationbetweenupstreamproducers anddownstreamconsumers.However, themajor

88TheroleofNorwayisalsore�lectedinthefactthattheNorwegianMinisterofForeignAffairswasoneoftheprincipalspeakersattheopeningsession.

89ProducersincludedAlgeria,Egypt,Indonesia,Iran,Mexico,Nigeria,Norway,Oman,SaudiArabia,theUSSR,theUAEandVenezuela.ConsumersincludedBrazil,Canada,Czechoslovakia,France,Germany,theNetherlands,India,Italy,Japan,SouthKorea,theUKandtheUS.ThenineinternationalorganisationsincludedtheIEA,EBRD,IBRD,ECC,GCC,IMF,UN,OPECandEUROPIAonbehalfofEuropeanOilCompanies.TheEuropeanCommissionwasrepresentedattheCommissionerlevel.

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achievementoftheParismeetingisthatit‘broketheice’betweenproducersandconsumersandsetthefoundationforpotentialfuturecooperation.Theseminarallowedtheparticipantsto “break certain taboos and even to propose joint projects. The era of confrontation, wehope, is over; dialogue and communicationmust take its place”.90 TheG-7 summit held inLondoninJuly1991welcomedtheproducer-consumerdialogue,notingthattheGulfcrisis“hasledtoimprovedrelationsbetweenproducersandconsumers,contactsamongallmarketparticipants [being] further developed to promote communication, transparency and [the]ef�icientworkingofmarketprices”.91

Despitetheseconcreteachievements,theParisseminarshowedthataconstructivedialoguestillhadalongwaytogo.Atthattime,MEEScommentedonthemeeting:

It isclearthatFranceandVenezuela,aftermucheffortandpersuasion,andtakingfulladvantageofthepost-Gulfcrisisawarenessoftheneedtotackleenergyproblemsonamultilateralbasis,havesucceededinstartingthedialogueontherighttrack,despitethefactthatinonesensediscussionsinthemeetingsweremoreofamonologuesincetheleadingindustrialstates(US,UK,Japan)didnotmakeanycontributionandsomevitalissues,likepricesandproduction,weredeliberatelyexcludedfromtheagenda.92

OilMarketDevelopmentsandtheDialogueinthe1990s

Oilmarket developments in the rest of the 1990s in�luenced the content of the producer-consumerdialogueandshapedtheinterestsandattitudesofkeyplayerstowardscooperation.The1990sprovedtobeagloomydecadefortheoilmarket.DespitethecollapseoftheSovietUnionanditsdiminishedcontributiontoglobaloilsupplies,the‘containment’ofIraqwhichmeanttheexitofIraqfromtheoilmarketformostofthedecade,andtheUSsanctionsonIranandLibyawhichlimitedcapacityexpansioninthesecountries,theworldoilsupplycontinuedto grow faster thandemand. Frombeing a price setter in themid1980s,OPEC’s rolewastransformedtothatofameremanagerofsurpluscapacity,withOPECbeingsqueezedfromboththedemandandsupplysides:arelativelyslowgrowthinglobaloildemandandexpansioninnon-OPECsupply,thoughatamuchslowerratethanthatofthe1980s.Anenvironmentoflowoilprices,poorlyinformedoptimismaboutnon-OPECsupplyandwidespreadpessimismabout the prospects for global oil demand threw the industry into a deep recession andreducedtheattractivenessofinvestmentinallpartsoftheoilsupplychain.Producersfounditdif�iculttoadjusttothisnewreality.TheissueofhowtoallocatetheburdenofoutputcutsincreasedthetensionbetweenOPECmembersandultimatelyresultedinanoversupplyofoilandthecollapseoftheoilpricein1998.TheAsian�inancialcrisisof1998broughttoanendthehopesof strongeroildemand fromAsianeconomies.Thegrowth inAsiandemanddideventuallymaterialise,butOPECcountrieshadtowaitforafewmoreyears.

Oilcompaniesalsohadtoadjusttothisnewworld.Theyembarkedonindustrialand�inancialrestructuring,whichresultedin,amongotherthings,theerosionoftheirhumancapitaland

90FrenchSummaryoftheSeminarResults,MrDominiqueStrauss-Kahn,theFrenchMinisterofIndustryandForeignCommerce,2July1991.Source:MEES,vol.XXXXIV,No.10,p.A6,8July1991.

91http://www.g8.utoronto.ca/summit/1991london/communique/energy.html92MEES,vol.XXXXIV,No.10,p.A3,8July1991.

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managerial skills. Oil companies lost their appeal to investors who preferred to invest inhigh-growthcompanies.Eventually,awaveofmergersswepttheoilindustry,resultingintheconcentrationoftheindustryandtheemergenceofanewclassofoilcompanies,theso-called‘supermajors’.

In such an environment, security of demand and oil price stability became the dominantconcerns for producing countries. On the other hand, for consumers, the issue of supplysecurity,thoughstilldiscussed,receivedlessattentioninpolicycircles.TheUSfeltcon�identenoughtoimposesanctionsonkeyoil-producingcountrieswithoutfearingtherepercussionsof theirnegative impactonglobal oil supplies. In contrast, the climate changeagendawaselevated in consuming countries’ policy agendas. Sustainable development, taxation ofpetroleumproductsandgreentaxesbecamethefocusofconsumers’interestinthedialogue,issuesthatproducersconsideredasadditionalthreatstoanalreadyveryweakoilmarket.Anotherproducer-consumermeetinginJuly1992followedtheParismeeting.Themeeting,entitled“GlobalEnergyPolicyInter-relationship”washostedbyNorwaywithEgyptandItalyactingasco-hosts.93Whilethemeetingreiteratedthe importanceofthedialogue,giventheincreased interdependencebetweencountries, italsohighlighted thegulfbetweenthe twoparties,especiallyinrelationtotheeco-taxproposedbytheEC.Inthismeeting,OPECmadeclearitspositionregardingthecarbontax,consideringitasanotherformofexcisetaxandonewhichisprimarilyaimedatreducingoildemandwithnegativerepercussionsonoilproducingcountries’exportrevenuesandconsequentlyontheireconomicandsocialstability.Suchtaxesalso entailed a large transfer of income fromproducers to consumers.Thiswas echoed inthemedia,wherePlattsconsideredthatthe“gapbetweentheNorthandSouthgrowswiderandtheEC’sCarbonTaxproposalsimplyregistersastoohostileanideatothoseproducersstruggling to balance and contain fast-growing populations at 20/bbl”.94 One importantaspectofthismeetingisthatitplacedanewandcrucialfocusonRussia,insteadofonlyonthe traditional IEA-OPEC agenda.Whereas there were no agreed conclusions at the Parismeeting,atthemeetinginNorway,thehostandco-hostssummedupinadocumentthethrustof theexchanges, leaving it to individualdelegationstosaywhat theywantedtothemediaonanindividualbasis.Thejointdocumentbythehostsandco-hostsissuedonthe8thofJulycameoutasbeingveryweak.Thememorandumnoted,“energygoestothecoreofpolitical,economic and environmental interests”; emphasised the importance of “the interlinkagebetweensecurityofsupply,demandandinvestments”andthat“ofdevelopingtechnologicalpartnerships between producers and consumers”. Such diluted statements re�lected deepdivisionsbetweenthetwocamps.

The3rdInternationalEnergyConferenceheldinSpainon19-20September1994reiteratedthesamemessagesfromthepreviousmeetings.95However,therewerethreenewdevelopmentsthatareworthnoting.First, forthe �irst time, theparticipantsagreedonadocumenttobepublishedattheendoftheconferenceintheformofconcludingremarks.Thedocumentwas

93Themeetingwasattendedby22countries,theEuropeanCommission,theIEA,OPECandtheUN.94Platt’sWeek,6July,1992.95ThehostcountrywasSpainandtheco-hostswereAlgeriaandMexico.Threecountriesparticipatedinthe3rdInternationalEnergyConference,inadditiontotheEuropeanCommission,theIEA,OPECandtheUN.

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notabindingresolutionbutrepresentedaconsensusamongthevariousparticipants.Second,in terms of content, for the �irst time, the participantsmade an explicit reference to pricestability,inwhichtheconcludingremarksnotedthat“pricestabilityisakeyconcernfortheenergysecurityfromthepointviewofbothconsumersandproducercountries.Itisthereforenecessarytoenhancethestudyofthelimitsofthatreasonablepricelevelinordertoidentifytherangethatwouldprovideforcommonbene�itsandatthesametime,avoidtherisksofpricevolatilityforbothconsumerandproducercountries”.SuchaconcludingremarkrepresentedaU-turnfromthepreviousapproach,whichhadexcludedanydiscussiononprices.Finally,theconcludingremarksemphasisedtheincreasingstrategicimportanceofnaturalgasinenergysecurity,callingformeasurestoincreaseitsuseintheenergymix,whichwouldhelpachieveenvironmentalbene�itsandef�iciencyimprovements.

The4th InternationalEnergyConference,held inVenezuelaon25-27September1995- the�irsttimesuchameetinghadbeenheldinanOPECcountry-provedtobedisappointing.Forty-�iveproducingandconsumercountriesand28oilandenergyministersparticipated inthemeeting, includingeightOPECMinisters(Algeria, Iran,Kuwait,Nigeria,Qatar,SaudiArabia,theUAEandVenezuela).Themeetingwasco-sponsoredbyRussiaandtheECCommission.Keyconsumingcountries-theUS,UKandJapan-sentjuniordelegates.Ratherthanbeingadialoguebetweenproducersandconsumers,theissueofquotadisciplinedominatedbilateraltalksamongtheOPECMinisters.Thereweregrowingconcernsaboutthequotaobservanceproblem,with Saudi Arabia andKuwait deliveringmessages to Venezuela on the need forOPECquotadiscipline.TheplenarysessionsintheConferencereiteratedthesamepositions,withproducingcountriesraisingthe issueof taxeson fossil fuelsandconsumingcountriesraising theusual environmental concerns. The conference endedon a downbeat note and,unlikepreviousmeetings,theConferencedidnotissueanyconcludingremarks.

Bythetimeofthe5thInternationalEnergyConferenceheldinGoa,Indiain1996,ithadbecomeclearthatthedialoguehadlostmomentumandhadfailedtomakeanyconcreteachievements.Whilepartiesrecognisedthattheexchangeofviewsbetweenproducersandconsumerswasuseful, the dialogue had turned futile,with both parties simply reiterating their positions.Thiswasre�lectedintheconcludingstatements,whichwereverygeneral,suchas“ensuringasustainableenergyfuturefortheworldisbothachallengeandanopportunity”or“energyinitsintimaterelationtoeconomicdevelopmentandenvironmentencompassessomeofthemostcriticalissuesmankindwillfacecollectively”.Itwasrecognisedthatforthedialoguetointensify,theremustbeachangeinapproach.95AHereagain,Norwayplayedanimportantrole.AttheendoftheGoameeting,itwasagreedthatNorwaywouldhostameetingofof�icialsinordertohelptoprepareforthenextconferenceataministeriallevel.

TheProducer-ConsumerDialogueandthe1998AsianFinancialCrisis

In1998,keyplayerssuchasSaudiArabiastartedshowinggreaterinterestintheproducer-consumer dialogue. This can be explained in large part by the events surrounding the oilmarketin1998,whereover-productionanddeclineinAsianoildemandintheaftermathoftheAsian�inancialcrisiscausedacollapseintheoilprice.

95AZhiznin,Stanislav,(2007).EnergyDiplomacy.EastBrook,Moscow,pp.97.

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The roots of the 1998 oil price crisis could be traced to earlier events in the 1990s. Inanticipationofhigherglobaloildemandandthewishforfurtherdownstreamintegrationinconsuming countries, Venezuela embarked on an ambitious investment programmewhichsaw Venezuela’s capacity and production increasewell above the OPEC quota. In October1997, Venezuela’s production amounted to 3.2 million b/d, substantially above its OPECquota.A temporary increase in theoilprice in1996andobservinganotherOPECmemberincreaseitsmarketshareinducedSaudiArabiatoincreaseitsproductionaboveitsquota.InOctober1997,SaudiArabia’sproductionstoodat8.27millionb/d-approximately300,000b/dmore than the old quota. OPECmembers sought to legitimise their production levels,whichwerewellaboveOPECof�icialquotas,andpushedforanevenhigherquotainthe103rdMeetingoftheOPECconferenceheldinJakartabetween26Novemberand1December1997.IntheJakartameeting,theOrganizationdecidedtoraisetheoutputceilingfromthepreviousof�iciallimitofaround25millionb/dto27.5millionb/d.Intermsofanincreasefromactuallevelsofproductionatthattime,thisrepresentedamodestincreaseofaround400,000b/d.Nevertheless, this increase coincidedwith fall in Asian demand due to the Asian �inancialcrisis,causingacollapseoftheoilpricefromaround$18in1997tobelow$10in1998.96

Anothercomplicationinthe1990sforOPEC’sproductionpolicywastheUNsanctionregimefor Iraq. Iraqwasallowed toexportoil inorder togenerate income to �inance imports formedical and nutrition needs. The sanction regime allowed for a set income, andwhen oilpricesweakenedIraqwasallowedmoreexportvolume.Ineffect,thisunderminedtheeffortsofOPECtostabilisepricesandcontinuedtohinderOPECpolicies.

Allproducingcountries felteconomicallyandpoliticallyvulnerabletotheoilpricecollapseandstartedexploringwaystoreversethedeclineintheoilprice,whichcouldonlybeachievedbyimplementingoutputcuts.Non-OPECproducersrealisedthattheoldpolicyoffree-ridingonOPECcutswasnolongerappropriateandthattheyneededtocooperateamongthemselvesandwithOPECtobringbalanceintothemarket.AsMabro(1998)notes,the“awarenessofsomenon-OPECcountriesabouttheneedtoco-operatewasperhapsamostsigni�icantfeatureofthe1998oilpricecrisis”.97Therewereindicationsthatsomenon-OPECproducers,suchasMexicoandNorway,werewillingtocutsuppliesinordertostabilisetheoilprice.FromthesideofOPEC,therewasawarenessamongmostmembersthatreversingthedeclineintheoilpricecouldnotbeachievedwithoutcooperationfromnon-OPECproducers.

Early1998witnessedmanyinitiativesaimedatbridgingthegapbetweenVenezuelaandSaudiArabia.Mexico,hurtbythedrasticfallinoilrevenues,approachedSaudiArabiainJanuarytoexplorewaystoreversetheslideintheoilprice.AtthattimetheleveloftrustbetweenSaudiArabiaandVenezuelahadreachedverylowlevelsandwhileSaudiArabiashowedawillingnesstoengageindiscussions,theKingdomagreedtodosounderverystrictconditions,themostimportant of which is that all members concerned should commit to cutting output. In aninterviewpublishedintheof�icialSaudiPressAgencyon8March,SaudiArabia’sOilMinisterAli Al-Naimi declared that the Kingdom has abandoned once and for all the role of swingproducerstatingthat“thosewhodemandthattheKingdomshouldassumealone,ortogetherwithotherGCCcountries, theburdenofmarket stabilitydonot recognise that theKingdom

96 Mabro,R.(1998).TheOilPriceCrisisof1998.OIES,SP10.97 Mabro,R.(1998).p.32

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pursuesaconsistentlinewhichisbasedonthefactthatmarketstabilityisajointresponsibility,andoneofthemainreasonsforthepricedecreaseisduetothenon-adherenceofsomeOPECcountriestotheirquotas.Thesecountriesshouldtakesigni�icantandtangiblestepstoreducetheirproductionso thatotherproducingcountries couldcooperate toachievestability”.TheKingdom’smessageoftheimportanceofjointresponsibilityinimplementingoutputcutscouldnotbeclearer. InMarch1998,asecretmeetingtookplacebetweenVenezuelanandMexicanrepresentatives.MexicomanagedtoconvinceVenezuelathatcuttingproductionwouldserveitsinterestsinthelongterm.Venezuelaagreedtoproductioncutsontheconditionsthatthesecutsbetakenfromexistingproductionandnotfromquotas,thatthemeetingwouldnotdiscusslongterm-investmentplans,andontherequirementthatnon-OPECcountrieswouldalsoimplementproductioncuts.98Onthe19thofMarch,theEnergyMinistersofNorwayandMexicometinOslotodiscuss“bilateralproblemsinoilpolicy”aswellas“thecurrentoilmarketsituationandpossiblefuturedevelopments”.AsecretmeetingbetweenSaudiArabia,VenezuelaandMexicotookplaceinRiyadhbetweenthe21stand22ndofMarch,inwhichthepartiesagreedtocutproductionby1.725millionb/d,ofwhich1.325mb/dwouldbecutbyOPEC(excludingIraq)whilenon-OPECexportersincludingNorwayand,Mexicowouldcuttheremaining400,000b/d.OnMarch30,1998,inits104thExtraordinaryMeetinginVienna,OPECmembercountriesrati�iedtheRiyadhaccord and agreed to voluntary cuts fromeach country’s currentproduction levels, totalling1.245millionb/deffectiveApril1,1998.TheConferenceacknowledgedthat“theproductioncutspledgedbysomenon-OPECoil-producingcountries,inparticulartheSultanateofOman,Mexicoandothers,andagreedtocontinueconsultationswiththenon-OPECoilproducerssoas to establishandmaintain stability in theoilmarket in the future”.At its105thMinisterialConferenceconvenedinViennaonthe24thofJune1998,OPECagreedtoafurtherroundofcuts,bringingtheOrganizations’totalreductionssinceMarch1998to2.6millionb/d.

ASaudidelegationledbyMinisterAliAl-NaimivisitedWashingtonandmetwithateamfromthe US Department of Energy headed by Energy Secretary Frederico Pena inMay. In thismeeting, theSaudisideurged theUS to takeamorepositiveviewof thecurrentcollectiveeffortbyOPECandnon-OPECoilexporterstoreduceoutputinpointingoutthatsuchamoveprovidesstabilitytotheoilmarket.TheUSrefrainedfromexpressingoutrightUSoppositionto the joint actionbetweenOPECandnon-OPEC.Nevertheless, they re-emphasised theUSpositionthat it“cannotendorsecollectiveactionwhichmightattemptto interferewiththemarket.”99

Against the background of these turbulentmarket conditions, the 6th International EnergyConferencetookplaceinCapeTowninSouthAfricabetweenthe29thandthe31stofOctober1998.Beforethemeeting,NorwaycalledforameetinginitsembassyinLondontoformalisea support group known as the Informal Support Group (ISG) to assist the host country inpreparingtheagendafortheministerialmeetinginCapeTown.100Oneofthepurposesofthe

98 Mabro,R.(1998).99 MEES,VOL.XLI,No.20,18-May-1998.100 ThegroupconsistedofFrance,Norway,theUK,Japan,theEC,theNetherlands,India,SouthAfricaandSaudiArabia.TheEUCommissionwasalsoanISGmember.Asamatteroffact,theactivitiesoftheCommissionintheproducer-consumerdialoguebecame,afterthepublicationofthegreenpaperonsecurityofsupply,animportantpartofdevelopingsharedviewsamongmemberstatesonsecurityofsupplyissues.

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ISGwastogivethemeetingmorestructuresothatitcouldresultinamorepurposefuldialogue.AlthoughtheoriginsoftheISGcanbetracedbacktothepreparationoftheministerialmeetingin India, itwas givenmore structure in 1998. The group agreed to the terms of referencedraftedjointlybyUKandSaudirepresentatives.TheISGwaslaterexpandedtoincludetheUS,RussiaandItaly,whileChina,IndiaandIranwereinvitedtojoinaftertheRiyadhmeeting,andwasincorporatedintotheIEFframework.

In terms of representation, the conference was a success, attracting 46 countries andsix international organisations. However, in terms of content, the concluding statementssurprisinglydidnot re�lect anyof thedramatic eventsof earlier that year,withonly a shyconcludingremarkstatingthat“oilmarketstabilityisabasicpre-requisiteforenergysecurityandadynamicglobaleconomy”.Ineffect,themeetingamountedtonomorethananexchangeof views about the general situation of the oil market. After themeeting in South Africa,Saudi Arabia, the organiser of the nextmeeting, suggested a new name for the producer-consumer dialogue: the International Energy Forum, which would underline the informalcharacterofthemeetingsandcouldleadtomoreopendiscussions,avoiding“ConclusionsandRecommendations”.

Conclusion

The�irstdecadeofproducer-consumerdialoguesendedwithalargersenseoftrustamongthecountriesinvolved.Themeetingspromotedagreaterunderstandingandacommonalityofperceptionsamongparticipants,helpingdecisionmakingatthenationallevelandpromotingcooperationbetweenexistingbodies.Securityofsupplyanddemandwasarecurringthemeof the informaldiscussions,aswere investmentsandmarketstability.Bothconsumingandproducingcountriesoftenrepeatedacallforgreaterdatatransparency.Environmentalissuesandenergytaxeswereamongthethemeswhichremainedsubjecttodifferentviews.The�irstdecadecanthereforebeseenasalongprocessofcon�idencebuilding.Nevertheless,thefactthatrelativelylowoilpricesdominatedthroughoutthedecade,eventhoughthedecadebothstartedandendedwithhigherprices,wasperhapsafactorintheslowstartwithregardtosubstantivematters.

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ColourPlates

WeacknowledgewiththanksthefollowingimagesprovidedbyIEFHostCountries,theOPECSecretariatandSaudiAramco.

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IEF5-Goa1996.IEFMinistersatthe5thInternationalEnergyConference.

IEF2–Solstrand1992.IEFMinistersattheMinisterialWorkshoponEnergy.

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IEF7-Riyadh2000.HRHKingAbdullahIbnAbdulazizAl-Saud(thenCrownPrince)opensthe7thIEFinRiyadh.

IEF7-Riyadh2000

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IEF7-Riyadh2000

IEF7-Riyadh2000

73

IEF8-Osaka2002.Delegatesatthe8thInternationalEnergyForum.

IEF8-Osaka2002.Delegatesatthe8thInternationalEnergyForum.

74

IEF9-Amsterdam2004.CrownPrinceoftheNetherlands,Willem-AlexanderjoinsIEFMinistersforthe9thIEF

2003-InhisformerroleasChairoftheExecutiveBoard,NoévanHulstsignstheprotocolonimmunitiesandprivilegesfortheIEFSecretariatwithH.E.AliAlNaimi

ofIEFHostCountry,SaudiArabia.

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IEF9–Amsterdam.H.E.MinisterBrinkhorsthoststhe�irstInternationalEnergyBusinessForum(IEBF).ChairedbyPeterSutherland.

IEF9–Amsterdam.ArneWalther,the�irstSecretaryGeneraloftheIEF,participatesinaMinisterialpanelsoonaftertheestablishmentoftheIEFSecretariatinRiyadh.

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IEF10-Doha2006.IEFMinisters

IEF10-Doha2006-H.E.MinisterAbdullahBinHamadAl-Attiyah,DeputyPrimeMinisterandMinisterofEnergy&IndustryQataraddressesfellowIEFMinisters.

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IEBF2-Doha2006.IEFMinistersandBusinessLeaders

IEF11–Rome2008.The�irstmeetingofJODIHeadofDelegations.

IEF11-Rome2008.IEFMinisters

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IEFSecretaryGeneral,NoévanHulstcongratulatesincomingChairoftheExecutiveBoard,AldoQuirogaasMexicoassumestheroleofhostcountryforIEF12attheconclusionofthe11thIEFinRome.

HRHPrinceAbdulazizbinSalmanAlSaud,ChairoftheIEFExpandedHighLevelSteeringGroupconferringwithIEFSecretaryGeneralNoévanHulst.

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Thedialoguehasitslightermoments...

Dialoguemakesadifference–IEAExecutiveDirectorNobuoTanaka,OPECSecretaryGeneralAbdullahEl-BadriandIEFSecretaryGeneralNoévanHulstatIEF11inRome2008.

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June2008-HRHKingAbdullahIbnAbdulazizAl-Saud,MinistersandIndustryLeadersattheJeddahEnergyMeeting

June2008–PressConferencefollowingtheJeddahEnergyMeeting

June2008-HRHKingAbdullahIbnAbdulazizAl-SaudhoststheJeddahEnergyMeeting

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7thInternationalJODIConference,Quito,Ecuador-June2009

December2008-PrimeMinisterGordonBrownHoststheLondonEnergyMeeting

November2008-InternationalSupportGroupMeeting(ISG),OPECVienna.

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IEF12–Cancun2010.IEFMinisters.

IEF12–Cancun2010.MexicanPresidentFelipeCalderóninauguratedthe12thIEF

83

MinistersofEnergyandhigh-levelof�icialsissuethehistoricCancunDeclarationagreeduponby66IEFCountries

H.E.GeorginaKesselMartinez,MinisterofEnergyofMexicochairingasessionofIEF12Cancun

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IEBF4–Cancun2010.IEFMinistersandBusinessLeaders.

IEF12-Cancun2010.IEFMinisters

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Introduction

The turn of the 21st century proved to be an eventful period for the global economy andenergymarkets.Itwitnessedmajortransformationsintheoilmarketaswellasshiftsintheattitudes and the interests of some key players, helping to shape newproducer-consumerenergy relations. Key among the oil market transformations were: the rapid rise in non-OECDoildemand,drivenbyrapideconomicgrowth,urbanisationandgeneralimprovementsin living standards; the shift in internationaloil trade �lowsassociatedwith the riseof theAsianconsumer;theriseofNOCsasimportantplayersontheglobalenergyscene;thelargeconcentrationofprovenoilreservesinthehandsofafewNOCsinproducingcountries;andtheemergenceofnewanddiversesourcesofsupplyinAfrica,LatinAmericaandtheFormerSovietUnion.ThesechangesledtotherisingimportanceofnewenergyplayersoutsidetheauspicesofIEAandOPEC,suchasChina,India,Russia,Brazil,SouthAfricaandtheCaspiancountries. These new players have different interests, aspirations and perceptions of theenergychallenges.

The2000s alsowitnessed themost sustained increase in oil prices in recent history,withtheannualaveragepricerisingyear-on-yearforsevenconsecutiveyearsbetween2002and2008.Thisboom,however,endedwithaspectacularcollapseoftheoilpricetowardstheendof2008.Therapidriseinoilprices,thesharppriceswingsandheightenedvolatilitybroughtseveral key issues to the fore. These included the role of spare capacity in promoting oilmarketstability;improvementoftheinvestmentclimateintheenergysector;theunderlyingdriversof oil pricemovements; the economic, political and social costs associatedwithoilprice instability;andthemeasures thatproducersandconsumersareable toundertake toimprovethefunctioningofthemarket,suchasenhancingdatatransparencyandregulatingderivativesmarkets.The2000swerenotonlyaneventfultimefortheglobaloilmarket,butthedecadealsowitnessedtherapidlyincreasingimportanceofnaturalgasoninternationalenergymarkets and in producer-consumer relations. In addition to these transformations,nationalenergypoliciesinconsumingcountriescontinuedtoevolve,drivenbyenergysecurityconcernsand the climate changeagenda,whileproducing countries’ long-term investmentplans,theirrisingdomesticdemandandissuesofaccesstoreservesremainedatthecentreofconsumers’energysecurityconcerns.

Inparallelwith thesedevelopments, the �inancial layers surrounding thephysicalmarketsalso witnessed structural changes that imposed themselves on the producer-consumerdialogue.Thesechangesweremanifestedinthemassive�lowsof�inancialinvestmentsintocommoditiesmarkets;theentryofnewtypesofplayerssuchashedgefunds,pensionfunds,

Chapter5:The2000s-ShiftsinInterestsandtheInstitutionalisationoftheIEF

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insurancecompaniesandindexinvestors;�inancialinnovationwhichallowedinvestorstogaingreaterexposuretocommoditiesthroughthecreationofsophisticated�inancialproducts;andthehigherdegree of interconnectednessbetween �inancial andphysicalmarkets in the oilpriceformationprocess.

ShiftinInterests

Alongsidethesetransformationinenergymarkets,the2000ssawashift intheinterestsofkeymarketplayers.Formostofthe1990s,producerswerenotveryactiveinthedialogue,andtheir interestswerenotverywellarticulated.By2000,however, thesituationhadchangedandakeyproducer,SaudiArabia,expressedstronginterest inthedialogue.TheKingdom’spoliticaland�inancialsupportprovedtobeimportantforstrengtheningthedialogueinthe2000safteradecadeinwhichthedialoguehadmadelittleprogressonsubstantivematters.TheshiftinSaudiArabia’spositioncanbeexplainedinlargepartbytheeventssurroundingtheoilmarketin1998,throughwhichtheKingdomrealisedthatitcannotaffordtonotactivelyengageininternationalenergypolicyandstrengthenitsenergyrelationswithbothproducersand consumers.TheKingdommade the IEF central to its bilateral andmultilateral energyrelations. Therewas also awarenesswithinOPEC that stabilising themarketmay at timesrequireclosercooperationwithnon-OPECproducers.

Whileinthemid1990sVenezuela’splanstoboostproductivecapacityinaweakmarketcreatedserioustensionsandcon�lictswithinOPEC,thisbecameaminorfactorinthe2000s.ThearrivalofHugoChaveztothePresidencyofVenezuelaheraldedamajorchangeinthedirectionofthecountry’soilpolicyandareversalinitsexpansionplans.ThestrikesthateruptedfollowingChavez’sdecisiontochangethemanagementofPDVSAandexerthiscompletecontroloverthecountry’soilpolicyresultedinamajorglobaloilsupplyshock,withproductiondroppingsharplyinthe�irstmonthsof2003.TherelationsbetweenVenezuelaandtheUScontinuedto deteriorate in the 2000s, reaching very low levels in September 2008,when VenezuelabrokeoffdiplomaticrelationswiththeUS.Althoughdiplomatictieswerere-establishedlaterinJune2009afterthearrivalofPresidentBarackObamatotheWhiteHouse,thetraditionalstrongtradeandinvestmentrelationsandcooperationthatcharacterisedtheUS-Venezuelarelationsinthe1990swereneverrestored.Iran’splanstoexpanditsoilandgasproductioncapacity inthe1990swerealsoderailed. InternationalsanctionsagainstIranintensi�iedasrelationsbetweenIranandtheWestcontinuedtodeteriorateoverIran’snuclearprogramme.Nevertheless,theinterestsofIranandVenezuelainthedialoguedidnotfadeaway,andthetwocountriescontinuedtoparticipateinthevariousMinisterialmeetingsduringthe2000s.Butunlikethe1990s,duringwhichthesetwoproducersassumedanimportantroleininitiatingandpromotingthedialogue,IranandVenezuelatookmoreofabackseatinthepastdecade.

TheUSpositionregardingthedialoguecontinuedtooscillateduringthe2000s.The7thIEFinRiyadhin2000sawanimportantdevelopmentintermsofbothappearanceandcontent.Forthe�irsttimeinIEFhistory,theUSwasrepresentedataveryseniorlevel,bythethenSecretaryofEnergyBillRichardson.InpreviousIEFmeetings,theUShadalwaysoptedforalowerlevelofrepresentation,re�lectingitslukewarmsupportfortheproducer-consumerdialogue.Moreimportantly,duringthismeeting,theUScameoutclearlyinsupportofapricerangewhichoverlappedwith that ofOPECat that time. In a press conferenceon the18th ofNovemberduringthe7thIEFmeeting,SecretaryofEnergyBillRichardsonstated:

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$10/Bistoolowand$30/Bistoohigh.Whenitismorethan$30/Bconsumingcountries,particularly developing countries, are hurt. Stock levels drop, and it leaves theworldvulnerabletospotshortagesandpricespikes.Weshouldnotgetdrawnintoaccepting$30/Bnorshouldwetrytoreturnto$10/Boil.AsI’vesaidmanytimes,fortheUnitedStatestheidealpriceisbetween$20/Band$25/B.

Thisannouncementrepresentedamajorshift in thepositionof theUSgovernment,whichuntil then had refused to discuss oil prices. Secretary of Energy Bill Richardson quali�iedtheabovestatementbynotingthatrelying“onopencompetition,marketforces, isthe�irstprinciple”thattheUSabidesby.This,however,isaclearcontradiction:opencompetitionwillmostlikelydrivethepriceeitherbeloworabovetheoptimalor‘ideal’pricerange.Tomaintainthepricewithinagivenrange,someformofmarket intervention -most likely throughtheauspicesofOPEC-cannotbeavoided.Theideaofanoptimalpricerangedidnotsurvivelong.InJanuary2002,SaudiArabianOilMinisterAliAl-NaimiannouncedthatOPEC’spricebandmechanismwould be suspended due to imbalances in theworld oilmarket,while the USreiterateditstraditionalpositiononrelianceonmarketforcestodeterminetheoilprice.Inthe12thInternationalEnergyForum(IEF)inMexicoinMarch2010,theUSDeputySecretaryofEnergyDanielPonemancalledforfreemarketstoreignsupreme,statingthatthe“goaloftheUSisaclearandlong-standingone,andthatistoletsupplyanddemandsetprices”.

In 2000, energy had become amore important topic on the US political agenda,with theoccurrence of the Californian electricity crisis,mainly a result of regulatory imperfections,beingacrucialcontributor.ButalsodevelopmentsintheMiddleEasthadcaughtWashington’sattention,namely theongoingactivities in Iraqanddiscussions in theUNSecurityCouncilaboutaswitchtosmartsanctions.ThefactthatshortlyaftertheelectionsofNovember2000President-electBushappointedaspecialenergyteamtodeviseanewenergypolicyfortheUSshowshowserioustheconcernswiththeinternalandexternaldimensionsofenergypolicyhadbecome.InMay2001thiscommittee,ledbyDickCheney,presenteditsreport.Themainthrust of the policy proposals concerned the internal energy policy, stimulating domesticenergysupply,andinfrastructure.Nevertheless,afullchapterwasdevotedtorelationswithotherconsumingandproducingcountries. Inaddition todiversityof supplies, cooperationwith both producing and consuming countries was deemed very important to enhancingenergysecurity.101

Another importantdevelopmentwas that theEuropeanCommission,whichwasbecomingmoreconcernedwithsecurityofsupply,aswitnessedbythegreenpaperTowardsaEuropeanStrategyfortheSecurityofEnergySupply(Com769�inal,2000),began,moreactivelythanbefore,topromotesecurityofsupplypolicyattheEUlevel.AttheRiyadhmeetingboththePresidencyofthattime,France,andEUCommissionerdePallaciowerepresentandcoordinatedtheEUcommitmenttothedialogue.FortheEUCommissiontheproducer-consumerdialoguewasanimportantchanneltoengageindiscussionsonglobalenergymarketstability,whileitscompetenceinthesematterswasstilldebatedinternally.TheCommissionhadbeeninterestedin theproducer-consumerdialogue from the start andbecameanactiveparticipant in the

101EnergyPolicy(2001).ReportoftheNationalEnergyPolicyDevelopmentGroup,May2001,http://wtrg.com/EnergyReport/National-Energy-Policy.pdf

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ISG.CommissionerCardosaeCunhaparticipatedinthe�irstandsecondmeetingsinParisandBergen(Norway),respectively,whileCommissionerOrejawaspresentatthethirdinSpain.CommissionerPapoutsisattendedthemeetinginVenezuela,whilehemissedthemeetingsinIndiaandSouthAfrica.

Thesharpriseinoilpricesin2008providedanotherbigpushforthedialogue,increasingtheinvolvementofkeyconsumercountriessuchastheUK,France,Germany,NorwayandIndia.As oil prices started rising sharply inmid-2000s, someof�icials fromboth consuming andproducingcountries startedplaying the ‘blamegame’, attributing theoilpricehike toeachother’spolicies.By2008,therealisationarosethatthisblamegameandprovocativeremarksfromboth parties often exacerbated existingmarket volatility and that itwas therefore inthe interest of all parties tomake their best efforts to reduce unhelpful commentary andcommunicatetheirconcernsinprivate.Moreimportantly,therewasgreaterawarenessofthecostsofoilpriceinstability.Bothpartiesrecognisedthatlowandvolatileoilpricesundermineinvestmentintheoilsectorandlaytherootsforthenextenergycrisis,whilehighoilpricescouldendangerglobaleconomicprospectsandresultindemandreduction.Indiawentastepfurther,proposingapricebandmechanisminwhichconsumingcountrieswouldguaranteethatoilpricesnot fallbelowanagreed levelandproducingcountrieswouldguaranteethattheynotriseaboveanagreedlevel.Theproposalwonthebackingofsomeconsumercountries,thoughduetothedif�icultiesinimplementingsuchapricebandtheideawasnotpursuedanyfurther.However, the support for the producer-consumer dialogue as one of themeans totacklethecausesofpriceinstabilitycontinuedtostrengthen.AttheG-8SummitinL’Aquilainthesummerof2009,theG-8leadersfoundexceptionallyclearwordsabouttheneedforanimprovedenergydialogueframework:

It is in the interestofbothproducersandconsumers toenhance transparencyandtostrengthentheirdialoguetowardsreducingexcessivevolatilityinthemarket.Fossilfuelproducing,transitandconsumingcountriesmustworktogethertoincreasestabilityandpredictabilityof supplyanddemandpatternsandpromote investments in theenergysector,includingbysupportinganddevelopingfurtherpredictablelegalandregulatoryframeworks....We call for better coordination among the international institutionsand for the acceleration and strengthening of the existing initiatives towards amorestructureddialogue,…..,betweenproducing,transitandconsumingcountries,focusedonimprovingtheinvestmentclimate,discussingwaystoreduceexcessivevolatilityofpricesandpromotingenergysecurity.102

TheInstitutionalEvolutionoftheIEF

Thepoliticalandeconomicdevelopmentsofthe2000sprovedtobedecisivefortheproducer-consumerdialogue,asmanifestedbothintheinstitutionalevolutionoftheIEFandintheintensity,breadthandcontentofthedialogue(discussedinthenextchapter).Sinceitsinceptionin1991,theIEFasanorganisationhadremainedlargelyinformal,providingaregular,biannualforumforproducersandconsumers.Whiletheinformalityfeaturewasseenaspracticalandconvenientforbothpartiesduringthe1990s,itwasimportanttocreateacentralinstitutionthatwouldplan

102G-8Leaders’Declaration“ResponsibleLeadershipforaSustainableFuture”,L’Aquila,10July2009,Paragraph42.

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andcoordinatefutureIEFactivitiesandbroadenandstrengthentheglobalproducer-consumerdialogue.The institutional frameworkhadbeenbuiltonpracticesince its inception in1991,andthebeginningofthenewmillenniumseemedtobetherighttimetofurtherdebatewithintheorganisationastoitsfuturemodusoperandi.103The7thInternationalEnergyForumheldinRiyadhfrom17-19November2000provedtobetheturningpointfortheinstitutionalisationoftheproducer-consumerdialogue.Inthatmeeting,SaudiArabia’sthenCrownPrinceAbdullahIbnAbdulazizAl-SaudproposedtocreateapermanentSecretariatandheadquartersfortheIEF.Inhisspeech,heemphasisedthatproducersandconsumersshouldseekcooperationbasedonconstructiveandtransparentdialoguebetweenallpartiesinterestedinenergyissues.Toachievethesegoals,thethenSaudiCrownPrincesuggested:

the establishment of a permanent secretariat for the Energy Forum to work towardspromoting a continuous dialogue between producers and consumers. This dialogueshouldalso includethe industryandallotherparties interested inenergymatters.Theestablishmentofsuchasecretariatwillenhanceourdialogueandmakeitmoreregularandmoreconducivetoachievingourgoals.TheKingdomstandsreadytohosttheForum’sSecretariatinRiyadh.104

The proposal to establish the IEF Secretariatwaswelcomed at theMinisterialmeeting andembracedtwoyearslateratthe8thInternationalEnergyForuminOsakainSeptember2002.105A permanent body of staff subsequently began its work in December 2003 in temporaryaccommodation and then relocated to the newly built headquarters in Riyadh in 2005. TheestablishmentoftheIEFSecretariatmarkedaturningpointfortheIEFasanorganisation: itprovided theForumwithanadministrativearm. TheSecretariatperformsanumberofkeyfunctions which include providing a neutral platform for dialogue; exchanging energy dataand information among energy producing, consuming and transit States and energy-relatedindustries;organisingseminars,symposia,conferences,workshops,trainingprogrammesandroundtablediscussionsonenergy-relevantglobalorregionalissues;establishingdialogueandcooperationwithotherenergy-relevantentitiesinundertakingresearchandanalyses;preparinganddisseminatinganalyticalreports,statementsandpressreleasesonactivitiesoftheForum;andprovidingassistancetoMembersoftheForumtoensurethatthedialogueamongthemismorefocusedandresult-oriented.

Since its establishment, the Secretariat has played a key role in providing logistical supportfor the Ministerial meetings, including preparing and disseminating the agenda, providingbackgroundmaterialfordiscussion,andpreparingthehostcountry’sConcludingStatements.The Secretariat has also been given the important role of translating some of the broadobjectives of the dialogue into concrete initiatives.106 The outcome of such reform efforts

103SeetheIEF-commissionedReportoftheExpertGroup,asconvenedbythe2008ad-hocenergyministersmeetingsheldinJeddahandLondon.16January2010.Seealso12thInternationalEnergyForuminCancun,Mexico,March29-31,2010,MinisterialDeclaration.

104MEES,Vol.XLIII,No.48,27November2000.1058thInternationalEnergyForuminOsaka,September21-23,2002,Summarybythehostandtheco-hosts.

106However,thesuccessinthisareahasbeenlimited,asrecentlyacknowledgedbytheCancunMinisterialDeclarationwhichcalledfora“moreresult-orientedforum”.

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hasbeenamoreambitiousagendainwhichenergyministershavebeenwillingtodiscussawiderangeofenergyissuesasre�lectedinsomeoftherecentConcludingStatements.Thesehavebecomemore substantive, providing insight into the common interests of producersandconsumers,andevenidentifyingsomeareasofagreementwhichcouldformthebasisfor joint coordinated actions between the parties in the future.107 The IEF Secretariat hasalsobecomemoreactiveanddynamic.Communicationhas improved:anupdatedwebsitehasmadeavailablebackgrounddocumentsaboutmost IEFmeetings, aswell asbi-annualnewslettersandvariousreportsandarticlestothepublic,thereforerenderingIEFactivitiesmoretransparent.108TherepresentationoftheIEFatotherorganisations’activitiesviatheIEF’sSecretaryGeneralorotherpermanentstaffrepresentativeshasbeenanimportantsteptowardsraisingtheIEF’spro�ilewhilealsopromotingtheIEF’smaincause.TheSecretariathasmoreover gained from the expansion of its activities, often in cooperationwith otherrelatedorganisationsandresearchinstitutions.109

Towardstheendofthedecade,asecondreformprocesswasinitiatedwiththeaimoffurtherstrengtheningtheinstitutionalframeworkoftheIEFinordertofacilitateandpromoteamoreeffectiveandproductivedialogue.Thesharpswings inoilprices in2008and2009helpedshifttheglobalattentionbackontotheoilmarketandprovidedthemuchneededsupportfortheinstitutionaldevelopmentoftheIEF.InJune2008,SaudiArabiatookanunprecedentedactionbycallingforanad-hocmeetingbetweenproducerandconsumercountrieswiththeaimto identify thecausesof thecurrenthighoilprices.At the JeddahEnergyMeeting, theUKcommittedtohostinga follow-upmeeting inLondonbytheendof2008.ByDecember,theglobaleconomyandtheoilmarkethadwitnessedamajorshock.IntheLondonEnergyMeetinginDecember2008,theChair’ssummarynotedthatthe“recentdevelopmentsintheglobaleconomyhadhighlightedtheneedtoexaminetheinstitutionalarchitectureasitrelatestoenergy, toensurethat itmosteffectivelysupportsthecreationandmaintenanceofwell-functioningmarkets,whilereducingexcessivevolatility”.

An Expert Group (EG)was established pursuant to the decisionsmade in the Jeddah andLondonad-hocEnergyMeetings(2008)toproviderecommendationstothe12thInternationalEnergy Forum (IEF) Ministerial meeting on 29-31 March 2010 in Cancun, Mexico for“strengtheningthearchitectureoftheinternationaldialogue,theIEF,andreducingvolatilityintheoilmarket”.AHighLevelSteeringGroup(HLSG),coordinatedbytheIEFSecretariatandincludingof�icialsfromthehostandco-hostcountriesofthe12thIEF,alongwiththehostsofthetwoad-hocMinisterialmeetingsinJeddahandLondon,oversawthetermsofreference

107Perhapsthemostnotableoftheseisthe11thInternationalEnergyForuminRomein2008,wheretheConcludingStatementincludeddiscussionaboutbothlevelsandvolatilityofoilprices,interdependence,investmentintheentireoilandgassupplychain,increasedcooperationbetweenIOCs,NOCsandservicecompanies,achievingtheMillenniumDevelopmentGoals,CarbonCaptureandStorage(CCS)andasustainableenergyfuture.

108AllareavailableonlineattheIEFwebsite,http://www.ief.org.109TheIEFisnowapartnerorganisationoftheIEA,OPEC,theIMF,theUN,theIGU,OAPECandtheWorldBank.Ithasconcludedmemorandaofunderstandingwithanumberofresearchinstitutes,whichoftenco-organisespecialforasuchastheCCSSymposium:withChathamHouse,theEnergyandResourcesInstitute(TERI),InstitutFrancaisduPetrole(IFP),InstituteofEnergyEconomicsofJapan(IEEJ),andtheEnergyCharterConferenceSecretariat.

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and work of the EG.110 The HLSG was chaired by HRH Prince Abdulaziz Bin Salman BinAbdulazizAl-SaudofSaudiArabiaandco-chairedbyGrahamWhiteoftheUnitedKingdom.The EG recommendations for areas of reform were modi�ied by the HLSG and both therecommendationsandtheimplementationplanoftheHLSGwerereviewedandendorsedbyanExpandedHigh-LevelSteeringGroup(EHLSG)composedofrepresentativesfromproducerandconsumer,developedanddevelopingcountries,tobepresentedtotheministersatthe12thIEFMinisterialinCancuninMarch2010.

The Cancun Ministerial Declaration proved to be a landmark declaration in more thanone respect. For the �irst time in itshistory, adocumentwas approvedbyno less than66countries.ItalsomarkedacriticaljunctureinthehistoryofIEF’sinstitutionaldevelopment.Resulting fromtheEGrecommendations, themost importantproposalacceptedat the12thIEFMinisterial was that of the IEF Charter. Given the lack of any document outlining thestructural framework, theworkingprocessandobjectivesof the IEF, thecreationofsuchacharterwasoverdue.111HRHPrinceAbdulazizbinSalmanbinAbdulazizAl-Saud,theChairoftheHLSG,statedthatthe“Declarationisanembodimentofthesharedviewsofproducersandconsumersandarecognitionoftheneedforstronger,broaderandmoreeffectivecooperation.TheIEFCharter,re�lectingtheexpandedroleandadditionaltasksoftheIEF,willenableustoachievesuchanobjective.” LordHunt,UKEnergyMinisterstatedthatthe“internationalagreementwillsettheIEFonacoursetobecomingaForumthatwillguideactionanddeliveryforbothproducersandconsumers”.

Tooverseethecreationofthenewcharter,theMinistersintheCancunMinisterialestablishedanewHLSG,composedofrepresentativesofthecountriesthatapprovedtheCancunMinisterialDeclaration.112 The HLSG whose chairmanship and co-chairmanship remained the same,was given the responsibility of overseeing the drafting of the IEF Charter,with amandatetodevelopand �inalise the IEFCharterbeforeMarch2011, inaccordancewith theGuidingPrinciplescontainedintheEHLSG’sRecommendationsandImplementationPlan.

The IEF Charterwaswritten by the IEF Secretariat and overseen by the newHLSG to bepresented for formal agreement by theministers in theMinisterialmeeting to be held inRiyadhon22February,2011.TheshortperiodinwhichtheCharterwaswrittenandapprovedanditsbreadtharetestimonytothecommitmentofproducersandconsumerstocooperation

110TheHLSGiscomprisedofthefollowingelevencountries:Algeria,France,Germany,Japan,Kuwait,Mexico,Norway,Qatar,SaudiArabia,UnitedKingdomandUnitedStates.

111Asdiscussedabove,theStatuteoftheIEFSecretariatincludesanoutlineoftheobjectivesoftheSecretariatonly,whiletheIEFasawholeessentiallyfunctionedwithoutanyformaldeclarationofitspurposeorprovisionsforitsorganisation.SeetheIEF-commissionedReportoftheExpertGroup,asconvenedbythe2008ad-hocenergyministers’meetingsheldinJeddahandLondon.16January2010.

112ThefollowingcountriesapprovedtheMinisterialDeclaration:Algeria,Angola,Australia,Austria,Azerbaijan,Bahrain,Belgium,Brazil,BruneiDarussalam,Bulgaria,Canada,China,Colombia,CostaRica,CzechRepublic,Denmark,Ecuador,Egypt,Finland,France,Germany,Greece,Hungary,India,Indonesia,Iran,Iraq,Ireland,Italy,Jamaica,Japan,Jordan,Korea,Kuwait,Mexico,Morocco,Netherlands,NewZealand,Nigeria,Norway,Oman,Pakistan,Philippines,Panama,Peru,Poland,Portugal,Qatar,Romania,Russia,SaudiArabia,SlovakRepublic,SouthAfrica,Spain,SriLanka,Sudan,Sweden,Switzerland,Thailand,Turkey,Turkmenistan,UnitedArabEmirates,UnitedKingdom,UnitedStatesofAmerica,VenezuelaandYemen.

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andtheeffectivenessoftheHSLGtobridgethegapbetweenthedifferent interests.CentralfeaturesoftheCharterinclude:amissionstatement,orobjectivesoftheorganisation,therebyde�iningwhattheIEF’sfuturerolewillbe;provisionsregardingIEFmembership;provisionsregardingdecision-makingattheexecutiveleveloftheIEF,includingtheExecutiveBoard;andprovisions for the �inancial contributions tobemadebymember states, organisationsandotherforumparticipants.113

The agreement to establish an IEF charter represents a decisive juncture in producer-consumerrelations.TheCharterdescribestheIEFas:

anintergovernmentalarrangementthatservesasaneutralfacilitatorofinformal,open,informed and continuing global energy dialogue among its membership of energyproducingandenergyconsumingStates,includingtransitStates.

TheCharter states that the fundamental objectives of the IEF are to foster greatermutualunderstanding and awareness of common energy interests among its members, promotea better understanding of the bene�its of stable and transparent energy markets, and tonarrow the differences among energy producing, consuming and transit Member Stateson global energy issues. Another key objective is to facilitate the collection, compilationand dissemination of data, information and analyses that contribute to greater markettransparency,stabilityandsustainability.

BesidesprovidingastatementofIEFobjectives, theCharteralsospeci�iesthevariousorgansof the Forum, consisting of Ministerial activities made up of biennial Ministerial Meetings,extraordinaryMinisterialMeetingsandWorkingGroupsatMinisterialorother levels for theperformanceofaspeci�ictask,theExecutiveBoard,aSecretariat,anInternationalSupportGroupandanIndustryAdvisoryCommittee.TheCharterspeci�iesthefunctionsofeachoftheseorgansandthelinksbetweenthem.AttheapexoftheIEFaretheBiennialMinisterialMeetings,which“aretheprimarybodyoftheForumandserveasaneutralvenueforhigh-level,informal,open,informedandcontinuingglobalenergydialogueamongtheMembersoftheForum”.TheIEFisgovernedbyanExecutiveBoardandisheadedbyaSecretaryGeneral, initiallyArneWalther,andsince2008byNoévanHulst.TheExecutiveBoardconsistsofrepresentativesofMinistriesresponsible for energymatters from thirty-onemembers of the Forum. The representativesoftheIEAandOPECarenon-votingmembersoftheExecutiveBoard.Fromamongthethirty-onemembersof theBoard, twenty-threeserveaspermanentmembersandeightasrotatingmembers,where thepermanentmembersare thehostcountryof theSecretariat, theelevenlargestoilandgasproducersandtheelevenlargestoilandgasconsumers.

Another important organ is the International SupportGroup (ISG),whose function is nowmorespeci�iedintheCharter,namelytoprovidetheExecutiveBoardandtheSecretariatwithadviceon thestructureand themesof the forthcomingbiennialMinisterialMeetingand toadviseandassisttheExecutiveBoardandtheSecretariatintheimplementationofthebiennialProgrammeofWork.TheISGiscomprisedofrepresentativesfrommembersoftheExecutive

11312thInternationalEnergyForuminCancun,Mexico,March29-31,2010,MinisterialDeclaration.HighLevelSteeringGroup,DraftRecommendationsandImplementationPlan,DraftsubmittedfortheHLSG’sconsiderationandapprovalatits�irstmeeting,6-7February2010,Riyadh.

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Board,theIEAandOPECSecretariatsandfromasmanymembersoftheForumasarewillingtoparticipate.TheChairof theExecutiveBoardand theSecretary-Generalcan inviteotherinternationalorganisationstoparticipateintheISG.

Another organ is the Industry Advisory Committee, whose role is to advise the ExecutiveBoardandtheSecretaryGeneralonactivitiesoftheForum.TheIndustryAdvisoryCommitteeincludesrepresentativesofbusinessenterprisesandindustryentitieswhichcontributetotheForumandareinvitedbytheSecretary-GeneralinconsultationswiththeExecutiveBoard.

InadditiontoorganisingtheinstitutionalstructureoftheIEF,theCharteralsoaimedtoprovideadequateandpredictable�inancialresourceswiththeIEFCharter,callingonitsmemberstoensure theprovisionof the IEFand itsSecretariatwithaminimum,stableandpredictablesourceoffundingtopermitlong-termplanningandtheful�ilmentofmulti-yearprogrammes.

Anotherimportantinstitutionaldevelopmenthasbeendirectedtowardsinvolvingagreatervariety of actors in the dialogue. There was recognition in the 7th IEF that business andindustry leaders should be more involved in the producer-consumer dialogue, which hadsofarremainedlimitedtomeetingsattheministeriallevel.Inconsequence,a�irstinformalgathering of business leaders took place prior to the 8th IEFMinisterial in Osaka in 2002,followedbythe�irstInternationalEnergyBusinessForum(IEBF)atthe9thIEFMinisterialinMay2004inAmsterdam.Sincethen,ithasbeendecidedthattheIEBFbeheldregularlythedaybeforetheIEF’sbiannualMinisterialmeetings,andreportsofIEBF�indingsbepresentedatsubsequentMinisterialmeetings.114

TheJointOilDataExercise(JODE)−laterrenamedtheJointOilDataInitiative(JODI)−wasalsotheoutcomeofproposalsmadeatthe7thIEFinwhichthehostandtheco-hoststatementemphasisedtheimportanceof“improvingandtimelyaccessingtoenergydata”for“marketassessmentandtransparency”.Theideaofanoildataexercisewas�irstairedatanISGmeetingintheprocessofpreparingforthe7thIEFinRiyadh.CallsforgreateroilmarkettransparencythroughtheprovisionofdatatoacentraliseddatacollectioncentreledtothecreationofaworkinggroupandthestartofJODEin2001onatrialbasis.115Twoyearslater,thefeaturesoftheinitiativebecamemoreconcrete,andtheJointOilDataInitiative(JODI)asapermanentmechanismwasestablishedin2003.Thehostandco-hostofthe8thIEFissuedastatementcommendingthemonthlyoildatareportinginitiativeestablishedbytheAsiaPaci�icEconomicCooperation(APEC),theEU(throughEUROSTAT),theIEA,theLatin-AmericanOrganizationfor Energy Cooperation (OLADE), OPEC and theUnitedNations Statistics Division (UNSD)andurgingallcountriestoparticipate,notingthat“datatransparencywillonlybeachievedifallpartiesarefullycommittedtothisimportantinitiative”.ThedevelopmentofJODIandthededicationofthesixpartnerorganisationswasanimportantjusti�icationfortheestablishmentoftheIEFSecretariat.FollowingtheendorsementbyIEFMinisters,andwiththesupportofpartnerorganisations,theIEFassumedtheroleandresponsibilityofcoordinatorofJODIinJanuary2005andcurrentlymanagestheJODIWorldDatabasewiththeobjectiveofimprovingthequalityandtransparencyofinternationaloilstatistics.

114IEF,AbouttheIEBF,availableathttp://www.ief.org.115“AboutJODI”,http://www.jodidata.org/aboutjodi.shtm;Seealso7thInternationalEnergyForuminRiyadh,November17-19,2000,Summarybythehostandtheco-hosts.

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TheimportanceofachievingbetterqualitydatathroughJODIforenergysecuritywasforcefullyechoedbytheG-8HeadsofGovernmentintheirSt.PetersburgPlanofActiononGlobalEnergySecurityin2006.Theparticipantswelcomed“thebeginningofimplementationoftheJointOilDataInitiative(JODI)andwilltakefurtheractiontoimproveandenhancethecollectionandreportingofmarketdataonoilandotherenergysourcesbyallcountriesincludingthroughdevelopmentofaglobalcommonstandardforreportingoilandotherenergyreserves”.TheG-8leadersalsoinvitedtheIEF“toworkontheexpansionofJODImembershipandtocontinuetoimprovethequalityandtimelinessofdata”.High-levelpoliticalsupporttoJODIhasbeenexpressedalsobyAPECSummitsandotherinternationalmeetingsofMinisters.

Against this backdrop of high-level political attention and expectation, the IEF Secretariathosted the6th International JODIConference inRiyadh inNovember2006.TheConferencegathered 120 participants, representing thirty governments, nine international energyorganisations, nine international and national energy companies, and research institutesandconsultants.Itmarkedthe�irstanniversaryofthereleasetothepublicoftheJODIWorldDatabase.The JODIWorldDatabasewas released to thepublic inNovember2005byKingAbdullahonoccasionoftheof�icialinaugurationoftheSecretariatheadquarters,alsoattendedbyMinistersofimportantIEFcountries.116

JODI has since become a permanent database that collects oil market data from all IEFmemberstates.117TheSecretariathasconsistentlypromotedJODIasrepresenting“thesinglemost important collaborativeeffort toaddress the issueofmarketdata transparency”.Thepromotionofgreatertransparencyinenergymarketshasbeenarecurringkeymessageinmostinternationalgatherings.Partnerorganisationsparticipateintheprojectviadatasubmission,trainingworkshopsforstaffsubmittingdata,andprovidingtechnicalsupport.118 JODIhasaniche,giventhatitisarareattemptofdatacomprehensivenessinamarketcharacterisedbydivergingestimatesandlaggingdataavailability.CallsweremadeinrecentIEFMinisterialstoincludeotherdatarelevanttodemandandsupply,suchasreservesandinvestmentinnewcapacity.Firsttrialshaveinadditionbeenmadetoincludedataongasmarkets.119

WhiletherehasbeenasteadyimprovementinthetimelinessandqualityofdatasubmissionstoJODIinrecentyears,importantgapsstillexistintermsofgeographicalcoverageandtypesandqualityofdata.Completeness,timelinessandqualityofdatasubmitteddiffersubstantiallybetweenmembercountries,somethingthedatabaseiscurrentlystillunabletoovercome.120At

116Walther,Arne(2007).“DialogueforGlobalEnergySecurity:TheRoleoftheIEF”AspeechgivenattheCenterforInternationalandStrategicStudiesWashingtonD.C.,7November.

117IEFSecretariat,ProgrammeofWorkandBudgetfor2005,February2005,p.11,andre�lectedinvariousIEFpublications.In2004,IEFSecretaryGeneralArneWaltherdescribedJODIasafuture“�lagshipforouractivityofpromotingproducer-consumerdialogue.”WPA,25October2004,p.5.

118IEFSecretariat,ProgrammeofWorkandBudgetfor2006,1January2006,p.i;JODI’swebsiteishttp://www.jodidata.org.

11911thInternationalEnergyForum,Rome,20-22April2008,ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico;12thInternationalEnergyForuminCancun,Mexico,March29-31,2010,MinisterialDeclaration.

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present,submissionsbymembercountriesaremadeonavoluntarybasis.Thedatacoverageisquitenarrow.Countriesprovidedataonproduction,re�ining,trade,demandandstocksofsevenproductcategories.TheCancunMinisterialDeclarationin2010hasbeenvocalinthenecessitytoimproveJODI’scoverage,timelinessandquality,stating:

The IEF Secretariat data and information system should be forward-looking. FurthersupportfortheIEFSecretariat’songoingworkintheexpansionofJODItocovernaturalgas isneeded.AdditionalexpansionofJODIshouldalsoincludedataoninvestmentinnewcapacityintheupstreamanddownstreamoilandgassectors,incooperationwithrelevant organisations. The comparisonof of�icial data against secondary (other thangovernmental) sources and subsequent analyses could prompt participating states toprovidebetterdata,therebyimprovingJODI’stimelinessandquality.TheIEFSecretariatshould also explore the collection of demand-relevant data such as energy pricinginformation,energyintensityandenergyef�iciencymeasures.

TheInstitutionalisationandFormalityoftheDialogue

The institutionalevolutionof the InternationalEnergyForumhasbeenoneof thede�iningfeaturesoftheproducer-consumerdialogueinthe2000s.Thisinstitutionalisation,however,didnot induceanyshift towardscreatingaglobal energyorganisationwithbindingglobalenergygovernance,nordiditaffecttheinformalityofthedialogue.Thecentralityofenergyinacountry’seconomic,politicalandsocialdevelopmentandthestrongaversiontorelinquishingnational decision-making processes in the �ield of energy suggest that this objective isimpossible to achieve. The twenty-year history of the IEF demonstrates that the partiesconcernedarestronglyattachedtotheideaoftheinformalityofthedialogue.ThisisexpressedveryclearlyinthenewIEFCharter,whichstatesthatthe“Charterdoesnotcreateanylegallybindingrightsorobligationsbetweenoramongitsmembers”.Theemphasisoninformalityisexpected,asenergyissuesinvolvequitecomplexpolitical,economicandsocialdimensionsthataredif�iculttoreconcile.ChangingtheIEFintoaforumwithpowertomakebindingdecisionswoulddampentheinterestofbothproducersandconsumersandcouldlimitthescopeforanopenandfrankdiscussion.AsnotedbytheExpertGroupreporttotheHSLG,theinformalityofthedialoguehasmadeit“non-threateningandattractive,sincetheparticipantshavehadnothing to losebutpossibleopportunities togain”.Thoughsome intervieweeshavevoicedconcernsabouttheeffectivenessofinformaldialogues,whetherdialogueisformalorinformalseemstobeofsecondaryimportancetoitsachievements.Itispossibletohaveaformalbutunproductiveand ineffectivedialogue;oran informaldialoguewhich isofhigh-qualityandeffective in addressing participants’ concerns and improving relations among participants.Thus,thesuccessofthedialogueisnotlinkedtoitsnature,butrathertoitsquality,contentandtheextenttowhichthedialogueisabletocreatecommongroundtoallowproducersandconsumerstotacklesomeofthecommonproblemsandchallengestheyfacethroughhigherlevelsofcooperationorattimesthroughcoordinatedefforts.

120ConcernabouttheunevenqualityofdatasubmittedtoJODIhasrecentlybeenexpressedbyIEAHeadofEnergyStatisticsJean-YvesGarnierintheWPA:“Notallthecountriesareperformingthesameway.YouhavegoodpupilsintheclassandyouhavepupilswhostillhavetodosomeextraworkforthemtomeettherequirementsofJODI”.WPA,XL:13,12April2010,p.10.

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Compared to the 1990s, the agenda of the 7th IEF and subsequent meetings dealt with abroadenedsetofthemesanddiscussiontopics.Inadditionto‘theusualsuspects’ofdemand,supply and investment outlooks in the oil market, other topics �iltered into the dialogue:thechangingstructureof theenergy industry, sustainableenergydevelopment, technologychallenges, energy poverty and themutual impact of energymarkets and climate change.Thesetopicsreceivedmorefocusedattentionlateroninthedecade.121

ShiftsinGlobalOilDemandDynamics

One of the most important shifts in oil market dynamics in recent years has been theaccelerationofoilconsumptioninnon-OECDeconomies.Between2000and2009,demandgrowthinnon-OECDcountriesoutpacedthatofOECDcountriesineveryyear(seeFigure6.1).Duringthisperiod,non-OECDoilconsumptionincreasedbyaround10.5millionbarrelsperday(mb/d)whilethatofOECDdroppedby2.1mb/d.AttheheartofthisgrowthliestheAsianPaci�ic region,which accounted formore than 50%of this incremental change in demandduringthisperiod,butotherareassuchastheMiddleEastandLatinAmericahavealsobecomeimportantcentresforoilconsumption.Thisshiftinglobaloildemanddynamics,whichisstillin its early stages, will have wide geopolitical and economic implications, affecting manyaspectsoftheoilmarket,suchastheemergenceofnewplayerswiththeirownorganisationalmodels,theopeningupofnewtraderoutesandre�iningcentres,andtheestablishmentofnewpricingbenchmarks.

Non-OECD demand became one of the key subjects of debate in the producer-consumerdialogue that has taken place since the early 2000s.The Closing Statement of the 8th IEFin Osaka in 2002, for instance, notes that the growing demand of emerging economies,especiallyfromAsia,“willhaveinternationalenergyimplicationssuchastheincreasedneedforinvestments,increasingtradeinoilandgas,andtheneedforenvironmentally-acceptableenergyutilisation”.122MrAkiraAmari, the former JapaneseMinisterofEconomy,TradeandIndustry,carriedthisnewAsianself-con�idenceintotheproducer-consumerdialogueinhis

Chapter6:OilMarketDevelopmentsinthe2000sandtheContentoftheDialogue

1217thInternationalEnergyForuminRiyadh,November17-19,2000,Summarybythehostandtheco-hosts.ComprehensivesummariesandbackgroundmaterialonallofthementionedtopicscanbefoundontheIEFSecretariatwebsiteathttp://www.ief.org.

122Summarybythehostandtheco-hostsofthe8thInternationalEnergyForuminOsaka,September21-23,2002.Similarstatementsfollowed,forinstanceatthe10thIEFinRomein2008,whichconcludedthat“worldenergydemandissettoincreasesigni�icantlyinthecomingdecades,withstronggrowthprojectedinemergingeconomiesanddevelopingcountries.”

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OpeningStatementtothesecondAsianRoundtablein2007,claimingthat“itwouldnotbeanoverstatementtosaythatworldenergyproblemsinthefuture[will]dependon[Asian]energypoliciesinthecomingdecades”.

Figure6.1:OECDandNon-OECDOilDemandDynamics

TheriseofAsiandemandwasnotonlyre�lectedasoneofthethemesfordebateinthedialogue;AsiancountrieshavealsobeenmembersoftheIEFandhaveparticipatedinvariousforaandsymposia,andhaveinrecentyearsincreasedtheirengagements,forinstanceashosts,co-hostsandsponsorsofawidenumberofforaandsymposia.123TheriseinAsiandemand,andtheshiftinweightinoilandgasmarketstowardsnon-OECDcountries,maybeseenasthemainreasonbehindthedevelopmentofamoreregionally focusedproducer-consumerdialogue, thoughconcernsaboutcompetitionbetweentheIEF,theIEAandOPECandfearsofduplicationsofeffortbetween theseorganisationsmayhavealsoplayeda role in theregionalactivitiesoftheSecretariatintheperiodsbetweenMinisterials.InJanuary2005,the�irstofsubsequentlybiannualAsianMinisterialEnergyRoundtableswasheld inDelhi, India, followingasimilarconceptasthebiannualIEFMinisterials.SinceDelhi,twomoreAsianRoundtableshavetakenplace,oneinRiyadhinMay2007andathirdinTokyoinApril2009.ThefourthRoundtableisplannedfor2011inKuwait.AttendeesincludedenergyministersfromseventeencountriesfromEastandSouthAsia,includingChinaandIndia,andtheGulfStates(de�inedasWestAsia),alongwithrepresentativesoftheIEA,theIEFandOPEC.124TheaimofanAsianRoundtablehasbeentogiveAsia-speci�icenergyissuesaseparateforumfordebate.Criticismofsuchregional

123Forexample,ChinabecamethehostoftheIEF’s�irstCCSSymposiuminSeptember2009,withChina’sNationalDevelopmentReformCouncil,China’seconomicmanagementagency,assponsor.Japan,partofOECD-Asia,hasbeenhosttoanumberofIEFevents,includingthe8thIEFMinisterialinOsakain2002.

124ThefulllistofattendantcountriesincludeBahrain,Brunei,China,India,Indonesia,Iran,Iraq,Japan,Kuwait,Oman,Pakistan,Philippines,Qatar,SaudiArabia,SouthKorea,ThailandandtheUAE.LiketheIEFMinisterials,theAsianRoundtablesareheldalternatelyinaproducerandaconsumerstate.

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approachesisbasedonthenotionthattheydivertattentionfromglobalinitiativesbycreatingregionalblocsandbycrowdingministers’calendars.Theargumentthatregionalapproachesare unable to solve global problems, such as uncertainty over fundamentals and �inancialregulation,hasalsobeenputforward.125AnadditionalconcerninrelationtotheoutcomesofAsianandotherregionalinitiativesistheextenttowhichthemeetingsactuallyfocusontheirstatedpurpose,thediscussionofspeci�icallyAsia-relevanttopics.Infact,anumberofagendapointsoftheAsianMinisterialsreiteratetypicalIEFMinisterialdiscussionpoints,withlittleornospeci�icrelevancetoAsiaoverandabovetheirrelevancetoalloilmarketparticipants.ManyoftheRoundtables’conclusionsresembleIEFMinisterialSummaryStatementswithlittlelessspeci�icityorresult-orientation,includingissuesoftransparency,pricevolatility,investmentoutlooks,amongmanyothers.

Asia-speci�ictopics,suchasAsianupstreamanddownstreaminvestments,theroleofAsianNOCs,thedomesticpricingpoliciesofpetroleumproductsandtheenvironmentalconcernsintheAsianPaci�ic,promisegreaterrelevanceandjusti�icationforanAsianinitiativeinadditiontoglobalfora.Onepromisingstartinthisdirectionhasbeenmadeintheareaoftechnologythat enhances energy ef�iciency and reduces emissions, for instance in the case of carboncaptureandstorage(CCS)technology.Inthisarea,the3rdAsianRoundtablenotedthat:

Participants recognised that fossil fuels will continue to be a dominant part of theenergymix for the foreseeable futureand that carbon captureand storage (CCS)willplayanimportantroleinpromotingthesustainableuseoffossil fuels. Inthiscontext,participantsstressedtheimportanceofdevelopingroadmapsforinnovativetechnology,promoting demonstration projects, discussing regulation, monitoring methodology,socialacceptanceandfundingforCCS,suchasinclusionofCCSintheCleanDevelopmentMechanism(CDM),andstrengtheninginternationalcooperationtopromotetechnologytransfer.Participantsaf�irmedthatinordertoaddressclimatechange,engagementfromtheenergysectoriscrucial.

FutureOilSuppliesandtheInvestmentChallenge

Inthe2000s,investmentintheenergysectormovedbackintothecentreofattention.Surgingoilpricesaddedtoexistingfearsofinsuf�icientfuturesupplyandraisedconsumers’concernsover investment levels tonewheights.Thesubsequentoilpricecollapse inthesecondhalfof 2008 in turn reinforced producers’ concerns over an unpredictable price environment,rendering investment decisions all the more dif�icult. Like no other topic, the investmentchallengebecameanomnipresentthemeintheproducer-consumerdialogue.

Consecutiveupwardcorrectionsinoilandenergydemandoutlookseverysingleyearbetween2000 and 2008 raised expectations about higher overall consumption levels. At the sametime, the less than expected growth of non-OPEC supply, due to maturing oil �ields andabove-groundconstraints,disappointedhopesofadequatesupplygrowth.Despitethesharpoilpricerisebetween2001and2008,theresponseofnon-OPECsupplyoutsidetheFormerSovietUnion(FSU)remainedweak(SeeFigure6.2).Duringthisperiod,non-OPECtotalliquid

125Suchcriticismwasexpressedbyanumberofintervieweesaboutallregionalapproaches,includingAsianapproachesandtheEU’snumerousowninitiatives.

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productionadded3.14mb/d to theworld’soil supply.Mostof the increasewasaccountedforbyRussia,whichaddedaround2.8millionmb/d.Morerecently,however,Russiansupplygrowthhassloweddownandfellslightly in2008.Russiaoilproductionexpandedin2009,partlyinresponsetochangesintaxation,butmostanalystsarescepticalaboutwhethertheexpansioninRussianoilsupplyaswitnessedintheearly2000scanberepeated.

Figure6.2:Non-OPEC(ex-FSU)andFSUSupplyGrowth (Year-on-year,thousandbarrels/day)

The increasing pessimism about non-OPEC supply over the past few years re�lects keystructuralchanges,themostimportantofwhicharehighdeclineratesforexisting�ieldsandchanges in thesourcesofnon-OPECsupplygrowth.126Manymaturebasinshavewitnessedrapiddeclines.AccordingtoarecentOPECreport,theweightedaverageoftheannualobserveddeclinerateovertheperiod2000-2008stoodat4.6%perannum,implyingthat1.8mb/dofnon-OPECsupplyneedstobereplacedsimplytopreventsupplyfromdeclining.127Suchhighdeclineratesimplythatspecialattentionneedstobegiventorecoveryrates.Furthermore,themainsourcesofnon-OPECsupplygrowthhavebecomemorevariedascomparedtothe1970sandnowincludedeepoffshoreinBrazilandtheGulfofMexico,ethanolintheUSandtarsandsinCanada.

Acombinationofhighoilpricesandlimitedaccesstoreserveshaspushedmanyoilcompaniesinnon-OPECcountriestoexplorenewfrontiers.ThesenewfrontiersincludetheexploitationofoilreservesindeepandultradeepwatersinplacessuchastheGulfofMexicointheUS,AngolaandNigeriainWestAfricaandBrazilinLatinAmerica.Inaddition,oilcompanieshavebeenlookingatpotentialdevelopmentofunconventionaloilsuchasoilsands,bitumen,shaleoil,CoaltoLiquid(CTL)andGastoLiquid(GTL),extraheavyoilandbio-fuels.Accordingto

126IEA,WEO2009.127OPEC(2009).WorldOilMarketOutlook2009.OPEC,Vienna,Box4.2.

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a latestEIA InternationalEnergyOutlook, globalproductionofunconventional liquidswillincreasefrom3.4mb/din2007to12.9mb/din2035,accountingfor12percentoftheworld’stotalliquidssupplyin2035.

Thesechangeshaveanumberofimportantimplications.Onaverage,ithasbecomemorecostlytodevelopoilreservesinnon-OPECcountries.Inaddition,maintainingstabledeclineratesinmature�ieldsrequirestheuseofadvancedandmorecostlytechnology.Furthermore,thescaleandriskpro�ileofnon-OPECsuppliersaredifferentfromthoseofthepast.Itisnowtechnically,�inancially,andmanageriallymuchmorechallenging toextractoil in theseareas.Regardingdeepoffshore,theBPoilspillintheGulfofMexicohasraisedseriousconcernsaboutsafetyandthematurityoftechnologyandhasnecessitatedthereassessmentofthebalanceofcostsandbene�itsofoperatingat thesenewfrontiers.Althoughsuchenvironmentaldisasterswillnotstopthedriveforoffshoreoilproduction,theyaremostlikelytoresultinmoregovernmentregulation andwill place the industry under very close scrutiny. Thismay cause delays inprojectcompletion,inducinguncertaintyaboutthetimingofentryandthesizeoftheoutputincrement.Moreover,theproductionofunconventionaloilsuchastarsandsandshaleoilraisesserious issuesregardingtheenvironmentalcost.Finally,becauseofthedifferentriskpro�ileandthehighercostsinvolvedindevelopmentandproduction,non-OPECsupplyhasbecomemoresensitivetooilpricecycles.Speci�ically,thereseemstobeanasymmetricresponsetooilpricechanges.Asharpriseintheoilpriceinducesamodestinvestmentresponseinnon-OPECcountries,whileadeclineintheoilpricegeneratesasharpfallininvestmentintheoilindustry,especiallyinthosesegmentswithrelativelyhighmarginalcosts.

Theweak responseof non-OPEC supply to the sharp rises in oil prices, and the change intheriskpro�ileofpotentialsourcesofnon-OPECsupply,shiftedtheattentiontoinvestmentdecisionsandresourceaccessinresourcerichcountries.The2000swerecharacterised,likenopreviousdecade,bythedominanceofNOCsovertheworld’soilandgasreserves.Thisisinstarkcontrasttotheearly1970s,whenIOCsdominatedtheoilindustry.TheconcentrationofprovenreservesinthehandofNOCsimpliesthattheyareexpectedtoplayanincreasinglyimportantroleinprovidingfuturesuppliestothemarket.GiventhatthebulkofoilreservesareintheMiddleEast,theissueofinvestmentintheoilsectorsoftheregionreceivedspecialattention.ManyinternationalorganisationssuchastheIEA,andalsotheEnergyInformationAgency (EIA) of the US Department of Energy, project thatmost of the increase in globaldemandforoilwillbemetbyOPECandespeciallytheMiddleEastproducerswithinOPEC.Fromconsumers’perspectiveofenergysecurity, thiswouldrequire that theseMiddleEastoilexporters increasetheir investmentoutlayssubstantiallyor increasethe involvementofforeigninvestorsinthedevelopmentoftheiroilandgassectors.

Formostofthe1980sand1990s,investmentintheoilandgassectorsinOPECcountrieswasstagnant.Thelargesparecapacityandtheoilpricedeclineinthe1980sandmostofthe1990sthrewtheindustryintodeeprecession,reducedtheattractivenessofexistinginvestmentplansandadverselyaffectedtheincentivetoinvest.Thiswasaccompaniedbywidespreaddemandpessimismandexaggeratedexpectationsofnon-OPECsupply.GeopoliticalinstabilityandwarshavealsopreventedcapacityexpansioninmanyMiddleEasterncountries.Forexample,theIran–Iraqwar,theIraqiinvasionofKuwaitandtheUSinvasionofIraqhavelimitedthecapacityof Kuwait, Iran and Iraq to channel investment into their oil sectors. Economic sanctionsagainstIran,LibyaandIraqlimitedtheaccesstotechnologyandforeigncapitalandhindered

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anyseriouscapacityexpansion.Furthermore,oilpriceshaveoftenbeenvolatile,blurringthedistinctionbetweentransitoryandpermanentpricemovements.Thepotentialuncertaintiesfacingtheoilmarketinthecurrentcontexthavebecomemorecomplex,especiallyuncertaintyconcerningimportingcountries’responsestotheclimatechangechallenge.Assuggestedintheliteratureregardingirreversibleinvestmentunderuncertainty,thelargeinvestmentoutlaysinoilprojectsandtheirreversiblenatureoftheseinvestmentshavetheeffectofincreasingthevalueof theoption towait.There is thusa case fordelaying the investmentuntil newinformation aboutmarket conditions arrives, especially information about expected globaldemandandoilsuppliesfromothercountries.Fortheoilindustry,theoptiontowaitisveryvaluable,thoughtightmarketconditionsduetounderinvestmentcanresultinanacceleratedriseintheoilprice,morefrequentpricespikesandhigherpricevolatility.Suchbehaviourinoilpriceshasimportantdirectimplicationsonoildemandthroughpriceeffectsanditsimpactongrowth.Yettherearealsoindirecteffects,sincesuchpricedynamicswillresultinachangeinconsumerbehaviour,theaccelerationoftechnologicalinnovationsandgovernmentpolicy,withdetrimentaleffectsonlong-termglobaloildemand.

Inmanyoil-exportingcountries,therelationshipbetweentheownerofthenaturalresource(i.e.thegovernment)andtheoperatorandextractorofthesereserves(i.e.theNOC)ishighlycomplexandinef�icient,yieldingverylowratesofinvestmentintheoilsectorandcausingageneraldeteriorationintheNOCs’capabilities.Giventhecompetingandincreasingdemandsfor economic, social and infrastructureprojects, the �inancial resources channelled toNOCsare rather limited, and this prevents them from undertaking the necessary investment,acquiring technological capabilities and enhancing their managerial expertise. The impactof the inef�icientrelationshipbetweenNOCsand theirgovernments is likely tobe feltmorestronglyincomingyears.ManyNOCsfromresource-richregionsmightbeunderestimatingthemagnitudeofthecostandtheeffortthatcapacityexpansionrequires.Inmanyinstances,sincenationalisationthemaintaskofNOCshasbeentomanageexcesssupply,nottogrowcapacity.Currently,fewNOCshaveexperienceindealingwithlarge-scalecapacityexpansionprojects.

The sharp rise in oil pricesduring the2002-2008price cycle alsohighlighted tightness inre�iningcapacity.Excessre�iningcapacityandlowhistoricalmarginsinthe1990scurtailedinvestmentinre�iningtoverylowlevels.Onlymandatedproductqualityimprovementsandenvironmentalprotectionobligationsgeneratedinvestmentprojectsirrespectiveofreturns.Strictenvironmentalregulationshavemadethebuildingofre�ineriesmoredif�icultornearlyimpossibleincertainmarkets.Theexpansionofre�iningcapacityhasalsobeenconstrainedbyuncertaintyabouttheextentandtimingofgovernmentregulationswithwhichre�ineriesmustcomply.Thus,overtheyears,there�iningsectorhaslostmuchneeded�lexibility,giventhechangesinthestructureofdemandforitsproducts,themandatedmodi�icationofproductspeci�icationsandotherenvironmentalrestrictions,andthechangingmixofitscrudeslate,due to higher incremental volumes of sour and heavier crudes. This more generalisedunderinvestment problem across the different parts of the oil supply chain has importantpolicyimplications.Evenif investmentsintheupstreamoilsectormaterialiseandresult inanincreaseinoilproduction,bottlenecksinre�iningcapacitymeanthatthishighercrudeoilproductionwillnotnecessarily translate intohighervolumesofpetroleumproductswhichconsumerswant. Sinceproducershave little controlover theglobaloil logistics systems, aclosecoordinationofinvestmentplansisrequiredbetweenoil-consumingcountriesandoil-producingcountriestoaddressthebottlenecksintheoilvaluechain.

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TheInvestmentIssueandtheProducer-ConsumerDialogueinthe2000s

The investment environment in the oil sector, infrastructure constraints and bottlenecksbecame the focus of the producer-consumer dialogue. The need for investment alongsidetheentiresupplychainhasbeenoneof theconsistentlyrecurring themesat IEFmeetings,both in itsMinisterialsandatsubjectsymposiaandregional forasuchastheAsianEnergyRoundtable.In2002,atthe8thIEF,naturalgashadjoinedtheinvestmentdebate,whichhadalsobeenexpandedtoincludeonceagaintheconceptofenergysecurity:

While thereappears tobe suf�icientoil andgas tomeet theworld’sgrowingdemandforenergyto2020,amassiveamountof investmentwouldberequiredinexplorationfor,anddevelopmentandtransportationof,additionaloilandgassupplies.Oilandgasproducing countries emphasised the importance of secured and reliable demand toenergysupplysecurityandfutureinvestmentinthissector,whileconsumingcountrieswelcomed recent developments that encourage foreign investment in oil and gasproducing countries. The Forum stressed the importance of a favourable investmentclimateformarketstabilityandenergysecurity.128

Transparencyasaseparateaspectofsecuritywasalsoincluded,nowspeci�icallyinrelationto investment. Participants “underscored the importance of transparency and exchange ofenergydataformarketpredictabilityandstability,providingalsoforamorestableinvestmentclimatewhilesupportingplanningandenhancingglobalenergysecurity”.129

Theinclusionof industry leadersatthe9th IEFin2004inAmsterdamthroughthe�irstIEFBusinessForum(IEBF)addedtheindustry’sviewontheissue.TheIEBF’sclosingstatementrecommendedthatgovernments“createatransparent,predictableandconsistentpolicyandregulatory framework”.130 They called for countries to focus their policies on promoting astableeconomic,�iscal,regulatoryandlegalclimatewhichwillencourageandattract�inancialresources and especially foreign direct investment (FDI) in energy, including investmentsincleaner fossil fuelsand in thereductionofdetrimentalenvironmentaleffectsofgrowingenergyuse.TheForumalsoemphasisedtheavailabilityoffundsthroughdevelopmentbodiesandquestionedwhether theenergy sector canattract suf�icient funds in theglobal capitalmarket. It called upon �inancial institutions, investors and policymakers to improve theirassessment on the attractiveness of energy. The meeting also emphasised the urgency ofchangingtheimageoftheoilsectorinthepubliceye.131

Atthe10thIEFin2006inQatar,theinvestmentagendawasfurtherexpandedbytheinclusionofthedimensionofNOC-IOCcooperationandtheideathatenergycompaniesthemselveswere

128Summarybythehostandtheco-hostsofthe8thInternationalEnergyForuminOsaka,September21-23,2002.

129Conclusionsbyhostandco-hostoftheInternationalEnergyForum,10thInternationalEnergyForum,2ndInternationalEnergyBusinessForum,Doha,Qatar,22-24April2006.

130Summarybythehostandco-Hostsofthe9thInternationalEnergyForum,Amsterdam,22-24May2004.

131ibid

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partof the investmentsolution. In the10th IEF,Ministersnoted“thepotentialof reciprocaland joint investment between producers and consumers as well as between National OilCompaniesand InternationalOilCompanies, all along theenergysupplychain.Thiswouldincrease the volume of investment in the energy sector and enhance energy security byestablishinginterdependencies”.132

Bymid-decade,thetopicofhowtoimprovetheinvestmentclimatehadtakenonanalmostmonotonoustone,reiteratedthroughoutallIEFactivities.Highoilpriceshaddonetheirpartofpopularising the call formore investment – after all, timeshadneverbeenbetter asoilpricesgo,andinvestmentinnewdevelopmentswerenotonlyeconomicinconventionaloilandgasbutalsoincreasinglysoinunconventionaldevelopment,suchasoilsandsandshalegas, soon tobecome the latest catchwords in the industry.Muchsmaller in scale than IEFMinisterials,theG-8SummitinSt.PetersburginJuly2006becametheunusualsiteofdialoguebetweendifferentoilmarketparticipants.Globalenergysecurityhadbeenchosenamongthesummit’sthreemainthemesfordiscussion,inthecontextofrisingglobaldemandforenergy,raisingoilprices,andariseinclimatechangedebateandpolicyresponse.

Startingin2006,theinvestmentdebatewithintheIEFbecameincreasinglytiedtotheparalleldebatesurroundingincreasinglyhighoilpricesand,lateron,in2008,theissueofheightenedoilpricevolatility.Thesurgeinprices,attributedpartlytotightfundamentalsandpartlyto�inancialmarketstructures, rapidly increased theurgency in thecalls for investmentalongthesupplychain.Forproducers,investmentdecisionsremainedlockedbyuncertaintiesaboutprices, about the economicviabilityof theirdevelopmentprojects andaboutdemand.ThelatteroftheseconcernsstemmedfromseeinghighdemandgrowthfromAsiabutadeclineindemandgrowthinmostOECDcountries,combinedwithtwoyearsofnegativeglobaldemandgrowthin2008and2009−the�irstsincethe1980s−anduncertaintyabouttheavailabilityofsuppliesfromotherregions.

Lockedintoreiterationsofalreadyexistinggoals,theForuminevitablyendedupasanonlookerofoilpricemovements.TheJeddahEnergyMeetinginJune2008,bycontrast,addressedtheissueofinvestmentinafarmoredynamicmanner.SaudiArabiaalsoissuedapledgetoinvestinmorecapacity ifneeded.Themeeting,calledbySaudiArabia,was inpartanemergencyresponsetothesurgeinoilpricesandresultedinaJointDeclarationbythegovernmentofSaudiArabiaandtheSecretariatsoftheIEAandOPEC,the�irstofitskindatanIEFmeeting.TheJeddahJointStatementclari�iesthat“appropriateincreaseininvestmentbothupstreamanddownstreamisnecessarytoensurethatthemarketsaresuppliedinatimelyandadequatemanner.Predictableenergyandinvestmentpoliciesaswellasbetteraccesstotechnologyarenecessarytothisend”andinvites“enhancedcooperationamonginternational,nationalandservice companies from all producing and consuming countries in investment, technologyandhumanresourcedevelopment”.133Inaddition,suggestionsweremadetoincludedataoninvestmentinnewcapacityintheupstreamanddownstreamoilandgassectorsintheIEF’scentraldatabaseJODI.

132Conclusionsbyhostandco-hostoftheInternationalEnergyForum,10thInternationalEnergyForum,2ndInternationalEnergyBusinessForum,Doha,Qatar,22-24April2006.

133JointStatement,JeddahEnergyMeeting,22June2008.

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Investment-RelatedTopics

In addition, the IEF substantially expanded its various activities with regards to speci�icinvestment-related topics. Its new, subject-focused symposia and fora, offered since 2008,have included regular events such as the CCS Symposium and the NOC-IOC Forum, alongwithother events suchas the IEF-IFPTechnologyForumand theEnergyEf�iciencyForumplannedforthespringof2011.Whilenotprimarilyfocusingoninvestmentitself,allofthesefora serve thepurposeof enhancing information sharing and thus aim topromote amoreconduciveenvironmentforinvestment.TheIEFcommissionedareportontheprospectsofbiofuels,stillanenfantterribleformanyoilandgasproducers,asprospectsforbiofuelshaveadded toalreadyexistingdemanduncertainty foroilandgasproducers.134Anotherreport,the IEF’sUncertainties Report,was published in July 2009.135 A symposium looking at onespeci�icaspectoftheinvestmentchallenge,theneedforinvestmentinhumanresources,wasorganisedbytheIEFinMarch2009.Skillsshortagesintheindustry,lamentedbybothNOCsandIOCsthroughoutthe2000s,remindedmanyofthe1980s,whentheoilindustrylostitsattractivenessasanemployer.136Throughoutthe2000s,staffshortagesoncemorebecameanissueofconcern.The1990swiththeirlowoilprices,andthesupermajors’cost-cuttingwhichincludedstaffcuts,hadlefttheirtollontheindustry’sskillsbase.Itsimageasanattractiveemployer had furthermore suffered as a consequence of the oil industry’s environmentalrecordontheonehandandpeakoildebatesontheother.

Previously, the skills shortagehadbeen raisedat anumberofproducer-consumer forums,including the 11th IEF Ministerial in April 2008. This Forum noted the need to broadencooperation and exchanges in the �ields of human capital and technology advancement. Itpleadedtheimportancefortheoilandgasindustriestoworktogetherwithuniversitiesandresearchcentrestopromoteaworld-widecampaigninconsumingandproducingcountries,with the aimof improving the image and rewards of technicians and skilled staffworkingin theoilandgas industries.137The JeddahEnergyMeeting’s JointStatement identi�ied theproblemwithgreaterdepth,stating:

TheHumanresourcescrunchisanindustry-wideproblemrequiringglobalcooperationtowards a resolution. Studies show that by the end of this decade, the oil and gasindustry may be faced with signi�icant shortages, due to a wave of retirements andinadequaterecruitment.Akeyfactorinthisunfortunatesituationistheperceptionbymanypotentialrecruitsthattheindustryisina“sunset”phase.Competingforrecruits

134Mandil,ClaudeandAdnanShihab-Eldin.“AssessmentofBiofuelsPotentialandLimitations”,February2010,availableonlineathttp://www.ief.org/PDF%20Downloads/Bio-fuels%20Report.pdf.Ministersatthe11thIEFhadaskedforsuchareporttobeproduced.

135“UnpackingUncertainty:InvestmentIssuesinthePetroleumSector”,July2009,AReportcommissionedbytheIEF,writtenbyPFCEnergy.Availableonlineathttp://www.ief.org/PDF%20Downloads/IEF%20Unpacking%20Uncertainties%20Report..

136Qatar’sEnergyandIndustryMinisterAbudullahAl-AttiyahremarkedattheIEFHumanResourcesSymposiuminDohainMarch2009:“Isincerelyhopethatwedonotseeanexodusfromoil-relateddisciplinessimilartothatofthemid1980s.”

137See11thInternationalEnergyForum,Rome,20-22April2008,ClosingStatementbyhostItalyandco-hostingCountriesIndiaandMexico.

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withtheI.T.andotherhi-techsectors’imagesofhard-hats,drilling-rigsandotherheavymachinerycontinuetocharacterisetheindustryinthepressandelsewhereeventhoughcomputingpower,R&D,andcutting-edgehigh-techofalldescriptionsaretherealityofamodernoil&gascompany.Theseandotherfactorscombinetodiscouragebeliefinthesectorasanemployerofchoice.138

The Joint Statement at the end of the meeting called for “enhanced cooperation amonginternational,nationalandservicecompaniesfromallproducingandconsumingcountriesininvestment,technologyandhumanresourcedevelopment”.139

TheHumanResourcesSymposiuminMarch2009washeldunderthetitle“TacklingtheHumanResourcesCrunch in thePetroleum Industry”. Attendees included industry representativesfromoil and gas companies, aswell as representatives of educational institutions. For theIEF,thesymposiumwasanopportunitytohighlightsharedinterests:theneedbytheenergyindustries for skilled staff in the long-termon the one hand, and the attractiveness of thehydrocarbon industries as an employer on the other: “An industry-wide de�icit of skilledemployeesrepresentsacriticalbottleneckandlong-termchallengetothepetroleumsector”,saidIEFSecretaryGeneralNoévanHulstattheSymposium.Hefurtherstatedthatcommonlyheld,negativeperceptionsoftheindustryshouldbechallengedbybettercommunicating“therealityofthemodernoilandgassectorasahigh-tech,diverseandenvironmentallyconsciousentity,integraltothelong-termfutureoftheglobaleconomy”.140Importantly,keymessagestoaddresstheskillsshortagewereagreedupon,albeitwithoutspeci�iccommitmentsbyeitherside:industryactionintheformofbroadenedmentoringprogrammes,widenedscholarshipandinternshipopportunitiesforuniversitystudentsas“proactiveinitiativeswiththepotentialtoattract,developandretaininterestinthesectorascareerpathofchoice”,morecooperationbetweenindustryandacademia,aswellastheimmediateimportanceforcompaniesto“resistshort-termeconomicpressurestoimplementcutsinworkforce.”141

ChangingIndustryStructures:TheNOC-IOCRelationship

In the current environment, four key features of IOCs stand out: their limited access toreserves; their relationship with oil-producing countries; the increased competition frommultipleplayers;andtheadherencetotheprincipleofmaximisingshareholdervalue.AsnotedbytheEconomist,IOCsare“smallnexttotheindustry’struegiants:thenationaloilcompanies(NOCs)ownedorcontrolledbythegovernmentsofoil-richcountries....Ofthe20biggestoil�irms,intermsofreservesofoilandgas,16areNOCs”.142IOCsoftencitethedif�icultyofaccesstoreserves inresource-richregionsasthemainobstacletoreplenishtheirreservesandto

138ExecutiveReport,JeddahEnergyMeeting,22June2008.139JointStatement,JeddahEnergyMeeting,22June2008.ConcernhadalsobeenexpressedattheNOC-IOCForuminMarch2009,whereparticipantsnotedthat“thehighaverageageofpersonnelintheindustryandhowtoattractyounggraduatesisasourceofconcern”andthat“long-termconsiderationsshouldprevailasmoreskilledstaffwillbeneededtomeetfutureglobaloilandgasrequirements.”ConcludingStatement,NOC-IOCForum,KuwaitCity,30-31March2009.

140PressRelease,IEFHumanResourcesSymposium,13-14April2009,Doha,Qatar.141ConcludingStatement,IEFHumanResourcesSymposium,13-14April2009,Doha,Qatar.142TheEconomist(2006).“NationalOilCompanies:ReallyBigOil”,August10.

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increasetheirproduction.Oftotalglobaloilandgasreserves,only14percentarefullyopentoIOCcompetition.TherestareheldbygovernmentsandNOCs;IOCscanhavesomeequityaccess (11percentdo)ornoequityaccess (58percent).143Asmarketshave tightenedandtransitionedfromabuyer’stoaseller’smarket,thetermsandconditionsdemandedbytheownershavebeenhardeningovertime.Thesetrendswillbefurtherreinforcedbygrowinglong-termdemandforoilandgas,andbydecreasingopportunitiesopentoIOCs.

AlthoughbothNOCsandIOCsoperatewithinthesameindustry,theyhavedifferentobjectivesandfacedifferentchallenges.WhileIOCsaremainlyconcernedwithpro�itability,sharepricesand riskmanagement, NOCs have to dealwith government bureaucracy, local politics andoptimisingthelifeofreservesacrossgenerations.ManyconsiderthatsuchdifferencescanactasgroundsforcooperationbetweenIOCs,whichseekattractiveinvestmentopportunitiesinbelow-groundresources,andNOCs,whichseekabove-groundresources,namelytechnology,capital and managerial skills for dealing with large projects provided by IOCs. However,technology and capital are no longer themain drivers of IOC-NOC relationships.With thesupport of service companies,NOCs arenowable to tackle tasks thatwerenot feasible inthepast.Furthermore,theriseinoilpricesmeansthatgovernmentsarenolongerstarvingforcapital.SomeIOCshavenot fullyrecognisedthischangeofcircumstancesandhavenotadequatelyexplorednewformsofengagementwithsomeofthestrongerNOCs.

IOCshavealsobeen facing toughcompetition fromotherplayers in the industry. In recentyears,manyoilimporters,suchasChinaandIndia,havebeenkeentofurtherdeveloptheirNOCs.TheseNOCsareeager to increasetheir international investmentsandacquireassetsto secure new sources of oil supply. They hence compete �iercely with IOCs in acquiringoverseas assets. Since, unlike other oil companies, they are not driven by the objective ofmaximisingshareholdervalue,theyarelikelytobe�lexibleinnegotiatingcontractswithNOCsinoil-exportingcountriesandwiththeirgovernments.Furthermore,theseNOCsmaybene�itfromstate-to-state connectionsand thusgainbetter accesson thebasisof amoregeneralagreementbetweenthetwostates.

Asinotherperiodsoftheindustry’shistory,smalleroilcompanies(knownasindependents)insearchofanewidentityvis-à-vistheestablishedclubofmajorsarecompetingwithIOCsforashareintheoilbusiness.Theseindependentsarewillingtoexploresmallerareaswithlowhydrocarbondeposits,topickupconcessionblocksabandonedbymajorsandtocreate‘niche’advantages.Thetechnologybroughtinbytheseindependentshasbeenplayinganimportantroleinrevivingtheoilsectorinmanycountries.Oilservicecompaniesalsoworkdirectlywithresource-richNOCs, providing themwith the necessary technology on a fee-based system.Theseservicecompaniescansometimesengageinmanagingprojects,blurringthedifferencesbetweenthemandIOCs.

ItisimportanttonotethatalthoughtheseplayerscompetewithIOCs,thereisalsoasymbioticrelationship between the various players.When large and complex discoveries are made,independentsoftenrelyonIOCsforthe�inancinganddevelopmentofthesebasins.BothIOCsandindependentsrelyinturnonservicecompaniesforservicessuchasdrilling,geophysicalservices, reservoir characterisation and interpretation and well-testing. In fact, IOCs and

143Zanoyan,V.(2004).“TheOilInvestmentClimate”,MEES,Vol.XLVII,No.26.

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independentsconstituteamajorsourceofrevenueforoilservicecompanies.Thelatterthusactively seek to establish goodworking relationshipswith their clients. Finally, NOCs andIOCscanenterinstrategicalliances,implementjointprojects,andmakejointbidsforenergyassets.RecentexamplesincludethejointbidbyBPandChinaNationalPetroleumCorporation(CNPC)forthedevelopmentoftheRumaila�ieldinIraqin2009;Shell’sandCNPC’splanstojointlydevelopandproducenaturalgasinChina’sSichuanbasinin2010;andBP’sshareswapandArcticexplorationdealwithRussia’sRosneftin2011.

Under thepressureof shareholders and �inancial investors, therehasbeena shift in IOCs’strategytowardsmaximisingshareholdervalue.ThishasmeantashiftinIOCs’�inancialandinvestmentstrategies.Ratherthanusingthebulkofcash�lowforinvestmentinexploration,developmentandproduction,IOCshavepursuedastrategyofreturninglargecash�lowstoshareholdersthroughbuy-backschemesorthroughissuingdividends.ManyIOCshavealsoengaged inawaveofmergersandacquisitions inanattempt to improve theirpro�itabilitythroughcuttingcosts.AnotherimportantmotivebehindthemergerstrategywastoimproveIOCs’ reserve to production ratios by purchasing other companies’ booked reserves. Thiswas viewed as an alternative to investment in the relatively expensive and risky businessofexplorationanddevelopment.Maximisingshareholdervaluealsomeantashift fromtheverticallyintegratedstructurewhichcharacterisedtheoilindustryinthe1960sand1970s.Instead,thevariouspartsofthesupplychainarebeingtreatedasindependentpro�itcentres:ratherthantreatingupstreamanddownstreamaspartsofthesamesupplychain,investmentisdivertedawayfromrelativelylowpro�itcentressuchasre�iningormarketing,towardsmorepro�itablesegmentssuchasupstream.

TheIOC-NOCandProducer-ConsumerDialogue

The need for investment, skilled human resources and experience in long-term andunconventional oil and gas development has led to many calls for enhanced cooperationbetweenNOCs and IOCs to pull on a single strandwithin the industry. Consumer nations’concernoverresourceaccessfortheirownmultinationalsupermajorsisanadditionalmotive.Proponentsof greaterNOC-IOCcooperationargue in favourof the capital investment IOCsareabletoprovide,theirhumanresourcesandprovenexperiencewiththemanagementoflong-termandcomplexprojects,aswellastheirtechnicalknow-how.Theproducer-consumerdialoguewasbroughtintoplayinthiscontextasaforumfacilitatingdialoguenotonlybetweengovernments but also between industry players themselves, especially betweenNOCs andIOCs.

The IOC-NOC relationship increasingly became a subject of discussion at IEF meetingsthroughout the decade. Ministers at the 11th IEF in April 2008, for instance, called for“increasedcooperationbetweenIOCs,NOCsandservicecompaniesasamajoropportunityin coping with the increasing costs, complexity and risks of large investment projects”.Similar callswere latermade at the JeddahEnergyMeeting in June, 2008, and at the IEF-

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IGUSymposiuminNovember,2008.144ParticipantsattheIEF-IFPTechnologySymposiuminDecemberconcludedthat“partnershipbetweenNOCsandIOCsintechnologicaldevelopmentand implementation is awin-win situation” and called for “a renewed collaboration and astrengthenedcooperation”.145

InMarch2009,theIEF, incooperationwiththeGovernmentofKuwait,organisedthe�irstofwhatisintendedtobearegularforumbetweenIOCsandNOCs.Heldunderthetitle“NOCs-IOCsCooperationandPartnershiptoEnhanceEnergySecurity”,theforumwashostedandsponsoredby Kuwait Petroleum Corporation (KPC). Primarily targeted at industry representatives, theforumwasdesignedtopromoteregulardialoguebetweenNOCsandIOCsandtodemonstratewaystoimprovetheircooperation.Itisevidentthattheprinciplefunctionofthisforum,givenitwas the �irst of its kind,was to sendmessages rather than to come upwith solutions. Inconsequence,manyoftheforums’conclusionsaimedathighlightingindustryneedsmovealonggeneralguidelines:acall togovernmentstosetclearandstablepolicyframeworks, theneedforoverallinvestmentalongthevalue-chainandforpoliticalstability,andthemessagetotheindustrythatitshouldavoidgivingintoshort-termpressuresandtofurthercutexpenditureonjobs,capitalandtechnology.Atatimeofgreatuncertaintywithintheoilindustry,NOCsandIOCsagreedonawishlist,includingthesteadyemphasis,clarityandstabilityofenergypolicyframeworks,aswellas�iscal,legalandeconomicregulation.Theforumfurthermoregraspedtheopportunitytocallonitselftorefrainfromrespondingtothecurrenteconomicpressuresbyjobcuttingandcapitalspending.146Themeetingcouldnot–andwouldnot–movebeyondgeneralsupportforgreaterNOC-IOCpartnershipallalongthevaluechain.147

TechnologyandtheClimateChangeChallenge

Sincetheearly2000s,theconceptofsustainabilityhasmovedincreasinglyintothelimelightof the industry’s focus and has become one of the key themes of the producer-consumerdialogue.Factorsrenderingsustainabilitycrucialtothe2000sdialogueincludebotholdandnewsourcesofuncertaintyfortheindustry:theissueofpricevolatilitythathamperlong-termdemandstabilityforoilaswellasnaturalgas;prospectsofthedeclineoflow-costreservesandthecostriseforthedevelopmentofnewreserves;andtheimpactoftheclimatechangedebateandresultingcarbon-reductionpoliciesbyconsumingcountries.Newtechnology,bothneededtorecoveroilandgasreserves,andtorespondtoaglobaltrendtowardscleanerenergyalongtheentirevaluechain,hasbecomethesubjectofmuchofthefocusofintra-industrydialogue,whilethesocialandenvironmentalresponsibilityofproducersandconsumersofenergyalike

144MinistersattheJeddahEnergyMeetinginJune2008concluded: Thatco-operationisenhancedamonginternational,nationalandservicecompaniesfromall producingandconsumingcountriesininvestment,technologyandhumanresource development.(JointStatement)

AndtheIEF-IGUSymposiuminNovember2008: encouragedNOCsandIOCstoenhancecooperationandpartnershiptodevelophuman resourcesandencourageR&Deffortsinpursuitofef�iciencyandcostimprovements throughtechnologicaladvances.(ConcludingStatement)

145ConcludingStatementbyIEFSecretariatandIFP,IEF–IFPSymposium“EnhancingGlobalEnergySecurity,RoleofTechnologyinthePetroleumSector”,15December2008,Riyadh,SaudiArabia

146IEFNewsletter,May2009,Issue13,p.11.147ConcludingStatement,NOC-IOCForum,30-31March2009.

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challengesthetraditionalorientationofthebusiness.Riskmanagementisalsoincreasinglycomingtotheforeasanimportantissue.

The 11th IEF Ministerial in Rome in April 2008 speci�ically addressed the challenges of asustainableenergyfuture,whichrequires“ef�iciencyimprovements,technologicaladvancesinbothproductionandconsumptionoffossilfuels,anddevelopmentofalternativelow-carbonenergysources”.148Ministersatthe11thIEFhadalsoexpressedamoreconstructiveapproachtowards energy ef�iciency, while highlighting for the �irst time a shared understandingthat CCS technology had moved into the focus of the industry. In the Closing Statement,Ministers af�irmed themutual bene�its: “Improving energy ef�iciency throughactionplans,sectoralapproachesandsharingofbestpractices inenergyproduction, transportationandconsumption is cost-effective” since this enhances “energymarket stability, environmentalsustainability and economic development”. The forum also emphasised the importance ofcarboncaptureandstorage(CCS)asoneoftheoptionstoreducegreenhousegasemissionsfromfossilfuels.Theparticipantsexpressedthemselvesclearly,notingthat“CCSdevelopmentanddeploymentwillplayacrucialroleindeliveringasustainableenergyfuture.InclusionofCCSintheCleanDevelopmentMechanismsshouldbeenactedassoonaspossible(...).”149

TryingtotacklethetechnologychallengehasmadetheIEFandmanyofitsactivitiesalsoaforum fordebateover technology–bothbetween industryparticipants over technologicaloptions, and between consumers and producers over the prospects for different sets oftechnology and their impact on consumptionpatterns on the consumer side and recoveryratesontheproducerside.Therelevanceoftechnologyinthisregardhasbeenemphasisedthroughout the industry. There is clear recognition that “meeting expanding energy needs–whiletacklingcarbonemissions–willrequiredeliveringtechnologyatanunprecedentedscaleandpace”.150Manyofthesurroundingconcernsandquestionsweretakenastepfurtherat a specialised symposium in December 2008. The IEF-IFP Technology Symposium wasco-organisedby the IEFand theFrench InstitutduPétrole,withparticipation fromoilandgas companies, technology and service providers and representatives of a number of IEFmember states. Pragmatically, the symposiumwas promoted as “a symposiumon the roleoftechnologyinthepetroleumsector inenhancingglobalenergysecurity”151–aconsciouschoiceagainstreferencetocarbon-cuttingmotivesbehindthistechnologicalchange.Thefocusat the Technology Symposiumwas directed primarily at how technological advanceswereabletoenhanceoilandgasrecoveryrates,aswellasatef�iciencygainsthroughtechnologicalimprovements. Lip service was paid to environmental motives behind technology: CCStechnologyremainedtheonlytopicwithdirectrelevancetoclimatechange,butthedebateoncemoreremainedfocusedonCCSandimprovingrecoveryrates,withgeneralscepticismastoCCStechnology’sabilitytoeffectivelyreduceCO2emissions.

14811thInternationalEnergyForum,Rome,20-22April2008,ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico.

149ibid150WPA,XXXVI:7,13February2006,p.1.151ConcludingStatementbyIEFSecretariatandIFP,IEF–IFPSymposium“EnhancingGlobalEnergySecurity:theRoleofTechnologyinthePetroleumSector”,15December2008,Riyadh,SaudiArabia.

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The �irst CCS Symposium, co-organised by the IEF and Australia’s Global CCS Institute,followedtheIEF-IFPSymposiuminSeptember2009,havingagreaterfocusonCCStechnology.Thesymposiumwasheldunder the title “Challengesand theWayForward inAcceleratingCCS Development and Deployment, in Particular in Oil and Gas Producing Countries” anddistinguisheditselfbybeingdrivenbyveryspeci�icobjectives.Theeventwasremarkablenotonlybecause itconsciouslyputgreaterweightonCCStechnology itself,butalsobecause itwashostedbyChina’sNationalDevelopmentReformCouncil,animportantsignoftheevenmoreactiverolewhichthenewlargeenergyconsumerssuchasChinaarehopedtoplayinthecomingdecade.InthisforumCCStechnologywasonceagainplacedinthecontextofenergysecuritybutfoundremarkablymoreconciliatorywordswithregardstoclimatechange:

Inacarbon-constrainedworld,theissueofglobalenergysecurityisofutmostimportance,giventhelevelofprojectedlong-termenergydemandandcontinuingdominanceoffossilfuelinthefutureenergymix.Thesustainabilityoffossilfuelproductionandconsumption,especiallywithregardtotheenvironmentalfootprint,isanissueofcommonconcernandglobalimportance.152

With a focus on CCS technology, the advantage of the forumwas clear in that itwas abletoaddress its topic in its agendaand itsdiscussions in fargreaterdepth, andwith cleareroutcomesthanmanyofthelargerforumswithmuchbroaderagendas.ThisframeworkalsoallowedforgreaterjusticetobedonetothequestionofCCStechnology’spotentialtomakeapositiveimpactinparticipatingcountries’aimsofreducingtheirCO2output.TheimportanceofCCStechnologyhasalsobeenhighlightedbyitsregularinclusionintoIEFMinisterialclosingstatements:

Ministersaf�irmedthatfossilfuelswillstillprovidethelion’sshareoftheenergysupplyfordecadestocome,althoughrenewableenergywillhavetoplayanincreasingroleintheenergymix.Sincethereisanurgentneedtomitigateclimatechange,itisinescapable[thatitwillbenecessary]toalsoradicallyimprovetheenvironmentalsustainabilityoffossilfuels.Carboncaptureandstorage(CCS)isoneofthekeytechnologiestoachievethis.TheprogressofCCShasbeenencouraging, but cost, knowledge sharing and thenecessaryregulatory infrastructureremainassigni�icantobstacles.WhereCCScanbedeployedinconjunctionwithEnhancedOilRecovery(EOR),itmayprovetobeacatalystandsteppingstonetocommercialdeploymentofCCS.153

Energyef�iciencyhasbeenasecondareaofagreement,andonewhichbecamethestartingpointformanylaterIEFactivitiesfocusedontechnologicaldevelopment.Giventhatoilandnaturalgasareexhaustibleresourcesandthattheseresourceswillremainimportantinworldenergyconsumptionforyearstocome,theMinistersemphasisedinthe8thIEFtheimportanceof the long-termef�icientuseofoil andnatural gas.Theyalso recognised that cleanerandmoreef�icient fuel technologies, suchas fuel cellsandGTL,wouldhaveacontributingrole

152ConcludingStatementbyIEFSecretariatandGlobalCCSInstitute,IEF-GlobalCCSInstituteSymposium,27-28September2009,Beijing,China.

153ConcludingStatementbyhostcountryMexicoandco-hostingcountriesGermanyandKuwait,12thInternationalEnergyForum4thInternationalEnergyBusinessForumCancun,30-31March2010.

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inthefuture.Theycalledforparticipantstoexplorepoliciestoencouragethedevelopmentanddeploymentof such technologies.154The JeddahEnergyMeetingwentonestep furtherandemphasisedthatenergyef�iciencyshouldbe “promoted inallsectorsthroughpassingon market price signals, technology transfer and the sharing of best practices in energyproductionandconsumption”.155

EnergyPoverty

EnergyPovertyinmanydevelopingcountrieshasbeenrecognisedasalamentableaspectofoverallpoverty.Itiswidelyknownthatthelackofaccesstomodernformsofenergysuchaspetroleumproductsandelectricity inhibitseconomicandsocialdevelopmentand increasespoverty.Povertyandenergypovertyoftengohandinhand.Manycharacteristicsofthepoorsuch as low and irregular income, lack of basic education and limited access to social andpublicservicesimplythattheoptionsavailabletothepoorintermsofenergysourcesarealsoquite limited.Furthermore,suchcharacteristics implythatpoorhouseholdsexhibitastrongpreferenceforfreelyavailablebutinef�icientanddirtyfuelssuchas�irewood.Thus,transitioningtocleanandmodernfuelsconstitutesakeyobjectiveformanydevelopingcountries.

The lackofaccess tomodern fuelsaffectseconomicandsocialdevelopment throughmanychannels. As households transition tomoremodern forms of fuel, the fuel becomesmoreef�icient. For instance, in terms of cook-stoves, most traditional biomass stoves are veryinef�icientandusemuchmoreenergy thannon-biomass-burningstoves.Researchhasalsoshownthatmodernfuelsarecleanerandsafer.Althoughbiomassfuelshavefewcontaminantssuch as sulphur or metal, poor households do not allow enough air�low into the stove,resultinginindoorairpollutionandserioushealthrisks.Giventhatwomenaremostcloselyassociatedwiththecombustionofbiomass,theyhavethehighestexposuretohealthrisksofallmembersofthehousehold.Itisestimatedthatindoorairpollutionkills2millionwomenandchildreneveryyear.HalfthisnumberliveinChinaandIndia.Otherstudies�indthatgoodhealthhasapositive,sizableandstatisticallysigni�icanteffectonaggregateoutput.Thus,atthemacrolevel,negativehealthconsequencesduetouseoftraditionalformsofenergyhaveanegativeimpactoneconomicgrowthanddevelopment.Furthermore,collectingfuelwoodisatime-consumingactivitywhichmeansthatlesstimeisavailableforproductiveactivitiesandinvestmentinhumancapital.Thisimpactswomenandchildrenthemost,sincetheyhavetheprimaryresponsibilityforcollecting�irewood.Evidencesuggeststhattheuseofbiomassishigher for thosehouseholdswheremorewomenandchildren(i.e. labourresources)areavailable.Manystudies�indthatchangesinthequalityofenergyservicesenhanceseconomicproductivity,evenafteraccountingforthephysicalavailabilityofenergyperse.Speci�ically,theincreaseduseofmore�lexibleenergyformssuchasliquidfuelsandelectricityenhancesproductivity by enhancing “the discovery, development, and use of new processes, newequipment,newsystemsofproduction,andnewindustriallocations”.156

154Summarybythehostandtheco-hostsofthe8thInternationalEnergyForuminOsaka,September21-23,2002.

155JointStatement,JeddahEnergyMeeting,22June2008.156Schur,S.H.(1984).“EnergyUse,TechnologicalChange,andProductiveEf�iciency:AnEconomic-HistoricalApproach”,AnnualReviewofEnergy,Vol.9,409-425.,p.415.

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Theenergypovertytopichas�ilteredintothedialogue,andbothproducersandconsumersarekeentobeseentacklingtheenergypovertychallenge.The11thIEFinRomein2008recognisedthescaleoftheenergypoverty,noting:

Yetovertwobillionsofpeopledonotyethaveaccesstomodernenergyservices.Thisperpetuatesthepovertycycleandinhibitseconomicdevelopment,availabilityofcleanwaterandfood,whilepreventingtrainingandacceptablehealthstandards.157

Duringtheperiodofsustainedoilprice increasesfrom2002-2008,energypovertybecameatopicofmorewidespreadconcern,giventhathighoilpricesnaturallyhit leastdevelopedcountries thehardest – similarly to the1970s,when the �irst oil price shocksbegan tobeassociatedwithgreaterenergypovertyandhelpfundssuchasOPEC’sOFIDwereintroducedforthepoorestnations.TheJeddahEnergyMeetinginJune2008commentedthat“oilpricerisesandtheunderlyingvolatility,willhaveanimpactontheeconomiesoftheconsumingandproducingcountriesalike,especiallyintheleast-developedcountries”andrecommendedthat“developmentassistancefromnational,regionalandinternational�inanceandaidinstitutionsbe intensi�ied to alleviate the consequences of higher oil prices on the least-developedcountries”.158IntheJeddahEnergyMeeting,KingofSaudiArabiaAbdullahIbnAbdulazizAl-Saudproposedanenergy-for-poorinitiativewiththeaimtohelpdevelopingcountriescopewiththehighoilprices.KingAbdullahallocated$1billionforanOPECFundandoffered$500millioninsoftloansthroughtheSaudiFundforDevelopmentto�inanceprojectsindevelopingcountriestoalleviateenergypoverty.

InDecember2009,theIEForganisedaspecialEnergyPovertySymposiuminJohannesburg,where representatives from a number of large non-governmental organisations such asthe IEA, theNewPartnership forAfrica’sDevelopment (NEPAD),OPEC, theOPECFund forInternationalDevelopment(OFID),theWorldEconomicForum(WEF)andtheWorldBankmetwithindustryrepresentativestodebatethecurrentstateofenergypovertyanditspotentialremedies.TheforumwasthusalsohopedtomakeacontributionbeyondindustrybordersandtowardsthewidergoalofhumandevelopmentasadvocatedbytheUNMillenniumGoals.159

NaturalGasandtheProducer-ConsumerDialogue

The2000swerenotonlyaneventful time for theglobaloilmarketbutalsowitnessed therapidly increasing importance of natural gas on international energymarkets. Natural gascontinuouslyraiseditspro�ileinglobalenergymarketsinrecentyears,aidedbyfast-growingsuppliesofLique�iedNaturalGas(LNG)andmulti-decadedemandgrowthbothwithinandoutsideOECD.160ManyofthemembersoftheIEFaretodaybothmajoroilandgasproducers

157ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico,11thInternationalEnergyForum,Rome,20-22April2008.

158JointStatement,JeddahEnergyMeeting,22June2008.159ConcludingStatementbyIEFSecretariatandSouthAfricaMinistryofEnergy,IEFSymposiumonEnergyPoverty,8-9December2009,Johannesburg,SouthAfrica.

160Theshareofnaturalgaswithintheglobalprimaryenergymixstandsnowatover23%,comparedto34%foroil,withprospectsforfasterdemandgrowththanforoilinthemid-termfuture.Totalgasdemanddeclinedin2009dueprimarilytotheglobalrecessionbutispredictedtogrowaccordingtotheIEAReferenceScenario.IEA,WorldEnergyOutlook2009,p.366;BPStatisticalReview2010.

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161IEFmembersincludeallmajorproducersandconsumersofnaturalgas.ManyofthecompaniespresentatforasuchastheIEBFsarebynowalsomajorproducersofnaturalgas,includingbothnationalandinternationalenergycompanies.Shell,forinstance,isexpectedtomakehalfofitsnewproductionin2010ingas,whichalreadycontributes40%ofthecompany’stotalproductionandmakingittheleadinggascompanyamongthesuper-majors.CompaniessuchasStatoilHydro,Gazprom,ExxonMobil,ConocoPhillipsandTotal,amongothers,havemadesubstantialinvestmentsinnaturalgasinrecentyearsaswell.WPA,XXXVIII:3,21January2008,p.1.

162TheSummaryofthe7thIEFin2000,forinstance,reads:“TheForumunderscoredtheroleofenergypricesandenergyavailabilityinworldeconomicprosperity,andthecentralrolethatoilandgasplayinenergyconsumption.”7thInternationalEnergyForuminRiyadh,November17-19,2000,Summarybythehostandtheco-hosts.

163ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico,11thInternationalEnergyForum,Rome,20-22April2008.

164Forinstance,Ministersatthe11thInternationalEnergyForuminRomeinApril2008notedintheirClosingStatement:

5.TheForumnotedthegrowingrelianceofconsumingcountriesonnaturalgasimports. 6.TheForumstressedthatbringingavailableresourcestothemarketrequiresadequateand timelyinvestmentintheentireoilandgaschain.

TheChair’sSummaryatthe3rdAsianMinisterialEnergyRoundtableon26April2009concluded: Participantsrecognisedthatnaturalgasplaysanincreasingandessentialroleinenhancing energysecurityandmitigatingclimatechange.

andconsumers,soitwasclearlyonlyaquestionoftimeuntilnaturalgasmarketissueswouldalsoentertheagendaoftheproducer-consumerdialogue.161

Beginning in theearly2000s, references to energymarkets and the industry throughout awide rangeofpublicationshave increasinglybeenmadeno longeronly in termsofoilbutwith reference to gas as well. IEF publications such as Ministerial Statements and ChairSummariesofIEFMinisterials,inadditiontootherdocuments,haveregularlyreferredsince2000 to the oil and gas industries and underscore the importance of gas in global energyconsumption.162Atthe�irstIEBFinAmsterdam,thePresidentoftheInternationalGasUnion(IGU)participatedalongsideoil industry leaders.Manyof the topicsdiscussedatmeetingssuchasIEFMinisterials,butalsoatG-8summitssuchastheSt.PetersburgsummitorganisedbyRussia,theworld’slargestgasproducer,dealtwithenergymattersofequalinteresttothegasindustry,includingaccesstoresources,datatransparency,energymarketregulationandclimatechangedebates.Similarly,the11thIEFin2008explicitlystatedtherisingimportanceofgasintheproducer-consumerdialogue:

TheForumnotedthegrowingrelianceofconsumingcountriesonnaturalgasimports.Itwassaidthatlargegasprojectstendtobecapitalintensivewhilerequiringlongleadtimesbeforetheybecomeoperational.Inaddition,gastransportandtransitsmayaffectseveralcountries.Betterco-ordinationbetweengovernmentsandcompaniesandspecialregionalagreementsneedtobepromotedaccordingtoMinisters.163

Thediscussionofgas-marketissuesgainedgreaterbreadththroughoutthedecadeandbegantoincludethemessuchastheincreasedimportdependenceofconsumerstates,theneedforgreaterinvestmentbytheindustrysharedbythegasandoilindustries,andtheenhancedroleofnaturalgasinviewofclimatechangepolicies.164Inparalleltotheproducer-consumerdialogueontheoilfront,theparticipantsemphasisedtheimportanceofthemultilateralapproachand

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intergovernmentalsolutionswhichareneeded“tobringforwardnewinfrastructure,tojointlyexploreandexploitnewgasreserves,andtohelpestablishrobustandsecuremarketstothebene�itofallparties”.Sucheffortsrequire“longtermcooperationbetweengasproducersandconsumers,andtransitcountries”.

Discussion about greater transparency of gas markets led to calls at various IEF fora toexpandJODI,theinternationaloildatabase,toincludegasmarketdata.165The�irstIEF/IGU(International Gas Union) Ministerial in Vienna in 2008 was a testimony to the growingimportance of natural gas in the producer-consumer dialogue. The IGU brings bothgovernmentsandcompaniestothenaturalgastable,andIGUsupportedthedatatransparencyeffortsofIEF.Theproposalwaslaterembracedatthe12thIEFinCancunandhasledto�irsttestrunswithindividualcountriestogathergas-relateddataforJODI.

InNovember2008,theIEForganiseda�irstMinisterial forumfocusedentirelyondialogueovergasmarkets.TheforumwasorganisedincollaborationwiththeInternationalGasUnion(IGU), amultinational association of gas producing states and industries, in an attempt toprovideanarenatotheworld’sgasmarketprotagonists.Underthetitleof“TheWorldGasMarketsGoingfromRegionaltoGlobal”,theaimwastodebatecurrentdynamicsinthegasindustry and to identify key challenges facing the industry today. The wider objective ofincreasingmutualunderstandingbetweengasmarketparticipantswasoutlinedintheforum’ssummarystatement:

Thesharedunderstandingisthatthroughanenhancedandsustaineddialoguenaturalgasstakeholderscanbetteraddresskeychallengesfacingthegasindustrysuchasmarkettransparency,investment,interdependence,transitandcontractualframeworks.166

The meeting had both practical and impractical implications. The need for gas marketsparticipantstocommunicateanddebatebeingself-evident,theprincipalbene�itofforasuchastheIEF-IGUMinisterialliesinitsabilitytosponsorfocuseddialoguebetweenallsides.Manyof thechallenges identi�iedanddiscussedinViennamirroredoilmarketproblems,suchassecurityofdemandandsupplyconcerns,investmentallalongthevaluechain,theimpactofenvironmentalregulation, theneedforskilledhumanresources,andaccesstoresources.167Futureforathatfocusmoreonspeci�icallygas-relatedissuesandthatavoidreplicatingotherongoing fora such as the IEFMinisterialsmight further contribute to the debate. Possibletopics includegaspricingandpriceharmonisationandcross-border tradeand thegreaterinterconnectednessofregionalmarkets.

The2ndIEF-IGUMinisterialGasForumwasheldinDoha,Qatar,on30November2010underthetitle“TheRoleofNaturalGasinaSustainableEnergyFuture”.Inthismeeting,thediscussion

165The�irstsuchcallwasformallymadeatthe11thIEFinRome.SimilarcallsfortheinclusionofgasdatatoJODIweremadeatotherinternationalforums,forinstanceattheG-8SummitinJuly2009,whichdeclared:“Webelievethatgreatertransparencyingasmarketsisrequired.WethereforecallupontheIEFtoexaminethepossibilityofextendingJODI-typeactivitiestonaturalgas.”G-8LeadersSummitDeclaration,ResponsibleLeadershipforaSustainableFuture,L’Aquila,8July2009.

166IEF-IGU1stMinisterialGasForum,JointIEF-IGUSummaryStatement.167ibid

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focusedonthekeychallengesfacingthenaturalgasindustryandexploredpotentialsustainablemeasurestotheclimatechangechallenge.Theparticipantsreemphasisedtheenvironmentalqualitiesandadvancesintechnologywhichrendernaturalgastobean“essentialpartoftheglobalsolutiontoclimatechange”where“thenaturalgasindustryhasthescale,technology,and resources to reduceCO2emissions”. Interestingly, theparticipantsexpressedoptimismaboutthefutureofgas,emphasising:

Duetoanumberofpolitical,technical,economicandmarketrelatedfactors,theexpectedperiodleadingtoasubstantialrenewableenergybasewillbelengthyandwillrequiresigni�icantsubsidies.Naturalgascanbean“enablingfuel”.Itcanplayaroleofa“dual”fueltorenewablesbyenablingincreaseddeploymentofenergysupplyfromintermittentrenewable technologies. Natural gas is abundant, affordable and environmentallyacceptable.Hence,towardsasustainableenergyfuture,naturalgasismorethanabridge,it’sadestinationfuel.

The participants, however, recognised the investment challenge and urged the industry toadoptalong-termviewandincreaseinvestmentinthegasvaluechaineveninanenvironmentofincreasinguncertaintyandweakmarketconditionscharacterisedbyagasglutandrelativelylowprices.TheparticipantsfurtheremphasisedthattheconvergenceoftheinterestsofNOCsandIOCsislikelytobehigherinthenaturalgasbusiness,statingthat“strongerpartnerships,multifaceted cooperation and innovative arrangements between NOCs, IOCs and servicecompanieswillbeneeded,particularlyforthechallengesofdevelopingremoteanddif�icultgasresources”.Inthismeeting,theparticipantsalsoannouncedthattheIEF,incooperationwith its JODI partner organisations and GECF, are considering the launch of the Gas-JODIDatabase in 2011whichwill providemore accurate assessment ofmarket conditions andhencebene�itgasmarketplayers.

Conclusion

The�irstdecadeofthe21stcenturywasapositivedecadefortheproducer-consumerdialogue.It ventured into anew set of themesofmutual interestwhichhelped increase further theawarenessofinterdependencebetweenthetwoparties.Whileissuesofsecurityofdemandand supply continued to underlie the dialogue, these issues were given more content, asre�lectedinthedebateoninvestmentwhichwasapproachedfromamuchwiderperspectivetoincludeissuesofpolicyuncertainty,datatransparency,humancapitalshortages,theIOC-NOCrelationshipandtheroleoftechnology.Similarly,althoughtheclimatechangeissuewasnotdirectlyaddressedinthevariousIEFmeetings,therewassomeconsensusontheimportanceofsustainabledevelopment,energyef�iciencyandtherolethattechnologiessuchasCarboncaptureandstorage (CCS) canplay inaddressingenvironmental concerns.Suchconsensuscancreatethebasisforfuturecooperationorevencoordinationofpolicies.Incontrasttothe1990s,issuessuchastaxationofpetroleumproducts,greentaxes,howtomaintainaneffectivelevelofsparecapacityinthesystemandtheexplorationofwaystostabilisetheoilpricetookabackseatinthedialogue.Thisbynomeansimpliesthattheseissueshavebeensolvedorhavebecomelessimportant.Butitseemsthatbothpartieswantedtoavoidconfrontationaltopicsandfocusmoreonthemesthatcanbringthemclosertogether.Furthermore,someofthekeypartiesmaynotyetbereadytodealwithsuchcontentiousissues.Whilethisapproachiseffectiveinbuildingcon�idence,inthelongrun,thereisariskthatkeyissuesthatlieatthe

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heartofconsumers’andproducers’concernswillbecomemarginalised, leadingtoalossofinterest in thedialogue.Furthermore,while thedialogue in the2000swasable to identifythemainchallengesandbottlenecksfacingtheenergyindustry,itcameshortofformulatingconcreteinitiativestoresolvesomeofthesebottlenecks.Thisre�lectsthatwhileconsumersandproducershavebecomemoreawareofthechallengesfacingtheoilmarketandaremoreconsciousoftheotherparty’sconcerns,thereisstillwidedivergenceofintereststhatpreventbothpartiesfromtakingthedialoguetoahigherlevel.

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119

Introduction

If developments in oil prices prior to 2008were considered eventful, then those of 2008are spectacular in comparison.The remarkabledevelopments inboth the �inancial andoilmarketsmade2008oneofthemostexcitingyearsoftheproducer-consumerdialogue.The�irsthalfoftheyearsawasharpriseintheoilpricewhichincreasedfromlessthan$100perbarrelinthebeginningof2008tomorethan143dollars/barrelonthe11thofJuly(SeeFigure7.1).The11th InternationalEnergyForumheld inRomefrom20-22April,precededby the3rdIEBF,unsurprisinglybecameaforumdominatedbypricedevelopments.TheForumnotedthat“oilpricesshouldbeatlevelsthatareacceptabletoproducersandconsumerstoensureglobaleconomicgrowth,particularlyindevelopingcountries”.168Drivenbyconcernsaboutthepossiblede-couplingofoilpricesfromindustryfundamentals,theForumnoted:

Theavailabilityofoilandgasresourcesissuf�icienttomeetworldneedsoverthenextdecades.However,publicandmarketperceptionsarenotinlinewiththegeologicaloiland gas realities. IEF countries were invited to work together to re-align public andmarketperceptionswithmarketfundamentals.

One of the central questions had becomewhich factors had led to the current oilmarketsituation.169 Someobservers in theoil industry and in academic institutions attributed thebehaviourofpricestostructuraltransformationsintheoilmarket.Accordingtothisview,theboominoilpricescanbeexplainedintermsoftightenedmarketfundamentals,rigiditiesintheoilindustryduetolongperiodsofunderinvestment,andstructuralchangesinthebehaviourof key players such as non-OPEC suppliers, OPEC members and non-OECD consumers.170On the other hand, other observers considered that the changes in fundamentals, or evenchanges in expectations, havenotbeen suf�icientlydramatic to justify the sharp rise inoil

Chapter7:OilMarketDevelopmentsin2008,TheYearofTwoHalves

16811thInternationalEnergyForum,Rome,20-22April2008,ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico.

169Foracomprehensiveoverview,seeFattouh,B(2009).OilMarketDynamicsthroughtheLensofthe2002-2009PriceCycle.OIES,WPM39;Jesse,Jan-HeinandCobyvanderLinde.(2008)“OilTurbulenceintheNextDecade”,CIEP,2008/03,June2008,athttp://www.clingendael.nl/publications/2008/20080700_ciep_energy_jesse.pdf.

170Seeforinstance,IMF(2008),WorldEconomicOutlook(October),Washington:InternationalMonetaryFund;CommodityFuturesTradingCommission(2008),InteragencyTaskForceonCommodityMarketsInterimReportonCrudeOil;Kilian,L.andMurphy,D.(2010).“TheRoleofInventoriesandSpeculativeTradingintheGlobalMarketforCrudeOil”,CEPRDiscussionPaperNo.DP7753.

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prices.Instead,theoilmarketwasseenashavingbeendistortedbysubstantialandvolatilespeculative �lows of �inancial investments in deregulated or poorly regulated crude oilderivativesinstruments.171Thislatterviewwassharedbymanyobserversandorganisations,includingOPEC.InDecember2007,theOPECSecretaryGeneralAbdullahal-Badriarguedthat“themarketatthistimeisnotcontrolledbyfundamentals;itiscontrolledbyspeculationandspeculators.Untilthisphenomenonisoutofthemarket,wewillseevolatilityinthemarketdayafterdayandmonthaftermonth”.172

Figure7.1:EuropeBrentSpotPriceFOB(DollarsperBarrel)

TheJeddahEnergyMeeting

Themarket,unimpressedbythemeetinginRome,continuedtoseeever-increasingpricesofoil,reachinglevelsabove$134perbarrelsonJune20.Bynow,someofSaudiArabia’sclosealliesstartedpubliclyexpressingtheirdissatisfactionwithoilpricebehaviour.MalaysiarequestedthattheissueoffuelpricetoptheagendaatthemeetingoftheOrganizationoftheIslamicConference(OIC),withtheForeignMinisterRaisYatimstatingthatIslamiccountriesmustaddresstheissueimmediatelybecauseoilisproducedlargelybythem.Someproducingcountriesalsoexpressedtheirdissatisfactionaboutoilpricebehaviour,blamingacombinationofspeculationandthelowdollarforthesharpriseintheoilprice.Noneofthesereasonscouldconcealwhatincreasingnumbersofcommentatorsatthisstagesawasaprincipalincapability–ratherthanunwillingness

171See,forinstance,theTestimonyofMichaelGreenbergerbeforetheCommodityFuturesTradingCommissiononExcessiveSpeculation:PositionLimitsandExemptions,5August2009.Greenbergerprovidesanextensivelistofstudiesthatareinfavourofthespeculationview.

172WPA,Vol.XXXVII:49,10December2007,p.7.

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–byproducingcountries, includingOPEC, toactively in�luenceprices.On9 June2008,SaudiArabia took an unprecedented action by calling for an emergency meeting between coreproducersandconsumers,withtheaimtoidentifythecausesofthecurrenthighoilpricesandthethreatthisposestoglobaleconomicgrowth.173TheJeddahEnergyMeetingwasheldonJune22,2008uponthepersonalbackingandinvitationbySaudiArabia’sKingAbdullahIbnAbdulazizAl-Saudandattendedbypoliticalheavyweights,suchasUKPrimeMinisterGordonBrownandChineseDeputyPresidentXiJinpingwith36nationsandthemainIOCsbeingrepresentedattheMeeting.Perhapsforthe�irsttimesincethe1990s,bothproducersandconsumersgenuinelysharedtheopinionthatcurrentoilpricesweretoohighandthatthecurrentvolatilityoftheoilpricehadbecomedetrimentaltobothconsumingandproducingcountries.Thiswasre�lectedintheagreementonaJointStatementbytheKingdomofSaudiArabia,theIEA,OPECandtheIEFSecretariatsattheendofthemeeting.174IssuesagreeduponintheJointStatementmarkinmanywaysamilestoneintheproducer-consumerdialogue.Theyincludedacallfor“immediatecollaboration”betweentheIEA,OPECandtheIEF,thestatedrecognitionoftheimportanceofsparecapacityforthestabilityofglobaloilmarketsandtheneedforappropriateinvestmentintheoilsupplychain.Forthe�irsttime,theideawasraisedtoinitiateannualdatacollectiononinvestmentplansincrudeoilandre�iningcapacity.Finally,energyef�iciencywasembraceduniversallyasdesirablebyallsectorsof the industry.Adiscussionthatsurfaced justpriortotheJeddahmeetingwastheimpactoffossilfuelsubsidiesforend-consumers,whichstimulateddemand,andwaswidelyseenasapotentialsourceofenergysecurityissuesinasituationoflimitedsupplies.Atthetime,subsidiesinChinaandIndia,andalsotheMiddleEast,wereseenasasourceoftherapidincreaseofdemand.

Moreimportantly,duringtheJeddahEnergyMeeting,SaudiArabiasentastrongsignaltothemarketthatitwasdeeplyconcernedaboutsharprisesinoilpricesandtheimpactstheseoilpricemayhave on growth anddemand.Despite the fact that themarketwaswell supplied,theKingdomannounced that itwould bring additional supply to themarket. SaudiArabia’sdeclarationthatitwouldincreaseoutputto9.7mb/d,followedlaterbymarketcon�irmationofthatincrease,playedakeyroleinconvincingthemarkettopriceinamoreelasticsupplycurve.Someofthethrustbehindrisingpriceshadcomefromaperceptionthatkeyproducerswereunwilling,orevenunable,toincreaseproductiontolimitoilpricerises.Thatpositionbecameuntenablewhenakeyproducerannounced,andthendelivered,signi�icantincreasesinoutput.

173Thirty-eightcountrieswereinvitedtoattendtheJeddahMeeting:USA,UK,France,Germany,Italy,Russia,Japan,Brazil,Canada,Mexico,Norway,India,SouthAfrica,Australia,TheNetherlands,Korea,Bahrain,Oman,China,Spain,Kazakhstan,Azerbaijan,UAE,Qatar,Kuwait,Libya,Algeria,Iraq,Venezuela,Angola,Nigeria,Iran,Ecuador,Poland,Egypt,Turkey,Austria,Indonesia.InternationalorganisationsinvitedincludedOPEC,IEA,IMF,EuropeanCommission,InternationalEnergyForum,andtheWordBank.TheOrganizersalsosentseparateinvitationstoalargehostofnationalandinternationaloilcompaniesandre�inerieswhichincludedAramco,ExxonMobil,JapanOilCompany,Shell,BP,Total,ENISpa.,Reliance,Mitsubishi,Petronas,Pedrovas,SK,Sinopec,NIOC,Adnoc,Nippon,Sonatrach,IraqOil,KuwaitPetroleumCompany(KPC),OmanOil,QatarPetroleum,Repsol,StatoilHydro,ConocoPhilips,Chevron,Marathon,Sonangol,Petrobras,PEMEX,CNPC,BABCO.

174JointStatementbytheKingdomofSaudiArabiaandtheSecretariatsoftheInternationalEnergyAgency,theInternationalEnergyForumandtheOrganizationofPetroleumExportingCountries.JeddahEnergyMeeting,22June2008.TheIEF’sSecretaryGeneral,NoévanHulst,calledthisJointStatement“ahistoricaleventinmanyways.”NoévanHulst,inInternationalEnergyForumSecretariatNewsletter,November2008,Issue12,p.7

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SaudiArabia’sannouncementtoincreaseoutputdidnothaveanimmediateeffect,however,andpricescontinuedtorise,reachingapeakofover$143perbarrelonthe11thofJuly.Bythen,concernsaboutthehighoilpricesandtheirimpactontheglobaleconomywerefurtherampli�ied.Thiswasre�lected in the34thG-8Summitheld inToyako, Japanbetween the7thand9thof July,atwhichtheG-8leadersexpressed“strongconcernsaboutthesharprise inoilprices,whichposesriskstotheglobaleconomy”.Theleaderscalledforconcertedefforts“toaddresstheunderlyingcausesforthebene�itofall...recon�irmingthesharedinterestandresponsibility of energy producing and consuming countries in promoting global energysecurity” which requires enhancing further the dialogue and partnership.175 In hindsight,thisshowsthattheeconomicproblemsthatharshlysurfacedinthefallof2008werelargelyundiagnosedininternationalgatherings176,perhapsinthehopethatthesignalsaboutstressesandstrainsintheUSeconomywouldremainadomesticproblem.However,withthedollarasamaintransmittingmechanismandthelargebalance-of-paymentimbalancesintheworld,thesehopeswerenothingmorethanwishfulthinking.Thelinkagebetweenoiland�inancialmarket developments had again presented itself at the core of international economicrelations,whichmaytakeyearstoaddress.

TheFinancialCrisis,theOilPriceCollapseandtheLondonEnergyMeeting

Thecollapseoftheoilpriceinthesecondhalfof2008soonprovedtobemorespectacularthan�irstthoughttobe.Asaresultofsupply-sideresponsesfollowingJeddah,butalsoduetomountingevidencethatOECDdemandhadweakenedmorethaninitialexpectationshadsuggested,oilpricesfellfromapeakofmorethan$143forEuropeBrentSpotpriceon11Julyto$124attheendofthemonth,to$108bymid-August,$105bythestartofSeptemberandto$95on12September–thelasttradingdaybeforetheLehmanbankruptcy.ThedefaultofLehmanBrotherson15September2008markedadrasticreversalindemandexpectationsforglobaloilmarkets,asaconsequenceofincreasingexpectationsofaglobalrecessionandthespreadingoftheUSsubprimecrisisintoglobal�inancialmarkets.OnecouldarguethatthesharpreversalinoilpricesfromJuly2008toDecember2008cameintwodistinctphases(SeeFigure7.1).The�irstwasacoolingoffinpricesfromtheirpeaks,broughtonprimarilybythecombinationofasupply-sideresponsefromthekeymarginalproducerfollowingtheJeddahmeetinginJune2008,andbymountingevidenceintherear-viewmirrorthatOECDdemandhadweakenedfarmorethan initialexpectationsandprovisionaldata �lowshadsuggested.Thesecondphasewasmoredirectlyassociatedwiththeintensi�icationoftheglobal�inancialcrisis and the associated decline in expectations of future global economic growth in theaftermathofLehmanBrothers’collapse.

In mid-September 2008, just as Lehman Brothers was entering into bankruptcy, theWallStreetconsensusofexpectationsforUSgrowthin2009stoodat2.5%.BytheendofOctober,

175G-8HokkaidoToyakoSummitLeadersDeclaration,HokkaidoToyako,8July2008.Availableathttp://www.mofa.go.jp/policy/economy/summit/2008/doc/doc080714__en.html.

176Thiswaslatercon�irmedintheG-20MeetinginWashingtonwheretheleadersadmittedthat“policy-makers,regulatorsandsupervisors,insomeadvancedcountries,didnotadequatelyappreciateandaddresstherisksbuildingupin�inancialmarkets,keeppacewith�inancialinnovation,ortakeintoaccountthesystemicrami�icationsofdomesticregulatoryactions”.DeclarationoftheSummitonFinancialMarketsandtheWorldEconomy,WashingtonDC,November15,2008,Paragraph3.

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consensusexpectationshadshrunktozerogrowth,andbytheendofFebruary2009theyhadfallenfurthertoadeclineof2.5%.Overjust�ivemonths,theforecastforUSeconomicgrowthfellby�ivepercentagepoints.Intermsoftheoilmarketrepercussions,thereweretwoeffectssimultaneouslyatwork in themonths that followed theLehmanbankruptcy.The �irstwastheparallelimpactofsharplyreducedeconomicprospectsontheexpectationforoildemandgrowth.Thesecondwastheimplicationofarushtoliquidityandawayfromriskinmarkets.The truncation of, and re-pricing in, creditmarkets brought about a sudden desire for fargreaterliquiditywithinmost�inancialmarkets.Activityacrossriskiermarketsinparticularwasseverelycurtailed,whileassetholderssoughtsaferinstrumentsforretainingvalue.Thereduction in the amountof gearing available to investors alsobrought about a fairly rapidunwindingofpositions,withanygivencapitalbasenowbeingdeemedcapableofcoveringasubstantiallyloweramountofmarketrisk.Theformerwasenoughtocreatethemomentumforasharpretrenchmentinprices,andthelattercausedtherapidliquidationofpositionsandsharpincreaseinriskaversion,whichinturncreatedtheconditionsforanundershootinoilprices.

The root causes of the �inancial crisis and the actions that governments should take toavoid future crisesbecame themain focusof theG-20meetingheld inWashingtonon the15th ofNovember. TheG-20 leaders emphasised the importance of strengthening �inancialmarketsanddesigningnewregulatoryregimes.Whiletherewasrecognitionthatenhancingsound regulation is �irst and foremost the responsibility of individual countries, given theglobalisationof�inancialmarketstherewasemphasisonintensifyinginternationalcooperationamongregulatorstostrengtheninternationalstandards,toenhancetransparency,topromoteintegrityin�inancialmarketsandtoreforminternational�inancialinstitutions.Asdiscussedbelow, such reform efforts had signi�icant spill-overs on commoditiesmarkets and on thecontentoftheproducer-consumerdialogue.

Againstthisbackground,theLondonEnergyMeetingwasheldonthe19thofDecember2008.Themeetinghadbeenoriginallyplannedasasecond-stepmeetingfollowingJeddahtodeepenthedialogueabouttheheightenedoilprice.Followingthecollapseofoilprices,themeetingassumed a distinctively different character from the Jeddah EnergyMeeting. Nevertheless,the London EnergyMeetingwas an important step in the producer-consumer dialogue. Itreaf�irmedthesupportofkeyconsumingcountriestothedialogueeveninanenvironmentoflowoilprices,whichwasaveryimportantsignalcomparedtothosegiveninearlierperiods.ThemeetingcalledfortheestablishmentofanExpertGroupunderthesupervisionofaHigh-LevelSteeringGrouptomakerecommendationsandproposemeasurestomitigateoilpricevolatility.177 Italsoprovideda forumfortheexchangeofviewsabout thecurrenteconomicclimateandexploredwaystopromoterapideconomicrecoveryatatimewhenexpectationsabout the impact and length of the recession in different parts of theworldwere rapidlydeteriorating. Efforts by the UK Government in gathering a wide support for the LondonEnergyMeetingplayedakeyroleinmaintainingthemomentumbehindthedialogue,attimeswhenmanyconsumingcountriesbegantoloseinterestasaresultofloweroilprices.

No jointStatementwasproducedat theLondonEnergyMeeting,but theChair’s summaryre�lects some insights into the concerns raisedbyparticipants.Thekey long-termconcern

177LondonEnergyMeeting,19December2008,UKChair’sReport.

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became price instability: the sharp swingswhich the oil price had shown in 2008 and itsimpactonlong-terminvestmentweremajorconcernssharedbyproducersandconsumers,andtherewasenoughcommongroundtomaketheLondonmeetingmeaningfuldespitethereoccurringdichotomizationofproducersandconsumersvis-à-vistheloweredoilprice.Theparticipants “reaf�irmed thepriorityof reducingvolatility in theoilmarket” and called forthebetterfunctioningofoilmarketswhichwouldprovide“moreconsistentpricesignalstoenableproducerandconsumercountries tohavegreatercon�idence inmaking investmentandpurchasingdecisions”.

FinancialCrisisandtheContentoftheProducer-ConsumerDialogue

The �inancial crisis and thedebate surrounding it had an immense spill-over effect on thecontentof theproducer-consumerdialogue,bydrawing theattentionofglobaldiscussantstotwomainareas:thelinkagesbetween�inancialmarketsandoilmarketsandtheregulationofcommodityderivatives;andtheimpactofthecrisisoninvestmentintheoilsectorandtheimplicationsforlong-termoilsupplies.

FinancialMarketsandOilPriceBehaviour

Thesharpswings inoilpricesand themarked increase involatilityduring the2008-2009pricecyclepolarizedviewsabouttheunderlyingcausesofoilpricedrivers.Thepolicyandacademicdebatebecamestronglydominatedbythedichotomybetweenfundamentalsversusspeculation,withtheempiricalevidenceprovidinglimitedconcreteevidenceinsupportofoneexplanationortheother.

Theinvolvementof�inancialplayersintheoilmarketisnothingnew.Investmentbankshavebeenoneofthelargesttradersofcrudeoilandpetroleumproductssince1985.However,thesebankshavebecomemoreinvolvedinbridgingthegapsbetweenproducersandamorediversesetof�inancialplayers.These�inancialplayerscanbedividedintothreebroadcategories.First,therearethehedgefunds,whichalsocomeindifferentvarieties.Therearethemacrohedgefundsthattradeinarangeofmarkets,notjustcommoditiesandhaveatop-downapproachandtakeaviewonmacroeconomicissues.Therearethespecialistcommodityhedgefundsthataremorebottom-up,uselargequantitiesofdataandtakeastrongviewoffundamentalsofsupplyanddemand.Therearealso“blackbox”hedgefundsthathaveaviewoftheoilpricebasedoncalculationsknownonlytothem.Second,thereareinstitutionalinvestorsthatprimarilyconsistofpensionfunds,sovereignwealthfundsandinsurancecompanies.Theytypicallyputasmallshareof their funds intocommodities forthesakeofportfoliodiversi�ication.Theytendtosellwhenpricesarehighandbuywhentheyare low,stabilisingthemarket,owingtoprice-weighted limits in theirportfolios.Finally, thereareretail investors,which includeprivateinvestorsandhighnetworthindividuals.Retailinvestmentincommoditymarketshasbeenoneofthefastestgrowingcategoriesviatheeasy-to-accessExchangeTradedProducts(ETPs).

Many reasons have been suggested as towhy these �inancial players have increased theirparticipationincommoditiesmarkets.Thehistoricallylowcorrelationbetweencommodities’returns in general and �inancial assets’ returns, such as stocks or bonds, has increasedthe attractiveness of holding commodities for portfolio diversi�ication purposes for some

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institutional investors, such as pension funds and insurance companies. Expectations thatcommoditieswill have relativelyhigher returns in investment than �inancial assets, due tothe perception of tightenedmarket fundamentals stimulated by China’s quick ascent as acommodity importer and continued disappointing performance of non-OPEC supply, havemotivatedmanyinvestorstoentertheoilmarket.Becausecommodityreturnsarepositivelycorrelated with in�lation, many investors have entered the commodities market to hedgeagainstin�lationriskandaweakdollar.Financialinnovationhasalsoprovidedaneasyandacheapwayforvariousparticipants−bothinstitutionalandretailinvestors−togainexposuretocommodities.

Initially,theinstitutionalplayers’exposuretooilwasthroughcommodityindices.Acommodityindex swap is simplya �inancial instrument that allows for theexchangeof �inancial �lowsbetweenthebuyerandthesellerbasedonthevalueofaspeci�iedindex.Inthecaseofmostswaps,thatindexwillbethepriceorpricestripofasinglecommodity.A‘swapdealer’,usuallyabankorbroker-dealer,offersinvestorsaswapwhosevalueislinkedtothevalueofaspeci�iedcommodityindex.Theseswapsaresold‘overthecounter’(OTC).SwapdealerswhoareshortintheOTCmarketmaychoosetohedgetheirriskinthefuturesmarketbytakinganoffsettingposition;theymay�indanaturalhedgewithintheirexistingoverallbook;ortheymaychoosetoaddthatrisktotheirbook.Thus,indexinvestmentstendtobelongonly,andasigni�icantproportionoftheirtransactionswillultimatelypassthroughthefuturesmarketinsomeform.Greatermaturityinthemarkethasledawayfromrelianceonpassiveindicesandtowardsamoreactive,bespokenandfocusedapproach.Anotherwaytogainexposuretocommoditiesisthroughexchange-tradedproducts(ETPs).ETPsarecomprisedofexchange-tradedfunds(ETFs)andexchange tradednotes (ETNs).Like commodity swaps,ETPsallow investors togain exposure to commodity indices or particular commodities. Unlike commodity swaps,ETPsareconstructedasfundswhosesharecanbetradedonthestockexchangelikeanyothershare,andtheETPsthemselvescanbestructuredasbeinglongorshort.Commodity-basedETPshavegrownrapidlyinrecentyears,astheyseemtoofferasimpleandacheapwayforinvestorstogainexposuretocommodities.

Despite ful�illing thekeyrolesof liquidityprovision, thewidespreadentryofnew�inancialplayers, their trading strategies and the leverage supporting such strategies, and the large�lowsoffundsinandoutofthepaperoilmarkethaveraisedseriousconcernsabouttheimpactof�inanciallayersontheoilpriceformationprocess.Someobserversholdtheviewthatthenewplayerstradeonnoiseandsentimentratherthanonfundamentals,withadverseeffectson the functioning of oilmarkets. Others argue that �inancial investors have the tendencytoherd,astheseinvestorstendtofollowtheapparenttradingstrategiesofotherinvestors.Herding undermines the role of price discovery, may induce higher volatility and, undercertaincircumstances,canleadtosharppriceswings.Somearguethatcrudeoilhasacquiredthecharacteristicsof�inancialassetssuchasstocksorbonds.Manyempiricalpapersexaminewhether the price behaviour of commodities mimics that of �inancial assets and whethercommodity and equity prices have become increasingly correlated. One important aspectof the ‘�inancialisation’oftenhighlighted is the increasingrolethatexpectationsplay inthepricingofcrudeoil.Inthecaseofequities,pricingisbasedonexpectationsofa�irm’sfutureearnings.Intheoilmarket,expectationsoffuturemarketfundamentalshaveincreasinglybeenplayinganimportantroleinoilpricing.Ifthereislargeuncertaintyastowhatthelong-termoilmarketfundamentalsare,orifperceptionsofthesefundamentalsarehighlyexaggerated

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andin�lated,thentheoilpriceinthefuturesmarketcandivergeawayfromitstrueunderlyingfundamentalvalue,causinganoilpricebubble.

Empiricalstudiesontheimpactof�inancialplayersonoilpriceshavebeenthin.Duetodatalimitations,thediversityofplayersinthemarket,andthedif�icultyofidentifyingthemotivebehindtradingdecisions, theempirical literaturehasstruggledtooffermuchinthewayof�irmconclusions.Consequently,atpresentthereisabroaddiversityofviewsabouttheroleof�inancialmarketsinpriceformation.Nevertheless,the2008oilpricecyclehasbroughttheissuesof‘excessive’speculationandtheregulationofcommodityderivativesmarketstothefore. In theThirdAsianMinisterialEnergyRoundtablemeeting inTokyo inApril2009, theChair’ssummarynoted:

Participants recognised that excessive �luctuations in oil prices are undesirable forboth energy producers and consumers, and that �inancial markets have an impacton oil price formation. Participants were made aware of the discussions under theG-20 on strengthening �inancial supervision and regulation. Regarding transparencyof commodity markets and supervision on over-the-counter markets, participantsappreciatednationalauthorities’effortsandcalledforfurtherharmonisedactionssuchastheintroductionofpositionlimits.178

DuringtheSixthEU-OPECEnergyDialogueinViennainJune2009,theforumwarnedthat“thespeculation issuehadnotbeenresolvedyetand that the2008bubblecouldberepeated ifadequateregulatoryreforms,includinggreatertransparency,werenotmadetobepartofanoverallreshapingoftheglobal�inancialsector”.The12thIEFDeclarationinCancunin2010,however,wasmorecautious,statingthat“givenconcernsaboutthelackofconclusivedata,theIEFshouldnotadvocateanyparticularformofregulation”.Instead,Ministersrecognisedthepotentialimpactofregulatingderivativesmarketonthefunctioningoftheoilmarketandhencerecommended:

Whereauthoritiesareconsideringadditionalregulationandtohelpcreateef�icientandeffectivemarketconditions,itisproposedfortheconsiderationoftherelevantauthoritiesthatanyregulationshould(i)promotemarkettransparency;(ii)retainnecessarymarketliquidity;and(iii)beimplementedinapracticalfashion,avoidingadisorderlyunwindingofpositionsaffectedbyanynewregulation.

TheCancunMinisterialDeclarationwasalsoclearabouttheIEF’sroleinanyfutureregulatoryeffortsstatingthatwhilethe“Secretariatshouldcatalogueregulatoryeffortsinmajorenergyderivatives markets179, it should play no regulatory role, “leaving direct market oversightresponsibilitytostates”.

178Chair’sSummary,TheThirdAsianMinisterialEnergyRoundtable,Tokyo,JapanApril26,2009.179Tothisendandinordertopromotegreatercoordinationamongregulators,theIEF,incooperationwiththeIEAandOPEC,organisedaroundtableforregulatorsinNovember2010.Theroundtablediscussedregulatoryproposalsfromallovertheworldandexaminedtheirpotentialimpactsontheoilmarket.

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TheInvestmentIssue

Astheglobal�inancialcrisispersisted,attentionwasdivertedtothelong-termdynamicsofoilsupplyandtheimpactofthe�inancialcrisisoninvestmentintheoilindustry.Thepowerfulshocksonglobaloildemandandexpectationsofitsgrowthwerecounteractedbyapowerfulsupply response from OPEC and expectations of further weaknesses in non-OPEC supply.Long-term uncertainty about demand and oil prices affects the incentive to invest in newproductivecapacity,whilelowoilpricescanlowerexplorationanddevelopmentactivityandrendersomeoftheexistingprojectsunviable.Furthermore,thehighcostoffundingandtheloweravailabilityofcreditcanpreventsomeoilcompaniesfromundertakingnewinvestmentsorevencompletingexistingones.Asonemarketobserverputsitatthattime:

Withthebackdropofahailofrecentannouncementsoncapitalexpenditurereductionsfor both conventional and non-conventional oil, together with the continuing moveaway from investment inalternativeenergy,webelieve that thesharp fall in industrycon�idenceislikelytohaveamorelastingeffectonthehealthofthesupplyside.Indeed,forthatnottorepresentasevereproblemoverthecourseofthefollowingdecade,theweaknessinglobaloildemandwouldhavetobecomefairlyprolonged.Ittendstobeafarlongerprocesstoreinstateprojectsthanitistomothballorcancelthem,andthescaleofthecurrentindustryfreezeandcon�idencelossseemslikelytoseverelyaffectnon-OPECproduction.Further,givenhowmuchofexpenditureinmatureareasisdirectedattryingtocontaindeclinerates,wesuspectthatthosedeclineratesmightnowbesetforanotherstepup.180

Highuncertainty about prospects of long-termdemandhas also affected investment plansinOPECcountries. In its2009WorldOilOutlook,OPECannounced that itsmembershavedelayedorevenpostponedover35projectsuntil after2013,with total crudeoil andNGLcapacity hovering around5mb/d. The report claimed that "the surge in investment plansin OPEC Member Countries that were aimed at addressing perceived market tightness,particularly in2007and the �irsthalfof2008,would inactualityhave turnedout, at leastpartially,tobeforunneededcapacity.Allofthisunderscoresagainthegenuineconcernsoversecurityofdemand".Intermsof investments,OPECmembershaveplannedtoreducetheirupstreaminvestmentrequirementforthemediumtermovertheperiod2009-2013from$165billiontoaround$110-120billion.

Thus, while the investment issue has always dominated the producer-consumer dialogue,itwaselevatedduringthe �inancialcrisiswithconcernsthat lackof investmentdueto lowoil prices, uncertainty and credit constraint could create the grounds for tight oil marketconditionsandhigherpricesonceoildemandstartstorecover.

TheYears2009-2010:RecoveryandStabilisation

Oilpricebehaviourin2009canbedividedintotwodistinctphases.The�irstistherecoveryphasewhichsawBrentspotpricerisefromaverylowbaseof$33.73on26December2008to almost $78 on 31 December 2009, an increase ofmore than 160%. The second is the

180Barclays’Capital,OilMarketWeekly,January2009.

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stabilisationphase,which saw theoil price oscillatewithin a relativelynarrowpricebandbetween$60and$70betweenthemonthsofJulyandSeptemberandthenbetween$70and$90intherestof2009andmostof2010(SeeFigure7.1).

Thenegativedynamicsunleashedby the �inancial crisis causedoilprices toundershoot inDecember2008.Asinassetmarkets,oilpriceswereboundtorecovertosomeextent,asmanyinvestorsrealisedthatthefall inoilpriceshadgonetoofarbytheendof2008. JustasthemovetowardpricelowshadbeenaccompaniedbyarapidreductioninbothGDPgrowthandoildemandexpectations,therecoveryinpricesaccompaniedaperiodofimprovinggrowthexpectationsandaparticularlymarkedreboundinoildemandexpectationsfollowinga�lowofstrongerthanexpectedglobaldemanddata.Inlinewiththestabilisationofexpectationsabouttheglobaleconomyandoildemand,therewerealsoconcernsat theheightof the�inancialcrisisthatcreditconstraints,thehighdegreeofuncertaintyandthelowpriceenvironmentwouldlimitinvestment�lowsintotheoilsector,withnegativeconsequencesonfuturenon-OPECandOPECsupplygrowth.Therewas(andstillis)astrongsentimentthattheoilindustrycannolongerfunctioninarelativelylowpriceenvironment.

Thus, toavertanoil crisis in themediumterm,pricesneededtobeadjustedupward fromtheirlowsinDecember2008.Concernsaboutlong-termfundamentalsplacedalimitonhowmuchmarketplayerswerewillingtodiscountthepriceatthefrontendrelativetothepriceatthebackendofthefuturescurve.Ontheonehand,theoilpricewasrelativelyhighgivencurrentmarketfundamentals.Ontheotherhand,theoilpricewasrelativelylowcomparedtoperceivedlong-termfundamentals(seeFigure7.2).Thus,theoilmarketreachedapointatwhicheitherthelonger-termfuturepricehadtoadjustdownwardorthefrontendthefuturescurvehadtoadjustupwards.Intherecoveryphase,itwasthefrontpartofthecurvethatmovedup.Thisimpliesthatinthe�irstmonthsof2009marketexpectationsoffuturefundamentalsbecamethedominantfactorinthepriceformationprocess.Whileoilmarketfundamentals(asindicatedbythedemandsupplybalance)remainedweakin2009,participantsattachedlittleweighttothesebearishsignalsandoilpricescontinuedtorise.

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Figure7.2:WTITermPriceStructure(December2008,MonthlyAverage)

Oncetheprocessofpricerecoverywascomplete,themarketenteredthestabilisationphase.Inthelastfewmonthsof2009andformostof 2010,oilpricesoscillatedwithintherangeof $60-$80, though theupper endof the rangehasbeenbrokena few times. In effect, theoil market operated within an implicit band. This is remarkable given the highly volatileexpectationsabouttheprospectsoftheglobaleconomyandthelargeuncertaintyaboutoilmarketfundamentalsatthetime.

The2008-2009OilPriceCycleandtheProducer-ConsumerDialogue

The 2008-2009 oil price cycle proved to be an important turning point in the producer-consumer dialogue. Extraordinary price instability and heightened levels of uncertaintypushedbothproducersandconsumerstointensifytheircooperationandexplorewaystofacethesecommonchallenges.Theyear2008witnessedtwoextraordinarymeetings(theJeddahEnergyMeetingand theLondonEnergyMeeting)of theproducersandconsumersoutsideformal schedules. Provocative remarks from both producing and consuming states whichoftenexacerbatedmarketvolatilitywerereplacedbyprovocativeannouncementsfromlargerproducingandconsumingcountries.

Duetotheseverityofthepricecycle,therewasarealisationamongconsumersandproducersthatnoonewasservedbyoilpricesthatwereeithertoolow(theoilpriceinDecember2008)ortoohigh(theoilpriceinJuly2008).Ontheonehand,lowoilpricesconstrainthe�lowofinvestmentrequiredbytheindustrytoensurestableoilsupplies.Ontheotherhand,highandvolatileoilpricescandamageprospectsforglobalgrowth,canresultinoildemanddestructionandcreateworldwideimbalanceswithdestabilisingconsequences.Thesesignalsoriginatedfrombothconsumingandproducingcountries.TheFrenchPresidentNicolasSarkozyandthe

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thenUKPrimeMinisterGordonBrownurged “oil producers to agree a targetprice range,basedonaclearerunderstandingofthelong-termfundamentals...thatarenotsohighastodestroytheprospectsofeconomicgrowthbutnotsolowastoleadtoaslumpininvestment,ashappenedinthe1990s”.181Similarsignalshavealsoemergedfromkeyoilexporters.Inarareprecedent,KingAbdullahofSaudiArabiasaidinanewspaperinterviewthatheconsiders$75tobea‘fair’priceforabarrelofcrudeoil.HereiteratedhispositioninDecember2009arguingthat"we[theSaudis]expectedatthestartoftheyearoilpricesbetween$75and$80abarrelandthisisafairprice...Oilpricesareheadingtowardsstability”.182TheSaudiOilMinister,AliAl-Naimi, justi�ied the target price as the “price thatmarginal producersneed tomaintaininvestments suf�icient to provide adequate supplies for future oil consumption needs”.183IntheOPECmeeting inSeptember2009,MrAl-Naimiannouncedthatthecurrentprice“isgoodforeverybody,consumersandproducers”.HereiteratedhispositioninDecember2009,arguingthat"themarketisstablerightnow,volatilityisatminimum,everybodyishappywiththeprice,itisintherightrange”.184

WhilethemarketexpectedpricestoadjustfromtheverylowlevelsreachedinDecember2008,therewasuncertaintyastothepriceorpricerangethatwouldstabilisemarketexpectations.Thereisawiderangeofpricesatwhichthemarketcanclear.Theissuethenis:howdoesthemarketconvergetoonepricerangeandnotanother?Inanenvironmentofhighuncertainty,publicinformationorsignalsmaytakealeadingroleinmovingthemarket,evenifthesepublicsignalsdonotnecessarilyre�lect largechangesinunderlyingfundamentalsorprovidenewinformationtothemarket.Ithaslongbeenrecognisedthatwhenindividualsareconfrontedwithlargeuncertainty,focalpointsmayinsomeinstancesplayanimportantroleinprovidingapointofconvergenceforindividualexpectations.185Somefocalpointsmaybeapriorimorereasonableormoreprominentandnoticeable thanothers. It remainsunclearwhether thevarious signals from consumers and producers stabilised expectations and were in partresponsible for the oil price oscillatingwithin a relatively narrow implicit band. However,there is littledoubt that thesignalshavemuchstrongereffectsonmarketsentimentwhengovernmentsofdifferentcountriesagreeandcommunicate theirviewsto themarket.Thiscreatesafurtherrolefortheproducer-consumerdialogue.TheCancunMinisterialDeclarationcapitalisedonthedynamicsoftheconvergenceofviewsbetweenconsumersandproducersaboutapreferredoilpricerange,withtheIEFshowingmorewillingnesstointeractwiththemarketandrepositioningitselfintheglobalmap,stating:

The unique composition of the IEF (covering both producer and consumer countriesincluding major producers outside OPEC and major consumers outside IEA) and itsneutralstatuspositiontheIEFSecretariatforanenhancedroleinprovidingimprovedandexpandedrelevantmarketdataandcompiling/pullingtogetherrelevantanalyticalreportswithrespecttoboththephysicalandpaperoilmarket.Thiswiththeobjective

181GordonBrownandNicolasSarkozy.“WeMustAddressOil-MarketVolatility”.TheWallStreetJournal,8July2009.

182Reuters(2009).“OilPriceMightRise‘Reasonably’–SaudiKinginPaper”.26December.183Reuters(2008).“LowOilPricesMeanLessFutureSupply–Saudi”.19December.184Daya,AyeshaandMaherChmaytelli(2009).“SaudiArabia’sAl-NaimiSaysOilPriceIsPerfect”,Bloomberg,December5.

185Schelling,T.(1963).TheStrategyofCon�lict.OxfordUniversityPress,NewYork.

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to achieve amore constructive and focused producer-consumer dialogue, based on agreaterdegreeoftrustandopenness,thatcouldpromotecon�idence-buildingmeasuresamongproducersandconsumersandsendstrongmarketsignalstohelpstabiliselong-termexpectations.

Oneofthemajorfeaturesthatcharacterisedtheoilmarketduringthe1980sandthe1990swas the stability of expectations about the long-term oil price. The stability in long-termexpectations establishes a relationship between the spot oil price and expected change inprices.Asustainedincreaseordecreaseintheoilprice(afeatureofpriceswings)cannotbemaintained,asexpectationsofsupplyanddemandresponseswouldputa�loorandaceilingon the price, and thus prices oscillated within a narrow band. In the Cancun MinisterialDeclarationinMexicoinMarch2010,producersandconsumersnotedforthe�irsttimetheimportanceofstabilisingexpectations,recommendingthattheIEFshould:

disseminatekeyinformationrelatedtomarginalcost,investmentlevels,andalternativeenergysourcesthatcouldhelpstabiliseshortandlong-termexpectations.

AnotherinnovationintheCancunMinisterialDeclarationistheindicationofthewillingnessof consumersandproducers tocommunicatewith themarket, recommending that the IEFshould:

actastheforumthroughwhichabettermutualunderstandingofviewsiscommunicatedtothemarket.

Conclusion

TheIEF’semphasisonexpectationsandtherolethatsignalsfromproducersandconsumerscan play in stabilising expectations − and hence, prices − can be considered to be abreakthrough in theproducer-consumerdialogue. Itwas the �irst time thatproducers andconsumersshowedawillingnesstointeractandtosendsignalstomarketparticipantswiththeaimofstabilisingexpectations.Inthisrespect,theJeddahEnergyMeetingprovedtobeagamechanger.Ifanticipatedfeedbacksareslow,orareperceivedtobeabsentoneitherthedemandorsupplyside,themarket is likelytodriftupwarduntil thesefeedbackskick in. Ifmarketperceptionsarewrongabouttheextentandthetimingoffeedbacks(forinstance,ifthemarketbelievesthattherearenofeasibleinstrumentswhileinfacttheseexist),thenthedialoguecanplayaroleinpreventingsharppricemovementsbyincreasingthevisibilityofthesefeedbacksandpolicyresponses.TheLondonEnergyMeetingwasalsoimportantasitreaf�irmedthesupportofkeyconsumingcountriestothedialogueinanenvironmentoflowoil prices. Itwould be interesting tomonitor how the producer-consumer dialoguewouldrespond to the next oil price cycle, whichmany analysts predict that has already started.Theeventsof2008,thefurtherinstitutionalisationoftheIEF,andcreationofanewcharterindicatethattheproducer-consumerdialoguewillonlyintensify,especiallyasoilpricesreachcritical thresholds that are considered to be harmful for both consumers’ and producers’interests.However,itremainstobeseenwhethercoremembersfrombothsideswillshowthewillingnessandhavethecapabilitytotakeconcretemeasuresandsendcrediblesignalsthatcouldin�luenceandstabilisemarketparticipants’expectations.Thesuccessorfailureindoingsowillplayanimportantroleinshapingproducer-consumerrelations.

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In its relativelyshorthistory, theproducer-consumerdialoguecanalready lookbackatmanyimportantachievements.Manyof theseachievementshave comeabout in thepast tenyears.Yetwithout the con�idencebuildingof the early years, noneof the achievementswouldhavehappened. The dialogue has been nurtured by various countries and has survived becausenoonepartyhasorhasbeenallowedtoclaimthedialogueasitsownorbecomeavehicleforspecialinterests.Everycountrythatatonetimeoranotherhasnurturedthedialoguecanstillbeconsideredacorecountrytoday,willingtonudgethedialoguealongifneeded.In2008SaudiArabia’sKingAbdullahIbnAbdulazizAl-Saudcalledonthesecorecountriestosignalthemarketaboutthesupplyanddemandrealities,whiletheyalsoprovidedmuchneededstabilityduringtheaftermathofthe�inancialmarketcrisislaterthatyear.

In the future,newcountrieswillneed tocomealong toextend thedialogue further.With thedialoguenowenteringitsthirddecade,theemphasisonthetraditionalproducingandconsumingcountriesischangingtoincludenewconsumersandproducers,bringingnewdimensionsandchallengestothedialogue.

Twentyyearsafterthe�irstmeetinginParis,theIEFhasevolvedintooneofthemostinclusiveplatformsfordialogueinwhichconsumersandproducersmeetonaregularbasistodiscussissuesofcommoninterestpertainingtotheglobalenergyscene.Atpresent,theIEFmembercountriesaccountformorethan90%ofglobaloilandgasconsumptionandproduction.Suchabroadanddiversebaseofconstituents,however,doesnotinitselfguaranteeasuccessfulandconstructivedialogue. After all, thesemember countries have very diverse interestswhich are often verydif�iculttoreconcile.Anecessaryconditionforasuccessfuldialogueisthatdespitetheirdiverseinterests,thereisrecognitionamongmembercountriesofsharedaimsandanawarenessofthecommonchallengesfacingproducersandconsumers.

Perhapsthemainachievementofthedialogueofthepasttwentyyearsisitssuccessinincreasingtheawarenessofthehighdegreeofenergyinterdependencebetweenconsumingandproducingcountries,whichmostlikelywillincreaseintheforeseeablefuture.Ratherthantreatingitasasourceoftensionandcon�lict,theIEFhasbeencallinguponbothconsumersandproducersovertheyearstoembraceinterdependence“foritspotentialasacohesiveforceunderpinninghealthygrowthoftheworldeconomy,fairenergytrade,andinternationalcooperation”.186Suchstatementsareafarcryfromthetenserelationsbetweenoilproducersandconsumersthatprevailedinthe1970sand1980sandre�lecthowmuchhaschangedforthebetterintherelationship.

186ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico,11thInternationalEnergyForum,Rome,20-22April2008.

Chapter8:TheRoadAheadfortheProducer-ConsumerDialogue

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Toalargeextent,thedialoguehasalsosucceededinbringingcloserthetwomainconsumerandproducerorganisations:OPECandtheIEA.ThefollowingexcerptfromarecentinterviewwithDrAlirioAParra,aformerEnergyandMinesMinisterofVenezuelabetween1992and1994,shedssomelightontheextenttowhichtheseenergyrelationshavechanged:

Intheearlydays,whentheIEAwassetup,itwasprobablywiththeintentoftryingtodestroyOPEC.ThesetwoOrganizationssimplydidnottalk.TheheadsofOPECandtheIEAwouldnotevenbeseen ineachother’scompany.Youcouldnotget theExecutiveDirectoroftheIEAtocometoVienna.Infact,the�irsttimehecame,hearrivedsecretlyandhadlunchwiththethenSecretaryGeneral,privatelyinaVienneserestaurant.Today,thingsaretotallydifferent.YouseetheOPECSecretaryGeneralandtheIEAExecutiveDirectoratseminars,onpanels, theymeet together, theyareondifferentcommittees.Theymayhavetheirownpointsofview,buttheytalk,theydiscuss,andtheycooperatewhencooperationisnecessary.Theydifferwhendifferencesareimportant,butthingshavechangeddramatically.187

Another visible and concrete example of success in the producer-consumer dialogue istheestablishmentof the JointOilData Initiative(JODI).188TheSecretariathasconsistentlypromotedJODIasrepresenting“thesinglemostimportantcollaborativeefforttoaddresstheissueofmarketdatatransparency”.Thepromotionofgreatertransparencyinenergymarketshasbeenarecurringkeymessageinmostinternationalgatheringsandisconsideredcrucialtoachievingsecurityofbothsupplyanddemand.TherearestillcriticalproblemsthathavechallengedtheachievementofJODI’sobjectivesofprovidingtimelyandreliabledataonallIEFmemberstates.YetJODIremainsthesinglemostcomprehensiveattempttocollectdataofsuchmagnitude.AnotherimportantachievementofJODIisthat ithasraisedawarenessof thetechnicaldif�iculties involvedin improvingthequalityandreliabilityofenergydataand its timeliness.Thishas induced theSecretariatand itspartners toplayamoreactiverole in improvingdatacollectionmethods indifferentcountries throughprovidingadvice,organisingworkshopsandconductingtrainingsessions.

TheIEFhasalsoachievedacertaindegreeofinstitutionalisation,whichhashelpedtogivethe dialoguemore structure. This institutionalisation, however, has not induced any shifttowardscreatingaglobalenergyorganisationwithbindingglobalenergygovernance,norhasitaffectedtheinformalityofthedialogue.Thetwenty-yearhistoryoftheIEFshowsveryclearlythatthepartiesconcernedarestronglyattachedtotheideaoftheinformalityofthedialogue.This is expected, as energy issues involvequite complexpolitical, economic andsocialdimensionswhicharedif�iculttoreconcile.ChangingtheIEFintoaforumwithpowerstomakebindingdecisionswoulddampentheinterestofbothproducersandconsumersandcouldlimitthescopeforanopenandfrankdialogue.

In the early years, the agenda for theMinisterialmeetingswas set in an ad-hocmannerwithoutmuchthoughtgoingintode�iningtheissuesfordiscussionoranalysissupportingthe

187OPECBulletin,September2010,p.50.188IEFSecretariat,ProgrammeofWorkandBudgetfor2005,February2005,p.11,andre�lectedinvariousIEFpublications.In2004,IEFSecretaryGeneralArneWaltherdescribedJODIasafuture“�lagshipforouractivityofpromotingproducer-consumerdialogue.”WPA,25October2004,p.5.

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dialogue.Sincethe2000s,theproducer-consumerdialoguehasbecomemoreorganised,inlargepartduetotheeffortsoftheSecretariat.Nevertheless,theagendaremainsverybroad;thedialoguehascoveredalargenumberoftopicsovertheyears,asseeninpreviouschapters.Suchabroadagendahashadtheeffectofdilutingthedebateattimes.Thereisalsoafeelingthattheagendaisoftendrivenbythevolatilemarketeventswithnosenseofcontinuity.Aconstructivedialogueshouldbesupportedbyrelevantandaccuratedata,statisticsandotherqualitative information. It shouldalsobe informedby independent, in-depthandrigoroustheoreticalandempiricalanalysesandstudies.ThiswouldrequiretheIEFtocollectresearchinkeyareasthatimpacttheoilandotherenergymarkets,inadditiontotheexpertpapersthatithasalwayshadpreparedforMinisterialmeetings.Inthisfunctionitcanrelyontheresearch strengths of existing institutions so as to avoid any duplication of effort.Whileproducingandconsuminggovernmentsmaydecidenottosubscribetotherecommendationscomingoutfromthevariousresearchprojects,theseanalyticalstudiesremainessential,astheyinformandenhancetheproductivityofthedialogue.

AlthoughthebiennialMinisterialmeetingsareattheapexoftheproducer-consumerdialogue,cooperationshouldnotbereducedtothishigh-levelevent.Thedialogueshouldbeperceivedasanongoingprocess189incorporatingawiderangeofactorsandmanifestedinanumberofactivities,themostofimportantofwhichare:theprovisionoftimelydataandinformation;providingtechnicalassistancefortheimprovementofdatacollectionmethods;conductingin depth and analytical studies; and engaging actively withmarket players, internationalorganisationsandresearchcentres.

Thepasttwentyyearshaveshownthattheintensityandbreadthofthedialoguehavebeendrivenlargelybykeymarketevents.Oftheseevents,oilpriceinstabilityhasbeenthemainimpetusbehindtheintensi�icationofdialogueinrecentyears.Itisinterestingtonote,though,thatwhiletheparties’mainconcernsareaboutthelevelandvolatilityoftheoilprice,neitherconsumersnorproducershaveaninterestinmanagingthepricelevel.Thereisanimplicitagreementthatthedeterminationoftheoilpriceshouldbelefttomarketforces.ThisdoesnotimplythatpricesarenotdiscussedinMinisterialmeetings.Buttheclosingstatementsare very general. They often call to “reduce price volatility in the interests of producersand consumers” because volatility “complicates the interpretation of market signals andmay adversely affect investment”. Other statements call on “both producer and consumercountries...to take action to reach sustainable price levels”without describingwhat theseactionsmightbe.Similarly, inthe2004-2008pricecycle,concludingstatementsexpressedconcerns about the level of oil prices, noting that “oil prices should be at levels that areacceptable toproducersandconsumers toensureglobaleconomicgrowth,particularly indevelopingcountries”withoutanyindicationofwhattheselevelsshouldbe.

Historically, producers and consumers have had very divergent interests: producers tendto favour higher prices while consumers favour lower prices, depending on the stage inthe oil price cycle atwhich importers and exporters �ind themselves. Recently, there hasbeenarealisationthattoo lowortoohighoilpricesservenoneofthegroups.Ontheone

189Asnotedbyoneinterviewee,onelimitationoftheproducer-consumerdialogueisthatitgainsintensityandmomentumandistakenseriouslybyministersduringcrisistimes.However,innormaltimes,thedialogueisnotgiventhesameattention.

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hand,lowoilpriceswillconstrainthe�lowofinvestmentrequiredbytheindustrytoensurestableoilsupplies.Ontheotherhand,highandvolatileoilpricescandamageprospectsofglobalgrowthandcreateworldwideimbalanceswithdestabilisingconsequences.Themereconvergenceofinterestsandviews,however, isnotenoughtostabiliseexpectationsinthelong term or to ensure a relatively stable behaviour of oil prices. Thus, if one of the keyobjectivesofthedialogueistopreventoilpriceinstabilityandtomitigatethecostsassociatedwithsuchinstability,thenthequestionconfrontingconsumersandproducersis:Whatcouldthedialogueachieveintheeventofpriceshocks?

In theeventof anoilprice collapse, the response fromproducers ispredictable.ThroughtheauspicesofOPEC,producerswouldimplementoutputcutstopreventpricesfromfallingbelow a given �loor deemed unacceptable for producers. If OPEC is able to generate theexpectationsofsucharesponse,thenitmightnotevenneedtoimplementthecut.However,themarketmaywishtoseewhetherappropriatecutscouldbeimplementedinpractice-inwhichcaseitcouldtakesometimebeforeOPECsucceedsinreversingthepricedecline.Whileproducers’actionsarepredictableinafallingmarket,thesamecannotbesaidforconsumers.In theory, theremightbesomeoptionsavailable for importinggovernments.For instance,non-OPECsupplierscouldsupportOPECpolicybyannouncingoutputcuts,ashappenedin1998,inwhichcasethemostrelevantdialoguewouldbebetweenproducersfrombothsides.Leaders inconsumingcountriescouldsendclearsignals that lowoilpricesaredamaging,providepublicsupportforOPECcutsandsupportthecooperationbetweenOPECandnon-OPEC countries. Alternatively, importing countries could show a willingness to supportthepricebycreatingarti�icialdemand– for instancethroughbuildinguptheirstocksandstrategicpetroleumreservesintimesofslackmarkets.Itisclearthattheseandothersimilaroptionsrequirefar-reachingchangesinpolicywhich,sofar,noconsuminggovernmentseemswillingorevencapableofimplementing.

Intheeventofasharpriseinoilprices,onepotentialresponsewouldbeforOPECtoincreaseproductionandmanagethepriceceiling.However,theresponsefromOPECinarisingmarketisnotstraightforward.ThekeyfunctionofOPECisnottoimposeaceilingonoilpricesbuttoensurethatthemarketiswellsupplied–i.e.,thatsupplydisruptionsareavoided.Unlikeacentralbankthatcanincreaseinterestratestobringin�lationdown,OPECdoesnothaveamechanism or an agreed set of tools to lower oil prices. Moreover, OPEC is concernedthat increasingproductionwithoutanycoordinationwith consuminggovernmentson theissueofstockreleasecouldresultinanuncontrollabledeclineinprices.Theeventsof1991showedtheimportanceoftheimplicitcoordinationbetweenOPECandtheIEAonthereleaseof stocks.Due to geological andpolicy constraints, the short-termresponseof consumingcountriesisrathermutedintightmarketconditions.Onthesupplyside,somegovernmentsmightencouragetheexplorationanddevelopmentoftheiroilreserves,butinthepastsuchapolicyprovedtobeineffectiveinproducingfastenoughfeedbackonthesupplyside,giventhelimitedsizeofreservesandthetimelagsinvolvedinbringingproductiontothemarket.Onthedemandside,theimpactofhighpricesremainsmuted,giventhatoildemandintheshortrunishighlyinelastic.Ofcourse,highoilpriceswouldeventuallyhavetheirimpactondemand,butthefeedbackisperceivedtobetooslowandgradual.Policyannouncementoftheintroductionofef�iciencymeasurescanhaveonlyalong-termimpactbutareunlikelytoplayanimportantroleinin�luencingmarketplayers’short-termexpectations.

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Theabovediscussionrevealstwofeaturesthathaveshapedthecontentof thedialoguetodate.First,anypolicytocounteroilpriceshockswouldnotbecredibleifmanagedbypartieswithverydivergentinterests.Inarisingmarket,producersloseinterestinpolicingtheupperboundary and, when prices fall, consumers lose interest in policing the lower boundary.The producer-consumer dialogue has not matured enough to deal with such complexissuesortosuggestpotentialwaystomanageoilpriceinstability. Second,thereisaclearpowerasymmetryintheshortterm.Whileproducershaveoptionsinbothfallingandrisingmarkets,consumersaremuchmoreconstrainedintheirpoliciesintheshortterm.Inthelongterm,however,thebalanceofpowertendstoshiftinfavourconsumerswhocanpursueoilsubstitutionpolicies,implementef�iciencymeasures,raisetaxesonpetroleumproducts,andencouragethedevelopmentofalternativesenergysourceswhichhavetheeffectofreducinglong-termoil demand and the share of oil in the energymix. Thus, an important role fortheproducer-consumerdialogueistobridgethegapbetweenthelongtermandshortterminterestsofconsumersandproducers inorder tocreateamorepredictableandstableoilmarket.

Doesthefailuretobargainaboutpricelevelsortomanagethepricelevelwithinboundsmeanthat the producer-consumerdialoguehas failed?The answer is no. Since both sides agreethattheoilpriceshouldbesetbymarketforces,theproducer-consumerdialoguehasaimedat improvingthefunctioningof themarket.Recenteventsreveal thatbothsideshavebeenadvocatingpoliciesthatenhancetheprice-determiningroleoftheoilmarket.Oneofthemajorconcernshasbeenthein�luenceof�inancialmarketsonthelevelandvolatilityoftheoilpriceand, inrelationtothis,whetherthe large-scaleentryof �inancialplayershashadtheeffectofshiftingthepriceawayfromunderlyingmarketfundamentals.Effortsarecurrentlybeingmadetounderstandthelinksbetweenthe�inancialandphysicallayersoftheoilmarketandwhetherregulationisneededtoimprovemarkettransparency.

TheIEFhasalsobeenshowingawillingnesstoengagewiththeissueofstabilisingshort-andlong-term expectations through bettermutual understanding of oilmarket conditions andcommunicatingtothemarket.Sincethepricecanoscillatewithinawidebandduetomarketstructure,suchcommunicationsorsignalscanplayanimportantroleinin�luencingoilpricebehaviour.Theconvergenceofviewsofkeyplayersaboutapreferredoilpricerangein2009hashelpedstabilisemarketexpectationsintheoilmarket.Thiscurrentconvergence,however,is unlikely tobe sustained if not supportedby coordinatedeffortsbetweenproducers andconsumers.TheIEFhasthereforebeencallingforbetterinformationdisseminationaboutkeyvariablessuchascosts,investment�lowsandthedemand-supplybalancesoastoavoidthedevelopmentofalargedivergenceofopinionbetweenconsumersandproducers.Whenkeyplayershavedifferentbeliefsregardingoilmarketfundamentalsduetolimitedandimperfectinformationaboutmarketfundamentalsanduncertaintyaboutthebehaviouroftheseplayersindifferentmarketcircumstances,itisnotpossibletosustainconvergenceofviews.

Inthepast,supplydisruptionsprovedtobedecisivefortheproducer-consumerdialogue,astheyincreasedtheawarenessofcommoninterestsamongpartiesandrevealedtheusefulnessofcoordinatingactionsinkeyareassuchastheuseofstocksandsparecapacity.Duringthe1990s,disruptionsdidnotfeatureprominentlyinthedialogue.TheavailabilityoflargesparecapacityandthewillingnessofOPECto�illthegapinthecaseofphysicaldisruptionsmeantthat concernsaboutdisruptions received littlepriority in thepolicyagendasof consuming

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countries. The rapid rise in demand in the mid-2000s and the various supply shocks inproducingcountriessuchasIraq,Venezuela,andNigeriabroughtbacktotheforetheissueofsparecapacityanditsroleindampeningpricevolatility.Despiteitsriseinimportanceonthepolicyagenda,producersandconsumersshiedawayfromtheissueforalongtime.ItwasnotuntiltheJeddahmeetingin2008thatspeci�iccallsweremadefortheexpansionofsparecapacity:

The existence of spare capacity throughout the oil supply chain is important for thestability of the global oil market. Hence an appropriate increase in investment, bothupstreamanddownstream, isnecessary toensure that themarkets are supplied inatimely and adequate manner. Predictable energy and investment policies, as well asbetteraccesstotechnology,arenecessarytothisend.190

Theabovestatementhighlightsanimportantdimension,asitacknowledgesthatmaintainingsparecapacityistheresponsibilityofbothproducersandconsumers;itshouldbeextendedtotheentiresupplychainandnottoupstreamplayersonly.However,thestatementisgeneralanddoesnot address the complexityof the issues surrounding spare capacity:Does sparecapacityconstituteapublicgood?Ifitdoes,shouldallpartiessharethecostofmaintainingsparecapacity?Ifsparecapacityistobeheldinproducingcountries,canconsumingcountries�indacceptablemechanismstocompensateproducingcountries?Insuchasystem,whomakesthedecisiontoreleasethesupplyfromexistingcapacity?Theseandotherquestionshavenotyetbeenthesubjectoffrankdiscussionanddebate.Currently,policiesconcerningwhethertomaintainsparecapacityandatwhatlevelsaresolelysetbyindividualgovernmentswithnocoordinationevenbetweenproducingcountries.

Ratherthanfocusingongeopolitically-induceddisruptions,thedialoguehasshiftedtowardspotentialdisruptionscausedbythelackofinvestmentintheoilsupplychain.Theinvestmentissue has been a recurring theme in most Ministerial meetings. One of the importantachievementsofthedialogueinthisareahasbeentheincreasingawarenessthatinvestmentisasharedresponsibilitybetweenproducersandconsumers,asbringingavailableresourcestothemarketrequiresadequateinvestmentandtimelyinvestmentintheentireoilandgaschain. Nevertheless, the fact remains that the decision to develop reserves in producingcountriesismainlyinthehandoftheirgovernmentsandtheNOCs,andnoneoftheproducerswishtorelinquishthissovereigndecisioneitherthroughdiscussionoragreementsbetweenproducingcountriesorbetweenproducingandconsumingcountries.Asaresultofthewaveofmergers in the1990s, investments inupstreamand in re�iningarenow in thehandsofprivatelyownedoilcompaniesinmanyconsumingcountrieswheregovernments’in�luenceis mainly in the area of regulation. Recognising this asymmetry, the producer-consumerdialoguehasneverattemptedtocoordinateinvestmentplans.Instead,ithasexploredwaystoremoveimpedimentstoinvestmentintheoilsector.Thebasicmessageofthedialoguehasbeentheimportanceofadequateinvestment,aidedby“favourableenergy,�iscal,investmentandenvironmentalrelations”which“areneededforfreerandexpandedtradeinoilandgasand for sustainable world economic growth”.191 The IEF agenda has broadened to discuss

190JointStatement,JeddahEnergyMeeting,22June2008.191Summarybythehostandtheco-hosts,7thInternationalEnergyForuminRiyadh,November17-19,2000.

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speci�icmeasuresthatcaninduceinvestmentintheenergysector,suchasreducinglong-termuncertaintythroughincreasingtransparencyandimprovinginformation�lowsoninvestmentplans, energy security and climate change policies and their potential impact on demand,enhancing the corporation between NOCs, IOCs and Service Companies, and broadeningcooperationandexchangesinthe�ieldsofhumancapitalandtechnologyadvancementandmanyothermeasures.Thedialoguebetweenproducingandconsumingcountriesandamongindustryparticipantshasresultedingreaterunderstandingofthenatureoftheinvestmentproblemandappreciationoftheindividualsides’pointofview.However,concreteinitiativesandproposalstoalleviatetheinvestmentproblemhaveremainedlimited.

Duringthepasttwodecadesincreasedenvironmentalconsciousnesshasbeentranslatedinmanypartsoftheworldintoconcretepolicyresponses.OneofthekeyframeworksforthispolicyresponsehasbeentheUNFrameworkConventiononClimateChange(UNFCC).In2005,theKyotoProtocolcameintoforce,animportantcornerstoneunderlyingmanystates’nationallegislationtocurbgreenhousegasemissions,andmainlyfromconventionalformsofenergyintheformofcoalandoil.TheClimateChangeAgendahasbecomeatoppriorityinpolicyagendas.In2009,G-8Leadersstatedinveryclearwordsthat:

Climatechangeisoneofthegreatestchallengesofourtime.As leadersoftheworld’smajoreconomies,bothdevelopedanddeveloping,we intendtorespondvigorouslytothischallenge,beingconvinced thatclimatechangeposesacleardangerrequiringanextraordinaryglobalresponse,thattheresponseshouldrespectthepriorityofeconomicandsocialdevelopmentofdevelopingcountries,thatmovingtoalow-carboneconomyisanopportunitytopromotecontinuedeconomicgrowthandsustainabledevelopment,that the need for and deployment of transformational clean energy technologies atlowestpossiblecostareurgent,andthattheresponsemustinvolvebalancedattentiontomitigationandadaptation.192

By contrast, climate change as an issue has played a subordinate role in the producer-consumerdialogue.OneofthefewoccasionsofclimatechangebeingmentionedinaclosingstatementofanIEFMinisterialwasin2008,whereministersstatedthat“co-operationandeffectivedialoguethroughtheIEFisanimperativeforgrantingenergysecurityandde�iningcoordinated energy strategies to confront the global climate change challenge”.193 Becauseof the complexities surrounding climate change debates and the fact that there are otherinternationalforumsinwhichclimatechangesissuesarecurrentlybeingaddressedatagloballevel,an importantthemeis leftouttheIEFagenda.As inthecaseofprices, theproducer-consumerdialoguetouchesontheclimatechangeagendabutinanindirectway.Forinstance,overtheyears,thedialoguehasreferredtowide-rangingissuessuchasthedevelopmentofalternativeenergies,thedevelopmentofcarbon-friendlytechnologyincludingCarbonCaptureandStorage(CCS)andtheenhancementofenergyef�iciency.The11thIEFMinisterialconcludedthatasustainableenergyfutureimpliesef�iciencyimprovements,technologicaladvancesinbothproductionandconsumptionoffossilfuels,anddevelopmentofalternativelow-carbon

192G-8Summit,DeclarationoftheLeaders,TheMajorEconomiesForumonEnergyandClimate,L’Aquila,9July2009.

193ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico,11thInternationalEnergyForum,Rome,20-22April2008.

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energysources.194PreviousIEFMinisterialshadagreedontheneedtoacceleratealternativeenergiesbutalsonotedthatthedevelopmentoffossilfuelsresourceswillcontinuetobereliedupontomeettheexpectedenergydemand.195TheIEFhasalsoadvocatedtheneedforenergyef�iciencytobe“promotedinallsectorsthroughpassingonmarketpricesignals,technologytransfer and the sharingofbestpractices in energyproductionand consumption”.196Thus,whileproducersandconsumershaveso faraverteddiscussing the issueof climatechangein a directway, they have beenwilling to explore policies that can have direct impact ontheenvironmentandsustainabledevelopmentwithoutplacingthesepoliciesinthegeneralcontextoftheclimatechangeagenda.

Theaboveexamplesshowthatinthelastdecadebothpartieshaveavoidedconfrontationaltopicssuchasgreentaxesandthe�inancingofsparecapacityandhavefocusedmoreonthemesthatcanbringthemclosertogether.Furthermore,theyalsorevealthatmanykeyplayersarenotyetreadytodealwithsuchcontentiousissues.Thisapproachhasbeeneffectiveinbuildingcon�idenceandpromotingtrustamongtheparties.However,thereisariskthatinthelongrunthekey issuesthat lieat theheartofconsumers’andproducers’concernswillbecomemarginalised,leadingtoalossofinterestinthedialogue.Furthermore,whilethedialogueinthe2000swasabletoidentifythemainchallengesandbottlenecksfacingtheenergyindustry,itcameshortofcomingupwithconcreteinitiativestoresolvesomeofthesebottlenecks.Thisre�lectsthatwhileconsumersandproducershavebecomemoreawareofchallengesfacingtheoilmarketandmoreconsciousofotherparty’sconcerns,thereisstillwidedivergenceofinterestsandevenunwillingnessbysomepartiestotakethedialoguetothenextstagewheremoreconcreteinitiativescouldbeimplemented.

Manyoftheeventsthathaveshapedtheproducer-consumerdialoguewillcontinuetoplayanimportantroleintheyearstocome.Whileeveryeffortcanbemadetoimprovethequalityofthedialoguethroughsupportingitbyafocusedagenda,reliabledataandinformationandsoundanalyses, thefactremainsthatadialogueissuccessfulandusefulonly if it isabletotackleissuesthatareofcommonconcernsforbothparties.Oftheseconcerns,thedegreeofuncertaintyengul�ingenergymarketsanditsimpactoninvestmentwillcontinuetodominatethedialogue.Whilethehighdegreeofuncertaintyhasbeenthepredominantfeatureoftheindustrysince itsestablishment,policyuncertainty,especially inrelationtoclimatechangepolicies,willbecomeadominant factor. In thisregard, the IEFcanprovidea forumfor theexchangeofinformationaboutthenatureofthesepolicies,thetimingoftheirimplementationandtheirshort-andlong-termimpacts.Anotheraspectofuncertaintyconcernstheinvestmentpolicies and plans of producing countries. Since investment decisions are in the hands ofproducingcountries,theIEFislikelytoplayalimitedroleinremovinginvestmentbarriersandimprovingmarketaccess.Nevertheless,theIEFcanplayanimportantroleintheregularexchangeofinformationaboutproducingcountries’investmentplansandtheirlongtermoilpolicies.

194ClosingStatementbyhostItalyandco-hostingcountriesIndiaandMexico,11thInternationalEnergyForum,Rome,20-22April2008.

195Conclusionsbyhostandco-hostoftheInternationalEnergyForum,10thInternationalEnergyForum,2ndInternationalEnergyBusinessForum,Doha,Qatar,22-24April2006.

196JointStatement,JeddahEnergyMeeting,22June2008

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With rising geo-political tensions, one cannot exclude the possibility that political shockswhichdisruptoilorgassuppliescouldoccur.Insuchevents,theIEFshouldbeattheheartofcoordinationeffortsbetweencountrieswithsurpluscapacityandcountrieswithstrategicstocks.But thebottom lineremains that for interest in theproducer-consumerdialogue topersistinthelongrun,itshouldbeabletodealwithakeyconcernthatliesattheheartofproducers’andconsumers’interests:thepricelevelthatisacceptabletobothparties.Therehavebeenmanycallstoestablishapricebandwithanoilstabilisationfunddesignedtokeeppriceswithinreasonablebounds.However,asdiscussedabove,a fundamentalweaknessoftheseproposalsisthatsuchasystemwouldhavetobemanagedbypartieswithverydivergentinterests.Furthermore,itwouldbedif�iculttodesigntheinstitutionalmechanismsthatcouldgenerate feedback to prevent the price from straying outside the band, let alone to �indagreementonsuchaschemeamongthememberstates.

Given these factors, it isunlikely that the IEFwill evolve intoa forum inwhichconsumersand producers try to manage the oil price. Instead, the IEF can aim for a softer kind ofmediation,basedon its roleof championing transparency.Given theroleexpectationsplayintheprocessofoilpriceformation,oneofthemainobjectivesofbothoil-importingand-exportinggovernmentsshouldbetostabilisemarketparticipants’longer-termexpectationsaboutarangeofoilpriceswhichbothpartiesconsideracceptable.Furthermore,ifanticipatedgovernment responses are slow, or are perceived to be absent on either the demand orsupplyside,themarketislikelytodriftawayfromthepreferredpricerange.Thiscreatesareasonforcooperationanddialoguebetweenconsumersandproducers.Forexample,ifthemarketbelieves that spare capacity is thin,while in reality supplies are abundant andkeygovernments arewilling to bring these supplies to themarket, then the IEF couldplay animportantroleinstabilisingexpectationsbyincreasingthevisibilityofthesepolicyresponses,likewhathappenedintheJeddahEnergyMeeting.

In part, expectations are formed on the basis of data and information and on analysissurrounding thesedata. Poordata contribute to the volatility of oilmarkets, both throughallowing inaccurate information to �ilter into investors’ expectations and by increasingspeculationon crucial data.Although the coverage andquality of information about crudeoil market fundamentals have improved in recent years, there are still some major dataproblems.Onthedemandside,dataonoilconsumption,eventhoseforOECDcountries,arenotstandardised,aresubjecttomajorrevisionsandarepublishedwithaconsiderabletimelag.Thisproblemisbecomingmoreacuteasmanycountriesandregions inthenon-OECD,suchasChina,IndiaandtheMiddleEast,havebecomeamajorsourceofdemandgrowthinrecentyears.Inmanyofthesecountries,thereareseriousstatisticalshortcomingsintheareasofdataonconsumptionandonthepricingpoliciesofpetroleumproducts,includingthesizeofsubsidiesandtaxesimposedontheseproducts.Regardingdataoninventories,OECDdataoncrudeoilandproductstocksarepublishedmonthlyandwithconsiderabledelay.Dataonnon-OECDstocksarenotavailableonaregularbasisandaresubjecttoagreatdealofspeculation.For instance, in the context of China, itwould be dif�icult to gaugewhether the growth inimports isduetoan increase inactualdemandoran increase in thedesiretostockpile. Inadditiontolaggingindicatorsofsupplyanddemand,itisimportanttoexplorethepossibilityof increasing the availability and transparency of data that can help us better understandfuturemarket fundamentals. For instance, on the supply side, detaileddata on investmentplansintheoilsectorandinalternativeenergycanaffectexpectationsaboutmedium-term

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andfuturemarketfundamentals.Onthedemandside,informationonenergypoliciesandtheirpotentialimplicationsforlong-termdemandwouldalsoalterlong-termexpectations.Infact,theprovisionofbetterdataandinformationandindependentandcredibleanalysisofhowthemarketfundamentalsmayevolveinthefuturemayreducethedegreeofuncertainty.Suchanalysismayalsohelpdilutesomeoftheextremeviewsandsignalsthatinsomeinstancesdominatethemarketpsycheanddrivecoordinated�inancial�lows.ItisintheseareasthattheIEFshouldbeabletocarveitselfaroleinglobalenergymarkets.

Whilealltheissuespertainingtocreatingtransparencyonthesupply,processinganddemandsidesremainimportant,theriseofnewconsumingcountrieswiththeirownorganisationalmodel will introduce a new set of discussions to the dialogue: consumer-consumerdialogues.AlreadyduringtheJeddahconference,energysubsidieswereanimportanttopic.Energy subsidies can place pressure on prices in tight markets, send false signals aboutsupply needs and redistribute energy �lows among countries according to ability to affordsubsidies.Discussionscanalsoarisefromthefactthatconsumercountriesdeploydifferentorganisationalmodels in their energy industries and support investments along the valuechain to generate energy �lows for their national economies rather than the internationalmarket. These new types of consumer dialogue, also important for producing countries,cannoteasilybediscussedwithinthetraditionalenergyorganisationswheremembershipislimited,buttheycanbecoveredintheIEF.

Thesameistruefornewdimensionsintheproducersideofthedialogue.Asnewfuelsenterthemixtheycompetewiththeconventional fossil fuelsandcomplicatesecurityofdemandissues.Withthegrowingcomplexityoftheglobalenergymarkets,thecorecountriesoftheearlydaysofthedialoguewill�indthemselvesmoreandmoreengagedwithnewcountriesandnewissues,essentiallylookingforthesametrustoverandoveragain.Alsowiththeadvanceofnewenergy-relatedorganisationssuchastheGasExportingCountriesForum(GECF)andtheInternationalRenewableEnergyAgency(IRENA),itisimportantfortheIEFtocontinuetobringalltheseseparatediscussionstoaconstructiveplatform.

Importantly,thedialogueshouldhopetohavethesortofsupportersthatmadethedialogueasuccessinthe�irsttwentyyears.Althoughthedialogueismainlyaboutnotablesactingonbehalfoftheircountriesandorganisations,itisclearthatthemaintenanceanddevelopmentofpersonal contacts,alsoat this levelof internationalpolitics,arevery important inorderforgovernancetofunctionwell.Inmanycountries,politicianschangeeveryfewyears,whichcanmake itmoredif�icult todeveloppersonal contacts.Thesecontactsareoftenprizedattheadministrativelevel.Manyofthemeetingswerepreparedandcommunicationchannelskeptopenbyagroupofassiduousrepresentativesofthesesamecountriesandorganisations,withoutwhichtheIEFwouldnothavesucceeded.Althoughnotmentionedspeci�icallyinthisoverviewof theproducer-consumer relations, the importanceof theirwork isnonethelessnoteworthy.

In its short history, the dialogue has already crossed many milestones. Consumers andproducershaveovercomesomeof theirpastmyths, fearsandsuspicionsandhavebecomemoreawareofanumberofcommonchallengesrelatedtoenergymarkets.Theinstitutionalstructuresupporting thedialoguecontinues tostrengthen; thestructureandqualityof thedialoguehavealsoimprovedovertheyears.The2000swerethetimeinwhichtheIEFemerged

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asaninstitutionalisedforumwithitsownpermanentinfrastructureandanewcharter.Withallthisinmind,theevidentconclusionmustbethatthepasttwentyyearshavebeenpositivefortheproducer-consumerdialogue.Nevertheless,manychallengesremainandmanyothersarelikelytoemergeinthefuture.Thisrequiresthatproducersandconsumerscontinuetheireffortsofcooperationwiththeintentiontoprotecttheirlong-termcommoninterests.Theymustalsocontinuetoactivelyattempttogainbetterunderstandingofeachother’spositions.Thewayinwhichproducersandconsumersexpresstheirinterests,towhatextenttheyarewilling toengage in issues that lieat theheartof theirenergyconcerns,andwhether theysucceedinrelatingtheseenergyissuestothewidercontextofpolitical,economicandsocialsecurityandtheclimatechangechallengewillde�inethefuturepathofthedialogue.

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1stIEFSecretaryGeneral,ArneWalther

CurrentIEFSecretaryGeneral,NoévanHulst