Robert Mabro

Honorary President

Robert Mabro, CBE, 1934-2016.

Robert founded the Oxford Energy Policy Club in 1976, the Oxford Energy Seminar in 1979 and the Oxford Institute for Energy Studies in 1982.

The fact that these institutions still thrive today is testament to his strong leadership, deep vision, sheer determination, great intellectual ability and not least his extraordinary bonhomie. Over his long career, Robert enriched our understanding of energy markets, the behaviour of the various players, the dynamics within OPEC, and the interaction between governments and oil companies. With his writing and through the various institutions he created, he persistently tried to bring producers and consumers closer together, despite his recognition of the challenges involved and the wide divergence of interests.

He was an intellectual, a diplomat, the interlocutor, the friend, and above all, the generous intellectual and thinker whose deep insights and intellectual integrity will keep shaping and influencing our ideas.

He built a truly remarkable and dynamic institution in OIES; it provides a unique atmosphere for reflection and an arena for the rare opportunity to engage in honest intellectual debate. He leaves behind a legacy of iconic accomplishments in the field and an emptiness in the hearts of all those who came to know him, and who, invariably, admired and loved him.

He will be dearly missed and we are privileged to carry on his legacy.

Contact

Between 7th Jan and 7th Mar 2000 the WTI price rose by $9.50 per barrel
Between 7th Mar and !0th Apr the WTI price fell by $10 00 per barrel
Between !0th Apr and 20th Jun the WTI price rose again by $9.50 per barrel
and Between 27th Nov and 14th Dec the WTI price fell again by $7.50 per barrel.

These are significant movements amounting sometimes to a 30% variation in a matter of few weeks. Does any of that matter? Ask any trader and the answer will be almost invariably 'no'. The alleged economic rationale is that we are considering a market which sends signals about the allocation of resources. That would be perfectly correct if these price changes caused rapid adjustments in supply and demand. But they do not because the commodity traded is not physical oil but either a claim on future oil or a price differential which is no a commodity at all. The signals that the industry needs are about investments in capacity. One could argue that the prices quoted for long term swaps provide these signals, and indeed long term prices fluctuate much less than short term ones. But investments do not depend only on the view taken about prices in the long term, they are strongly influenced by the cash flow available to companies and the cash flow is a function of current prices. Volatility generates uncertainty and uncertainty inhibits or confuses the investors. The big price movements of the 1998 type are disastrous because they end up by curtailing investment plans significantly. This forces service companies, on whom much depends, to lay off personnel with damaging losses of skills and experience. Volatility disturbs governments of exporting countries as they rely heavily on oil revenues. Low prices lead to severe curtailment of expenditures, but such as the constraints of domestic politics that the axe does not always fall on the less worthy projects. High prices lead to demands for expenditure increases that are not sustainable in the long run. Price instability generates instability on a wide front: investments, human capital, corporate performance and the economic development of oil exporting countries. That it serves trading interests is of no great consolation. And price instability feeds itself on itself because it induces OPEC into remedial courses of actions that backfire sometimes, given uncertainties about the forces at work, misinformation and faulty interpretation by the market of OPEC's intentions. Stability does not imply fixed prices. A certain amount of flexible variations is both necessary and beneficial. What is required is a market that signals correctly the state of the current and the expected future balance of the demand for and the supply of oil. There is clearly a need for a fundamental market reform. This will require the co-operation of all the major players. We are not yet there: the understanding of the issues leaves much to be desired and the political will is very weak. Sooner or later, however, the adverse effects of excessive volatility and damaging price shocks will induce a search for remedial action. [post_title] => Does Oil Price Volatility Matter? [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => does-oil-price-volatility-matter [to_ping] => [pinged] => [post_modified] => 2001-06-01 00:00:48 [post_modified_gmt] => 2001-05-31 23:00:48 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/does-oil-price-volatility-matter/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [8] => WP_Post Object ( [ID] => 27987 [post_author] => 1 [post_date] => 2001-02-01 00:00:46 [post_date_gmt] => 2001-02-01 00:00:46 [post_content] => Two of the most persistent myths of oil markets are that: 1) the prices set for oil are efficient, which is to say, reflect the state of best knowledge about the market; and 2) oil production data published by the reporting services and consultancies accurately reflect the supply situation. In both cases, analysts are the victims of their own naïveté. Pricing of oil is anything but the product of 'efficient markets', at least in the sense that we understand that term as applied to securities markets in a highly regulated environment such as the United States. Nor is the quantity of oil produced as readily ascertainable a sum as many would think. Faith is placed all too readily in the numbers reported by the services, with little or no critical analysis of the basis or implications of those numbers.

The tale of the missing barrels

At the centre of the debate over transparency in oil markets is the issue of production estimates. While exporting nations are quick to publicise new production targets and estimates, it is almost unheard of for these same nations to announce with equal fanfare the fact that they have either chosen or failed to reach these numbers. Thus the putative level of oil stocks in the world increases on the back of such estimates, which soon obtain the character of facts, and the search begins for the 'missing barrels'. Reporters and analysts display a singular reluctance to examine the numbers with a critical eye, for if they did, they would discover that the amounts of oil in question are of such a fantastic scale as to call into question the initial estimates in the first instance. A specific example that can be cited is the market in early 1998. OPEC, at its meetings in Jakarta in November 1997, reached a consensus that production quotas should rise by 10%. The decision was implemented in January of 1998. When asked by reporters how much crude they had produced for January, producers such as Saudi Aramco, the Abu Dhabi National Oil Company, and Kuwait Petroleum Corporation all would have replied that they had increased production by 10%. Such numbers became invested with authority when the IEA took these numbers on board. The end result was that, notwithstanding flat or declining imports in Asia, that production overall had 'increased'. The result was the commencement of a hunt for barrels of crude that the IEA stated as being 'missing'. Rather than go back to the source and critically examine the rationale behind the production reports, the press and many analysts instead engaged in a conspiracy theory worthy of Oliver Stone. Speculation about tankers at sea with millions of barrels of crude ran rampant, along with darker theories about oil stockpiling in China. In the end, a much simpler explanation resolves the mystery without recourse to James Bond theories. In simple truth, the numbers were inflated. Producers could not be seen to not be implementing the new OPEC quotas, and yet demand was down. It would have been madness to produce at increased levels while imports held steady or fell, and yet many gullible observers, and even industry insiders, believed precisely this to be the case. One of the central assumptions about oil markets is that the basis upon which prices are formed is known. In reality, much of the information that plays a key role in price formation is hidden from the view of all but the intimate participants in the particular oil transactions in which they happen to be engaged. Their knowledge is itself restricted to those transactions, and not all transactions occurring globally. First and foremost, a significant percentage, if not a majority, of physical oil transactions occurs beyond the view of analysts and outside the sphere of regulated markets. Futures markets such as the IPE and Nymex, which are more visible deal with contracts, not dirty oil. To summarise, we must first acknowledge that there is an upward bias in production estimates. Second, demand, in the form of consumption data, is not known until a very long time after the period for which it is reported. Lastly, very little publicly reported, accurate information exists for oil stocks outside of the United States. And yet the US oil stocks may not be an accurate reflection of the world situation. Faced with assessing price movements in the market, analysts can choose between focussing on the upstream sector - broadly speaking OPEC and in some cases non-OPEC oil production - or turning their attention to the altogether thornier question of the downstream. It is far easier to turn to OPEC, where in the glare of publicity, pronouncements on production quotas and pricing formulae allow analysts to construct a simpler, and thus more readily comprehended, story. Yet the price spikes in 2000 had more to do with the refiners' behaviour and the oil product markets in the US than with production of crude oil. Finally, the reference prices (WTI and Brent) used in the formulae at which oil is sold by exporting countries are generally futures prices. Prices in the futures market do not move exclusively in response to physical oil supply and demand conditions. They are determined by many factors, not least of which are the totality of positions taken by traders in many non-oil markets (for example, bonds, equities, foreign exchange and other commodities). The reference prices are those of paper assets held in diversified portfolios. It is the price of an asset which is a composite and not that of the oil supplied by exporting countries and demanded by refiners. The present system of pricing oil is effectively based on prices determined by portfolio decisions, not entirely by physical markets conditions. Oil is being priced by a set of factors in which non-oil elements sometimes dominate. What is needed now is first for analysts to develop a critical mindset when assessing the information available to them. With such a critical approach, analysts can then recognise information which is obviously wrong. Even if truth cannot be reached, it helps to know and expunge immediately all that is non-truth. More importantly, the time may have come for the current oil pricing regime to be reviewed with the aim of finding an alternative that is less imperfect. [post_title] => Transparency in Oil Markets and Other Myths [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => transparency-in-oil-markets-and-other-myths [to_ping] => [pinged] => [post_modified] => 2001-02-01 00:00:46 [post_modified_gmt] => 2001-02-01 00:00:46 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/transparency-in-oil-markets-and-other-myths/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [9] => WP_Post Object ( [ID] => 27995 [post_author] => 1 [post_date] => 2000-08-01 00:00:33 [post_date_gmt] => 2000-07-31 23:00:33 [post_content] => In 1973/4 OPEC inherited from the Seven Sisters a pricing regime, which effectively administered by fiat the price of oil. There was a difference, however. The majors in the pre-1974 period used to fix a posted price, which was then used to compute royalties and the income tax paid to producing countries. When OPEC countries took over, the administered price (then called GSOP or OSOP) was in effect the price at which oil was sold and bought in arms' length transactions from the exporting countries. The fixed (or administered) price system collapsed in 1985. The problem arose from the difficulty encountered by OPEC of defending a given price in the face of strong competition from emerging, and rapidly growing, non-OPEC sources. Increasing non-OPEC supplies, at a time of stagnant world demand resulted in the emergence of considerable surplus capacity within the OPEC region. This induced intra-OPEC competition, which means price discounting by several countries to protect their export volume. In the end, the defence of the administered price resulted in such a production fall in Saudi Arabia as to become unsustainable. For a relatively short, but dramatic period in 1986 netback pricing replaced administered prices. The effects were catastrophic. The experience of the first half of the 1980s combined with a resurgence of a liberal `the markets rule' view backed by powerful western political interests, has led to the conviction that administered pricing is a dangerously flawed system which is fundamentally unviable. That the oil majors found it perfectly suitable during twenty-five or thirty years at least, and that the OPEC countries enjoyed a revenue bonanza thanks to this system has been totally forgotten. This does not mean that we are advocating a return to an administered price system. Our point is that a more balanced judgement on its merit and defects is needed in order to clarify the pricing debate. The administered price regime collapsed after several decades; the netback system in less than a full year! Netback pricing was replaced in 1987/1988 by a market related price formulae system. The first country to introduce it was Mexico. This country's officials disliked netback pricing and never wanted to use it because the negotiations with buyers on the various components of the netback calculations lacked transparency and involved opportunities for corruption. The price formulae system links the price at which a producing country would sell its oil to that of the `market price' of a reference crude. Initially the reference crudes were ANS Spot, dated Brent, Dubai and Oman. The idea is to ensure that the price at which a buyer will purchase an OPEC crude will be equivalent to that of competing non-OPEC crudes in the relevant importing region. Like all pricing systems, this one is not without defects. The idea of trailing the market has a strong economic rationale if the market that is being followed is the locus where demand and supply forces meet on a world scene. In such a case the price that emerges brings into balance world supply and demand. The markets which generate the reference on marker prices which exporting countries use for selling their oil - being Brent, WTI or Dubai - have important limitations. The first is that they are regional markets. The WTI price is strongly influenced by the balance between oil demand in the Chicago region and crude supplies in the US Gulf region. The Brent price is similarly influenced by demand and supply conditions in NW Europe. Although there is arbitrage between different regions of the Atlantic Basin, this force operates much more weakly as we move further away from that basin. The second is that the reference prices emerge through a complex interaction between very thin spot markets, a relatively more liquid physical forward market (in the case of Brent), two very liquid futures markets (the NYMEX and the IPE), and markets which trade a variety of instruments such as the CFDs. The more liquid markets, those which play therefore the greater role on oil price determination, are the ones that are farther removed from the fundamentals of physical supply and demand. This is not to say that the fundamentals play no role at all, but that they are only one element in a set of determinants which include traders' responses to news, traders' views on how other traders interpret information and news, and on many occasions switches by financial investors to and from the oil markets from and to other commodity, bond or foreign exchange markets. There are other problems. Let us mention two which are particularly significant. (a) The array of instruments available to traders enable a small number of powerful and sophisticated players to operate squeezes or launch other operations which causes prices to move in directions do not always reflect the actual state of the supply/demand balance. Whether these `games' whose frequency has been increasing in recent years affect price trends over the medium term is debatable. It is certain, however, that they cause higher price volatility, and that they rob prices from their most important function which is to signal at every movement the state of the supply/demand balance. (b) The information available to economic agents - oil companies, traders, oil-exporting countries etc. - about the key parameters - production, exports, demand and stocks - is so poor that the responses to this information which are important determinants of price formation in futures exchanges and elsewhere do not always relate to actual economic conditions. Everybody is to blame for this information problem: particularly the exporting countries, the oil companies and the IEA. One is tempted to say that the failure to recognize this problem and to seek remedies must mean that all those involved believe that the lack of transparency serves their own interests. The truth, however, is that poor information corrupts the functions of markets and prices and must in the end cause more harm than good to all the parties. The reliance on reference prices generated by markets which are (1) more strongly influenced by economic fundamentals in specific regions than on the global scene, (2) often subject to squeezes and manipulations, (3) moved by switches of funds from oil to non-oil trading, (4) dominated by responses to poor or wrongly interpreted information and (5) led by transactions such as futures, CFDs etc. which are at some remove from the supply/demand interface is a cause of serious problems. To list the most important:

Oil price volatility has become a very significant phenomenon. Consider the following price movements of the first month WTI contract on the NYMEX in year 2000: 7 January $24.64 7 March $34.13 10 April $23.85 20 June $33.05 1 August $27.60 21 August $32.47
Over eight weeks (7 January/7 March) the price rose by $9.50 per barrel. Then in less than 5 weeks (7 March - 10 April) the price fell by more than $10 per barrel. We then had a movement of $9.50 per barrel over ten weeks (10 April - 20 June), and finally a $5 per barrel change in as short a period as 3 weeks (1 August - 21 August). To put this in perspective, recall that the fall in price from $19 to $11 per barrel during the famous 1998 crisis occurred over a period longer than a year.
As mentioned before, because of the lack of good information on production, stocks and demand, what rules the market is the consensus view about these numbers rather than the actual situation. This has an important implication for OPEC. When OPEC has to decide on a production policy in order to reverse a price fall as in 1998 and March 1999, it is obliged to reduce production by the volume demanded by traders and not by the amount required to restore the supply/demand balance. And the market has a tendency to believe in myths, such as the myth of the `missing barrels' in 1998. In that year OPEC, together with Mexico and Norway, reduced oil production twice (in March and June) to no avail. The oil price continued to fall. The market did not believe that the reductions were large enough. In March 1999 OPEC cut production by the large amount demanded by the market. This turned out to be too much as evidenced by the relentless price increase that followed throughout that year. It is nice to say that markets should rule. The statement is however meaningless and indeed dangerous in its implications if one does not specify which market, and the conditions that qualify a market to rule. The oil futures markets as they exist today and for the reasons mentioned earlier on do not qualify. Yet, OPEC has to follow their whims to influence the course of oil prices and this seems to be an important cause of high volatility.
The developments of recent years have now reached a point where the oil industry, in the USA and in many other places elsewhere, has become very attuned to the operations of trading instruments. Refiners have learnt to hedge. They look closely at the term structure of prices on futures markets (backwardation and contango), at arbitrage and hedging opportunities etc. They have learnt (and this has now become an almost universal feature of behaviour) that you do not add to stocks when the market is in backwardation and that you pile up onto stocks as much oil as you can get hold of if the market is in a contango. The trouble is that futures markets watch inventory levels and interpret a fall in stocks as a sign of supply/demand tightness and a rise in stocks as a sign of supply/demand slack. A vicious circle then sets in. As stocks fall, oil prices are bid up and this often results in a steeper backwardation which further discourages the building up of stocks. As stocks rise, oil prices are bid down and this often results in a steeper contango which encourages further build-up in stocks. The system is in very unstable equilibrium. Backwardation could lead to prices rising and rising, contango to prices falling and falling. Only big shocks can stop these movements. But big shocks do not only arrest the price movement. They can reverse it, recreating the problem of relentless rise or fall until the next shock. We have witnessed some of that in 1998-2000.

To conclude. The situation is very unsatisfactory. Traders like it because they all think that it provides them with opportunities to make money. That it is impossible for everybody to win at the same time does not concern them since everybody believes that one day a good opportunity will be encountered and fortune will smile. Whether the system is good for the exporting countries, the oil companies, the importing countries, the US government and the final consumer is very doubtful. Judging from recent experience it is clear that nobody likes either very high or very low oil prices. When they obtain, it is far too easy to blame OPEC. The issue however is not OPEC on its own but the system in its complex operations, in the links between various markets, and the awkward relationship between markets and OPEC. A fundamental reform is required. We hope to be able to contribute ideas for changes in the coming months. [post_title] => Oil Markets and Prices [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => oil-markets-and-prices [to_ping] => [pinged] => [post_modified] => 2000-08-01 00:00:33 [post_modified_gmt] => 2000-07-31 23:00:33 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/oil-markets-and-prices/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [10] => WP_Post Object ( [ID] => 27999 [post_author] => 1 [post_date] => 2000-06-01 00:00:53 [post_date_gmt] => 2000-05-31 23:00:53 [post_content] => New features have emerged and transformed the physiognomy of the world petroleum market in this first half of the year 2000. The first is that the USA has behaved publicly and without any inhibition as a member of the oil producing countries’ club. The USA is, of course, a non-signed up member who nevertheless has considerable weight. The Secretary of Energy engaged in a high profile exercise of shuttle diplomacy in February and March, visiting ministers of oil exporting countries, most of them OPEC members but as importantly Mexico and Norway, arguing the need for a significant increase in oil production. Rather remarkably, Mr Richardson went as far as to phone some OPEC ministers on their mobiles during a committee meeting in Vienna in March. In these days of modern communication technology one need not attend a meeting physically since telephone conferences can be arranged. More recently, the US government persuaded a reluctant Saudi Arabia to announce an intention to increase production by 500,000b/day in order to bring oil prices down to the more moderate level of $25 per barrel. The new phenomenon is not US intervention, but its bluntness and its high visibility. The second development of high significance is that the notional oil price that is now talked about as reflecting a reasonable, or `comfortable’, level is no longer the famous $18 per barrel which ruled throughout 1987 to 1999, but $25 per barrel. There has been a radical change in the mindset about prices. This does not mean that the market will always deliver $25 for a barrel of oil. It will not. But the market will continually assess price movements, and judge their deviations, by referring to this notional $25 per barrel. And whenever the view that the deviation has become too large begins to prevail, powerful forces will attempt to move prices closer to the norm. We may have entered a new episode in the matter of oil prices: a $mid-twenty oil price which now supersedes the very long $18 episode. The third feature is the very large price variations that have obtained on two or three occasions, over fairly short periods, this year. Thus, the WTI price on the NYMEX fell from a peak of $34.13 per barrel on 7 March 2000 to $23.85 per barrel on 10 April .The period over which the oil price change was a very significant $10 per barrel was slightly longer than four weeks. To put things in perspective, the dramatic price fall of Jan1998-February 1999, which was also of the order of $10 per barrel (albeit from a lower level), obtained over a long period of eleven months. And between 10 April and 13 June 2000, the oil price increased by about $9 per barrel, a significant shift considering that the period considered was only four-weeks long. The fourth feature is that the volume of surplus capacity available at present to OPEC countries is very heavily concentrated in Saudi Arabia. This has occurred in the past on a number of occasions, but had not been not a feature of the market in most of the 1990s when there was potential for rapid production increases, not only in Saudi Arabia, Kuwait and Abu Dhabi, but also in Venezuela and Iraq. The current situation bestows considerable power on Saudi Arabia. One should hope that wisdom will always prevail over the temptations that power induces. A final development which is partly responsible for the recent behaviour of crude oil prices ( they rose above the $30 per barrel mark and remained stubbornly at high levels) is the emergence of a rigidity in the petroleum products trade. Tough environmental specifications which became applicable in some US states on 1 May 2000, and in some others on 1 June, have limited the scope for imports from Europe and elsewhere to relieve a product shortage in the USA. This shortage is due to reduced levels of refinery utilisation in America in January and February. This would have caused no serious problem in the past when product specifications were more homogenous. The implications of all that are as follows:

The volatility of the world petroleum market today is a very serious issue that needs to be addressed by the main players.
The increase in crude oil production demanded by the US government is no solution to the current price problem because Saudi Arabia, Kuwait, Venezuela and Mexico, the countries that may produce more, can only supply sour crudes. What is demanded today is an additional supply of sweet crudes. There is no surplus production capacity for low sulphur oil.
The performance of the market would improve significantly if:
(a) The USA refrained from throwing its weight about; (b) The US and the UK regulators took a less a benign view of squeezes that regularly mar the behaviour of informal markets; (c) Serious efforts were made by producing countries, oil companies and the IEA to improve the quality of the information on which traders rely; (d) OPEC, instead of attempting to guess the market through a process requiring a consensus among members, tested its responses through either the price band mechanism or a yet-to be designed alternative policy.

[post_title] => The New World Oil Market [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => the-new-world-oil-market [to_ping] => [pinged] => [post_modified] => 2000-06-01 00:00:53 [post_modified_gmt] => 2000-05-31 23:00:53 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/the-new-world-oil-market/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [11] => WP_Post Object ( [ID] => 28004 [post_author] => 1 [post_date] => 2000-03-01 00:00:04 [post_date_gmt] => 2000-03-01 00:00:04 [post_content] => This article appeared in Middle East Economic Survey Vol XLIII, No 11, 13 March 2000. The oil-exporting countries spent fifteen months (January 1998-March 1999) to agree upon and implement production cuts of the magnitude required by a sceptical and intemperate market for correcting the declining trend in prices. They all knew that a small percentage reduction in production of the order of 7-10 per cent would most probably lead, within a few months, to a price increase of 80-100 per cent and to a higher percentage increase of per barrel revenue. They found it difficult first to make a small production sacrifice that would yield a significant monetary reward and second to convince the market on two occasions (March and June 1998) that they meant business. The oil-exporting countries are now asked to increase production in order to bring prices down. It is not surprising that such a decision is proving difficult to make. The production policy that would succeed in lowering the oil price would undoubtedly entail a loss in revenues. Oil ministers who were unable to make a quick and effective decision involving tangible gains only a year ago are asked to now make a quick decision involving tangible losses. True, a production policy that would calm an over-excited market which is overshooting every conceivable reference (WTI closed at $34.13 on Tuesday March 7) involves some benefits. Some of them, however, are in the nature of intangibles, others are uncertain and others may only accrue in the long term. There are two political factors to consider. First the relationship with the USA that no country in the world (with the possible exceptions of Cuba and North Korea) can ignore. The US Congress is not hiding its unhappiness with high oil prices and the administration with various degrees of conviction is echoing the concern. The USA would have perhaps been more effective had Mr Richardson not engaged in high profile shuttle diplomacy. Sovereign states do not like to obey orders given in public by an overbearing superpower. They have legitimate pride and need to take into account domestic political repercussions. But Mr Richardson has his own agenda at home and will no doubt claim credit for any OPEC decision to increase output irrespective of when and how it is taken. The second political factor is the relationship with developing countries that are net importers of oil. As always, rich countries who can afford to pay more for their imports complain loudly, and with no sense of shame, about their economic vulnerability to high oil prices. Most of them have a remedy available in the form of a reduction in the excise taxes on petroleum products but will never contemplate using it. As always, poor countries either remain silent or utter muffled complaints which are never listened to. To put things in the correct perspective, it is the plea of developing countries not that of the OECD that oil exporters should want to heed. The arguments that are more relevant to the economic interests of oil-exporting countries are: (a) The oil price may cause a world economic downturn which will reduce demand for oil, then the oil price and consequently oil revenues. This negative impact could well hit the producers' interests in the short or medium term. (b) High prices would encourage investment in high cost oil, non-conventional oil and energy substitutes. This will hurt the producers' interests in the long run. Consider the first point first. Whether high oil prices which are unlikely to obtain for a very long time (they never do) would be the main cause of an impending recession is, to say the least, highly debatable. Just recall that the issue of whether the US economy will have a soft or hard landing has been talked about since early 1999 when the oil prices were hovering around $12 a barrel. One may be fairly certain that the US economy will slow down sooner or later. A high oil price may or may not be the straw that breaks the camel's back. But why focus on the straw and not on the heavy burdens which have been heaped on the camel such as low savings rates, frenzied speculation on Wall Street, and indebtedness of large sections of the population? What is certain, however, is that the oil-exporting countries will be blamed for any slowdown of the US economy whatever the real causes of that event might be. Consider now the second argument. It is true that high prices provide an incentive to investments in energy efficiency and in the production of substitutes. This argument however requires some clarification. The incentive to improve energy efficiency relates more directly to domestic fuel prices and national policies than to the international price of oil; and the domestic price is strongly influenced by domestic taxes. High oil prices only provide an inducement to investment in high cost substitutes when the industry becomes convinced that high prices will be sustained over the long period. The industry today remains very sceptical about this sustainability. Oil exporters may nevertheless wonder whether they should adopt a low price strategy to protect their share of the energy market in the long run. The problem faced is that the price level that would provide a deterrent to the entry of substitutes reduces revenues over a long period of time; and many countries cannot afford for both economical and political reasons such a costly policy which may only bear fruit in a distant and uncertain future. All these reasons explain the oil-exporters' initial reluctance to respond to the current price movements with a new production policy. But as oil prices have kept on rising the major exporting countries have become convinced that some action is needed to calm an over-excited market and to regain some control over a price movement which reflects both an imbalance in the supply/demand equation and the dynamics of expectations about the future course of this imbalance. Because they wield market power through production policies they are vested with a price-making role. Despite many limitations on the ability to perform this role in a very effective manner, a price-maker, as it were by definition, needs to have a view on a preferred price level and a concern for a measure of price stability. Now that the main exporting countries appear to have surmounted their initial reluctance, and are attempting to design a production increase policy that can secure a high degree of agreement, a new set of difficulties arises. First, there is a structural issue. The oil-exporting countries divide into two groups. Some of them enjoy a degree of market power and can be considered as price-makers; others are price-takers. The latter know that they cannot influence the course of prices and are not particularly concerned about the future impact of high prices on the demand for their oil. They are small entities which will always be able to sell the volumes they manage to produce. When prices are low they urge the price-makers to respond with output cuts. When prices are high they are more than happy to collect the revenue and sternly oppose any move to raise production. Second, there is an information issue. All that we know, with reasonable confidence, is that crude oil and products inventories have been declining in the USA at an alarming rate. What is happening in the rest of the world is less clear. A critical, yet very uncertain, piece of information is about the current production level. Does actual output of OPEC members plus Mexico and Norway correspond to the levels agreed in March 1999? Many observers believe that output is higher than these levels. And the question is by how much? More synthetically, the question is about the current supply/demand balance in world oil. A small amount of light may be shed on this vexed issue by analysing US data. The USA is important because the WTI price is the leading reference and the WTI price is strongly influenced by the market conditions in this country. The relevant statistics are: (a) Crude oil imports from the Riyadh pact countries (Mexico, Saudi Arabia and Venezuela) were lower in 1999 than in 1998. They averaged 3.766 mb/d in 1999 compared with 4.104 mb/d in 1998. (b) Total crude oil imports were slightly lower, averaging 8.519 mb/d in 1999 as against 8.659 mb/d in 1998. (c) Total petroleum stocks (excluding the SPR) increased by 79 million barrels in 1998 and decreased by 185 million barrels in 1999. As there also was a build-up in 1997 of about 53 million barrels one could say the depletion of stocks in 1999 removed a larger volume than the surplus built up in the previous two years. The rate of depletion was 145,000 b/d in excess of that needed to remove the previous overhang. Coincidentally this is almost equal to the 140,000 b/d deficit in imports when 1999 is compared with 1998. (d) Rather interestingly, the rate of refinery utilization in the USA in the four weeks ending on 18 February 2000 was as low as 85.9 per cent compared with a rate of 91.2 per cent in the corresponding period in 1999. This means that, earlier this year, the USA was refining 600,000-700,000 b/d less than last year in the corresponding weeks. No wonder that a dramatic rate of stock depletion obtained in January and February of this year. The moot question is whether the low rate of refinery utilization is the result of a shortage in the supply of crude oil or whether it reflects a refiner's response to low margins and to a steep price backwardation in the NYMEX where the price of the second month futures contract has been as much as $1.8-1.9 lower than the price of the first month? The only way to find out is to increase supplies to the US market at the rate of 200,000 to 300,000 b/d and evaluate the buyers' responses. Third, there is a market response issue. The market behaves like a stubborn and ill-bred child who will not stop screaming until given what he asks for. And what he asks for is not necessarily what is needed. In 1998, the market responded to two production cuts (March and June 1998) with a decline in oil prices. Early in February 1999 it pushed the oil price down to an abysmally low level when all the available signs indicated that supply and consumption demand were more or less in balance. The market was demanding a new and very large production cut. When OPEC obliged, it was rewarded with price increases. Some months later it became clear that the market had demanded too much. And we may well be in a similar situation today. The market seems to be clamouring for a production increase of at least 2 mb/d. This may well be much more than needed. One cannot discount the possibility of a perverse market response - keeping the oil price at a high level or pushing it further up - if the production increase falls short of this demand. And one can be almost sure that if the production increase is larger than required by the economic fundamentals (as opposed to what is demanded by the animal spirits' of punters) prices will eventually fall to low levels. Fourth, the more fundamental issue relates to the price objective. The aim of a production policy is to steer prices towards a preferred level. For many years between 1987 and 1999 the conventional view was that an $18 per barrel price was, broadly speaking, an acceptable price. In fact, several ministers stated in March 1999 in comments about the OPEC decision to cut production that their hope was for a correction that would put prices back in the $18-20 per barrel range. But is this the target today? As mentioned earlier the price that may act as a barrier to entry to competing fuels is probably of the order of $13-14 per barrel, far too low for the budgetary needs of the main exporting countries. The choice of a price target depends therefore on a different criterion: either political acceptability or possible repercussions on the world economy. Some people believe that the USA will not object too strongly if the OPEC policy ensures that the WTI price does not breach the $25 line. Others talk of a $20-25 per barrel price band; and yet others mention a $22 per barrel price as a new magical optimum. I do not know whether the exporting countries have been discussing at any length target prices, or more to the point, whether there is a consensus among the main price-makers about a possible target (the smaller countries are unlikely to agree willingly to any target that is lower than the market price, but this does not really matter since these countries, by definition, are price-takers). As regards the world economy, two factors do matter. The first is the price level and the second is the degree of stability around that level. The price level matters for balance-of-payments reasons, particularly to developing countries. I dare say that $25, or even $30 per barrel will not break the back of most OECD countries on this particular front. The volatility, however, matters very much because inflation is about price changes, not about price levels. The inflation threat in the USA is due to a tripling of the price from a low of $11 per barrel to a high of $33 per barrel over a short twelve-month period. If prices are kept stable at some acceptable level or allowed to rise slowly over a long period of time there would be no inflationary impact. Volatility is the more serious issue. And volatility is largely due to the interaction between a market with an inherent and strong tendency to overshoot or undershoot and producers' policy instruments which are far too blunt and far too rigid. What should the oil-exporting countries do? The worst scenario from their point of view would be a failure to come up with an agreed policy. This would result in a free-for-all with catastrophic consequences for the producers' interests. A better course of action is to agree to an increase in production of a moderate size, in the first instance, to test the market response. By moderate size I mean something of the order of 1.2-1.3 mb/d. This is not as small an amount as may seem at first sight because there is already leakage. Actual production may well be higher than the March 1999 agreed ceiling by 0.7-1.0 mb/d. Given the nature of the petroleum market, the uncertainties that surround both the economic fundamentals and the behaviour of punters, and the sensitivity of markets to the direction of change in the level of stocks, it is essential that the production policy be designed as a flexible instrument that regularly responds to prices diverging significantly from the preferred target. With hindsight we now know that the decision of March 1999 to hold the production cuts for a period as long as one year was a mistake. OPEC put itself, unwittingly no doubt, in a strait-jacket. The sensible approach is to plan from the outset a flexible production policy which will allow for either increases or decreases in output at the end of every two-month period depending on the behaviour of oil prices during the relevant period. The market will ultimately give OPEC the price OPEC wants if it becomes convinced that the producers will always take swiftly the measure that reveals the seriousness of their objective. Nobody can tell today whether an increase of x million barrels a day is too little or too much. The solution to this problem is to announce that output will be increased by a certain volume and that this volume will be raised in two months' time if the market remained overheated and that it will be reduced if the price fall was too large. The rate of output changes in subsequent two-month periods should be agreed in advance (even if they are not announced) and not left for bargaining and negotiations after the expiry of the agreement. To open the gates for extra production over a long period of time is a sure recipe for disaster as three or four historical precedents have shown. In 1981 Saudi Arabia increased production very significantly to force the oil price down. The result was a build-up of stocks in the world which was partly responsible for the 1985-86 crisis. In 1986 the netback pricing approach pushed prices down to a dismal $7 per barrel. The 1997 Jakarta decisions about higher quotas were partly responsible for the price decline of 1998. And once prices fall significantly the task of bringing them up proves to be an uphill task. To decide on an output increase without planning in advance future responses to subsequent price movements will simply aggravate the volatility of prices. In the order of things, volatility is a more serious issue than a high price level. [post_title] => OPEC: Hard Choices [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => opec-hard-choices [to_ping] => [pinged] => [post_modified] => 2000-03-01 00:00:04 [post_modified_gmt] => 2000-03-01 00:00:04 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/opec-hard-choices/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [12] => WP_Post Object ( [ID] => 28011 [post_author] => 1 [post_date] => 1999-11-01 00:00:41 [post_date_gmt] => 1999-11-01 00:00:41 [post_content] => Iraq's decision on 22 November to suspend oil exports, helping to send oil prices to highs not seen since the Gulf war, underscores the continuing turmoil surrounding international policy on Iraq. By all accounts the UN economic sanctions imposed on the country nine years ago after the invasion of Kuwait have reduced it to hardship. Having led Iraq into a disastrous war with Iran from 1980-88 and perpetual battles with the Security Council since 1990, the regime sheds a river of crocodile tears over its people's suffering as if it had no responsibility for their plight. The main architects of the policy, the USA and the UK, accuse Baghdad of exaggerating the pain in order to gain sympathy but privately realise sanctions are debilitating Iraq's society. So Saddam Hussein must be savouring the irony this month as the permanent members of the Security Council try to hammer out a compromise on a draft UK-Dutch resolution to suspend sanctions which Iraq already declares it will reject. How is it that the United States and its allies appear to be in a bigger hurry to ease sanctions than the Iraqi government itself? The answer reveals a lot about the shortcomings of international policy on Iraq and the regime's own determination to outface its punishers, whatever the cost. It also suggests that the strategy of containing Iraq through restricting its ability to export oil is beginning to crumble, with uncertain consequences for the market. There is no question sanctions are hurting. One commonly cited estimate puts the value of Iraq's foregone oil exports alone at $100 billion. The country is divided into two parts, the government-controlled central and southern regions, and three autonomous Kurdish provinces to the north. Studies by the UN and private relief agencies show that while humanitarian conditions in the north have stabilised due to the accessibility of international aid, those in government-held areas, where four-fifths of the population live, have deteriorated sharply. For a country that once boasted one of the highest standards of development in the Middle East, the descent into squalor has demoralised the populace, which is more concerned with daily survival than overthrowing the government. Far from disabling the regime, sanctions have become its life support system. The government's control of the black market and the food distribution system gives it powers of reward and punishment to augment an already fearsome internal security apparatus. This has bought it breathing space to exploit Iraq's humanitarian misery in the Security Council and wear down the UN consensus on containment. Moreover, compared to five years ago, when Iraq was banned from selling oil and forced to admit UN weapons inspectors, the situation today could hardly be more different. Iraq is now allowed to export up to $10.5 billion worth of oil a year. In December 1998 it succeeded in expelling the inspectors from Baghdad, incurring a US and UK bombing campaign but no cancellation of the oil-for-food programme. This is significant because the regime wants sanctions lifted so Iraq can reassume its regional mantle, but not at the cost of relinquishing its weapons of mass destruction - essentially the deal on the table in New York this month. Aware that the agony of Iraqi people is eroding the Security Council's resolve, the government is in no rush to see sanctions suspended now if prolonging them means a deal on its own terms later. Meanwhile sanctions have become a political millstone for the United States. They have failed to unseat the regime or compel it to abandon its nuclear, chemical and biological weapons. At the same time, Washington knows that dropping sanctions unconditionally would be touted as a victory by Saddam and remove any remaining incentive he has to co-operate with the weapons inspectors. The oil-for-food programme begun in 1996 to soften the blow of sanctions and shore up political support is hampered by delays and accusations of obstruction. On the Security Council, France, Russia and China dislike US unilateralism and are keen to resume business with Iraq - a split the regime has widened by promising oil production sharing agreements to all three once sanctions are lifted. More worrying still, popular sympathy for Iraq's people is running high in the Middle East, where even such traditionally dependable allies as Turkey, Egypt, Saudi Arabia and the Gulf states are at pains to distance themselves from the American position. In the US itself Iraq policy is no less divisive. From the left there is growing criticism of sanctions' harshness, while the Republican-dominated Congress, which last year authorised $97 million to fund Iraqi opposition groups, is clamouring for tougher action to topple Saddam Hussein. A few legislators have even spoken of arming the opposition, seemingly forgetting the fraught record of past interventions in places like Cuba, South Vietnam and Nicaragua. The looming presidential campaign narrows the administration's room for manoeuvre even further. If it allows sanctions to remain in place, it runs the risk of appearing callous and stretching international consensus to the breaking point. If on the other hand it is seen to go soft on Saddam, Republican hard-liners could pounce and corral the administration into adopting a more activist approach to subverting Iraq's government. From the administration's viewpoint, suspending sanctions is attractive because it defuses humanitarian criticism and puts the focus back on Iraq's weapons. And if Iraq tries to renege, sanctions can be reinstated and the blame laid at Baghdad's door. Whatever the outcome, the implications for oil are unsettling. Iraq was thought to be maximising current production capacity when output peaked in September at 2.8 million b/d; production fell last month to about 2.5 million b/d. Of this, 550,000 b/d is for domestic consumption, 70,000 b/d is earmarked for Jordan, and the remaining 1.8 million b/d is available for export. The oil-for-food programme created by UN resolution 986 has contributed to market volatility in two ways. Firstly, because the resolution defines a revenue rather than a volume ceiling, Iraq is effectively immune to the price changes that concern its neighbours so long as it has the production capacity to meet the ceiling. Secondly, decisions affecting production levels are driven primarily by the unpredictable political dynamics of sanctions and only secondarily by market considerations. On two occasions when renewal of the six-monthly oil-for-food phases ran into snags at the UN, in June and December 1997, some 700,000 and 1 million b/d respectively were abruptly removed from the market and then restored a few weeks later. The latter case coincided with the Security Council's decision in February 1998 to increase the revenue ceiling from $2 billion to $5.2 billion every six months, followed by another resolution in March allowing Iraq to increase production to make up for past delays and low prices. This paved the way for a production increase from 1.7 million b/d in February to 2.4 million b/d by August, contributing significantly to the supply overhang that resulted in the oil price crisis of 1998. As recently as this month, Iraq's announcement on 22 November that it would halt exports in protest at the Security Council's two-week extension of the oil-for-food programme helped to send crude prices to their highest level in years. Even if sanctions are suspended, the periodic renewals that would continue to be part of the new arrangements mean there is no guarantee that similar disruptions could not recur. Indeed, because suspension would give Iraq the opportunity to repair damaged facilities and expand capacity, the market's exposure to the messy politics of sanctions would be all the greater. There is an argument to be made for revising the UN's approach to Iraq so that its objectives are met more effectively. It is worth recalling that an entire generation of young Iraqis has known nothing but deprivation, isolation and embitterment these past nine years, a Versailles-like legacy that may well outlast the regime of Saddam Hussein. Containing Iraq is an unenviable task. But the time may have come to admit that sanctions - in their present form - are doing more injury to innocent people and to the moral authority of the sanctioners than to the regime itself. A new policy is needed if the UN is to have a chance of success. [post_title] => Suspending Sanctions on Iraq: Make Haste, Slowly [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => suspending-sanctions-on-iraq-make-haste-slowly [to_ping] => [pinged] => [post_modified] => 1999-11-01 00:00:41 [post_modified_gmt] => 1999-11-01 00:00:41 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/suspending-sanctions-on-iraq-make-haste-slowly/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [13] => WP_Post Object ( [ID] => 28019 [post_author] => 1 [post_date] => 1999-09-01 00:00:47 [post_date_gmt] => 1999-08-31 23:00:47 [post_content] => Oil prices fell to very low levels during the January 1998 - March 1999 crisis. The oil-exporting countries sought to redress the situation by repeated attempts to impress the market with production cuts. The first attempt, made in March 1998, did not produce the desired price effect. The second attempt, in June 1998, was equally unsuccessful. The much delayed third attempt in March 1999 caused prices to rise to unexpectedly high levels. This long and disturbing episode has undoubtedly taught oil-exporting countries many lessons. The first and most important one is that revenues, so vital to those developing countries which have few other resources than oil, depend far more on prices than production volumes. As Mr Nader Sultan, the chief executive of the Kuwaiti Oil Corporation, recently said: 'A production cut of seven per cent brought about a 100 per cent increase in revenues'. This is a lesson that ministers in oil-exporting countries will not immediately forget. The oil price movements of 1998- 9 carry another message. The message is simple, almost trite yet of considerable significance. It says that in commodity markets prices often under- or over-shoot equilibrium levels. In oil, the relevant price concept is not the competition market equilibrium but the producers' preferred objective given that exporting countries exercise market power from time to time, however infrequently and clumsily. In a market that naturally causes prices to collapse or to explode in response to either ill-informed expectations or small physical imbalances between supply and demand, production policies are unlikely to yield the desired price effect. Exporting countries, unhappy about a particular price situation, may change production volumes by too little or too much. The price target will therefore be missed. Furthermore, market's views about what production policy ought to be rather than what the policy actually is have a significant bearing on the price outcome. The exporting countries found themselves badly hit by an oil price crisis which they could not manage during fifteen months. And once out of the crisis they soon became confronted by a dilemma: should we now increase production to moderate the price rise or should we do nothing lest any production increase send prices tumbling down? Production policy is failing to yield the desired price effect for the simple reason that it is not instrumentally related to the desired price target. Production cuts (as in 1998 and 1999) or production increases (as decreed by OPEC in their Jakarta meeting in November 1997) are shots in the dark. They cause oil exporters much trouble whenever they miss the price objective as we observed throughout 1998 and as we are seeing now. The dilemma which OPEC and its allies face today is whether they should keep unchanged the production quotas agreed in March 1999 at the risk of having prices running ahead out of control, or increase the quotas at the risk of having the price fall below desired levels. It is worth recalling in this context that the oil market usually bids prices down whenever the producing countries are engaged in protracted and very public negotiations seeking an agreement on production. So far OPEC's approach to policy making is to respond to a crisis in an ad hoc manner whenever one may emerge, and to stay put, sometimes for several years, when member countries believe that a change in the status quo will not be easily agreed upon. This is an inefficient approach. To sum up, OPEC's policy making suffers therefore from two defects. The first is the lack of a link between the production policy and a price objective, and the second is the ad hoc nature of responses to price shocks. Some five years ago I proposed a policy scheme which is free from these two defects. The idea is simple and consists of the following elements: (A) Producers would first define an oil price range as their objective for the average price of a reference crude that obtains over a certain period of time. The reference crude could be either WTI or Brent. The period of time over which the average price is computed should not be shorter than a month, and not as long as three months. The range which defines the acceptability of the average price should not be very wide. A reasonable range is $2 per barrel. It is important to stress that the proposed range does not set limits to price fluctuations in the market. They can move as they wish outside the limits of the range. What matters is that the average price of the relevant period (computed as an arithmetic average of closing prices) would be deemed acceptable if it falls within the range. (B) If the average oil price in a relevant period falls outside the range, the exporting countries will automatically implement in the next period a pre-agreed adjustment to their exports. Exports will be cut if the average price is below the lower end of the range, and increased if it is above the higher limit of the range. A one per cent change in quotas (or a change close to one per cent) for a $1.0 barrel divergence of the average price from the relevant limits appears to be an appropriate adjustment. (C) The variable subject to adjustments should be exports not production. This may require a translation of current production into export quotas. (D) No policy - be it a single production policy or one which links production to a price objective - can perform efficiently when the decision makers have no access to the relevant information. One of the reasons why the production cuts of March and June 1998 and those of March 1999 were less than optimum is because they were based on wrong assumptions about production and /or stock levels. There is not much that OPEC can do about statistics in inventories other than apply a healthy and sharp critical sense to available information. But exporting countries have it within their power to publish export data every month. In the context of our suggested policy scheme, export volumes can be reported at the end of every month to an ombudsman by submitting copies of the bills of lading of tankers which lifted oil in the month. When cuts are required no party will have an incentive to understate its exports. It may try to overstate them but this would imply faking bills of lading which is easily spotted. Similarly when export increases are required a party has no incentive to underestimate exports. As before, overstatement may be a problem but can easily be spotted. This procedure does not require the expensive use of a firm of accountants visiting countries and checking their books. Since the relevant variable is exports, all that is needed is a pocket calculator to add up the bills of lading and a subscription to the Lloyds services to check on the existence of dubious tankers. This idea of a policy scheme involving a price range and production adjustment is being promoted by some OPEC member countries. It is eliciting a number of objections some of which reflect a misunderstanding of the proposal outlined above (although perhaps not of proposals made by others which I have not seen). It is wrong to liken this scheme to Central Bank intervention on foreign exchange markets. These sometimes fail because the market has larger foreign exchange holdings than the Central Bank. The oil situation is of a completely different nature. It is also wrong to assume that the scheme is about an intervention that will keep price fluctuations tightly bound between limits. The objective is the average price not day-to-day or intra-day volatility. More importantly the purpose of the scheme is to signal to the market that the exporting countries are serious in their resolve to have average prices sticking to a preferred range. It would be naïve to think that the periodic quantitative changes will at every round bring the average price within the band. The adjustment is likely to be progressive involving a sequence of moves. The benefit of the scheme is that it reduces significantly the risk of prices moving consistently, for a fairly long period, below or above the range. Three problems remain. First to define the range. Negotiations on the issue will revive the rift between doves and hawks. Second to cope with asymmetrical responses to price falls and price rises. Producers are more likely to adopt a policy that stops and reverses a price decline than to take the steam out of a price rise. Third, there is the more serious issue of the impact of price certainty on investments outside OPEC. For this reason the price range should be changed from time to time. This may appear to be the most difficult aspect of the scheme. Yet, on reflection, one wonders whether the industry investment plans are not predicated on what they think is a likely average price that remains stable for a long period of time. This price is perhaps $15 for Brent. To give them some certainty at $17 or $18 for Brent may not be such a very big deal after all. [post_title] => Managing Oil Prices within a Band [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => managing-oil-prices-within-a-band [to_ping] => [pinged] => [post_modified] => 1999-09-01 00:00:47 [post_modified_gmt] => 1999-08-31 23:00:47 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/managing-oil-prices-within-a-band/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [14] => WP_Post Object ( [ID] => 28021 [post_author] => 1 [post_date] => 1999-08-01 00:00:50 [post_date_gmt] => 1999-07-31 23:00:50 [post_content] => A. The Oil Price Saga How far is Tipperary? Well, the answer to this question depends first and foremost on where you happen to be when you enquire. In the same vein we can ask: `How high are oil prices today?' And we would then answer the question by a further question: `What is your reference point?' Oil prices hit very low levels on Tuesday 9th February 1999. At the end of that day dated Brent was assessed at $9.70/barrel and WTI on the NYMEX closed at $11.68/barrel. The downward trend in prices which began in 1997 reached a nadir on that dark day. On Wednesday 11 August, almost exactly six months later, dated Brent was assessed at $20.57/barrel and WTI on the NYMEX closed at $21.52/barrel. The dated Brent price more than doubled and the WTI price rose by about 85 per cent! The price rise appears to be huge if the reference point is the very low level where the decline bottomed out. A different picture emerges, however, if we compare current prices with the levels that have tended to prevail, save in three instances, throughout a recent ten-year period (1988-97). The exceptions were: (a) The Iraq-Kuwait war. It caused prices to rise to high levels between August 1990 and mid-January 1991. In retrospect, considering the significance of this political event, the considerable damage caused to oil production facilities in Kuwait, and the embargo on Iraq the period of high oil prices appears to have been surprisingly short. (b) A downturn in 1994. Oil prices fell down to $13 or $14 per barrel in reaction to the emergence of excess supplies. Compared with what happened later, in 1998 and early 1999, the oil price decline of 1994 now appears as a relatively short episode of limited significance. (c) An upturn in 1996. During that year prices reached the $25/barrel level. The rise was generally attributed to low inventories. There is indeed an observed statistical relationship between crude oil prices on the NYMEX and oil inventory levels in PADD 2 (the US Mid-West) and PADD 3 (the US Gulf Coast). Prices started to fall away from this $25/barrel peak when inventory levels regained their normal levels. One could broadly state that for the rest of the 1988-1997 period Brent prices have tended to average $17-18/barrel and WTI prices $19-20/barrel. For some reasons these price levels are accepted as `normal' by the majority of oil producers (countries and companies) and by powerful governments of OECD countries. That they have been falling at about 2 or 3 per cent per year in real terms does not seem to have raised much concern. There is no doubt that the petroleum markets implicitly use these price ranges as references against which to assess the significance of price movements. Whenever the deviation from these reference levels appear to be unjustifiably large a correction sets in. In the fifteen months period, from January 1998 to March 1999, oil prices deviated significantly from the usual norms. They moved, and stayed for a very long time, well below the levels that have come to be generally considered as acceptable, although not necessarily comfortable. Markets marked down prices during this period: first, because oil production increased faster than demand, the latter being adversely hit by the economic crisis in Asia; secondly, because a contango on futures markets led to a build up of inventories which was then correctly interpreted as a supply overhang casting a long shadow on the months ahead; and thirdly, because in the period between June 1998 and early March 1999 the market lost faith in the ability of exporting countries to decide upon, and implement, a credible programme of production cuts. In March 1999 the exporting countries got their act together. They agreed a package of output cuts to be implemented beginning in April which the markets judged to be credible for five important reasons. (a) The size of the cuts, in excess of 2 mb/d was significant. (b) Saudi Arabia agreed for the first time since 1993 to set its production well below 8 mb/d, a level that was considered for the past six years as immutable irrespective of the supply/demand balance on the market. (c) The long-standing disagreements between Venezuela and the rest of OPEC were resolved with the election of President Chavez. (d) The disagreement between Saudi Arabia and Iran about the Iranian quota and actual production levels which had paralysed OPEC during long months was removed by negotiations between the two countries conducted by their respective ministers of foreign affairs. (e) The decision to curtail output was taken at a time when the supply/demand equation was roughly in balance, that is at a time when there was no further build up of inventories. This simply means that production cuts if implemented would, sooner or later, begin to reduce the supply overhang which the build-up of stocks in late 1997 and in the first eight or nine months of 1998 had created. Markets always react in anticipation. They began to bid up oil prices towards the end of March, before the date at which the cuts began to be made. Because of inevitable lags due to the time it takes to bring oil to its destination, and to the fact that the first three months (April to June 1999) of implementation coincided with the seasonal fall in demand that usually occurs in the spring, inventory levels did not begin to fall before late in June, and more markedly in July. The fall in inventory levels gave a new impetus to the oil price rise. We should recall, however, that prices move up or down, in response to news, anticipations or shocks from whichever level they happen to be at. This is precisely why commodity markets, like equity, bond on foreign-exchange markets, tend to over- or under-shoot on occasions. Anticipations had already pushed prices up when the decline in inventory levels send a new bullish signal which sent prices higher up. B. Oil Prices are neither the Sole Criterion nor the Sole Objective The critical question, now, is whether the exporting countries have reached, or even over-reached, their objective? Many voices are heard prompting exporting countries to reconsider their production policies, advising that quotas should be revised upward at the OPEC meeting next September, if not before. Haven't prices doubled in the past six months? Isn't this a very dramatic increase, a significant shock that calls for a remedy? Alas, these questions and views reflect a deplorable lack of understanding of the state of the market, the ways in which it behaves and the objectives of exporting countries. Once more, as in 1996 when prices reached temporarily a high level and in 1998 or early 1999 when they fell to abysmal levels, commentators who ought to know better want us believe that the high or low prices which obtain in a particular episode are there to stay for ever. It is misleading to assess the oil price movement in relation to the trough of February 1999. The relevant observation is not that the oil price has doubled over the past six months but that after a very long interval of eighteen months or more it has returned to the level which most parties involved in the petroleum scene consider as acceptable or normal. The question that should concern the exporting countries, and indeed all those with a professional interest in petroleum, is whether all the fundamental features of the market reflect a return to a stable state? The factors that caused the price collapse of 1998, apart from the inability of exporting countries to agree and implement swiftly a production policy were: production increases in the OPEC region in excess of the call on OPEC, that is from the difference between the increase in world demand for oil and the increase in non-OPEC production; the build-up of inventories which was helped by the emergence of a contango in the term structure of prices on the futures markets. The current situation may be characterised as follows. Although oil prices have been racing ahead inventory levels are not yet back to the levels that ensure some market stability and the term structure of futures prices is not yet entirely in backwardation. To assess these features of the current market we need a point of reference for comparison. Neither the 1996 nor the 1998 market situations provide valid references because the market was in disequilibrium in both these years. A better, though not ideal, reference period may be the first half of 1997. During these six months prices moved back from the high levels attained at the end of 1996 to the normal ranges of $17-18/barrel of Brent and $19-20/barrel of WTI; inventories were built up from low levels to more usual ones, and the steep backwardation on futures markets gradually became flatter and flatter. The averages of relevant data for the six first months of 1997 (an approximation of the period's mid-point) provide a reasonably good idea of the features that characterise a market in a state consistent with the desired price ranges. The average levels of crude oil inventories in the first half of 1997 in the USA and in PADD 2 and PADD 3 were as follows: USA PADD 2 PADD 3 309.2 mb 67.8 mb 150.3 mb On 30 July 1999 the respective levels were as follows: USA PADD 2 PADD 3 325.6 mb 71.5 mb 167.8 mb We are considering these particular data instead of estimates of world-wide inventories not only because US statistics are more reliable but because the WTI price is very sensitive to oil inventory levels in the USA and particularly in PADD 2 and PADD 3. It is clear that the inventory levels are still higher than their comfortable levels. Although the WTI price on the NYMEX reached $21.52/barrel on 11 August 1999, the term structure of futures prices showed on that day a small contango between the September contract ($21.52/barrel) and the October contract ($21.61/barrel). Backwardation only appears as from the third month. In 1997 the term structure shifted from steep backwardation at the beginning of the year (68 cents between first and second month and $3.19 between first and sixth month on 1 January 1997) to a flat price line in March and a mild contango of about 10 cents per month in June.This inversion was the first symptom, unnoticed at the time, of the crisis to come. It is clear that the term structure of futures prices at the beginning of this August does not clearly suggest that supply and demand are in stable balance, and certainly not that the market is tight. C. Conclusions We conclude that the time has not yet come for exporting countries to decide on an upward revision of their quotas. They may all draw great comfort from the rise on oil prices. They should remember, however, that prices do over- or under-shoot. They often move ahead of other indicators. The oil-exporting aim was, and still is, to remove the supply overhang which is still there in the form of surplus inventories. Oil prices would become vulnerable to a strong downward correction if this aim is not achieved. And they will inevitably fall in a significant manner if premature increases in production leads to a new inventory build-up, to the re-emergence of a contango on futures market, and to a change of the market's perceptions of the motives and behaviour of oil-exporting countries. [post_title] => Should OPEC Now Raise its Output Quotas? [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => should-opec-now-raise-its-output-quotas [to_ping] => [pinged] => [post_modified] => 1999-08-01 00:00:50 [post_modified_gmt] => 1999-07-31 23:00:50 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/should-opec-now-raise-its-output-quotas/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [15] => WP_Post Object ( [ID] => 28027 [post_author] => 1 [post_date] => 1999-05-01 00:00:35 [post_date_gmt] => 1999-04-30 23:00:35 [post_content] => Distillate (heating oil and diesel) inventories fell steeply in the USA in the early eighties (see figure below) and have lost some of the pronounced seasonal effect associated in particular with heating fuel oil . Why have stock levels fallen and what has driven the changing seasonal pattern in the 1980s and 1990s? Below I explore some possible reasons. Distillate inventories grew from 35 to 205 million barrels (mb) (annual averages) over the 1947-1980 period. As is shown in the figure a large build-up was seen between 1973 and 1980, followed by a 62 percent fall in inventory levels until 1989, after which stocks gradually increased. In the 1990s stock levels gradually rose to 125 mb in 1995, but 1996 saw a sharp fall to an uncomfortably low 106 mb, then in 1998 stocks surged to 137 mb. The seasonal effect (stock draws in the February to April period and stock builds in the July to August period) has dampened considerably over time. A number of reasons have been suggested as explanations for these trends: a) rationalisation in the refinery industry; b) a move to relatively higher crude stocks; c) "just-in-time" inventory management; d) changing demand patterns; e) increasing environmental regulation, and; f) an increasing reliance on imports. Below, we consider these in more detail. Following a steady build-up of refining capacity in the 1970s the removal of price and allocation controls in 1981 saw the industry enter a period of rationalisation. The number of US refineries declined from 324 in 1981 to 163 in 1997, with most of the closures coming in the early 1980s. The fall of inventory levels in the 1980s was mainly due to the drive to cut costs. Stocks held by refiners declined by about 31 percent from 49 mb in 1981 to 34 mb in 1989. The largest drop in inventories was seen at bulk terminals where stocks went from 114 mb in 1981 to 45 mb in 1989. Stocks at bulk terminals are a seen as a direct variable cost, in the order of 1 cent per gallon per month, while stocks held at refineries are needed for smooth operation of the system and hence reflect demand more directly, a point we return to below. New investment went into upgrading existing facilities by adding secondary processing equipment, and this together with capacity creep helped to offset the impact of refinery closures. By 1997 the number of refineries was half that of 1981 but, total distillation capacity only fell by 17 per cent. Utilisation rates increased from 66 per cent in 1982 to over 90 per cent in the late 1990s and, while distillation capacity has declined, output has increased. Increased refinery complexity and utilisation rates have facilitated greater flexibility for refiners, and hence lower stock levels were needed to avoid stock-outs. Perhaps the greatest impact has been on the seasonal component of distillate inventories. Greater flexibility has meant that distillate output has fluctuated less, even though runs have increased, which is reflected in distillate inventory behaviour. Over longer time periods this effect is quite marked. In the 1990s inventory draws and builds have been smaller than in the 1980s, and stock builds are drawn out over a longer period. Some have suggested that relatively higher crude stock levels have allowed refiners to meet incremental demand with higher crude runs rather than using product inventories. With regard to the ratio of crude to distillate stocks a large rise in the ratio was seen in the early 1980s. It increased from approximately 2.5 in 1983 to above 3 in 1990. However, it had dipped back to 2.5 by 1998. Also relevant is that in terms of days covered crude stock levels have been below those for distillates and motor gasoline throughout the 1980-98 period, with days covered falling for crude oil and the two petroleum products during the period. With "Just-in-Time" (JIT) inventory management one sees a fundamental shift in the supplier/refiner relationships or supply acquisition practices that spread the benefits and the risks between the two parties. Lags associated with waterborne or pipeline shipments restrict refiners in adopting JIT relationships. JIT appears to be a loosely used term in the literature when the authors really mean cost-cutting practices, some of which would also be undertaken by a firm that wishes to pursue JIT inventory management. [The interested reader is referred to the Oil and Gas Journal (8 July 1996) for a critique of JIT adoption in the US refining industry.] Demand for distillates peaked in 1976-77 at 4.1 mb per day (b/d) and gradually fell to 2.7 million b/d by 1982/83. This drop in demand was due to fuel switching and energy conservation. Following a fall in prices demand has recovered to about 3.4 million b/d. The demand for heating fuel and diesel fuel has not followed the same pattern. Peak demand of distillate is driven by winter heating oil, consumption of which has declined steadily, in part due to competition from cheaper natural gas. At the same time demand for diesel fuel has gradually risen. Falling demand has lowered the demand for stocks, indeed, the (mildly) U-shaped pattern of demand is in line with the pattern displayed by refinery-held inventories, and the changing proportions between heating fuel and diesel reduced the seasonal component of stocks. Environmental regulation has also had an impact on inventory levels, and in particular it has reduced the fungibility of oil product stocks. The increase in the number of grades has required more segregation in storage. These factors have created an upward pressure on stocks which may in part explain the gradual rise in distillate inventories in the 1990s. Finally, US imports and exports influence stock levels, as both can be used to balance supply and demand without needing recourse to inventories. A number of factors combined to reduce distillate inventory levels in the 1980s. The two main factors were refinery industry efforts to raise profitability combined with falling demand. In the 1990s, distillate stock levels have remained steady or increased slightly. In part, his may be due to the lagged effect of increased environmental regulations which have increased demand for storage. The declining seasonal effect is largely due to increased refinery complexity coupled with a changing (heating oil/diesel) demand composition and a greater use of international trade. [post_title] => Distillate Inventory Behaviour in the USA [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => distillate-inventory-behaviour-in-the-usa [to_ping] => [pinged] => [post_modified] => 1999-05-01 00:00:35 [post_modified_gmt] => 1999-04-30 23:00:35 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/distillate-inventory-behaviour-in-the-usa/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [16] => WP_Post Object ( [ID] => 28038 [post_author] => 1 [post_date] => 1999-03-01 00:00:28 [post_date_gmt] => 1999-03-01 00:00:28 [post_content] => Gas-exporting companies and gas-importing utilities in Europe are in the process of reconvening, possibly in Norway, a conference first held last December in Algiers, to consider the impact of the current economic environment on the gas industry. Although the initiative was triggered by the prevailing oil price crisis, the Algiers conference also expressed concern about the likely effect of the forthcoming liberalisation of gas markets in Continental Europe. The producers, who took the initiative for the Algiers meeting, seem primarily troubled by the impact on investment returns of lower gas prices, whether generated by depressed oil prices or by the opening up of the gas markets. However, the two phenomena are of a different nature, create different uncertainties and challenges, and therefore signal different policy directions.

Gas price formation in a nutshell

In a managed system, as is presently the case in Continental Europe, gas is generally traded by a monopoly utility in the various market segments. As gas competes mainly with oil products, its value is derived from the end-use prices of these alternatives, weighted to reflect the share of the different segments of the market, and netted back to the export border to form the contractual base price. A price indexation formula, incorporating a pass through factor, ensures that gas maintains its competitiveness in the end-use market. In addition, to smooth out the fluctuations of oil prices, a lag mechanism is introduced typically 3 months backward-6 months forward. Therefore, when oil prices collapsed in 1998, gas prices at the borders, after having been sheltered for a while, followed suit. Indeed, when the UK-Europe Interconnector was commissioned in October 1998, contractual gas prices on the Continent were below the prices generated in the liberalised British market. In a liberalised market, gas prices tend to be determined by the interaction of supply and demand of gas. For example, in the US market as regulations were gradually lifted in the early 1980s and market forces allowed to operate, a spot market developed, followed, since 1990, by a futures market. This facilitated price discovery for prompt deliveries and for future spot gas supplies. As a result, market-based prices replaced old indexation formulas where gas prices had been linked to those of alternative fuels. Similarly, though in a more dramatic way, the process of liberalisation in Britain has induced rapid changes in market structure and prices, leading to the development of spot and futures markets for gas. Although the structural features of the American and British markets are very different, prices have tended to reflect competitive supplies and therefore have declined substantially

Does liberalisation always generate lower supply prices?

The American and the British experiences exhibit a general pattern. In mature markets where logistics and supplies are ample, liberalisation leads to the development of commercial commodity markets. This supports the expectation that a liberalised Continental European gas market would ultimately lead to new price mechanisms. But does liberalisation always generate lower supply prices? And if yes, how low would they go? In the short term (first stage of market opening), there is likely to be an excess of supply at the borders of North West Europe, following the commissioning of the Interconnector, and in a later phase possibly in 2000-2001, of the Belarus-Poland (Yamal) pipeline. These will be the key drivers of prices and new contractual arrangements. In particular, it is expected that gas trading through the Interconnector will greatly influence the gas business in that part of the continent. As a consequence, the development of transparent reporting of short-term transaction prices will develop into a spot market at Bacton-Zeebrugge, and, in a later phase at a trading point somewhere in Germany. As neither the Interconnector nor the Belarus-Poland pipeline capacity is fully contracted on a long-term basis, the potential floor for border prices may be set by the new Bacton-Zeebrugge spot market or the lowest offer price for Russian gas. To a lesser extent, an opposite move in the form of upward pressure on prices and longer-term contractual arrangements, may result from a 'dash' for gas in the power generation sector, similar to the one caused by the first wave of gas-fired power generation in the UK in the early 1990s. However, the generators would hardly be willing to pass to the supplier some of the incremental gas value resulting from cost and efficiency gains of CCGTs as well as a premium reflecting part of the environmental cost savings. In the longer term (second and third stages of market opening), as open access is progressively implemented, and gas-to-gas competition emerges, pressure will start to mount on long-term contract prices. In particular, determinants of gas import prices will shift from prices of competing fuels to spot prices. In this case, border prices may tend towards the marginal costs of supplies

Differing uncertainties, challenges and responses

Whether generated by depressed oil prices in a managed system or by competition in a liberalised system, lower gas prices generate lower value for the producers and therefore pose the fundamental problem not only of dwindling government revenues but also of the economic viability of investments aimed at developing new gas supplies far afield and from costly reservoirs. However, gas producers should be aware of the fundamental difference between the uncertainty caused by low oil prices and that caused by the prospect of liberalisation. In the first case the impact is on the well head value of gas; in the second case, it is the whole structure of the value of the gas chain which is affected. In the first case, the producers-exporters alone will bear the brunt of the impact. With limited scope to raise funds for new investments, they will be compelled to reassess their upstream development and refocus their priority investments. As the main importing utilities have secured their gas supplies well until the second half of the next decade, some of them even holding supply contracts in excess of their apparent market requirements in 2010, this prospect will hardly affect the security of supply. In the second case, the impact is on all the actors, who will come under increasing pressure from competition. Existing and new players are expected to move aggressively to capture whatever new value is generated along the chain. Those who do not adapt to the new market structure will lose margins or even whole market segments. As market developments unfold and pressure on prices increases, producers-exporters will have to find fresh ways to differentiate themselves, take advantage of new opportunities downstream and add value to their gas business. Ensuring access to the end-users, through different aggregation routes than those currently available, will be a crucial move in that direction. As one informed company leader put it candidly and bluntly: 'It would be foolish to stay a producer only', meaning that, in a liberalised market, the concept of a gas producer-exporter will be obsolete. [post_title] => Lower Gas Prices: Have Producers Got The Right Signals? [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => lower-gas-prices-have-producers-got-the-right-signals [to_ping] => [pinged] => [post_modified] => 1999-03-01 00:00:28 [post_modified_gmt] => 1999-03-01 00:00:28 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/lower-gas-prices-have-producers-got-the-right-signals/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [17] => WP_Post Object ( [ID] => 28039 [post_author] => 1 [post_date] => 1999-02-01 00:00:49 [post_date_gmt] => 1999-02-01 00:00:49 [post_content] => This article was first published in Middle East Economic Survey February 1st 1999. The merger frenzy to which the oil industry is succumbing today should not be attributed to the recent price collapse. Prices fall and rise in the short period; mergers are designed to last for a much longer while. Companies seek to merge, so desperately that some are willing to sacrifice their independence, for more fundamental motives than a transient price upset. These motives belong to a story that goes back to the early 1980s. A story which has a single hero: the shareholder. In a remarkable revolution shareholders bestowed on themselves the divine right to growth. Read dividends and share prices growth. And this right supersedes those of all other stakeholders - labour, customers, and the countries where companies operate. But shareholders are absentee landlords. They cannot achieve this growth objective without the help of insiders. They readily found them in management and brilliantly succeeded in mobilising them by offering share options. From then on management adopted the motto _deliver shareholder value' that is growth plus the firm promise of future growth. The management of oil companies faced, however, a big hurdle from the outset. Their's was a low growth if not stagnant industry. The growth in profits could not be easily achieved through increases in gross oil revenues. Attention had to turn therefore to net revenues and return on assets. Some companies began to retrench and downsize, selling non-core assets, buying back their own shares, and of course shedding labour everywhere including R&D departments. Although there were some mergers in the early days (Gulf- Chevron, BP-Sohio, Texaco-Getty) others preferred to reduce their size rather than expand. As there are limits to reductions in employment, companies focussed next on the savings potential of new technology. They did remarkably well on this new front particularly in exploration and off-shore development. So well indeed that cost reductions can no longer be achieved at the same rate. Lower taxation enhances net revenues. Oil companies thus lobbied governments to reduce or abolish upstream production taxes and royalties. Their greatest success on this fiscal front was in the UK. Having exploited the cost-savings potential of labour redundancies and technology and done their utmost on taxes, oil companies are now trying to deliver growth promises through alliances, mergers or acquisitions. The new philosophy is that size does matter. Downsizing achieved cost reductions by lowering the ratio of labour to assets, and increased rates of return by shedding non-performing activities. Mergers which, on the contrary, involve increases in size seek both lower labour ratios and higher returns by adding together complementary assets, and getting rid of duplicate facilities. Let us get bigger so that we can continue to cut. The expected benefits of mergers relate to economies of scale, labour redundancies and the mysterious workings of synergies. For these to obtain one needs to find a partner that is both suitable and willing. Alas, the many that are eagerly willing today are not always suitable. The secret hope is that mergers will increase profits by increasing concentration in both input and output markets. This is perhaps what synergy means. Companies of course will never refer to the small elements of market power that mergers may give. Twisting the meaning of concepts they say 'We need mergers to enable us to compete'. Are mergers the last step in the quest of growth in profits? The most successful will realise benefits in two or three years' time, and with luck generate then after a steady stream. But shareholders demand growth not constant incomes. One avenue, the companies hope, remains for profit growth. Its name is access to the rich oil reserves of the Middle East and Latin America. It is there that the oil paradise lies. Past nationalisations have closed its doors. And the companies' most cherished desire today is to return to Paradise Lost. Gatekeepers are more likely to open its doors when they have been weakened by impoverishment, political pressures from the West, and ideological brainwashing. For this reason, some may think that low oil prices today are a blessing in disguise. Once inside paradise companies will naturally want to produce without constraints. It is not difficult to imagine the possible impact on oil prices and the political consequences of low revenues for exporting countries. The forced entry of paradise with the idea that maximum production is bliss may hold a vengeance against companies. Their profits are not immune to low oil prices and their investments to the assault of reborn nationalism. There is no Eldorado in oil without a production policy. Companies fascinated by the haunting image of this Eldorado should begin to think about the necessary marriage between access to huge and cheap reserves and production restraints. Are they prepared, for example, to shut down a barrel of high cost oil for every new barrel of low cost oil they may produce in the Eldorado? Or will they blindly bring the roof down on fragile governments of oil countries and ultimately on themselves? Think of the Venezuelan elections: oil nationalism is not yet dead. Think of the parlous state of the oil market: maximizing production brings about a price collapse. What should matter is profits and revenues, and more often than not it is price which sustains them, not maximum production and greater market shares. A simple notion which everybody seems to have forgotten at great peril to all concerned. [post_title] => Mergers and the Oil Eldorado [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => mergers-and-the-oil-eldorado [to_ping] => [pinged] => [post_modified] => 1999-02-01 00:00:49 [post_modified_gmt] => 1999-02-01 00:00:49 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/mergers-and-the-oil-eldorado/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [18] => WP_Post Object ( [ID] => 28051 [post_author] => 1 [post_date] => 1998-01-01 00:00:51 [post_date_gmt] => 1998-01-01 00:00:51 [post_content] => Oil prices have fallen since the end of November 1997 well below a level of $18 per barrel for dated Brent which petroleum-exporting countries and oil companies have been recently inclined to consider as a kind of acceptable norm. The fall in price has elicited rather speedily a producers' response which involved both OPEC and non-OPEC countries. [post_title] => The Oil Price Crisis of 1998 [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => the-oil-price-crisis-of-1998 [to_ping] => [pinged] => [post_modified] => 2016-02-29 13:53:47 [post_modified_gmt] => 2016-02-29 13:53:47 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/the-oil-price-crisis-of-1998/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [19] => WP_Post Object ( [ID] => 28116 [post_author] => 1 [post_date] => 1991-01-01 00:00:19 [post_date_gmt] => 1991-01-01 00:00:19 [post_content] => The notion that a dialogue, leading to co-operation between oil-producing and oil consuming countries, may either avert oil shocks and excessive price instability or, at least, mitigate their adverse effects emerged early on in the 1970s. The very few observers who predicted the 1973 oil shock a year or two before its occurrence also sensed that the impending crisis would not be rapidly solved by smooth market responses and short-term economic adjustments. In their judgment the dramatic situation that was going to develop with dire consequences for the welfare of oil-importing nations called for a political solution. [post_title] => A Dialogue Between Oil Producers and Consumers: The Why and the How [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => a-dialogue-between-oil-producers-and-consumers-the-why-and-the-how [to_ping] => [pinged] => [post_modified] => 2016-02-29 13:48:40 [post_modified_gmt] => 2016-02-29 13:48:40 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/a-dialogue-between-oil-producers-and-consumers-the-why-and-the-how/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [20] => WP_Post Object ( [ID] => 28121 [post_author] => 1 [post_date] => 1990-01-01 00:00:58 [post_date_gmt] => 1990-01-01 00:00:58 [post_content] => The Middle East holds a very Iarge proportion of the world's proven oil reserves. More importantly, the region has been the major potential source of incremental supplies since the 1940s, and will retain this role in the foreseeable future. Other oil regions that played this roIe in the past, such as the North Sea and Mexico, have not been able to sustain it for very long. [post_title] => Political Dimensions of the Gulf Crisis [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => political-dimensions-of-the-gulf-crisis [to_ping] => [pinged] => [post_modified] => 2016-02-29 13:48:27 [post_modified_gmt] => 2016-02-29 13:48:27 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/political-dimensions-of-the-gulf-crisis/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [21] => WP_Post Object ( [ID] => 28158 [post_author] => 1 [post_date] => 1986-01-01 00:00:47 [post_date_gmt] => 1986-01-01 00:00:47 [post_content] =>

The double squeeze on OPEC’s oil ouput caused by a fall in the world demand for oil and a rapid growth in non-OPEC supplies is preventing this organization from performing a price stablization role . The current oil price crisis is the consequence of these developments.

[post_title] => The Impact of Low Oil Prices on Demand, Supplies & the Petroleum Industry [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => the-impact-of-low-oil-prices-on-demand-supplies-the-petroleum-industry [to_ping] => [pinged] => [post_modified] => 2016-02-29 13:43:18 [post_modified_gmt] => 2016-02-29 13:43:18 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/wpcms/publications/the-impact-of-low-oil-prices-on-demand-supplies-the-petroleum-industry/ [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [22] => WP_Post Object ( [ID] => 28172 [post_author] => 1 [post_date] => 1985-01-01 00:00:09 [post_date_gmt] => 1985-01-01 00:00:09 [post_content] =>

The economic development of the Arab region in recent years has become heavily dependent on the fortunes of oil . The sudden and significant increases in oil prices and revenues of 1973/74 and 1979180 have had a considerable impact on the levels and patterns of economic development in the oil-exporting and in the non-oil countries of the Arab world.

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01.02.01

Transparency in Oil Markets and Other Myths

Two of the most persistent myths of oil markets are that: 1) the prices set for oil are efficient, which is to say, reflect the state of best knowledge about the market; and 2) oil production data published by the reporting services and consultancies accurately reflect the supply situation. In both cases, analysts are the […]

By: Robert Mabro
01.08.00

Oil Markets and Prices

In 1973/4 OPEC inherited from the Seven Sisters a pricing regime, which effectively administered by fiat the price of oil. There was a difference, however. The majors in the pre-1974 period used to fix a posted price, which was then used to compute royalties and the income tax paid to producing countries. When OPEC countries […]

By: Robert Mabro
01.06.00

The New World Oil Market

New features have emerged and transformed the physiognomy of the world petroleum market in this first half of the year 2000. The first is that the USA has behaved publicly and without any inhibition as a member of the oil producing countries’ club. The USA is, of course, a non-signed up member who nevertheless has […]

By: Robert Mabro
01.03.00

OPEC: Hard Choices

This article appeared in Middle East Economic Survey Vol XLIII, No 11, 13 March 2000. The oil-exporting countries spent fifteen months (January 1998-March 1999) to agree upon and implement production cuts of the magnitude required by a sceptical and intemperate market for correcting the declining trend in prices. They all knew that a small percentage […]

By: Robert Mabro
01.11.99

Suspending Sanctions on Iraq: Make Haste, Slowly

Iraq’s decision on 22 November to suspend oil exports, helping to send oil prices to highs not seen since the Gulf war, underscores the continuing turmoil surrounding international policy on Iraq. By all accounts the UN economic sanctions imposed on the country nine years ago after the invasion of Kuwait have reduced it to hardship. […]

By: Robert Mabro
01.09.99

Managing Oil Prices within a Band

Oil prices fell to very low levels during the January 1998 – March 1999 crisis. The oil-exporting countries sought to redress the situation by repeated attempts to impress the market with production cuts. The first attempt, made in March 1998, did not produce the desired price effect. The second attempt, in June 1998, was equally […]

By: Robert Mabro
01.08.99

Should OPEC Now Raise its Output Quotas?

A. The Oil Price Saga How far is Tipperary? Well, the answer to this question depends first and foremost on where you happen to be when you enquire. In the same vein we can ask: `How high are oil prices today?’ And we would then answer the question by a further question: `What is your […]

By: Robert Mabro
01.05.99

Distillate Inventory Behaviour in the USA

Distillate (heating oil and diesel) inventories fell steeply in the USA in the early eighties (see figure below) and have lost some of the pronounced seasonal effect associated in particular with heating fuel oil . Why have stock levels fallen and what has driven the changing seasonal pattern in the 1980s and 1990s? Below I […]

By: Robert Mabro
01.03.99

Lower Gas Prices: Have Producers Got The Right Signals?

Gas-exporting companies and gas-importing utilities in Europe are in the process of reconvening, possibly in Norway, a conference first held last December in Algiers, to consider the impact of the current economic environment on the gas industry. Although the initiative was triggered by the prevailing oil price crisis, the Algiers conference also expressed concern about […]

By: Robert Mabro
01.02.99

Mergers and the Oil Eldorado

This article was first published in Middle East Economic Survey February 1st 1999. The merger frenzy to which the oil industry is succumbing today should not be attributed to the recent price collapse. Prices fall and rise in the short period; mergers are designed to last for a much longer while. Companies seek to merge, […]

By: Robert Mabro
01.01.98

The Oil Price Crisis of 1998

Oil prices have fallen since the end of November 1997 well below a level of $18 per barrel for dated Brent which petroleum-exporting countries and oil companies have been recently inclined to consider as a kind of acceptable norm. The fall in price has elicited rather speedily a producers’ response which involved both OPEC and […]

By: Robert Mabro

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01.01.91

A Dialogue Between Oil Producers and Consumers: The Why and the How

The notion that a dialogue, leading to co-operation between oil-producing and oil consuming countries, may either avert oil shocks and excessive price instability or, at least, mitigate their adverse effects emerged early on in the 1970s. The very few observers who predicted the 1973 oil shock a year or two before its occurrence also sensed […]

By: Robert Mabro

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01.01.90

Political Dimensions of the Gulf Crisis

The Middle East holds a very Iarge proportion of the world’s proven oil reserves. More importantly, the region has been the major potential source of incremental supplies since the 1940s, and will retain this role in the foreseeable future. Other oil regions that played this roIe in the past, such as the North Sea and […]

By: Robert Mabro

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01.01.86

The Impact of Low Oil Prices on Demand, Supplies & the Petroleum Industry

The double squeeze on OPEC’s oil ouput caused by a fall in the world demand for oil and a rapid growth in non-OPEC supplies is preventing this organization from performing a price stablization role . The current oil price crisis is the consequence of these developments.

By: Robert Mabro

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01.01.85

The Economic Consequences of the Fall in Future Energy Demand in the Arab World by

The economic development of the Arab region in recent years has become heavily dependent on the fortunes of oil . The sudden and significant increases in oil prices and revenues of 1973/74 and 1979180 have had a considerable impact on the levels and patterns of economic development in the oil-exporting and in the non-oil countries […]

By: Robert Mabro

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01.01.84

On Oil Price Concepts

What do people mean when they refer to the ‘world price of crude oil”? What do they really mean when they state that the price of oil has risen” or that “it has come down”? There are many different concepts of the price of oil, a term which can be deceptive in its apparent simplicity.

By: Robert Mabro

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Books by Robert Mabro

24.02.11

Demand, Prices & the Refining Industry

This book of essays analyses the behaviour of demand for petroleum products in Europe, the structure of European refining and the patterns of investment and disinvestment in refining, the characteristics of capacity utilization in refining and of the marginal refining yield, the determinants of product price movement and their relationship to crude oil price behaviour […]

By: R. Bacon M Chadwick J. M Dargay Robert Mabro

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24.02.11

The 1986 Oil Price Crisis

The papers presented in this book assess the implications of the new era of low oil prices for energy-dependent countries (producers as well as consumers), energy industries, the international economy and the indebtedness of third world countries. The papers, given at the Oxford Energy Seminar in September 1986, reveal the initial reactions of important decision […]

By: Robert Mabro

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24.02.11

Natural Gas, An International Perspective

This collection of papers is concerned with the issues of international trade in natural gas. The prospects for trade are examined and the particular problems which hinder the expansion of gas trade in Western Europe, Japan, the USA and the developing countries are treated in detail by different authors. The controversial gas pricing issue is […]

By: Robert Mabro

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24.02.11

The Market for North Sea Crude Oil

This is the first comprehensive Study of the market for North Sea crudes. Written by a team comprised of academic economists and professionals from the oil industry, the book analyses and describes all the main features of the market. The operations of the market are examined in detail, and the main buyers and sellers of […]

By: Robert Mabro R. Bacon M Chadwick D. Long

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Robert Mabro

Honorary President

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The tale of the missing barrels

Gas price formation in a nutshell

Does liberalisation always generate lower supply prices?

Differing uncertainties, challenges and responses

Latest Publications by Robert Mabro

The Peak Oil Theory

Is the widely expected war on Iraq an oil war?

Saudi Arabia’s Natural Gas: A Glimpse at Complex Issues

China: The CO2 Elephant Steps Back into the Canoe

Iraq and Oil

The Oil Weapon

Political Crises and Price Rises

Does Oil Price Volatility Matter?

Transparency in Oil Markets and Other Myths

Oil Markets and Prices

The New World Oil Market

OPEC: Hard Choices

Suspending Sanctions on Iraq: Make Haste, Slowly

Managing Oil Prices within a Band

Should OPEC Now Raise its Output Quotas?

Distillate Inventory Behaviour in the USA

Lower Gas Prices: Have Producers Got The Right Signals?

Mergers and the Oil Eldorado

The Oil Price Crisis of 1998

A Dialogue Between Oil Producers and Consumers: The Why and the How

Political Dimensions of the Gulf Crisis

The Impact of Low Oil Prices on Demand, Supplies & the Petroleum Industry

The Economic Consequences of the Fall in Future Energy Demand in the Arab World by

On Oil Price Concepts

Books by Robert Mabro

Demand, Prices & the Refining Industry

The 1986 Oil Price Crisis

Natural Gas, An International Perspective

The Market for North Sea Crude Oil

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