ENERGY FORUM

A QUARTERLY JOURNAL FOR DEBATING ENERGY ISSUES AND POLICIES CONTENTS

Issue 75 November 2008 Middle East Political Stability Henry Siegman Lakhdar Brahimi In the Personal Commentary written for this issue by Andrew Gould Eric Rouleau the CEO of Schlumberger, the respective roles of services companies Walid Khadduri – page 3 and the international oil corporations are insightfully defined. Gould Whither OPEC? relates his analysis to Mark Moody-Stuart’s commentary published Robert Mabro in Forum 74 (August 2008) to which readers are referred for a fuller Bassam Fattouh – page 10 presentation of complementary views. He firmly believes that ‘the in- dustry can only satisfy society’s needs effectively when all the players Letters – page 16 clearly communicate their roles and relationships’. The contribution Personal Commentary of services companies is in technology and in the provision of first Andrew Gould – page 18 class skills that reflect the high quality of their staff. Trust between them and their customers is the most valuable asset; and this trust Asinus Muses – page 20 arises because competition is not involved in the relationship. The other articles in this issue are contributors all of whom have a long grouped under two themes. The first experience with, and often a direct which is covered by four contribu- involvement in, these matters. tions is the difficult subject of politi- I must add however that the stabil- cal stability in the Middle East. The ity issue involves other important importance of this topic for the oil elements from domestic political and gas industry is well recognised. conflicts, frustrations with the state At present a large share of world of economies and the lack of politi- production originates in this region; cal participation, resentment about and the huge reserves held by Mid- corruption, the impact of oil rev- dle East countries suggest that their enues on the distribution of income, role in supplying the world with oil to name but a few. Some of these and gas can only become more criti- may be addressed in future issues of cal in the long run. Forum. A host of factors are relevant to In a sharp analysis of the continual the stability problem. There are re- failure to solve the Arab–Israeli gional crises such as the Arab–Israeli problem, Henri Siegman points out conflict; international ones such that a country with the overwhelm- as the dispute over Iran’s nuclear ing advantages enjoyed by Israel ambitions; and internal instability rarely yields to the demands of a partly caused by foreign military very weak adversary. What is needed intervention in Iraq. These aspects is a powerful third party that can are addressed by distinguished restore the balance between Israel OXFORD ENERGY FORUM NOVEMBER 2008 and the Palestinians. The failure of many repeated Bassam Fattouh describes the relationship between attempts at ‘facilitation’ by the USA was not due OPEC and the world petroleum market result- to the lack of ideas but of a more critical lack of ing from the recent decision reducing production political will, in fact to cowardice. quotas as a dance in four stages or moves, some of which have already been made, and others are ex- The nuclear issue that has set the USA in associa- pected in the near future. He also points to cycles tion with other UN Security Council Members in the relationship with the market involving pas- plus Germany against Iran is analysed by Lakhdar sivity when prices are rising, except when political Brahimi, the veteran international mediator and pressure to intervene with production increases be- diplomat, and Eric Rouleau, the journalist and comes significant, and active responses when prices sometimes Ambassador who has followed the are too low or falling in a dangerous manner. Middle East for longer than five decades. Both Even then immediate success is a rare occurrence believe that the military option having been swept because of the initial scepticism of markets and the away by the problems in Iraq and Afghanistan long lags between the implementation of cuts and and the financial crisis is now leaving only the their impact at final destinations. ‘engagement’ policy as an option. Barack Obama’s election to the presidency (an event that occurred Forum is a debating journal. We welcome therefore after the articles were written) suggests that this letters to the Editor. We are publishing two letters option will indeed be pursued. This however here, and we encourage readers to write about the raises difficult questions about who will set the controversial issues addressed in this and other agenda of the negotiations, what the agenda will issues. consist of, and who will be involved other than the United States and Iran. My own question From time to time Asinus changes its identity and relates to the risk that Iran may read the US desire therefore its moods and style. A big thank you is to negotiate as a weakness and fail to make con- due to Robert (Bob) Sutcliffe who wrote the rubric cessions. What then? in a number of recent issues, and welcome to Paul Segal, an Asinus of a younger generation. Internal security in Iraq, a topic addressed by Wal- id Khadduri, is continually threatened by a long list of factors. The fundamental issue, however, is Contributors to this issue the failure to forge a social contract between the various population groups. Questions about the La k h d a r Br a h i m i is a UN mediator and former future also arise – such as the role of the army, Foreign Minister of Algeria Iraq’s reaction to a worsening of the nuclear dis- pute over Iran and the regional policy of a future Ba s s a m Fa t t o u h is Reader in Finance at the Iraqi government. School of Oriental and African Studies and Senior Research Fellow at the OIES The second set of articles is about OPEC. This Organisation has come under fierce attack by lead- An d r e w Go u l d is Chairman and CEO of ers of OECD countries when oil prices rose during Schlumberger the first half of 2008. Some seem to have forgotten Wa l i d Kh a d d u r i is a consultant to the Middle that the reference prices of oil are determined in East Economic Survey the futures market, a financial institution, and not by OPEC. Robert Mabro shows that the ‘cartel’ Ro b e r t Ma b r o is Honorary President of label consistently and continually pinned on OIES OPEC is only applicable to certain short episodes. Er i c Ro u l e a u is the former Middle East For a useful analysis of oil market’s behaviour it correspondent of Le Monde and French is important to understand correctly the role that ambassador to Tunisia OPEC plays in different times. The blanket use of the term cartel is an obstacle rather than a help to He n r y Si e g m a n is the director of the US/ understanding. Middle East Project in New York

2 OXFORD ENERGY FORUM NOVEMBER 2008 Middle East Political Stability

Henry Siegman asks choices Palestinians have so often of that goal. That is something Israel made in pursuing their struggle for has refused to say to the Palestinians whether the next US statehood – from egregious failures and to the Syrians and that is why at institution-building, to murderous all previous negotiations have gotten President can rescue violence against innocent civilians, nowhere. a two-state solution to to the more recent fratricidal warfare between Fatah and Hamas for which the Israel–Palestine Fatah’s refusal to accept the demo- conflict cratic choice of the Palestinian people “The next occupant of the in the parliamentary elections of 2006 Oval Office will be the last deserves most of the blame. Rather, The next occupant of the Oval Office American president to be it is intended to say that the difficult will be the last American president to measures Palestinians must take to put able to save the two-state be able to save the two-state solution their house in order will remain be- to the Israel–Palestine conflict. If he solution to the Israel– yond their grasp unless they are given does not pursue and achieve this goal Palestine conflict” a credible and proximate commitment during the first year of his presidency, for a Palestinian state alongside of the two-state ‘horizon’ that President Israel that is ‘independent, viable George W. Bush pursued so ineffec- Of course, while in office, Olmert and sovereign’ as of right, not Israeli tively is likely to disappear for good. not only did nothing consistent with generosity. And because such a state But even a quick engagement by the this understanding, but until the very is indeed the right of the Palestinian new president will fare no better than last moment personally approved people, its acknowledgement must previous US peace initiatives – all of measures – such as authorising further precede, not follow, conditions that which have gotten nowhere – if he construction in the settlements and are set for its implementation. That and his advisors approach the task in East Jerusalem – that deepened such a clear commitment has not been believing that some more ‘peace the despair of Palestinians and made made to this day is far more revealing processing’ or ‘confidence-building a two-state solution an even more of Israeli intentions and US/European measures’ will achieve the goal that impossible dream. indifference than any number of eluded his predecessors. confidence-building measures that *** The Israel–Palestine conflict has defied have left entirely unchanged the US ‘facilitation’ over these many years Palestinians’ status as a people under The first and most decisive of the not because of procedural shortcom- the heel of a crushing and open-ended ignored fundamentals is the vast ings, nor because of a paucity of ideas. occupation. discrepancy of power and influence The terms of a workable agreement – In a recent interview following his that defines the Israeli and Palestinian formulated in the Clinton Parameters resignation as prime minister, Ehud relationship. It is rare for a country and elaborated in the Taba discussions Olmert shocked Israelis by endorsing with the overwhelming military, that followed – are well-known, and views associated with Israel’s political diplomatic and economic advantages enjoy near-universal support. What hard left. Among other startling dec- enjoyed by Israel to yield to demands has been missing is the political will to larations, he said that the reason Israel of a near-impotent adversary without get the parties to act on these param- was able to reach a peace agreement a powerful third-party restoring some eters – a political and moral failure with Egypt – as opposed to its futile balance between the two. The only that has doomed all previous efforts. efforts to achieve a peace accord with outside power capable of restoring This failure has not been the result of Arafat or with Syria’s two Assad’s that balance is the United States, ignorance, but of cowardice – a willful – was not Sadat’s dramatic visit to because its support and friendship for disregard by successive American Jerusalem. The real reason is that well Israel are unquestioned by Israelis, administrations and by much of the before Sadat’s visit, Israel’s celebrated and are understood by virtually international community of certain chief of staff and foreign minister, everyone in Israel to be the country’s unchanging fundamentals that underlie Moshe Dayan, at a secret meeting most important security asset, one this conflict. Peace initiatives that with Sadat’s envoy in Morocco, they dare not weaken. ignore these fundamentals and seek delivered the following message from Without a determined American an agreement on the cheap cannot Prime Minister Menachem Begin: insistence that Israel end its occupa- succeed. First, Israel is prepared to return tion and negotiate a peace accord The following catalogue of past every last inch of Egyptian territory that approximates the international Israeli and European/US failures is under Israeli occupation. Second, now consensus without further delays, no not intended to excuse disastrous let us negotiate the implementation amount of tinkering with negotiating

3 OXFORD ENERGY FORUM NOVEMBER 2008 mechanisms or reformulations of per- the pre-1967 situation may be inevi- doing so. What Palestinians have manent status issues, and no amount table, they will not receive US and asked is that Israel return Palestinian of ‘CBMs’ – confidence-building international support or recognition territory on which Israel has illegally measures – will change the forty-year if made unilaterally by either party. It established settlements and to which dynamic of the conflict that has is a principle that President Bush and it has transferred its own population, resulted in so extensive an expansion Secretary of State Condoleezza Rice in violation of treaty obligations and of Israel’s population into Palestinian repeatedly affirmed rhetorically, but international law. territories as to no longer allow a two- never acted upon. So far, it is only Palestinians who state solution. That Israel’s continuing have made painful concessions. This settlement project in East Jerusalem they have done when, as a condition and in the West Bank has reached that for Israel’s acceptance of the Oslo point is beyond question. What is not “So far, it is only Accords, the PLO formally agreed to clear is whether these Israeli ‘facts on Palestinians who have made recognise the legitimacy of territory the ground’ are still reversible. painful concessions” acquired by Israel in the war of 1948. Such reversibility depends entirely It is a concession that reduced by on the next American president’s fully one-half the territory originally leaving no doubt about America’s At a press conference following her assigned to the Arab population of resolve to use its leverage to end the February 2006 meeting in Washington Palestine by the United Nations in conflict on the basis of the existing with Israel’s Tzipi Livni, Secretary the Partition Plan of 1947. Given that international consensus while fully Rice said that ‘the United States major Palestinian territorial conces- supporting – and participating in – position on [Israel’s unilateralism] sion, any new initiative that does not measures necessary to enable Israel to is very clear and remains the same. provide that negotiations begin at the deal with security challenges created No one should try and unilaterally pre-1967 armistice line and requires by a peace accord that conforms to predetermine the outcome of a final Palestinians to relinquish even more previous agreements and international status agreement. That’s to be done at of the 22 percent of the territory that law. However complicated and costly final status.’ Rice added that President has been left them (other than in equal they are, such arrangements hold far Bush’s letter to Prime Minister Ariel land swaps) will be stillborn. greater promise of protecting Israel’s Sharon endorsing the need to take into The United States and the interna- security within its borders – and at consideration ‘new population centers’ tional community must finally reject lesser material and moral cost – than in the West Bank does not provide a the unspoken but long-dominant the perpetuation of Israel’s occupation licence for anyone to ‘try and do that notion that if the parties do not reach of the West Bank. in a preemptive or predetermined way, a peace accord, the ‘default setting’ A muscular and proactive US diplo- because these are issues for negotia- of UN Resolutions 242 and 338 is a macy will be criticised by some as tion at final status.’ Yet both Bush continuation of Israel’s occupation. If constituting an inappropriate outsid- and Rice repeatedly prevented efforts this is what the resolutions intended, ers’ imposition of terms for a peace by members of the Security Council they would have provided a powerful agreement. It is no such thing. The to censure Israel for doing precisely incentive for the occupying power to parameters for a permanent status that – ‘unilaterally predetermining the resist a peace agreement indefinitely. agreement that the next US president outcome of a final status agreement’. Clearly, this was not their intention. must put forward would be based The USA and the international com- on principles that both Israel and the *** munity must therefore finally act on Palestinians have signed onto when the resolutions’ plain logic that their Particularly misguided and damaging they formally endorsed UN Resolu- default setting is a return to the status has been the oft-repeated demand tions 242 and 338, the Oslo Accords, quo ante – without territorial and that Palestinians offer territorial the Road map and the Annapolis other changes that negotiations and a concessions that match the ‘painful understandings. The American presi- peace agreement might have produced. concessions’ Israel’s leaders have said dent must insist that commitments It is a default setting that should have they are prepared to make. It is a made by Israel – no less than commit- kicked in long ago. formulation that reveals a profound ments made by Palestinians – must misunderstanding or deliberate distor- The cessation of violence by both finally be honoured and implemented, tion of the history of this conflict, and sides is a reasonable and necessary something previous presidents have must produce a one-sided outcome condition for successful peace negotia- failed to do. that is unjust and untenable. For Pal- tions. But it is not an achievable goal For such a new initiative to be estinians have not asked Israel to make absent an independent and empowered credible and effective, the next territorial concessions, i.e. give up any international mechanism that moni- administration must reaffirm the of the territory Israel has controlled tors violations by either side. If the foundational principle of the Road since the armistice agreement of 1949, occupying power – with its guns Map and of previous agreements, nor has Israel ever indicated it would trained on the occupied population which is that while some changes from under any circumstances consider – continues to serve as judge, jury

4 OXFORD ENERGY FORUM NOVEMBER 2008 and executioner as it has for the past containment, and if some do speak accepted as a much more proactive forty years, violence is inevitable and of ‘not taking the use of force off the partner in any negotiation. peacemaking will remain out of reach. table’, no serious party contemplates Iran is a major power in the Middle It is these fundamentals that must an immediate recourse to military ac- East. It was so under the Shah and inform what will surely be the last tion against Tehran. Unless the Israelis it did not lose its status after the US opportunity to salvage a two-state prove as reckless and as irresponsible triumph of Ayatollah Khomeini in solution. Losing this opportunity will as the Georgians were this past sum- 1979, despite the turmoil provoked by spell the end of Israel as a democratic mer … the Islamic revolution, the disastrous or Jewish state; given the emerging If, however, our assumption is right war with Iraq, and the hostility of the non-Jewish majority in the territories and the Bush–Cheney administration United Sates and much of the Western under Israel’s control, it can no longer leaves office without using force world. If anything, its standing in the be both. It is difficult to understand against Iran, it is fairly safe to predict region and the world has been signifi- why any head of state would believe that an Obama administration would cantly enhanced these past few years. that supporting or acquiescing to that offer to open negotiations with Tehran Today, Iran claims for itself the status kind of an outcome might be an act of at a very early stage whereas McCain of the regional superpower by virtue friendship to the State of Israel or to may take somewhat longer to break of its population, its natural resources, the Jewish people. away from the Bush–Cheney Neo- Con rhetoric he largely espoused and its strategic position and fast A US initiative that goes beyond the during the campaign. growing influence in the region. In failed ‘facilitation’ of previous admin- terms of population, only Egypt and istrations to vigorous and determined This is very good news for Iran and Turkey come anywhere near Iran with diplomacy can still produce a two- the Middle East as well as for the its 80 million inhabitants, but neither state solution, but only a president rest of the world including, naturally, has its natural resources. Only Turkey whose political and moral horizon the United States itself. For all of us, has military forces and an industrial extends beyond the next Congres- the Iraq disaster with its dire conse- base that are in the same league as sional elections – and understands quences is more than enough. But the Iran’s. Only Saudi Arabia has more oil that by the time those elections occur, willingness of the United States to put reserves but it has neither the popula- the two-state solution will have aside the military option in its deal- tion nor the military might or the disappeared – can hope to bring this ings with Iran and to express readiness economic base that Iran has. multi-generational tragedy to an end. to engage Tehran is just the beginning of a long march in which success will More generally, no other country not be achieved easily or soon. has worked so persistently and so effectively to enhance its strategic Many questions need to be satisfacto- assets in the region – from Lebanon to rily answered before any meaningful Afghanistan, Tajikistan, and Central negotiation can even start. Amongst Asia – and beyond. these questions I note the follow- ing: What will the Agenda of such a Iran invested patiently in Syria, in negotiation be and who will set it? Lebanon and with the Palestinians. Who else, if any, apart from Iran and With Damascus, a solid political alli- Lakhdar Brahimi the USA, would participate in the ance and a diversified economic and discusses Iran – war negotiations? cultural cooperation were built during The natural tendency in Washington is the ruinous eight-year long Iraq–Iran or peace in the Middle to unilaterally set the agenda, establish war. Co-operation with Syria opened East? the list of participants, and even define for Iran the way to Lebanon, where the outcome of the negotiation. Such it helped build a formidable militant an inclination to dictate rather than machine – Hezbollah – which is all at Surely, the last belligerent neo- discuss comes naturally to the Ameri- once an armed militia, a political party conservative voices calling for military cans. It has been taken to extremes and a social organisation providing action against Iran before the Bush– by the present administration but it services to the Shia, the largest and Cheney administration leaves office was there before George W. Bush and most deprived community in the must have been definitively silenced Dick Cheney entered the scene. This country. Now Iran has extended its by the financial crisis. The field is tendency is unlikely to disappear with reach – through Hezbollah – even now free for all kinds of Think Tanks, the end of this administration. But to important Christian groups such Universities and Ad Hoc groups to Iran will not accept to simply play as the one led by the populist leader send in their policy papers to the the role assigned to it by the new US General Michel Aoun. At the same Presidential candidates in the hope of administration of either Mr Obama, time, Hezbollah itself is fast becoming influencing future US policies towards or Mr McCain. They think they have a central political force in Lebanon. Iran. Most of these policy papers strong cards to play, and will demand Amongst the Palestinians, the organi- recommend engagement, rather than to be treated with respect, and be sation of the late Yasser Arafat, Fatah,

5 OXFORD ENERGY FORUM NOVEMBER 2008 used to be particularly popular in Iran Middle East and in the USA itself Americans, the Israelis and most Eu- and close to the Iranian leadership comment somewhat unkindly that the ropeans say, and many others suspect both in Tehran and Qom. But since Bush–Cheney administration suffered they are? Are they just a couple of the Oslo Agreement between Israel the death of more than 4000 of their years away from actually producing and the PLO in the early nineties, the soldiers, spent billions every month a bomb, or are they still five to ten two parties have slowly drifted apart and is maintaining 150,000 troops years away from this outcome? Or and it is now Hamas and other radical in Iraq to keep the place safe for the have they chosen the so-called ‘Japa- Palestinian movements who enjoy sole benefit of Iran! This is perhaps a nese option’? intimate relations with Tehran. The simplified, caricatural way of putting And what if, after all, the Iranians United States, Israel and others in the it, but it is not far from the truth. are telling the truth, and are only, West may call Hezbollah and Hamas Iran, at present, exercises infinitely strictly and honestly exercising their ‘terrorist organisations’ as much as more influence in Baghdad and most ‘inalienable rights’ under the Interna- they wish; what is important in the of the rest of the country than the tional Atomic Energy Agency (IAEA) region is that both organisations enjoy United States or any other country or rules and regulations? Mohamed widespread support in their respective group of countries; at the same time, Al-Baradei, the Director General of communities and growing – indeed it has established the strongest, most the IAEA says emphatically that his overwhelming – sympathy throughout diversified economic ties that Iraq has inspectors did not see any sign that the Arab and Muslim world. with any country in the region or in Iran was acting outside of those rules the world at large. Iran invested also patiently in and regulations even if it did not Tajikistan, Afghanistan and the rest of always fully disclose all its activities Central Asia. It openly supported the ‘in full and on time’. Islamist rebellion in Tajikistan soon after the break-up of the Soviet Union “The natural tendency In the Middle East, there is a stark in the early 1990s and played a key in Washington is to contrast between the attitude of role in the return of stability to that unilaterally set the governments and the reaction of country. the public. At the official level, all agenda, establish the list capitals strongly suspect that Iran is In Afghanistan, Tehran supported the of participants, and even determined to produce its own nuclear resistance of the ‘Mujahedeen’ against define the outcome of the armament and they do not like that. Soviet occupation in the 1980s and The public, on the other hand, both the Northern Alliance – along with negotiation” the common man in the street and the India and Russia – against the Taliban elite – journalists, academics and intel- in the 1990s. Their Afghan allies lectuals – have no problem with Iran’s lost roundly to the Taliban, but then If proof were needed to show how ex- alleged nuclear ambitions. Even those came 9/11, and both suddenly found tensive is Iran’s influence in Iraq, one who mistrust Iran in all sorts of ways, themselves on the winning side, in the needs only to look at the painstaking say they can live with a nuclear armed context of the US military interven- negotiation of a ‘Status of Forces Iran. This, obviously, has much to tion in Afghanistan. Agreement’ between the USA and the do with the fact that Israel is sitting, And last but not least, there is Iraq, Iraqi government. There is no doubt some say, on a significant number of the trump card in Iran’s hand these in any one’s mind that the Maliki nuclear bombs. If Israel can be trusted days – a card received free of charge government will not sign anything with atomic weapons, why can’t Iran from the Great Satan itself, the arch without securing previous approval be? from Iran. One has the impression enemy whose president stigmatised The legal nuances of who is a signa- that even the Bush administration Iran in February 2002 as a member of tory of the Non-Proliferation Treaty is resigned to the fact that Iran has the ‘Axis of Evil’ along with Saddam (NPT) – Iran – and who is not – Israel veto rights these days in Baghdad and Hussein’s Iraq and Kim Ill Jung’s – are of course lost on the people no Agreement will be completed if North Korea. And, just 13 months of the region. For them the central Teheran does not give its seal of ap- later, the USA invaded Iraq, toppled argument that wins the day, legally proval: even if Washington, with help down Saddam Hussein, the bitter and politically, is that the NPT was an from Kurdish leaders in the govern- enemy of Iran, disbanded the Iraqi explicit bargain between the original ment, were to succeed in forcing the Army, dissolved the Baath Party and members of the nuclear club and the hand of Prime Minister Maliki, Iran’s in the process completely destroyed rest of the international community. weight will shift to Parliament where the Iraqi State. To rebuild Iraq and The latter undertake not to go nuclear they most likely can muster enough its institutions, the Americans put in while the former would progressively support to defeat any agreement they charge Iran’s closest and most trusted reduce and ultimately totally eliminate dislike. allies among the Iraqi expatriates who their respective nuclear arsenals. The returned home with the invading It is against this background that the Major Powers did not keep their side armies. whole nuclear issue must be looked of the bargain. Why should other As a result, many observers in the at. Is Iran cheating as much as the countries keep theirs? And look at

6 OXFORD ENERGY FORUM NOVEMBER 2008

North Korea: it has defied the ban and looking the other way while Iran have been largely neglected. In this and it is being rewarded for it. Look was pushing its advantage day after regard, the Bush–Cheney administra- at India, too. They never signed on to day, inch by inch. Only Iran can help tion has established a record: for the NTP, acquired the bomb and now the USA disentangle itself from the seven years, they not only neglected they are practically accepted as a new Iraqi mess. And for that, the United the region and its problems; they member of the nuclear club. If India, States must accept to pay a price. ignored them. It is doubtful that the why not Iran tomorrow, Turkey the Others in the US capital have more next president will be able to focus day after and whoever else has the will nuanced views. Iran does have a on all the Middle Eastern problems in and the cash to follow suit? strong hand, they say. It does not his first year of office. But it is fairly Be that as it may, the fact is that, as we mean they can dictate their conditions certain that Iran will be an immediate said earlier, Iran has a winning hand. and unilaterally set the agenda of a and serious preoccupation for the Tehran has almost exclusive influence future negotiation. They see in the future new White House. And if the in Iraq; it has also a presence in Af- Report of the Study Group co-chaired Iranian issues are approached prop- ghanistan and may, at the very least be by James Baker and Lee Hamilton erly, there is some hope that the other a dangerous spoiler there. In addition, a valid road-map for a big Middle problems in the Middle East will also they have a huge inflence in Lebanon, East bargain, in which Iran will no be addressed. a solid alliance with Syria and strong doubt occupy a very important place, relations with Hamas – arguably the but not an exclusive one. Indeed, most important organisation amongst the USA cannot even put itself in an the Palestinians. Furthermore, they are exclusive position. To begin with, on a major oil producer and an influential Iraq, neither the USA alone nor Iran member of OPEC. And they enjoy together with the USA can decide much sympathy and support in the what the future of the people of Iraq Muslim world in particular and in the should be in their absence. They have Third World in general. to occupy centre stage in any discus- Eric Rouleau assesses sion concerning their country. Furthermore, the other countries in the Iranian nuclear “Only Iran can help the the region may have done little so far, threat but that does not mean that Turkey, USA disentangle itself from Saudi Arabia, Egypt, Syria and all the Iraqi mess” the others will accept to leave so What about the Iranian nuclear threat? many issues that so vitally affect their It is not at all certain that Arabs, Sun- interests in the sole hands of Iran and nites or not, do believe that this threat is real, or that it is imminent. Some The political elite outside the Bush– the United States. There are of course recent intelligence reports estimate Cheney administration and the many issues that are of a bilateral that Iran would be unable to build its neo-con circles in Washington are nature. Those need to be identified first nuclear weapon within the next very much aware of these realities. and taken up by the United States ten years. They know that Iran is deeply con- and Iran alone. But regional issues scious of its strength and believes it is need to be addressed within regional In any case, many political observers in a position to go to any negotiation frameworks; and some of them require of the region are convinced that Arab on its own terms. Self-confidence the involvement of international actors public opinion (excluding govern- in Tehran has reached such a high such as the other Permanent Members ments) would not mind, or may even level that the media there writes quite of the Security Council, the European welcome Iran becoming a nuclear openly that they are now the regional Union, Japan and India (as well as power. They perceive the Islamic superpower and that what is needed is Pakistan if Afghanistan is also on the Republic as a potential counterweight for the United States and Iran to get agenda), the Arab League and the to American hegemony and to Israel’s together, alone, to discuss and agree Islamic Conference. military superiority. Optimists are even convinced that a nuclear Iran, on the future shape of things in the As the US presidential election moves having established a more favourable entire region. closer, many voices are heard in Wash- balance of power, might open the way A few voices in the United States ington saying that the future president to a settlement between Israel and the are starting to say ‘and why not?’ will inherit more serious problems Arabs, in the same way that the fear particularly with regard to Iraq. In than any of his predecessors in a long of a nuclear war maintained peace that country, it is indeed true that Iran time, perhaps ever. The problems of between the Soviet Union and the has decisive influence and the fact that the Middle East have been on the United States for nearly half a century. this is due to massive blunders made table ever since the end of the Second by the USA itself does not change this World War. They seldom made it very Middle Eastern rulers are plainly scep- reality. Besides, the Arab neighbours high on the priority list of any US tical about the anti-Iranian campaign of Iraq have been wringing their hands president. Quite often, these problems which has moved from stage to stage

7 OXFORD ENERGY FORUM NOVEMBER 2008 without apparent success. Either they a ‘coalition of the willing’ as in the not considered to constitute an all-out do not believe that Iran is a potential interventions against Saddam Hussein war. and imminent threat, or more likely and his regime? Although the question The hawks believe that such strikes they are in favour of a negotiated set- was regularly asked at least in the will have a double effect: reduce tlement between the Islamic Republic US and European media no definite Iran’s military capabilities and weaken and Western Powers, rather than in a answer was provided. the regime sufficiently to cause its confrontation over the nuclear issue. Those who believed that President eventual demise. Yet some US intel- Is it not striking that the Islamic Bush will not take risks pointed to ligence reports have argued that the Republic far from being isolated in the various catastrophic consequences overthrow of the regime will not be region has been able to develop good that may follow. Some American and possible in the foreseeable future. and fruitful relations with a number of civilian analysts mentioned that Iran On the contrary, military strikes will neighbouring countries, all of which possesses long-range missiles that provoke a patriotic upsurge in favour are either friendly with, or allies of, could reach as far as Israel. An Iranian of the regime. the United States? These include Saudi retaliation would most probably target The threat to the Iranian regime may Arabia, other Gulf countries, Afghani- oil tankers in the Gulf and the Straits come from another direction: the stan, Turkey, India and even Iraq. All of Hormuz. The oil price will explode. difficulties due to the mismanage- these countries are being insistently The initial fear was that an economic ment of the economy and a galloping warned by Washington that Iran crisis will ensue. Now that we are in demography that brings big cohorts of represents a threat to their security. such a crisis a military intervention in young persons into the labour market The US efforts to include regional Iran will worsen the situation. every year chasing very few new jobs. countries in a coalition against Iran Otherwise the regime is stable. There have not borne fruit. President George is no alternative political force that W Bush has been trying to follow the “many political observers can come to power. The reformers example of his father who, in 1990–91, have a certain influence but are not was able to set up a vast coalition of the region are convinced well organised and are discriminated of states, including Arab countries, that Arab public opinion against in elections by laws that enable before launching an attack on Iraqi … would not mind, or the regime to reject candidates wish- forces occupying Kuwait. George W ing to contest parliamentary seats. hoped to forge a similar alliance, but may even welcome Iran In fact, the press campaign against now of Sunni states against Shiite Iran. becoming a nuclear power” Iran over the nuclear issue and the This was not a realistic endeavour. threats recently made by some Israeli leaders can only reinforce nationalistic In contrast, the United States suc- feelings in the country and bring the ceeded in convincing the permanent The political consequences of the Iranian people in closer support to the members of the UN Security Council conflict may be as serious. Not only regime. plus Germany to adopt a number of Shiite populations, most of which resolutions that imposed essentially are sitting on the richest oil fields of President Bush did not in the end economic sanctions on Iran. This the region, but also Sunnite would send cruise missiles and war planes was undoubtedly a major success of probably consider Washington‘s against Iran. The US army was op- American diplomacy, taking into con- military attack as an aggression against posed to the idea. The other countries sideration the fact that Russia, China a brotherly Muslim country. Pro- of the group of ‘five permanent UN and European powers have agreed to Iranian Hezbollah in Lebanon and Security Council members plus one’ vote in favour of measures that affect Hamas in Palestine will not remain – Russia, China, France, Germany their own interests. These countries, with their arms folded. In which way and even the UK – would not be since the break of all relations be- they will try to hit American interests inclined to support military action. tween the United States and Tehran remains to be seen. It is however And President Bush has too much on in 1979, had developed economic and practically certain that the present his plate from Iraq to Afghanistan and commercial relations with Iran. Iraqi government will either turn now a major financial and economic against the United States or collapse crisis. President Obama will definitely Do these countries realise that should to the benefit of anti-American forces. engage with Iran, as he stated during the sanctions fail the following step The warmongers thought that his campaign. The difficulties however could well be military intervention? President Bush had no choice but to will be in defining the agenda for President Bush has repeatedly stated attack Iran in a way that is supposed negotiations and to obtain meaningful that all options remain on the table to reduce the risks of retaliation. concessions from Iran. although a peaceful solution is still The Islamic Republic will not be preferred. invaded; selective targets will be Until recently, the question was: will bombed on and off. These so-called the United States attack Iran, and if so surgical strikes would not need the will it go about it on its own or with approval of Congress since they are

8 OXFORD ENERGY FORUM NOVEMBER 2008 Walid Khadduri looks are an example of the many problems of the cities of Khanaqin and Jalwla that will continue to haunt Iraq in located in the north central part of the at concerns over the the near future. Differences arose country, not very far from the Iranian over a definition of the identity of border. The question was whether future of Iraq and the country, the extent of the writ of they should remain under the author- regional implications the federal government, the division ity of Kurdish Peshmerga forces or of power between central authorities the Iraqi army. in Baghdad and the provinces, the There are serious concerns about The Kurdish Regional authorities, distribution of the oil wealth, and over without the acquiescence or approval the future security of Iraq. These the status of oil-rich Kirkuk and other stem mainly from the inability of the of the Baghdad authorities, hosted disputed regions. On this latter point Turkish insurgents of the Kurdistan occupying forces, five years after the the issue was whether these parts of 2003 invasion, to forge a new Social PKK, a move which Turkey treated as Iraq should be included in the domain an aggression, and accordingly sent its Contract among the population. of the Kurdistan Region. Other factors include: armed forces into Iraqi Kurdistan. The The constitution was drafted almost Turkish air force carried out strikes a) the strength of terrorist groups de- exclusively by the Kurdish and Shi’a against several towns in northern spite their recent defeats, parties. At that time, the Sunni Arabs Iraq, causing much destruction. The b) sectarian violence, had boycotted the political process. As Kurdish–Turkish dispute goes much c) the rise of criminal gangs, the wide- a result, they had no meaningful input deeper than the presence of PKK spread corruption and the smuggling in it. However, the Kurdish parties, fighters in Iraqi Kurdistan. Turkey has of petroleum products, the most active group in support publicly supported and hosted Iraqi d) the increasing ethnic conflict between of federalism, had a clear agenda of Turkomen parties; and this raised Iraqi Arabs and Kurds, what goals they wanted to achieve. fears about Ankara’s ambitions on e) the formation of the new army – its They knew exactly what federalism Kirkuk. new composition and the uncertain meant to them. This included their role it would play in the political full participation in the political decision-making process, process in Baghdad combined at the f) the rising influence and meddling same time with as much independence “The Kurds interpreted of neighbouring states In Iraqi from Baghdad as possible. The Kurds politics. federalism as a framework interpreted federalism as a framework that enables them to go it Last, but not least, is the Status of that enables them to go it alone, and at Armed Forces Agreement (SAFA), the same time providing them, through alone” scheduled to be concluded between their pivotal role in the new regime, Baghdad and Washington before with opportunities to maximise their The Kurdish parties have also opposed end-2008. goals, interests and territory. They also wanted to make sure that the Baghdad the Hydrocarbon Law that was tabled While each one of these factors authorities would never regain enough by the government in parliament in impacts the security of the state, strength and instruments of power to February 2007, while at the same they also have regional implications. be able to repress them, as had hap- time going ahead and concluding over The experience of Iraq during the pened under the previous regimes. twenty production-sharing contracts past quarter of a century (the Iraq– with international oil firms. They did Iran war, the invasion of Kuwait, The Shi’a parties agreed at that not inform Baghdad about the text of the international sanctions and the stage to support the Kurds in their the agreements and did not seek its 2003 US occupation) has shown demands, hoping that they would approval. Baghdad then announced very clearly the strong relationship benefit one day from the concessions that international oil companies oper- between the stability of the country’s obtained by the Kurds. However, ating in the Kurdish Region will not oil exports, its internal security, and these hopes were short lived, and be permitted to work in the rest of the the existence of appropriate and major differences surfaced soon after country. Furthermore, oil produced in stable relations with the neighbouring over the Hydrocarbon Law, the status Kurdistan is not allowed to be export- states. Iraq, with its semi land-locked of Kirkuk, the role of the army in ed through Iraqi territory. It appears, borders, needs friendly relations with relation to that of the armed forces so far, that Kurdish oil cannot be neighbouring countries to enable it of the Regions, and the ethnic and exported through Turkish or Iranian to export crude oil in cross-border sect composition of the officer corps. territory either. There are however pipelines. In this important respect The question is: How to distribute reports that some of the Kurdish oil is Iraq is different from all other oil- between Sunni Arab, Shi’a and Kurds being smuggled by trucks to Iran, but exporting countries of the Middle East the top positions in the army? the volumes involved, if these reports and North Africa. There was also a dispute between the happen to be correct, can only be very The controversies that surrounded Maliki government and the Kurdistan small. the drafting of the 2005 constitution Regional government over the security The USA, as a result of the 2003

9 OXFORD ENERGY FORUM NOVEMBER 2008 invasion, has, unwittingly or not, Much of Iraq’s future security will sympathies than the Sunni Arabs who allowed Iranian influence to establish depend on the SAFA agreement being monopolised the top military posi- itself in Iraq. US complaints of the negotiated between Washington and tions under previous regimes. Iranian role in the country, particu- Baghdad. There are many issues under larly the assertions concerning the discussion: How many US troops Having said that, one can still assume export of terrorism, baffle most Iraqis. will remain in Iraq? What will be that the newly formed Iraqi army Major Shi’a parties that had sought their functions? To ensure security would interfere once more in domestic asylum in Iran and built close and throughout the country, as they are politics, as happens in many Third cordial relations with various Iranian doing now, to provide training to the World countries. One may wonder political institutions, including the Iraqi army or to remain idly in some about the alliances with neighbouring Revolutionary Guards, returned to military bases? states that the officers may want to Iraq after 2003. Some of their mem- establish; and about the reactions of Other important questions concern- these states to the creation of military bers have assumed senior positions in ing Iraqi security and relations with the post-2003 governments. regimes (or political regimes strongly neighbours also arise. How is the USA influenced, albeit indirectly, by the Moreover, the USA decided to make or Israel going to deal in the future army). Would they allow Iraq to create Iraq a major theatre of war against with the Iranian nuclear issue? What new political systems in the region? al-Qa’eda. The presence of these would Iraq’s role be should a military extremist groups accentuated the confrontation take place? How would It is doubtful that Iraq’s neighbours sectarian conflict in the country, par- such a conflict impact Iraqi political will look on passively if Iraq were to ticularly in 2004 and 2005, leading to parties, particularly in the oil-rich forge alliances with Iran or Syria. Such much bloodshed and communal strife. southern part of the country? Would alliances would adversely affect Iraq At the same time, Iraq witnessed the there arise in Iraq a disciplined party since both these countries exert much rise of local resistance forces against loyal to Iran, similar to Hizbollah in influence within Iraq. They represent the US occupation. Lebanon, a party that would act as a a threat to its sovereignty. And there proxy to Tehran while occupying at will be opposition from other neigh- The United States tried and did the same time a significant place in the bouring states. succeed in winning the support of country’s political system? some of the Iraqi opposition groups Finally, what role would the new Moreover, Iraq’s economic security which – together with the Iraqi armed Iraqi army play in the country’s in the future depends very much on forces – have been able to deal major political system? The USA since 2003 maintaining a more cordial, or at least blows to terrorist and sectarian forces has definitely introduced substantial much less hostile attitude, towards throughout the country, particularly structural transformations in the neighbours than was sometimes the in Baghdad, Basra and Mosul. Yet, the organisation of the armed forces. The case in the past. The bitter experience military victories have not stopped system introduced by the British dur- of the past three decades amply dem- the daily carnage that is bleeding the ing the mandate in the 1920s has been onstrated that because Iraq is almost country. There is now a fragile peace, changed. We do not expect the new land-locked its oil exports could fall to and it is expected that any of the senior officers to be aligned or sym- a very low level in the absence of good groups mentioned above will wait for pathetic to Arab nationalism, as was and peaceful relations with the sur- the opportune time to resurface again, the case in the past. Most of the new rounding states. And this outcome will most probably with assistance from officers are either Shi’a or Kurds, who be obtained despite the huge proven neighbouring states. have different allegiances and political oil reserves that the country possesses. Whither OPEC?

Robert Mabro asks articles or reports with the clause, the often turns out not to be obvious at oil-exporting countries cartel. all. Once a label is stuck on a person, when OPEC is a cartel The trouble with labels is that they an institution or a phenomenon the and when it is not seem to impart full information about need to enquire about the real person, the entity to which they are attached the true nature of the institution albeit in a short-hand form. In reality, or the phenomenon at hand fails to Since 1973, the year of the first oil they conceal as much as, if not more emerge. There is no need for that price hike imposed unilaterally by than, they reveal. Most people do need. In short, labels are the enemies OPEC, this organisation of oil-ex- believe that they know perfectly well of research, of serious attempts for porting countries has been continually what the label means. It is obvious, better understanding. labelled a ‘cartel’. The Financial Times, isn’t it? for example, systematically follows It is important to know the exact every mention of the word OPEC in What at first appears to be obvious nature of OPEC – is it a cartel or

10 OXFORD ENERGY FORUM NOVEMBER 2008 something else? There are several the companies from then on never No cartel up to this point. types of cartels, in the same way as reduced the posted price which they Things did change in 1973. The there are different types of oligopolies. fixed unilaterally. The posted price negotiations between the ‘trade union’ They do not, all of them, operate in determined, given other parameters and the companies broke down. The the same manner. How does OPEC such as the tax and royalty rate and petroleum market had become very operate? And did the nature of OPEC the nominal cost of producing a bar- tight. A number of market indica- change from one episode to another rel, the per barrel take. tors – tanker freight rates, product of its 48-year history? Finally, how The very weak bargaining position price realisations and crude oil spot significant are the discrepancies of the ‘trade union’ characterised the prices – were rising. The prices of between the OPEC reality and the relationship between governments all primary commodities were ris- perceptions of an outside world and companies throughout the 1960s. ing between three to five fold. The shaped by this ‘cartel’ label that fails OPEC’s position became stronger at companies knew that oil prices must to tell us anything of interest. the end of that decade. A member be significantly raised. They did not My first point is that the changing country, in that instance Libya, taking want to be part of such a decision nature of OPEC related to the specific advantage among many factors of however. They would run into trouble structure of the world petroleum favourable market conditions in the with the governments, the media, market that obtained in each particular Mediterranean, managed to obtain and public opinion of oil-importing period. When OPEC was founded increases in the posted price. This countries. They asked for a long pause in 1960 its Member Countries (Iraq, success was achieved by a member in the negotiations. This was unac- Iran, Kuwait, Saudi Arabia and acting on its own, not by the collec- ceptable to their OPEC counterparts. Venezuela) had no direct involvement tive action of the trade union. Furthermore, the October war had in the exploration, production and The Gulf members of OPEC then broken out in the Middle East. A exports of crude oil. These operations obtained similar price increases thanks few days later, Arab oil-exporting were entirely performed by a small to a simple clause in the concession countries (but not OPEC) meeting in group of international major oil com- agreements which one often finds Kuwait decided on an embargo against panies under long-term concession in bilateral trade treaties. This is the the USA and Holland, and production agreements. The companies paid to the ‘most-favoured nation clause’. Every cuts across the board to make the host country a royalty and a notional country signatory of an oil concession embargo effective. income tax per barrel produced. This contract must obtain all the advan- system continued when other nations In this context OPEC no longer nego- tages secured by another country. This joined OPEC later in the 1960s and tiated over prices with the companies. led to the so-called Tripoli–Tehran– the beginning of the 1970s. It decided to administer the prices on Tripoli agreement of the early 1970s. its own. It raised twice the official OPEC countries depended financially At that time, I quipped that OPEC price (the replacement of the price on the payments made by the conces- was redundant. Favourable market previously posted by the companies), sionaires, and these revenues were a conditions enjoyed by any individual once in October and once at the end simple function of tax-cum-royalty country coupled with a most-favoured of December 1973. per barrel and the number of barrels nation clause are all that is needed to This development was labelled the ‘oil produced. secure generalised concessions from price shock’ in importing countries. oil companies. OPEC during this period was akin to However this was not the most a trade-union always engaged collec- The power of the ‘trade union’ important event. The economic impact tively in negotiations with the revenue increased significantly in the early of this shock did not last for very provider for increases of per barrel 1970s. This was largely due to two long, at least in OECD countries. The income (the wage). Some members, as major factors: the very rapid growth significant event with long-term impli- was the case with Iran under the Shah, of global oil demand that began to cations was a structural transformation will also repeatedly ask the companies tighten the supply/demand balance of the petroleum system. The major to increase the volumes produced on in the world petroleum market, and oil companies gradually ceased to their territory. The companies did not a new rise of nationalism in most move oil produced by them in OPEC always oblige. The collective bargain- OPEC countries. There were threats countries through their internal chan- ing involved solidarity which would of nationalisation of oil assets by some nels. Now, they bought it arm’s length be weakened if individual attempts to countries, and milder demands of from the various exporting countries. increase market share at the expense equity participation in the investments The previously integrated structure of other members turned out to be of the concessionaires by some others had become de-integrated. successful. including the politically moderate The ‘trade union’ managed to obtain Saudi Arabia. Higher posted prices, The two major consequences were as small concessions from the companies tax and royalty rates were obtained. follows: such as the expensing of royalties. The The strength of a trade union depends more important result of the establish- on the state of the relevant market and First, OPEC became the administrator ment of OPEC, however, was that on the ability to strike. of the oil price. Between 1973 and 1985

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OPEC used to determine the price of The paradox is that a price rise leads market-related formulae to price its oil Arabian Light 34ºAPI as the reference to the view that OPEC in such in exports. This is where we are now. for transactions in international trade. circumstances is strong. The truth is As well explained by Bassam Fattouh Secondly, de-integration caused the that when the market leads OPEC is in this issue, OPEC cannot directly emergence of an open market for in reality weak if it does not then have get the market to deliver its preferred international oil. And markets always the means to rein in market forces. price. It is essentially a price taker diversify over time. We thus saw the And the symmetrical proposition is who tries to signal to the market to emergence, besides long-term contract that often OPEC is potentially strong stop a price decline or to raise current transactions between companies and when it is generally perceived as weak levels when prices are either falling countries, of trades between compa- because of stagnant prices. This is the or deemed to be too low. The only nies, an expanding spot market, the only type of situation when it could, signal it can use is the decision to famous 15-day Brent forward physical if it so wished, effectively intervene. reduce production quotas. Markets market, and sometime later futures can receive the signal and act upon exchanges in New York and London. it or simply ignore it and indulge in This final development gave rise to an scepticism. There are so many nega- explosion of different types of deriva- “So long as OPEC fixed tive views about OPEC that can easily tives many of which are traded over the reference price of oil feed this scepticism. A market posi- the counter. and passively accepted the tive response to an OPEC decision on production cuts can be delayed A price administrator is not necessarily impact on the demand for a cartel. Nobody accuses the monetary because of long time lags between a committees of the Bank of England, its oil it was not acting as a decision and the actual changes in oil the US Fed or the European Central cartel” flows in the final market. Oil travels Bank, those who administer the for a long time toward destinations interest rate which is after all the price and it then needs to be refined and of money, of being cartels. So long as The first episode when OPEC tried distributed in product markets. OPEC fixed the reference price of oil to act as a cartel, that is to restrict To the extent to which OPEC uses and passively accepted the impact on production in order to support production as an instrument to influ- the demand for its oil it was not acting prices, was in the period 1982–85. It ence prices, the cartel characterisation as a cartel because it did not curtail introduced production quotas, but the applies. But the episodes when this production to support the price. It was fall in the demand for OPEC oil from behaviour has been effective were rare a price maker and a volume taker. This 30 million barrels per day in 1981 to and usually of short duration. Once was the case until 1982. just above 16 million barrels per day again OPEC was indeed a cartel in The structural transformation of the in 1985 (due to considerable increases 1998 when prices were brought down mid-1970s simply meant that OPEC in non-OPEC production and a fall through a price war launched by Gulf has been facing complex markets, in world oil demand) was too big. No countries against other members. never fully transparent, instead of the entity, however strong or sophisti- Finally, OPEC has been more often small group of oil companies with cated could cope with it. Agreements passive than in the instances men- whom it used to negotiate. Solidarity on quotas were not well implemented. tioned by Fattouh – the situation was more easily achieved in the former Saudi Arabia took the brunt of the when markets push prices up and state of the oil world, even if some shock in its attempt to defend the up. It behaved passively on many members of the ‘trade union’ made OPEC price; its production fell over occasions in the late 1980s and in the tougher demands than other members. four or five years from more than 10 1990s despite the fact that prices then million barrels per day to just above were low. In 1979–81, a tight oil supply/demand 3 million barrels per day. This was balance pushed market prices above unsustainable. Saudi engaged in an At that time many commentators those fixed by OPEC. The market was undeclared price war against both prepared OPEC obituaries. But leading, and the administrator lagged OPEC members and other exporting OPEC is still alive. behind. OPEC was universally blamed countries with the introduction of To quote Mark Twain, OPEC could for this second price shock. The im- a devastating weapon, the netback say ‘The reports of my death are portant point that is missed when one pricing system. greatly exaggerated’. rushes to the accusation that OPEC is responsible whenever oil prices rise Paradoxically, this is when OPEC was In short, things are not as they appear is that the actual market may have acting as a cartel because only cartel to be. Simplifications and labels lead members engage in price wars to played a role. Supply tightness due to gross misunderstandings. An oil to the fall in Iranian production, the discipline other members. price rise is not a proof that a cartel scrambling of consumer countries, OPEC took the view after the cata- is in operation. Gordon Brown was particularly Japan and some European strophic 1986 events that it could no misled by this wrong criterion when ones, in search for additional import longer administer the oil price. It will he accused OPEC of causing the price volumes caused prices to skyrocket. instead follow the market by using explosion of the first half of 2008.

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A price fall due to a price war is an on non-OPEC producers/exporters to asymmetry in response implies unmistakable sign that a cartel is in contribute to efforts to restore prices that the perceived risks associated existence. And one always needs to to reasonable levels and eliminate with a potential collapse in the oil remember that the market plays a harmful and unnecessary fluctuations. price are too high for any of the major role, and that it is strong when Finally, OPEC sent a signal to the members to be willing to bear and it is considered weak and weak when market that it means business by seem to outweigh any economic it is believed to be strong. ‘strongly emphasizing their firm com- or political risks of adopting a mitment to ensuring that the volumes more active strategy of cutting they supply to the market are reduced output. by the individually agreed amounts’. In what follows, we analyse OPEC The decision that OPEC would cut behaviour for the period 2004–2008. output was widely expected though some media reports were interpret- ing Saudi Arabia’s silence before the 2004–2006: OPEC the Passive Player meeting as an unwillingness to reduce in a Rising Market its production. Whether these output One of the most defining features of Bassam Fattouh cuts will succeed in preventing oil the recent behaviour of oil prices has describes OPEC’s prices from falling in the short term been that expectations about the long- is a separate matter altogether. As term price have been unlocked. This dance with the market argued below, the shift to the futures is reflected in the parallel shift of the markets for price determination that back end of the futures oil price curve. Introduction occurred in the early 1990s means that While the back end of these curves OPEC’s influence on prices does not In its emergency meeting on the 24th very rarely strayed outside the $20–$22 depend only on the signal sent about October, 2008 OPEC decided to cut range for all of the 1990s and early its intention to reduce production but oil output by 1.5 million barrels per 2000s, this anchor has been lost since on how market participants interpret day (bpd) from existing quotas. This 2004. In fact, in the past few months the signal. reduction amounts to around 1.8 the back end of the curve exhibited million bpd as some members were This does not mean that OPEC is high volatility almost matching the already producing above their quotas. irrelevant to oil prices in the current volatility observed at the front end. After the meeting, OPEC president, context. Since the early 1970s, the The conventional framework that the Algerian oil minister, announced organisation’s role has been central dominated the thinking about oil that the cut will be ‘100 percent to understanding the dynamics of oil prices was based on the belief that effective’ in stabilising prices. The prices. With the shift to the futures there are strong feedbacks from oil immediate response from the market market for oil price determination, prices to oil demand and supplies. was negative: WTI prices tumbled to OPEC maintained its influence High oil prices would have an adverse a low of $62.65 on the OPEC an- although its interaction with the impact on oil demand and economic nouncement but then settled at $64.15 market has changed in nature. The growth, reducing global oil demand by the end of the trading day. But this events of the past four years or so or slowing down its growth. High reaction may still prove to be at odds portray an evolving and dynamic oil prices would also create feedbacks with future responses. OPEC behaviour. through supply and investment The OPEC communiqué revealed deep responses in non-OPEC countries. It concerns about the fall in oil prices The OPEC Cycles would encourage inter-fuel substitu- describing them as ‘unprecedented tion at the margin, although with a It is best to describe OPEC’s behav- in speed and magnitude’. It added long time lag. An important part of iour in terms of cycles. Interestingly, that the ‘slowdown in oil demand is this conventional wisdom of the early the role of OPEC changes cyclically serving to exacerbate the situation 2000s was that OPEC in response to from being an active player to a pas- in a market which has been over- price rises will have a ceiling in order sive one. As argued by this author supplied with crude for some time’. to avoid demand destruction for its elsewhere, The communiqué sent a warning to oil in the long term, and to limit the oil importers that falling oil prices OPEC’s response to changes in entry of substitutes such as tar sands ‘may put at jeopardy many existing oil oil prices is asymmetric. In a ris- and ethanol. This view was supported projects and lead to the cancellation ing market, there is a tendency by an OPEC decision to introduce a or delay of others, possibly resulting towards adopting the more pas- price band which involved production in a medium-term supply shortage’. sive approach of supplying upon adjustments if the OPEC basket price It also sent a clear message to non- demand. On the other hand, in a moved above $28 per barrel for 20 OPEC suppliers that ‘OPEC cannot declining market, there is a strong consecutive trading days or below $22 be expected to bear alone the burden bias towards cutting supplies per barrel for 10 consecutive trading of restoring equilibrium’ and it called regardless of the context. This days.

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The conventional framework had is not concerned about long-term the spot price to rise and changed profound implications on the be- effects on global oil demand given that the shape of the futures curve from haviour of oil prices. It resulted in there is no sign of an urgent or serious contango into backwardation. a high degree of determinacy in the political economic response by OECD long-term oil price relating to sup- countries, and that the climate change ply/demand ‘fundamentals’, and it agenda is unlikely to seriously under- The First Half of 2008: OPEC the anchored the back end of the crude oil mine demand for oil in the absence of Passive Player futures curve at around the $20–$22 alternative transport fuels. Others have For most of the first half of 2008, range. Governments and financial noted that OPEC is concerned about when oil prices began to rise sharply, markets thought in terms of that high oil prices but that influencing oil OPEC resumed a passive role sup- range, and for most of the 1990s no prices is beyond its ability especially plying the market upon demand at oil one questioned the validity of this since the market perceives that OPEC prices ‘determined by the market’. It framework, especially at times when spare capacity is less than the figure did not attempt to bring down prices spare capacity was sufficiently big announced and not of the right quality. by auctioning its spare capacity or to provide a cushion against adverse Yet others have argued that OPEC is offer discounts for refineries to lift its geopolitical supply shocks. concerned about high oil prices and heavy sour crude. In a way, OPEC While there is a current debate has the ability to influence oil prices was comfortable with its position. A about the size of demand and supply but is politically constrained as actions market in backwardation meant that feedbacks, and the time lags involved, to reduce the price of oil by any one of there was no incentive for oil import- and on whether the current demand its members are likely to be met with ers to accumulate inventories. At the feedbacks resulted from the credit criticisms from the local population same time, spot prices kept rising as crunch, high oil prices or both, there and other members. There are also the market perceived low stocks as an was an interesting observation which fears that any action of OPEC may indicator of low oil supplies. Fur- is not widely recognised by oil induce a downward spiral of oil prices thermore, concerns about long-term markets commentators. This relates which the organisation may not be supplies intensified. Although there to the asymmetry of OPEC response able to control. were clear signs of weakening demand to oil price movements. Specifically, in OECD countries, excess supplies the boom of late 2007 and first half did not manifest themselves because of 2008 showed that the main OPEC “One of the most defining OPEC passively adjusted its output in objective is to defend oil prices from line with the demand for its oil. falling below some level deemed unac- features of the recent ceptable by its members. OPEC’s role behaviour of oil prices is not to prevent oil prices from rising. The Jeddah Meeting: A Concerned has been that expectations Saudi Arabia More accurately, OPEC assumes a about the long-term price passive role in a rising market. It The sharp rise in oil prices during is reluctant to reduce oil prices by have been unlocked” the first half of 2008 created serious auctioning part of the available spare concerns about the potential impact capacity or to engage in heavy dis- of oil prices on OECD economies counting of its heavy crude oil. OPEC which were already showing signs of does not have an official mechanism Early 2007: OPEC the Active Player a slowdown and potential financial to perform the role of reducing prices. OPEC’s passive behaviour was problems. The data on US oil demand Early on in the boom, it has become interrupted in 2007 when it became released by the EIA were pointing clear that a price ceiling in a band highly concerned about the rapid towards a sharp contraction. The was never relevant. Yet, at times, the accumulation of inventories. The year-on-year change in US oil demand perception that OPEC would respond organisation feared that high inven- turned negative in August 2007 and to limit price rises has been important tory levels can induce sharp falls in has remained negative since then. for anchoring long-term expectations oil prices if physical traders decide This, however, did not dent the rise about oil prices. to unwind their position and flood in oil prices as oil traders continued The latest cycle has raised various the market with supplies in response to condition their decisions on the hypotheses about OPEC behaviour. to a change in market sentiment. weak dollar. Amidst rapid rises and Some argue that OPEC has realised OPEC responded by cutting supplies. sharp volatility in oil prices, Saudi that higher oil prices did not have Although in 2007 the growth in global Arabia called for a meeting in Jeddah adverse effects on the growth of the oil demand was positive, the growth in June and announced that it would global economy and/or inflation, of oil supply turned out to be nega- increase its output by an additional and that oil demand is more price tive, mainly because of a reduction 500,000 bpd outside OPEC quotas inelastic than they originally thought. in OPEC output. This meant that in an attempt to calm the oil market. The world economy has proved oil-importing countries had to tap This decision was made despite Saudi fairly resilient to high oil prices. More into their oil stocks, reducing the level Arabia’s repeated statements that the sceptical observers argue that OPEC of crude oil inventories. This caused ‘market is well supplied’.

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The decision to add 500,000 bar- had a limited impact on oil prices so this behaviour may be unrelated to rels per day can be considered as a far. As discussed above, one major long-term expectations about supply change in the supply-upon-demand feature of the current oil markets and demand and is due to the current policy towards a more active approach is that prices have entered a phase weakness of the market in the short aimed at curbing the rise in oil prices. of indeterminacy where market term where the bulk of the trading Whether this additional output was participants including oil companies activity is concentrated. Either way, taken by the market and whether it and oil producers do not know where the term-structure has shifted to con- was responsible for the subsequent de- to anchor the oil price that balances tango with the price of the first month cline in oil prices is highly debatable. supply and demand in the long run. futures contract falling below the Oil prices reached their highest levels This is affecting the behaviour of prices of subsequent contracts for each after the Jeddah meeting and there was short-term prices as long-run and maturity as shown in the figure below. not a rapid rise in inventories despite short-term prices seem to be co- A steeper contango could result in an the slowdown in the growth of global determined. This has become apparent accumulation of inventories leading to oil demand. The more plausible story in recent price behaviour when both further falls in oil prices as high inven- is that once market sentiments turned short- and long-term prices rose and tory levels are usually interpreted as negative, news about the extent of the declined simultaneously (although the reflecting a supply glut. decline in US demand intensified. The falls were less pronounced at the back fall in oil demand became the main end of the curve). Figure 1: WTI Forward Curve as public signal on which traders started of 27 October 2008 coordinating their decisions. In any In such a market, traders watch public 90 case, this experiment to put a ceiling signals. Even if news does not convey on oil prices was very short-lived and accurate information about the funda- by September Saudi Arabia was back mentals of supply and demand, they 80 on its passive policy of supplying tend to be misinterpreted, causing oil ‘whatever the customers want’. prices to overreact to news in either 70 direction. As there is an abundance $/barrel of news and information, traders will 60 OPEC Dancing with the Market limit their attention to few signals that The organisation’s latest decision can they think other market participants 50 be best described as ‘OPEC danc- would also consider as relevant at ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 every particular point in time. Until ing with the market’. This involves Source: NYMEX Website a series of moves, some that have July 2008 traders conditioned their already been made and others that are decisions on news about inventories, In the third move, traders demand to expected in the future. potential supply disruptions, and the see actual cuts in productions. After weak dollar. The situation has now all, OPEC signals do not involve a In the first step, traders talk about the changed and the market has switched cost and are often perceived by the amount that needs to be cut. Anything to coordinating on public signals market as not credible. Traders think below that amount is considered as about the demand for oil and health of that OPEC signals in a falling market ‘worthless’ or ‘not enough’ to alter the world economy. In these current are some sort of cheap talk that they price expectations. It is very difficult circumstances, OPEC signals about could ignore. This is the phase when to explain how certain numbers come output cuts are likely to be washed the market starts doubting the vi- to dominate the market’s psyche. But out by news about the depth of the ability of OPEC. In the past, OPEC’s the number of ‘more than 1 million recession, the decoupling of Asia, and announcements of output cuts and bpd’, later raised to 2 million bpd, the impact that these have on global the phrase ‘the death of OPEC’ went became the barometer to test whether oil demand. This is likely to keep a hand in hand. For instance, in 1998, OPEC’s output cut is big enough. downward pressure on oil prices in when the Dubai price approached $10 In the second move, OPEC responds the near term. per barrel, many observers claimed by announcing cuts of more than 1 that OPEC had lost its ability to The extent of undershooting will million bpd. If the signal is successful defend oil prices with many observers be affected by the term-structure of in stabilising expectations, OPEC will predicting its demise. This time is no futures prices. While both the front not to have to resort to output cuts. different. Many commentators are end and the back end of the oil price Instead, it will continue to supply questioning whether OPEC will be curve have seen sharp declines in the upon demand at a price that the able to implement these cuts given the past two months, long-term oil prices organisation is comfortable with given ‘divisions’ within OPEC, the differ- have fallen more slowly. This may current market conditions. However, ent needs of their members, and the be due to concerns about long-term OPEC signals are rarely successful in difficulty of sustaining an unanimous supplies as the market expects that the stabilising short-term expectations in a production decision in face of falling current crisis will induce a slowdown falling market. demand. in investment and tighter oil market As expected, this latest decision has conditions in the future. Alternatively, In the fourth move, as oil prices

15 OXFORD ENERGY FORUM NOVEMBER 2008 continue to fall, OPEC will suc- often to overreact, by implementing groups remain highly misaligned. In ceed in implementing production excessive cuts for traders to take them a rising market, OPEC switches to a cuts. Despite their divergent needs seriously. Since these cuts take time passive mode. In a falling market, oil and interests, the source of the pain to feed through to the system, there consumers switch from an active to a (falling oil revenues) is the same. is a risk that they will tighten supplies passive mode. This is clearly reflected Some members may be more able to at a time when the global economy in Mr Gordon Brown’s recent plans withstand the fall in revenues than is about to bounce back from reces- to downgrade the international oil others, but eventually as oil prices fall, sion. This would worsen the global summit (to be held later in December all oil-exporting countries (including economic outlook. 2008) to ministerial level as the ‘most non-OPEC) will feel the pain. The worrying situation in the world’ a few main difference from the 1998 situa- months ago (i.e. high oil prices) is no Another Missed Opportunity tion is that the oil price that OPEC longer a pressing issue. The current wishes to defend is much higher now The recent behaviour of oil prices cycle has confirmed once more that than it was ten years ago. This may has raised the issue of whether policy oil producers and consumers cannot affect OPEC’s resolve to act swiftly, via the oil importer–oil exporter agree on a ‘fair’ oil price that satisfies and in the current context it may take dialogue should seek to establish a the needs of both parties and that oil a long time before Member Countries stable medium-term expectation of price cycles which have always been adhere to their quotas. However, the oil price that can help dampen the the defining feature of the oil market falling oil prices will eventually induce cycles. Unfortunately, this is not likely in the past will continue to prevail. OPEC members to react, and more to work as the interests of the two

Letters

Dear Editor, – such as target zones – have proved international oil market. Famously, fragile at best. Why should oil markets demand and supply elasticities are The Oil Price Conundrum: be any different? very low in the short run. Increas- A comment The answer, according to the article, ingly, they appear low in the longer is that the oil market is not fit for run as well. (For example, non-OPEC Robert Mabro provocatively raises the supplies have been disappointing question as to whether oil prices can purpose. Avoiding the loosely used term ‘speculation’, the suggestion is despite high prices; investment, for all safely be left to the market, conclud- sorts of reasons, cannot or does not ing that they cannot. He suggests a that financial markets (including the trading arms of oil companies) play an respond). Much of this is not new, new regime involving an agreement though the extent of non-response between large importers and exporters undue role in the determination of the oil price. Drifts or ‘bubbles’ may lead has surprised analysts. What is new involving a system of price admin- is the lack of response to high oil istration consisting of a committee to overshoots (in either direction) and extreme volatility – which is damaging prices via the world economy. In to examine and comment on the OECD countries, the recent impact, fundamentals and which would ‘define to investment and supply capacity and to producer and consumer countries larger than the great oil shocks of the a reference price at regular intervals’. 1970s, has not led to the expected The system would need to be backed alike. A system which gives a greater role to the ‘fundamentals’ (including inflationary recession that was widely up by the physical capacity to inter- anticipated. (The credit crunch is vene. Effectively, Robert Mabro is institutional help in determining what they are!) would be of benefit to all. another matter). This is startling. calling for the reestablishment of the First, it means that demand does not consumer/producer dialogue with a I see the situation rather differently. fall nearly as much when oil prices go cooperative research and intervention What appears to have happened since up as previously anticipated. Second, mechanism on top. He rightly notes 2004 is that the market became indirectly, producers and particularly that ‘political vision and much good- detached from any idea of what the OPEC, have learned that this is so will’ would be required! longer-term fundamentals actually and market operators see that this There is always a temptation to inter- are. The whole futures curve moves is so. So the potential feedback via vene, often in a heavy handed way, to up and down in parallel fashion. With market perceptions that OPEC would control prices which are too important no anchor in the future, the oil price, limit price rises for fear of longer-term to leave to the market. But the history within wide (and apparently ever ‘demand destruction’, has also gone is not favourable. Domestic agricultur- wider) limits, driven by small pieces out of the market. Add to this the fact al protection, on just these grounds, is of news, can be almost anywhere. The that any expectation that the Strategic a sorry tale. Commodity agreements system is close to indeterminacy. Petroleum Reserve (SPR) would be have come and gone. International An explanation for this recent volatil- used to lower oil prices (or to quell a attempts to manage exchange rates ity is the lack of feedbacks in the rise) has gone, since, surprisingly, this

16 OXFORD ENERGY FORUM NOVEMBER 2008 policy weapon has not been used, of target ranges and intervention Dear Sir, even as a threat. Finally, on a longer arrangements. In other important time scale, the fear that high oil prices markets, such as for the dollar in the would trigger political initiatives, for 1980s, policies of ‘benign neglect’ have Regarding Peter Fox-Penner and example on climate change or security, led to serious instabilities which have Matthew McCaffrees ‘The Oil Cli- and thus lower future oil demand, has been reversed as policy changed. mate Bargain: How Fuel Economy greatly attenuated. Standards May Help Global Climate Oil markets have been through a Policies’ (Oxford Energy Forum 74, If the story of near indeterminacy period of ‘benign neglect’, or, more August 2008, pp. 14–17), I agree with is right – that quite large changes in accurately, something worse – a stand the authors’ claim that it is in the prices don’t have very much effect any off between producers and consumers interest of the United States to reduce more – what are the implications? The (what Mabro calls the blame game). domestic oil consumption, and I find first is that there is extreme uncer- Clearly the establishment of a credible the idea of a concomitant ‘climate tainty about the future oil price. This set of international policies towards bargain’ with the developing world is both a cause and a consequence oil markets is going to be very dif- intriguing, but probably slightly of the way the market functions. ficult. For obvious reasons, OPEC unrealistic. Its potential really depends It would be quite wrong to blame finds it politically difficult (even if solely on the relative pricing of coal finance or financial operators for this. they have the capacity) to stem a price and oil after the US induced price The industry is just as uncertain about rise. Moreover there are fears that reductions suggested by the authors: future oil prices and the ‘fundamen- price falls would get out of control. tals’ as financial operators. A second On the other side, the United States Oil and, more specifically, gasoline- is that the market is likely to ‘coor- has proved very reluctant to use the saving-policies can have a very dinate’ on apparently small or even SPR, for fear that it would not work. large and direct impact on prices... irrelevant public signals. Everyone is Lower oil prices will carry even Any credible framework must involve greater benefits for the economies trying to out guess everyone else. Or, at least the recognition that prices can in Keynes’s famous words: ‘We have of emerging nations. (pp. 15 and be too high, for both parties, and too 16) reached the third degree where we low, for both parties. In practice, a devote our intelligences to anticipating commitment by consumer countries In other words, if the price of oil what average opinion expects average (especially the USA) to help prevent makes this fuel more economic than opinion to be’. The third is that any- oil prices falling below some level coal, then developing countries will be thing that helped to establish a market (say $60), e.g. by building up the experiencing a dash for oil without the view of what the ‘fundamentals’ are SPR, would have a large effect on the need for an explicit ‘bargain’. (or to limit the range of uncertainty) prospects for cooperation. Moreover, If oil remains more expensive than would help the market to function in given concerns over other agendas, a better way. coal, then it is unlikely that develop- such as security and climate change, ing countries will be willing to pay What kinds of intervention or political it would not be hard to make the case for the incremental mitigation costs. change would help? Some aspects of for a lower bound – in the interest However, the situation is not as bleak the Mabro Scheme fit directly within of consumer countries. With that in as might seem, for there are many this framework. The idea that better place, help from OPEC to prevent ways in which mitigation in develop- public research and analysis of the price rises beyond a reasonable view ing countries could be financed short ‘fundamentals’ would be helpful is of the longer-term fundamentals of bothering the much beleaguered straightforward: it is a public good. would also be much more likely to be treasuries of the North, such as the What is needed, however, is that forthcoming. Clean Development Mechanism markets should coordinate their Given the recent volatility of oil mar- and other (win-win) private sector medium-term perceptions on the kets, it is quite possible that even the initiatives. results of such research – which might start of such a constructive dialogue be problematic given the genuine – the end of the blame game and the uncertainties. (The Mabro response search for common ground – would Yours sincerely is a reference price backed up by the make a big difference to the dynamics capacity to intervene.) of the oil market. What is needed is My view is that the key lies elsewhere for market operators to start thinking Dr Benito Müller – in an essentially political commit- about what kind of regime will be in [email protected] ment to support a broadly agreed place in the medium term – which range of policies and prices for the hopefully would start to stabilise future. The political commitment short-term prices as well. itself is the factor that should stabilise market perceptions. The mechanisms to police the policy could be relatively Christopher Allsopp informal – stopping short, for example [email protected]

17 OXFORD ENERGY FORUM NOVEMBER 2008

Although I write at a time of great volatility of oil prices escaped at least confidential information. Our reputa- concern over the global economy, I part of the blame for the impending tion for integrity and fair dealing is think it important to begin by saying recession. vitally important in winning and retain- that the global oil and gas industry has Where does this lead us? The value ing this trust.’ a critical role to play as an effective and of a well functioning oil and gas indus- This is a very clear position. I firmly reliable partner in providing energy at try is critical to the wellbeing of the believe that the industry can only sat- reasonable cost both in the short and people on this planet. The benefits of isfy society’s needs effectively when all long term. Within that context, I would oil and gas exploration and production the players clearly communicate their like to focus my remarks on the role of (E&P) are measured in trillions of dol- roles and relationships. Each player the service company as a technology lars, as are the global economic costs must understand and fulfill their role in supplier to the exploration and produc- of inadequate supplies that lead to oil order for the industry to function. We tion industry. Naturally, I write from have a clear understanding of our role my own perspective at Schlumberger, as a service company, which does not but in the spirit of the debate that the seek to compete with its customers for Forum seeks to foster, I will build on equity in oil and gas assets. We provide the insights on the roles and relation- Personal services and technologies that help our ships of the industry players that were customers improve the performance presented by Mark Moody-Stuart in Commentary and reduce the risk of producing oil August 2008. and gas, and investors value us on our There have been many studies ana- Andrew Gould ability to do this. This is quite distinct lysing the correlations between eco- from the valuation of an oil company, nomic growth and the demand for which is based on its production and oil and gas that have included some its reserves. excellent work on the demand side price shocks. One would think that this One of the most important char- by the International Energy Agency would provide ample incentive for all acteristics of any service company is (IEA), especially the last World Energy companies involved in the oil and gas the quality of its people. It will come Outlook (WEO) focusing on China industry, as well as the major resource as little surprise to know that we at- and India. On the supply side, the IEA holders, to invest in providing adequate tract our staff by offering exciting and acknowledged the importance of future oil supplies at a reasonable cost. If varied careers, equal opportunities, energy supplies to economic growth consumers are also reassured over the outstanding training and competitive in the 2001 WEO subtitled ‘Assessing security of future oil supplies as well as salaries. However, the ability to attract Today’s Supplies to Fuel Tomorrow’s a reduction of oil price volatility, then the best is made harder by unstable Growth’. This was followed in 2003 by there is significant additional value for E&P spending. This affects all industry an estimate of the cumulative invest- global economic growth prospects. players, but the service company is ment required to provide the necessary Within this sphere lie the roles and less protected than the oil company oil and gas to meet demand over the relationships of the oil and gas compa- because it is measured by the financial period 2001–2030. This figure totalled nies and the oilfield service providers. performance of its current operations $6.2 trillion (in year 2000 dollars) for In order for these companies to clearly rather than by the quality of its oil upstream-, downstream- and transpor- communicate their position to stake- and gas assets. Consequently, the ser- tation-related investment. Four years holders, whether they are employees, vice company must react rapidly to later this figure was increased to $9.6 customers, host governments or inves- the changing spending patterns of its trillion (in year 2006 dollars) over the tors, it is important for them to define customers. While oil companies can shorter period of 2006–2030. While this the guiding principles of their business. adjust E&P spending levels up and amount of capital may appear large, the As well as statements on corporate down depending on their perception of economic value of the fuel produced is governance ethics and values, the Sch- supply, demand and price, the service certainly very much higher. lumberger guiding principles include sector has to respond with increasing Turning now to the impact of oil a commitment to our customers, the or decreasing resources. Hence we prices on economic growth, there have oil companies. As Mark pointed out, are heavily reliant on the forecasting been several studies that link the reces- the Schlumberger position on equity ability of our customers, and volatility sions of the last few decades to oil has not changed since that position of their investment plans. This also price shocks. In 2000, a study by Oak was first formulated. Stated simply, explains why oilfield cost inflation Ridge National Laboratory, estimated ‘Schlumberger is committed to excel- appears when activity increases after the costs to the US economy of the lence in everything we seek to do. We periods of under-investment. oil market upheavals over the period aim to do business in a consistent and I doubt if anyone would disagree 1970–1999 at $7 trillion (present value transparent way with all our clients that attracting the best people into the 1998 dollars). Indeed in the final write- and do not hold equity stakes in our oil and gas industry is a productive use up of the events leading up to the customers’ assets. Customers place a of the world’s human capital. By work- current economic gloom and inevitable great deal of trust in us, particularly ing together, international and national recession, I would be surprised if the when it comes to handling sensitive and oil companies, service companies and

18 OXFORD ENERGY FORUM NOVEMBER 2008 the major resource holding countries differentiation versus their competitors reinvested in E&P. But who really has can attract the best talent to the busi- through processing and interpretation, the knowledge to reinvest if not the oil ness and deliver reliable, cost-efficient the latest generation single-sensor tech- companies themselves? supplies of oil and gas. In doing so, nology requires a certain acceptance There are of course fundamental we compete with other sectors but of technology at the black-box level. differences between oil companies and at the moment it’s reasonably safe to It is not realistic to expect the service service companies. Oil companies have say that a technical career in oil and company to develop the technology traditionally been valued on their ex- gas is probably a better use of talent and then not receive the return of the posure to ownership of oil as a proxy than devising complex products in the required investment. Yet our industry for exposure to oil price and geological financial sector. is really no different to any other risk, or in the case of the national oil I would now like to turn to the technology-based industry. After all, companies their capacity to contribute importance of technology. This forms oil and gas exploration and production to the nation’s wealth. Even if the in- a fundamental part of our company’s is an engineering business and there is ternationals are increasingly accepting values and vision since its inception. no reason for the same transformation contracts that reflect more a service Schlumberger firmly believes that the that has led to significant progress in model than an equity model, it is likely service sector has a fundamental role to the aerospace, automotive and bio- that they will continue to be valued on play in the research, development and medical industries not to apply to oil the net present value of the quantity of deployment of upstream technology and gas development. the commodity they can find, produce and that is why we reinvested over 14 The technology development land- and sell. Service companies on the percent of our net income in R&D in scape is not limited to hardware and other hand are typically valued on the 2007. For comparison, the correspond- data acquisition. It also extends to in- earnings power of their technology ing figure for the world’s largest inter- formation technology and data condi- portfolio applied to a probable activ- national oil company was 2 percent. tioning, processing and interpretation. ity scenario and they are tributary to We firmly believe that the need for Workflow process software has made the oil companies’ desire to spend upstream technology development to dramatic strides thanks to the engineer- on exploration and production. In find and produce more oil and gas has ing efforts of the service sector. Work- fact, I would suggest that today’s ser- never been greater. We also recognise station, visualisation and simulation vice companies are probably wrongly that there are technology opportuni- capabilities have extended far beyond named – a more correct description ties in other parts of the oil and gas the impressive efforts of just ten years would be technology suppliers as is value chain, where Schlumberger has ago. The shared earth model, the meet- the norm in many other engineering no participation and which are most ing place of geologists, geophysicists industries. suited to oil companies. and engineers has enabled incredible The risk profile and appetite of the One of the best examples of the progress to be made in the manage- oil companies and service companies effect of technology lies in production ment of one of the most vital energy remains fundamentally different. Most of natural gas in North America. With assets we cannot see for ourselves – the oil companies typically cover more of many conventional reserves well de- hydrocarbon reservoir. The develop- the E&P value chain than any service pleted, the North American exploration ment of high-performance software company. The service companies remain and production industry has turned platforms to manage all of this has, in suppliers of technology products and more and more to unconventional re- the last twenty years, moved from be- services to the oil companies whatever serves to meet demand. The geological ing an activity internal to the large oil their form – national, international, and production characteristics of these companies to a competitive market of small or large, oil, gas, or of any other reserves have demanded new tech- third-party software vendors. variety and believe me there are many. nologies able to improve production I would now like to try to draw Such companies would, in my opinion, for satisfactory economic return. Well some coherence between the roles of remain well advised not to cross the placement, natural fracture identifica- the industry players. Economic growth divide and begin to take equity. A con- tion, pressure pumping stimulation and depends upon reliable and reasonably sistent relationship with all customers completion design have all had to make priced oil and gas supplies. If the oil is vital to a clear distinction of the roles advances, and have all had to become and gas industry and its major resource of each of the players. closely integrated for the performance holders are unable to deliver increasing In closing, I agree with Mark that to unconventional gas wells to be- supplies of oil, then governments will technical and operational excellence is come acceptable. The service industry investigate whether the market is cor- key for all the players in the oil and gas has met that challenge – one that lies rectly functioning and whether higher industry. However, I propose that to firmly within its remit. oil prices are resulting in increased achieve this excellence a company has But surface seismic acquisition and investment in exploration and produc- to be clearly focused on its role in the processing has also changed dramati- tion. If oil companies prefer to find industry and structured accordingly. cally through research and development other uses for the money generated by It is simply unrealistic to expect that investment by the service sector. Long the sale of oil and gas, then governments any company can effectively fulfil both seen as a commodity service by the may well feel justified in using taxa- roles. We at Schlumberger have made oil companies, who added their own tion to obtain capital that can then be our choice.

19 OXFORD ENERGY FORUM NOVEMBER 2008 Asinus Muses

Credit where it’s Due we can at least say he is experienced in Why do we need change? Things are these matters. quite bad enough already.’ As credit gets ever crunchier, Asinus has been counting his blessings. In Left Holding the Baby Winds of Change his current incarnation he is an ass with no assets: no shares, no houses, It seems the only people left holding Speaking of changes, clean energy’s no collateralised debt obligations. He anything of value are our old friends the newest and least likely advocate is has never been sold a SIV by a spiv. oil producers. But even the effervescent oil’s best-named personage, T. Boone And for the first time in a long time, oil price has lost some of its fizz. Asinus Pickens. (Asinus cannot read his name having no assets appears to be the only is not, however, so foolish as to assume without picturing Boss Hogg from the way to avoid becoming poorer. Should that it will not double, or indeed halve, Dukes of Hazzard, elbow-deep in a Asinus celebrate his out-performing in between this being written and being platter of porterhouse steaks.) Pickens the market? printed. Indeed, the best metaphor that plans to invest several billion dollars I have heard for the oil price is Paul in building wind farms in Texas. In Contra the old saying about love, be- Horsnell’s image of a naughty toddler addition to making a bundle, he wants havioural research finds that when it wandering in random directions until to reduce oil imports to the USA. He comes to money, humans prefer never he collides with something. declares: ‘We are now transferring $600 to have had than to have and to lose. billion [a year] out of the United States Soros, who knows a thing or two about This suggests that what the oil market to a few friends and a hell of a bunch of having and losing, has confirmed that needs is adult supervision, which is es- enemies. I can tell you, we are paying there is greater sorrow in losing a bil- sentially what our own Robert Mabro for the war against ourselves.’ Oilman lion than joy in gaining it. has called for: internationally-coordi- to green is thus explained. But Asinus nated public intervention to stabilise wonders if the difference in skill sets If losing a billion hurts, pity the poor oil prices, led by the biggest importers between the oilman and the diplomat souls who used to be CEOs of US and exporters. Such a proposal would might help to explain how the world investment banks. With little to cushion have been terribly unfashionable until got into its current geopolitical pickle their landing but their nest beds of a few recently. But post Fannie Mae, Fred- in the first place. hundred million bucks, these fellows die Mac, AIG, Bradford and Bingley, have lost everything: their jobs, their and so on and so forth, it seems that Man and his Ass reputations, and the right to gamble public intervention in markets is back with the wealth of people poorer than in style. Evidently Mabro was simply at Asinus has discovered that his equine them. Still, losing tens of billions of the forefront of the new wave of retro cousins are barred from the famous Inca other people’s money is probably pref- chic. But while I would be delighted to Trail to Machu Picchu, Peru’s recently- erable to losing a billion of your own. see the Americans and Saudis leading a anointed Wonder of the World. Pack new multilateralism, I am not holding animals are judged to be a danger to One of the more amusing sideshows my breath. the route and the priceless artefacts at of the crisis has been the sight of free the end of it. Curiously, tourists are market cheerleaders begging for bail- Mohamed ElBaradei apparently has not thereby induced to dispense with outs. It should probably be no surprise more faith. He has been arguing for pack-carriers but outsource, instead, that Hank Paulson, US Treasury Sec- international coordination in setting to other humans. These very fit human retary and former Chair and CEO of up a truly international energy agency specimens are known as portadores. Goldman Sachs, supports welfare for to represent all stakeholders. Accord- Even more curiously, some tourists bankers. Paul Volker, former head of ing to ElBaradei, OPEC, the IEA, and nonetheless have more trouble carrying the US Fed, has also called for a public UN-Energy don’t cause enough trouble their own unladen asses up the trail body to take over the bad debts littering on their own. Asinus is reminded of the than their ass-like employees have in the financial system. His main claim to comment made by Lord Palmerston, carrying their loads. (Loyal readers may fame is having caused the Latin Ameri- Prime Minister of Great Britain, to notice that Asinus’s views on the fat- can debt crisis of 1982, so I suppose Queen Victoria: ‘Change? Change? thin debate are experiencing a secular shift.)

Oxford Energy Forum. ISSN 0959-7727. Published by Oxford Institute for Energy Studies, 57 Woodstock Road, Oxford OX2 6FA, United Kingdom. Registered Charity 286084. Tel: (0)1865 311377. Fax: (0)1865 310527. E-Mail: [email protected] EDITOR: Robert Mabro. Annual Subscription (four issues) £45/$85/a65. © Oxford Institute for Energy Studies, 2008. Indexing/Abstracting: The Oxford Energy Forum is indexed and/or abstracted in PAIS International, ABI/IN- FORM, Fuel and Energy Abstracts, Environment Abstracts, ETDE and CSA Human Population and the Environment 20