MAY 2015: Issue 100 forum

A QUARTERLY JOURNAL FOR DEBATING ENERGY ISSUES AND POLICIES

This is the one hundredth issue of The issue begins with a personal CONTENTS the Oxford Energy Forum, a quarterly memoir refl ecting on a key episode in publication that Robert Mabro started the oil market and about which little Robert Mabro: refl ections on the man and his work back in 1990 to stimulate debate on information and detail are known. Based The Mexican, Saudi, and Venezuelan the key drivers shaping energy markets on unpublished documents, media connection – a memoir 4 and energy policies. This special issue comments and dispatches of the time, Adrián Lajous is dedicated to Robert Mabro who and personal logs, Adrián Lajous refl ects Robert E. Mabro: beyond scholarship to decision making 11 founded the Oxford Energy Policy Club on the 1998–9 oil price crisis, revealing Ibrahim A. Al-Muhanna in 1976, the Oxford Energy Seminar in some unknown facts about the secret The current oil price cycle and 1979, and the Oxford Institute for Energy negotiations that brought together refl ections on Mabro’s work 13 Studies in 1982. The fact that these Venezuela, Saudi Arabia, and Mexico Bassam Fattouh institutions still thrive today is testament Saudi Arabia and the limits of signalling 16 in an attempt to stabilize oil prices in Giacomo Luciani to his strong leadership, deep vision, the fi rst quarter of 1998. His account of Saudi Arabia and its role in oil markets 19 sheer determination, great intellectual events unveils some fascinating details Mark Moody-Stuart ability and, not least, his extraordinary and reveals the complexity involved Déjà vu all over again: another oil bonhomie. Over the last 50 years, price fi asco 22 in negotiations between oil producers Nordine Ait-Laoussine and John Gault Robert’s many insightful books, and the interactions between OPEC Saudi Arabia’s complex relationship articles, and papers have enriched and non-OPEC countries. In forging the to the oil market: 1985 and 2015 25 our understanding of energy markets, agreement on output cuts only a few Pedro Haas the behaviour of the various players, The political economy of oil and individuals – Mabro being one of them economic diversifi cation 29 the dynamics within OPEC, and the – played a key role, and his role in these Ali Aissaoui interaction between governments and oil negotiations has been only partially Oil and Arab economic development 32 Paul Stevens companies. With his writing and through recognized. the various institutions he created, he A perspective on Robert Mabro’s contribution to petroleum research 35 has persistently tried to bring producers Ibrahim Al-Muhanna’s article sheds light Majid Al-Moneef on Mabro’s role not only as a writer and consumers closer together, despite Robert Mabro and the theme of his recognition of the challenges and analyst, but also in bringing parties energy security 36 involved and the wide divergence of with divergent interests together. His John Mitchell interests. In this issue, some of Robert’s memories of Mabro’s talks with OPEC Energy security revisited 39 David Robinson governors and ministers behind the many colleagues and friends refl ect on European gas security in historical the man and his work: the diplomat, the scenes remind us how Mabro was perspective 42 interlocutor, the friend, and above all, the an effective intermediator, a friend, Jonathan Stern generous intellectual and thinker whose and a behind-the-scenes diplomat, The consumer–producer dialogue 44 Walid Khadduri deep insights and intellectual integrity who engineered an opening up of the Robert Mabro and the keep shaping and infl uencing our ideas different oil market interest groups to consumer–producer dialogue 46 in so many ways. one another. Ian Skeet

OXFORD ENERGY FORUM ’s Majid Al-Moneef looks back at Mabro’s refl ects on the legacy of ects on the legacy refl concern over sustainability, concern over sustainability, emphasis on the central importance of developing human capital, rejection of the concept of ‘resource curse’,

Oil and development in the Arab world in the Arab Oil and development Ali Aissaoui area of oil and Mabro’s work in the as Aissaoui or, economic development development as argues, the illusion of us how we perceived it. He reminds of his time, hadMabro, as always ahead cation diversifi begun to look at economic the early policies in Egypt during on to pick up 1970s. Aissaoui moves with a closer off, from where Mabro left surrounding the look at today’s debate cation of the oil-rich economic diversifi economies of the Middle East. Looking at the GCC economies in greater detail, Aissaoui emphasizes the vulnerability many of these economies experience as a result of their continued dependence, for much of their economic output, on the with export of oil; and arguing that today, uncertainty aboutat demand, greater fl the future direction of prices, and growing scal needs, these countries domestic fi face even more dire threats. Paul Stevens contribution to our understanding of the role oil has played in Arab economic development. The three dominant themes around which Mabro’s work has focused: are undoubtedly as relevant as ever, are undoubtedly as relevant as ever, and Mabro’s views still guide the The Arab Uprisings, debate today. Stevens argues, offered a brief glimmer of hope, but for the most part these glimmers have been extinguished, at least for the time being. Stevens calls for more political and economic reforms to be made in the Arab world, to unleash the enormous talents, abilities, and imaginations of the Arab releasing it from the private sector, shackles of the kleptocracies that have dominated the region for centuries. This is followed by memories of Mabro as a sceptic of the and draws comparisons Nordine Ait-Laoussine refl ect on Saudi Arabia’s ect on Saudi Arabia’s refl , and Stuart John Gault role on the oil market through the lens role on the oil market reminds of Mabro’s work. Moody-Stuart the 1980s andus of Mabro’s work during production was1990s, when non-OPEC ve decline about fi repeatedly forecast to date before years out from the forecast of improved technology (in the form water drilling, andseismic imaging, deep pushed thishorizontal wells) repeatedly future. This long decline further into the historical perspective of the industry, the present rise says, puts Moody-Stuart of shale oil production in context. Saudi Arabia’s historical advantage remains access to low-cost oil reserves; Aramco’s status as a highly adaptable company; and the Kingdom’s solid market access, built strategically over many years, which uence also forms part of the Saudi infl warns that on OPEC. But Moody-Stuart Saudi Arabia’s prominent position may be threatened by uncontrolled domestic energy consumption driven by subsidized and water prices. fuel, electricity, argue that the and Gault Ait-Laoussine challenge facing OPEC is even greater today than it was in 1986 and reinforce one of Mabro’s messages that the current strategy of seeking market share is likely to prove costly for OPEC in the medium term. The authors argue that OPEC should reconsider its current strategy and adopt a plan that would reverse the foreseeable revenue loss. Pedro Haas between Saudi Arabia’s role in the 1980s and in the current cycle. The differences in details, Haas points out, cannot obscure the fact that the current Saudi oil policy shares its DNA with the Saudi oil policy of the 1980s and is based on a deep understanding of the need to preserve the role of oil and the corresponding Saudi production volumes. Haas argues that one of the implications of Saudi Arabia’s current decision is to push other OPEC members to accept a new normal and ecting a new a lower price point, refl equilibrium in the market. Mark Moody- refl ects on the most ects on the most refl revisits Mabro’s work on OXFORD ENERGY FORUM However, Saudi efforts to signal to However, 2 Bassam Fattouh (since June uctuations fl recent oil price Robert Mabro would2014) and asks what argues that say about them. Fattouh has its own special every oil price cycle is no different: the features and this one revolution, the advent of the US shale oil and productassociated shifts in crude set of ows, the entry of a new trade fl model, players with a new business of the and the changing nature to mention a few. geopolitical risks, just features some fundamental However, have run across all previous cycles: the problem of excess supplies, rising levels question, the over-investment of inventory, OPEC behaviour and its relation with non-OPEC producers, the fundamental trade-off between maximizing revenues and maintaining market share, and the reviewsrole of market sentiment. Fattouh Mabro’s analysis of the 1998–9 oil price crisis and his views on these features, arguing that Mabro’s intellectual edge in analysing the oil market can be attributed to his extraordinary ability to understand and identify the fundamental questions facing the oil market and to brush aside transient factors. Giacomo Luciani the oil price crises in 1985–6 and 1998, commenting on the most recent oil price collapse in 2014–15. Luciani recalls Mabro’s view in 1986: that Saudi Arabia had already given up its role as a swing producer at times of falling oil prices, in favour of taking on the role of xed-volume producer’. Luciani a ‘fi argues that today’s non-OPEC producers continue to rely on OPEC to cut output in response to price declines, while OPEC producers essentially place the burden of cuts on Saudi Arabia. been the market have, in his view, ineffective in the absence of remedial action. Much in line with Mabro’s work, he points to the market’s dire need of reform and for a more coordinated approach between producers to reduce price volatility as recently seen by the market. In two separate articles, ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK THE MAN ON MABRO: REFLECTIONS ROBERT

INTRODUCTION TO THIS ISSUE MAY 2015: ISSUE 100

day’s theories back in the 1980s, and the issue of defi ning energy security, Russian gas supplies, and that is the INTRODUCTION TO THIS ISSUE his contribution to providing critical the question of how oil importers question of price security. analysis at exactly the right time. should manage the risk of supply disruptions;, The producer–consumer dialogue Energy security the idea that unconventional oil and In two separate articles, Walid Khadduri gas resources could provide the USA and Ian Skeet look more closely at John Mitchell traces the beginnings of with a greater sense of energy Mabro’s role in promoting dialogue Mabro’s work on energy and oil markets. security, between producers and consumers in Looking back at 1973, the time of the the puzzle of how lower oil prices will response to what, during the 1970s and Arab oil embargo, he provides a valuable affect all the above. 1980s, emerged as ‘the oil problem’. perspective of the trend, at the time, to Mabro’s motivations in doing so study energy primarily within the ‘energy In his article, Jonathan Stern revisits developed, as Skeet highlights, in security’ paradigms. The search was for lessons drawn by Mabro during the response to a set of market problems that solutions which would defend the USA 1980s on the security of gas supplies in still very much defi ne oil markets today: and the OECD, he notes, rather than Europe. Looking at today’s Ukraine the risk of national or regional confl ict developing a system for governing oil confl ict, Stern sees the same kind of to affect oil supply, trade and investment which both sides bargaining problems and political under-investment in producing would fi nd it attractive to support. When disagreement mix as was perhaps feared countries, Mabro’s work emerged, it gave a very during the 1980s, when a major policy a slack market that threatens an oil different perspective of the issue of question was whether and where Europe would be able to secure suffi cient gas to price collapse. energy security; namely that a ‘solution’ meet demand. Part of Stern’s response is would involve both producers and And, as Khadduri emphasizes, Mabro’s to ask where Europe’s alternatives to consumers. work contributed signifi cantly not only Russian gas this decade are. He also to bringing parties together but also to David Robinson revisits Mabro’s views links this discussion to an often removing barriers, and to dispelling on energy security and explores four underrepresented element in today’s vast what Mabro calls some damaging questions of interest today: media hype around the security of misconceptions and irrational fears.

CONTRIBUTORS TO THIS ISSUE

Majid Al-Moneef is Secretary General, Pedro Haas is Director of Advisory Sir Mark Moody-Stuart is Chairman of and member, of the Supreme Services, Hetco Hermes Equity Ownership Services, Economic Council of Saudi Arabia and a director of Accenture and of Saudi Walid Khadduri is former Editor-in- the Supreme Council of Saudi Aramco Aramco. He was Chairman of the Chief of MEES Ibrahim A. Al-Muhanna is Senior Royal Dutch/Shell Group from 1998 Advisor to the Minister of Petroleum Adrián Lajous is Senior Fellow in the to 2001. He was Chairman of Anglo for the Kingdom of Saudi Arabia Center on Global Energy Policy at American plc from 2002 to 2009 Ali Aissaoui is a Research Associate, Columbia University. He was the David Robinson is Senior Research Oxford Institute for Energy Studies CEO of Pemex from 1994 to 1999 Fellow at the Oxford Institute for Energy Studies Nordine Ait-Laoussine is President of Giacomo Luciani is Adjunct Professor NALCOSA and a former Algerian oil at the Graduate Institute (Geneva) Ian Skeet is a Research Associate, minister and Scientifi c Director of the Master Oxford Institute for Energy Studies Bassam Fattouh is Director of the in International Energy, Paris School Jonathan Stern is Chairman at the Oxford Institute for Energy Studies of International Affairs at Natural Gas Research Programme, John Gault is Co-Director, Executive Sciences-Po (Paris) Oxford Institute for Energy Studies Master in International Oil and Gas Leadership, The Graduate Institute, John Mitchell is Associate Research Paul Stevens is Distinguished Fellow Geneva Fellow at Chatham House at Chatham House

OXFORD ENERGY FORUM 3 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

The Mexican, Saudi, and Venezuelan connection – a memoir Adrián Lajous

Robert Mabro played a key, if recollection of events that happened that implied a US$1/bbl discount with unaccredited, role in the secret 17 years ago; these were necessarily respect to Maya. This was particularly negotiations that brought together infl uenced by later conversations problematic as Pemex was in the these three countries, in an attempt to with four key actors: Prince Abdulaziz process of approving the terms and stabilize oil prices in the fi rst quarter bin Salman, Alberto Quirós Corradi, conditions of new long-term supply of 1998. These had gradually eroded Humberto Calderón Berti, and Robert contracts, which included a light/ in the fourth quarter of 1997 and Mabro. The subjective nature of this heavy crude differential protection that tumbled in the last two trading days narrative has an intrinsic bias diffi cult incentivized and committed buyers of that year. The spot price of Brent to correct: it tends to portray an to install delayed cokers. Pemex was averaged US$19.30/bbl from January exaggerated image of the role played seeking to expand the demand for to November 1997 and dropped below by its author. More importantly, it heavy crude in US Gulf Coast refi neries US$16 on 31 December. As it turned hardly deals with the perennial issue of and in Mexico, which would provide a out, this was only the beginning of different actors and witnesses having stable home for Maya crude. different recollections of the same a deep and lengthy price collapse. Over the holidays I began to consider event. However, the undoubted central Prices continued to plunge in 1998 the possibility of a Mexican initiative fi gure in this episode, in the overall reaching US$11.05 on 17 March, that might contribute to the recovery management of the 1998–9 price further descending to 10.77 in mid- and stabilization of rapidly falling prices collapse and in international oil affairs June, and 9.91 by Christmas Eve. for its crude oil exports. An agreement over the past 20 years, has been Ali On 11 December 1998 I sent a short among producing countries would al-Naimi, the minister of Petroleum and handwritten note to President Zedillo be required for an immediate and Mineral Resources of Saudi Arabia. letting him know that Pemex had sold substantial reduction in global supply, I keep in my offi ce a photograph, cargoes of Maya crude for US$5.68/bbl as well as a more orderly behaviour with a kind message in Arabic, in the previous day, a drop of 64 per cent by the two most important regional which I am shaking hands with him from the average realized price of suppliers of heavy crude, who were in the gardens behind the Algerian October 1997. Not only had the price both increasing their production Embassy in The Hague, while the fi nal of internationally traded oil reached capacity. It was essential to achieve a press communiqué was being typed. very low levels, but the price differential new modus vivendi between Venezuela It was taken at the end of a long set between Brent and Maya crudes was and Mexico, and between Saudi Arabia of tripartite meetings that began on widening due to increasing volumes of and Venezuela. Changes in short- 21 March 1998 and extended for almost discounted Venezuelan crudes fl owing term policy were needed, as well as a year. In this last meeting we were to the US Gulf Coast. In spite of three the clearing up of misconceptions joined by the oil ministers of Algeria and major production cuts agreed by oil regarding their respective intentions. Iran. Unfortunately, the Mexican energy exporters, the price of Brent did not For this to happen, a modicum of trust minister was not able to attend. again breach the US$18 threshold until had to be re-established and this could 6 July 1999, having remained below only be done through dialogue and this level for 19 consecutive months. Mexican motives eventual negotiation.

On 17 December 1997 the Mexican Early in January 1998 I came to ‘AS IT TURNED OUT, THIS WAS ONLY THE intergovernmental committee on the conclusion that Mexico could BEGINNING OF A DEEP AND LENGTHY international oil trade (COCEP) potentially play a constructive role in PRICE COLLAPSE.’ was informed of the deterioration in the search for a compromise among market conditions and the increasing producers. First, we needed to reduce This memoir draws on memoranda that competition with Venezuela in the the tension between Venezuela and I wrote, other unpublished documents US Gulf Coast. The Pemex–Shell Saudi Arabia by facilitating direct in my fi les, personal logs, media joint venture in the Deer Park refi nery contact. Second, Mexico could offer comments and dispatches of the time, had acquired a number of cargos of a relatively modest reduction in actual and notes from a diary that Mabro kept heavy Venezuelan crude for delivery and planned exports. This could have a at the time. It is also based on my own in January and February, at prices signifi cant symbolic value, encouraging

4 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

other non-OPEC exporters to cooperate negotiations and mutual compliance the previous fourth quarter and fi rst and contribute to an atmosphere that complaints. two weeks of January. The estimated might facilitate an agreement within annual decrease in revenues was I wrote two long memoranda to OPEC. Third, a renewed contact equivalent to 0.4 per cent of GDP. President Ernesto Zedillo, both titled with the Venezuelans could clear up Pemex was asked to reduce its own Oil Diplomacy, one dated 13 January misunderstandings that arose from projected operating and capital and the second 2 March. The fi rst the intense competition taking place in expenditures. Before the end of March examined market conditions and the heavy crude oil market, as a new a second Pemex 1998 budget cut prospects, proposed cooperating expansive phase of production got was implemented. The rigorous and with other producers, and assessed underway in both countries. prompt response of the government the risks of taking the initiative and to lower prices, and eventually to participating in negotiations. The lower volumes, refl ected the deep ‘MEXICO COULD POTENTIALLY PLAY A other, an 18 page double-spaced commitment to fi scal discipline and to CONSTRUCTIVE ROLE IN THE SEARCH FOR note, contained a more detailed maintaining macroeconomic balances, A COMPROMISE AMONG PRODUCERS’ discussion regarding the execution as the country recovered from its of our strategies, proposing explicit devastating 1995 fi nancial crisis. I was well aware that the probability of marching orders for the Ministry of success of such an initiative was limited. Energy and the State oil company, on Pemex had previously managed to It could face a sudden death if the Saudis the basis of which we could coordinate convince the government of the need to or the Venezuelans rejected a Mexican our actions. I gave the fi rst memo to authorize signifi cant capital increases for mediation or had a preference for another the minister a few minutes before we the large-scale and complex Cantarell intermediary. The diversity and intensity entered the president’s offi ce. After heavy crude expansion project, and the of the underlying confl icts of interest reading it he recommended prudence full reconfi guration of at least two of its among producers were substantial. and suggested that I should not be refi neries, so that they would be able to Building an understanding that would too persistent with my proposals as run additional volumes of this type of accommodate short- and longer-term the president would be hesitant to crude oil. These projects had been objectives between countries with very explore the recommended course of launched in early 1997. Their timely and different economic and oil industry action. Fortunately he was wrong. The orderly execution was at risk if prices structures was particularly diffi cult. president read the memo carefully and revenues continued to fall. For Political conditions in the Middle East in silence, asked a few clarifying these reasons price recovery was and North Africa were a source of bitter questions, and basically agreed to the absolutely critical for Pemex. proposal. I felt obliged to mention that strife. However, if successful the potential On 15 January I held a press conference I understood that he might have some benefi ts to Mexico were signifi cant and in Mexico City that touched on market reservations regarding what was put the short-term up-front costs relatively conditions and prospects for 1998, forward in the paper he had just read. small. Mexico was in a privileged the recent sharp fall in oil prices, their He answered that he did have some position that could allow it to take the implications for the Federal Budget and misgivings, but that they were spelled fi rst step. It had a capital of goodwill for cuts in Pemex capital expenditures. out in the memo and that we did not accumulated in previous market My price assessment at the time was have many options. stabilization and crisis management wrong, having concluded that we were efforts; and a solid commercial reputation My own apprehension with respect facing a signifi cant fall in oil prices, in international markets, characterized to the effects of lower oil prices but that it would not turn into a price by its transparency. Its cultural affi nities was becoming more concrete. On collapse similar to the one in 1986. with the Venezuelans, the experience of 14 January the Mexican Minister of The main difference could be found managing a joint oil cooperation Finance, Angel Gurría, announced in the fact that global excess capacity programme in Central America and the the fi rst of a series of Federal Budget was small in comparison to that which Caribbean, and longstanding industry adjustments directly linked to the fall prevailed in the second quarter of 1985. relationships were relevant assets. in oil revenues. The original budget This would allow price overshooting to Finally, the fact that it was not part of approved by Congress considered be eventually corrected during the year. OPEC gave it greater fl exibility and a price premise of US$15.50 per At the time it was diffi cult to imagine the Mexico was unencumbered by the barrel for the Pemex export mix. This magnitude of the fall in global demand burden of cumulative grievances and assumption was lowered by US$2 triggered by the Asian and the Russian misunderstandings with respect to past on the basis of the price erosion in fi nancial and economic crisis, the

OXFORD ENERGY FORUM 5 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

reduction in the growth of consumption issues we were dealing with. He then to be happy about our rapprochement in other emerging economies, and the talked with Suleiman al-Herbish and with the Venezuelans. However, slow expansion of demand in industrial Majid al-Munif, high-level offi cials in the they were not yet ready to talk to the countries. However, I did recommend Saudi Ministry of Petroleum, who also Mexican minister or other Mexican that Mexico had to be prepared for praised his article. More importantly, offi cials directly. They seemed to be lower prices and greater price volatility, he agreed to meet Munif in Tokyo on reluctant to respond immediately over but I made the mistake of trying to sooth 24–26 February, where they would both the phone and preferred to continue public opinion regarding these matters. be attending a conference and have our communications through Mabro, time to chat. who kept me briefed. This saved them Privately I was much more concerned, from potential embarrassments. In and a bit depressed, by the lack of ‘I CONTINUED TO BE UNEASY ABOUT THE any case they wanted to assess and response by major oil producers. I shared corroborate independently what I my worries with Mabro over the phone REACTION OF THE SAUDIS TO ANY FORM had been conveying to them through in mid-January. We agreed to meet in OF MEXICAN MEDIATION.’ Mabro. I was frustrated but understood Oxford the weekend of 24–25 January that in these matters you must check (I would be on my way to a Repsol The week of 15 February I called and double check everything and try to Board of Directors meeting in Madrid), Mabro at home several times. He for leisurely conversation, good wine conveyed his conversations with the maintain deniability. and, if possible, a touch of intrigue. Saudis and discussed their content The distrust between Venezuela and When we met a mood of gloom and from various angles. By then he had Saudi Arabia ran deep and the pessimism prevailed. I sought his come to the conclusion that the time Venezuelans appeared to be doing advice regarding possible courses was ripe for a Mexican initiative, everything possible to make it more of action by Mexico, the sequence of as neither the Venezuelans nor the acute. Saudi-Venezuelan relations had eventual conversations with Venezuela Saudis were prepared to make a fi rst begun to sour in the mid-1980s. It was and Saudi Arabia, and the risks of a move or recognize that they were now not a secret that Sheikh Yamani and potential Mexican initiative. His fi nal hurting because of falling prices. On Arturo Hernández Grisanti did not get recommendation was negative. He the contrary the tension between the along with each other. The involvement thought that it was still too early to two would increase during the next of these two oil ministers in managing make any move, that the main actors three weeks due to statements and the 1986 price collapse fully revealed op-page articles made by Erwin Arrieta had not yet really felt the pain of lower the tensions between them. More and Luis Giusti (Venezuela’s minister prices, and that it would be wise to wait fundamentally, the development of the of Energy and Mines and president for some sign that they might engage. extra-heavy crude oil resources of the of PDVSA, respectively) as well as His prudence further distressed me. Orinoco Belt grew to become a veritable by other members of the Venezuelan Mabro reacted with what he did best: bone of contention. Many Venezuelans petroleum establishment, all blaming he wrote a short provocative piece believed that this type of crude, given the Saudis for their current predicament for the February 1998 issue of the its specifi c pattern of extraction and its and reiterating their refusal to cut Oxford Energy Forum titled ‘Whither upgrading requirements, ought not to production. I confi rmed to him that Oil Prices?’,1 which was immediately fall within the scope of OPEC production Mexican government offi cials would translated into Arabic. It managed to regulation. As development and try to meet with their Venezuelan initiate a serious conversation with a production activities advanced in this counterparts as soon as possible and number of friends and some foes. He area, the issue of the Venezuelan explore their conditions for meeting with was pleased by the comments that he production quotas came to the forefront. the Saudis. I continued to be uneasy received and happy to engage in more With the opening – the Apertura – of the about the reaction of the Saudis to any structured discussions. On 9 February Venezuelan oil industry to international form of Mexican mediation. he received a phone call from Prince investment and more aggressive Abdulaziz who wanted to pursue the From Tokyo Mabro conveyed to me investment and development plans in topics covered by his paper. As it that Munif had no objection to the the Orinoco Belt, pressure built up for turned out, it was a key exchange of government-to-government meeting the recognition of this exemption. ideas that launched the process that between Mexico and Venezuela. A current of opinion in that country was being sought. Mabro later told Back in Riyadh, he phoned Mabro on believed that their interests would be me that he had identifi ed a positive 3 March after speaking with Ali Naimi better served by simply exiting OPEC. attitude and a will to sort out the main and Prince Abdulaziz. They seemed In the 1997–8 juncture, this view was

6 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

refl ected in the strident statements by iii. the Venezuelans were prepared to the Saudi minister with respect to Luis Giusti that Venezuela would never put on the table cuts from current Venezuelan behaviour, and saw no reduce its production, no matter how production levels; advantage in talking with Mexico. low prices fell. They understandably iv. discussions would only relate to The Saudis had kept on reading the angered the Saudis. Later, when issues short-term market issues while Caracas media with a certain delay of compliance with OPEC agreements longer-term investment programmes and were incensed. It took them time were being discussed, Arrieta and production targets would not be to receive and translate press reports. unfortunately characterized this addressed; They missed the subtle change toward organization as a club of Pinocchios, moderation that was taking place and v. Mexico would also make a where everybody lied to each other. This did not fully understand that lower-level contribution to a global reduction of did not help to improve mutual goodwill executives and offi cials could continue oil supply; between two OPEC founding members. to follow old directives and that their vi. preparations for further meetings statements were diffi cult to control in would remain secret. Miami secrets a less centralized environment. We With this understanding in hand we were rebuffed by the Saudis. Munif told The Mexican energy minister was now were ready to talk directly with the Mabro that they had decided to give fully committed and offered to set up a Saudis. Once back in Mexico I asked Rilwanu Lukman, the Secretary General meeting in Miami with Arrieta and Giusti Mabro to convey to the Saudis our of OPEC, the opportunity to broker a for 4 March 1998. All three had been desire to set up a phone conversation solution within the OPEC structure. invited by Sheik Yamani to a Center for between the Mexican minister and Ali Mabro reported this in almost real time Global Energy Studies meeting with a Naimi, so that he could explain what and I conveyed to Quirós Corradi what revealing title: ‘Oil, power and regulation had transpired in Miami. was happening. in Latin America: from state monopoly to private investment’. I travelled separately, On 7 March, Youssef Yousfi , the Algerian took a large comfortable suite in a hotel ‘THE VENEZUELAN CHANGE OF HEART oil minister, arrived in a private jet in far from the one where the Yamani WAS STRICTLY TACTICAL.’ Caracas for talks with the Venezuelans. conference was taking place. The He had dinner with Arrieta, Giusti, Mexican energy minister arrived with The Venezuelan change of heart was Calderón, and Quirós. They shared with Arrieta and Giusti, and to my surprise strictly tactical. Giusti’s commitment to him the content of our conversations in with Alberto Quirós, a former CEO of opening up the oil industry to private Miami and talked about possible courses Maraven, Lagoven, and Shell Latin investment and his conviction that of action. The following day they would America. The meeting was kept secret heavy crude production not be subject be having lunch at PDVSA. Giusti never from other high-ranking Venezuelans to OPEC collective decisions remained arrived. The others continued their talks present at the Miami conference. intact. The Caldera government with Yousfi . He then fl ew to Riyadh would only restrain the more radical where he met Ali Naimi on 11 March, The Mexican minister and I succeeded expressions of these policies, but confi rming the agreement we had in what we had hoped to achieve would continue to condone the lack of reached with the Venezuelans. in Miami. Initially, the Venezuelans compliance to committed production This independent corroboration would responded rigidly and blamed Saudi cuts throughout 1998. It would not be allow us to move forward. Yousfi had Arabia for the situation. After a while until February 1999 that the Chávez proposed, since the beginning of 1998, they softened their positions. At the end a more ambitious plan that included a we agreed on six basic points: administration, with Ali Rodríguez as oil minister, would be prepared to comply general realignment of production i. Mexico would establish direct with OPEC production agreements. quotas within the OPEC framework, contact, at a ministerial level, with which the Saudis did not favour. Saudi Arabia in order to organize a However, he clearly understood the Saudi reticence and mistrust meeting with Venezuela that would importance of the pending negotiations break the impasse between these Various time lags were making the among OPEC members and with two countries; negotiations more diffi cult. Although non-OPEC exporters, and supported ii. Venezuela was willing to talk to the Mabro kept Munif fully briefed, we them. The Saudis did not feel Saudis if quotas and cuts from were not able to dent the prevailing comfortable with Yousfi because of his established production quotas were circle of mistrust. On 8 March 1998 strong links with the Iranians and the not discussed; Munif conveyed the scepticism of Libyans, among others.

OXFORD ENERGY FORUM 7 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

After the Yousfi visit to Riyadh Prince The window for a meeting with the agreement fi rst. With this in hand I had Abdulaziz fi nally made contact with Saudis and the Venezuelans was very to give proper assurances to the Saudis Mabro on 12 March. He continued to be tight. The Mexican minister and I were that the invitation would be accepted. mistrustful of the Venezuelans and was not available before the evening of The Prince and I discussed multiple still infl uenced by previous statements Friday 20 March. I had to present the options that might accommodate by them that had lost relevance. After Pemex annual report and deliver a the concerns of all involved. Some of some mutual recriminations between speech in south-east Mexico before these were rather elaborate and even them he agreed to talk to me directly. President Zedillo on 18 March. Arrieta extravagant, if not impractical. I sat He told Mabro that he knew me well, and Giusti would be travelling to down to draft what could be the script saw me at OIES board meetings, and Europe with President Caldera on for the minister’s eventual conversation, trusted me. Soon after, I received two 14 March. This meant that we must which would be circulated beforehand, long calls from the Prince, one on have everything decided by then so that there would be no surprises. As Thursday 12 March and the other on and that we could not meet before it turned out it was only useful to clarify the morning of 13 March in Tlayacapan, 21 March. There was an additional things between the Prince and me. We where I had locked myself up for a long overriding time constraint: the OPEC were running short of time. On Saturday weekend in my cottage in the mountains Conference would meet in Vienna on 14 March Mabro called at 9 a.m., my south of Mexico City, to write a speech 30 March. time. Prince Abdulaziz had confi rmed that I had to deliver on 18 March, the The fl ow of phone calls between that Ali Naimi was ready to invite the anniversary of the nationalization of the Tlayacapan, Oxford, Riyadh, Caracas, Venezuelan and Mexican ministers oil industry in Mexico. and Mexico City did not stop from to visit him in Riyadh. However, the Thursday to Saturday. Fortunately I Saudis had some fi nal doubts that ‘APPARENTLY THE SAUDIS NOW BELIEVED was able to take most of them from the morning. They were fi nally resolved THAT THERE MIGHT BE A WAY OUT OF terrace in front of my cottage. Mabro after the Venezuelans agreed to a full THE IMPASSE WITH THE VENEZUELANS.’ called to assure me that the Saudi moratorium on further comments to the minister was now fully on board. He press by all the parties involved. Mabro phoned immediately after his had continued to talk with Prince I fi rst needed the Mexican minister’s conversation with Prince Abdulaziz. He Abdulaziz and was convinced that it authorization. He was engaged in very was the case. The Prince had clearly had given him my telephone numbers complex trade union negotiations in the done a good job. I called Quirós to and thought that he would call shortly. electricity sector. I managed to reach share what was happening and Apparently the Saudis now believed him and obtained his endorsement. posed the issue of meeting in Riyadh. that there might be a way out of the Then came the Venezuelans, who were I insisted that the question of venue impasse with the Venezuelans. Our about to fl y to Europe. By this time we was secondary and that going to Riyadh fi rst conversation gave me some hope. only had 15 minutes to agree on the could turn out to be a good solution. He fi rst complemented me for the detailed contents of what would be a He warned me that his principals in the interaction with the Venezuelans and brief teleconference between the three Venezuelan government would be for extracting their agreement to basic ministers. Time differences – 13 hours – reluctant to accept. They felt that they principles that could possibly allow were working against us and the clock would be losing face after a long a constructive interchange. We were was ticking away. An agreement was standoff and appear to have caved in making some progress but he was fi nally reached. The ministers were then to Saudi power and arrogance. Not still unable to commit. I was not yet on the phone and the Saudi invitation only would they have blinked fi rst, but convinced that the Prince had the full was gracefully accepted by the other had in fact surrendered to their rivals. backing of Ali Naimi on these matters. two members of the trio. After this I drank After a long discussion, and a number At times I felt that other channels of two double tequilas to celebrate. The of calls, the Venezuelans accepted. communication were at play. The issue following morning I was back to the I went to sleep thinking that we were of the venue of the eventual meeting less exciting task of writing a speech. now close to a deal. then came up. He insisted that it should be in Riyadh. This was the only secure In these circumstances the proposed On the way place where we could be effectively solution was that Ali Naimi should isolated from the media. He was right, personally invite the Venezuelans and Immediately after reaching an but convincing the Venezuelans was the Mexicans to Riyadh. We needed, agreement with Ali Naimi and Erwin not going to be an easy task. however, to get the Venezuelan Arrieta, the Mexican energy minister

8 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

set up a dinner appointment in Oslo would be discussed in Riyadh. Yousfi Later we attended a dinner offered by with Marit Arnstad, the new Norwegian would not be participating in the our host Ali Naimi at a Saudi Aramco petroleum and energy minister, for the meeting. Much later I learned that the tent in the desert. Much time had been evening of 19 March, on our way to Venezuelans and Yousfi had dined spent drafting the fi nal communiqué Riyadh. Our objective was to convey the previous evening at the Algerian of the meeting and press releases by the content of the conversations Embassy in Madrid. The Venezuelans each of the three countries. The fi rst we held with the Venezuelans and explained that they were searching for one simply stated that the oil ministers the Saudis, and to elicit their own an ally who could help neutralize OPEC of Mexico, Saudi Arabia, and Venezuela participation in curtailing global oil members that might try to block a met in Riyadh and had decided to supply. Bringing in another major and Saudi-led agreement. undertake an effort, together with other well-regarded non-OPEC exporter OPEC and non-OPEC producers, Humberto Calderón Berti, a former would add signifi cant weight to the to withdraw 1.6 to 2.0 million b/d Venezuelan minister, joined the group. overall effort and would also provide from the crude oil market. They It was politically signifi cant that Arrieta Mexico with some cover with respect confi rmed commitments by others of had invited Quirós and Calderón to to possible criticism in Mexico and in approximately 1.1 million b/d. come, as they were not part of the other OECD countries. The Norwegian Caldera government. I was pleased, minister promised to give our request ‘THIS MET WITH ALI NAIMI’S PROPOSAL as I knew both of them well from her full consideration, wished us luck THAT SAUDI ARABIA WOULD MATCH THE previous contacts in both bilateral and in our endeavours, and posed some SUM OF THE VENEZUELAN AND MEXICAN multilateral negotiations. The presence of the limitations, both statuary and of two experienced men of substance CUTS.’ political, that she faced. What was was critical. Their candid advice to the important at the time was that she minister, and the counterweight they The other three press releases did not say no. The following morning exercised to Giusti’s more aggressive announced a cut in production by a press release acknowledged the positions, moderated the Venezuelan Saudi Arabia and Venezuela of 300,000 meeting with the Mexican energy fury at their Arab colleagues. We then and 200,000 b/d, respectively. The minister, mentioned that the current oil fl ew with the Venezuelans in their plane Mexican communiqué of 22 March market situation was discussed, and that took us to Riyadh. It was full and was more specifi c. It disclosed that that the ministers agreed to remain in the Ministry of Energy had instructed uncomfortable, but we managed to close contact. Pemex to reduce its crude oil export talk non-stop with Arrieta, Calderón, programme by 100,000 b/d with and Quirós. Giusti would fl y directly ‘BRINGING IN ANOTHER MAJOR AND respect to the volume realized in the from Paris. WELL-REGARDED NON-OPEC EXPORTER fi rst quarter of 1998, estimated at WOULD ADD SIGNIFICANT WEIGHT TO 1.84 million b/d, a cut of 5.4 per cent Weekend in Riyadh THE OVERALL EFFORT.’ over the next three quarters. This met We arrived late on Friday 20 March at with Ali Naimi’s proposal that Saudi On the trip from Mexico City to Oslo we the Royal area of the Riyadh airport and Arabia would match the sum of the Venezuelan and Mexican cuts. On had to change our connections after both teams were directly taken to the this occasion, as in previous ones, landing in Amsterdam instead of the government conference palace, thus Mexico’s commitment was expressed scheduled stop in Frankfurt. This meant ensuring that our presence remained in terms of exports, not production, that our baggage would not arrive in unknown to the media. We remained given that a large fraction of the total Oslo and that we would not receive it ensconced in this building until we went crude produced was domestically until after the Riyadh meeting. I phoned back to the airport on Sunday. Kindly, consumed. This was not the case of Prince Abdulaziz asking for his help. Prince Abdulaziz had a tailor waiting for other major exporting countries, with The Mexican minister and I then fl ew us and both the Mexican minister and the exception of Russia. All Mexican from Oslo to Madrid where we held I had two full sets of clothes ready the statements stressed the sovereign, a meeting at the Torrejón airport with following morning. On Saturday we had unilateral nature of its cuts. our Venezuelan colleagues and the a long morning session that allowed Algerian oil minister. The encounter our ministers to confi rm the agreements On Sunday morning we fl ew back was brief; we ratifi ed the overall content they had reached over the telephone, to Madrid, where we said goodbye of the conversations with the Saudis commit to specifi c cuts, and review the to our Venezuelan friends. Our lost and confi rmed that productions cuts probable support from other countries. baggage was waiting for us at our

OXFORD ENERGY FORUM 9 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

rooms at the Ritz. I called Mabro to it for purely political reasons. They of its exceptional circumstances Iraq comment on events, read to him a had reversed their decision and now was not called to participate in the draft of the Mexican press release, supported the minority government to agreement. OPEC also recognized the and shared my misgivings. The most go ahead with the cuts. He added that production cut pledged by non-OPEC important one was the inclusion in the the minister of energy would shortly exporting countries. It is interesting to fi nal communiqué of the target cut of publish a press release announcing a note that there was no mention in the 1.6 to 2.0 million b/d. I fi rmly believed cut of 150,000 b/d, equivalent to close opening address of the meeting, or in that this range was unfeasible and its to 5 per cent of the estimated 1998 the fi nal press release, of the important announcement unnecessary. production. The previous evening I had contribution by Norway. They only received a draft of their 27 March press referred to the participation of Oman release. The Norwegians preferred not and Mexico. The Vienna anticlimax to attend the OPEC Vienna meeting in The media liked to characterize the On Monday 23 March President Zedillo spite of their generous contribution. efforts deployed by the Riyadh trio gave a speech in Mexico City where he The Mexican minister had decided as cloak and dagger diplomacy in acknowledged the effects of the Asian early on that he would not participate in distant scenarios: Algiers, Amsterdam, fi nancial crisis and the fall in oil prices this meeting, but would send members Cancún, Caracas, The Hague, on the Mexican economy, carefully of his staff to represent him. This would Madrid, and Vienna, among other explained Mexico’s participation in preclude any further negotiations cities. They complained about the the Riyadh meeting, and reasserted within the OPEC framework. On Friday secrecy of these meetings and the need for prudent macroeconomic 27 March I called Rilwanu Lukman, preferred the circus atmosphere that management. The following day the the Secretary General of OPEC, and surrounded OPEC gatherings. The minister of fi nance disclosed a further touched on the subject of the invitation players thought that keeping the reduction in the Mexican crude oil mix to the Vienna meeting. He politely meetings private was necessary, given price assumption to US$12.50/bbl, new explained that such an invitation was the complexity of the negotiations, oil revenue estimates from lower prices the prerogative of the President of the the uncertainty of their success, and and lower volumes, and further cuts in Conference, who was expected to the stakes involved. They wanted the 1998 federal and Pemex budgets. arrive in Vienna early on 29 March. to come out in the open when they The costs of adjustment to the price fall This response was diffi cult to fathom had something to tell. The changing would continue to mount. but it did not particularly worry me. context in which these meetings took There were still two pending questions The invitation was fi nally extended place, and the long period it might in our negotiations: the response of hours before the meeting started. take prices to fully recover, required the Norwegians to Mexico’s request Ricardo Samaniego and Lourdes discretion. Throughout this period for a production cut and the invitation Melgar, from the ministry of energy, Mabro continued to talk with the media to Mexico to attend the meeting of were on standby in Vienna and were and with opinion makers, carefully the OPEC Conference in Vienna able to attend the meeting. Ali Naimi clarifi ed issues, corrected mistaken as an observer. Both came at the had previously asked the Mexican perceptions, and provided background very last moment. The Norwegian minister to send representatives for that helped understand what was parliament had initially voted down follow-up conversations. happening. the government’s proposal to cut The Conference lasted only one day. Much less justifi able had been the production. However, Mabro received After the intense communications dysfunctional secrecy imposed by a call from Jens Stoltenberg, whom and discussions of the Riyadh three, OPEC members with respect to their he knew from the Oxford Seminar. and their conversations with other crude oil production and export data, He had been minister of trade and producers, the debate at the OPEC and their reliance on estimates from energy from 1993 to 1996 and at the Vienna Conference came to a prompt secondary sources. Mexico always time chaired the standing committee close. It agreed to cut 1.245 million b/d argued that oil producers are better on oil and energy in Parliament (he from current production, as estimated served by full transparency and timely would later serve twice as prime by selected secondary sources. The disclosure of the relevant statistics. minister and is currently Secretary individually pledged fi gures would not This would improve their understanding General of NATO). He explained that constitute new quotas and the cuts of market conditions and give greater the Opposition was not averse to a were intended to be in place from credibility to their commitments. production cut, but had voted against 1 April until the end of 1998. In light For these reasons it has published

10 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

for years detailed oil sector statistics also derived important lessons from the the fi eld of petroleum research. With on a monthly basis, less than 30 days negotiations carried out by producers this memoir I want to pay tribute to his after the end of any given month. More from Jakarta to Vienna, via Riyadh. It intellectual generosity; his tireless work recently it has also released selected is worthwhile reading today. His active in building three sister institutions at daily data. participation in the events described in Oxford: the Oxford Institute for Energy this memoir was later recognized by the Studies, the Oxford Energy Seminar, ‘HIS ANALYSIS OF THE STATE OF THE governments directly involved, as was and the Oxford Energy Policy Club; OIL PRICE REGIME AND OF OIL MARKET his wider contribution to engagements and, of course, his extraordinary bonhomie. I have been privileged by a CONDITIONS WAS INSIGHTFUL.’ among producers and to the dialogue between producing and consuming friendship that began in 1979. In May 1998 Mabro published an OIES countries. He was decorated by the A second part of this narrative will cover working paper entitled ‘The Oil Price governments of Mexico and Venezuela the efforts that were deployed and the Crisis of 1998’.2 His analysis of the and, on the occasion of the third diffi culties that were faced in achieving state of the oil price regime and of oil OPEC Summit, was distinguished by oil price recovery during the rest of market conditions was insightful. He King Abdullah with a major prize in 1998 and the fi rst half of 1999.

Notes 1 ‘Whither Oil Prices?’, Robert Mabro, Oxford Energy Forum, February 1998, Issue 32, pages 15–16. 2 ‘The Oil Price Crisis of 1998’, Robert Mabro, OIES Working Paper SP10, 1998.

Robert E. Mabro: beyond scholarship to decision making Ibrahim A. Al-Muhanna

If you have worked in the energy get them together and, crucially, get Seminar (an annual energy- industry, been involved with oil policy them working towards a common goal. brainstorming meeting). Both brought making, or been in any way connected together offi cial decision-makers and It was, and remains, a rare skill. to the oil market during the last analysts from all parties (OPEC, non- 35 years, there is a small handful of OPEC producers, consumers, as well people whom you will know. You will Promotion of dialogue as industry) in meaningful discussions. have read their work, listened to their He was well known, and highly Among his many achievements, talks and, if you were lucky, engaged regarded, as one of the best-connected Mabro made a major contribution to with them in a rewarding discussion. men in the world of petroleum. the success of the dialogue between One such individual is the inimitable oil producers and consumers in the Robert E. Mabro. ‘HE IS TRULY AN OIL MAN WITH 1990s, and helped forge stronger His importance and contribution cooperation between OPEC and PRINCIPLE, NOT SIMPLY A BUSINESS to knowledge go beyond being a non-OPEC oil producers following the PERSON LOOKING FOR FINANCIAL distinguished analyst and a great collapse of the oil market in 1998. RETURN.’ ‘brain-stormer’. He is a scholar, par He is truly an oil man with principle, not excellence, with highly respected I was introduced to Mabro in the late simply a business person looking for academic studies behind him. Yet he 1980s by Prince Abdulaziz bin Salman fi nancial return. He is an intermediary has also engaged in the decision- bin Abdulaziz Al-Saud, now Vice who brings people together free of making process, not only in his Minister, then the Advisor to the Minister charge and for the good of everybody. capacity as trusted advisor and of Petroleum. The price of oil was consultant, but as a man who has He organized two important international recovering after its big collapse in the multiple connections – which he is energy activities, which brought people mid-1980s, and following the able bring together. Different people, together; the Oxford Energy Policy Club restructuring of the Saudi oil industry. from different backgrounds, and with a (forum for senior executives which met Mabro’s opinion was that Saudi Arabia different agendas – but Mabro could twice yearly) and the Oxford Energy had to engage more – publicly and

OXFORD ENERGY FORUM 11 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

privately – with all international energy which could increase their production communications. Mabro played actors (producers, consumers, supported the idea, but those who could a supporting role. It was the fi rst non-OPEC, oil industry, energy not were against it, preferring a higher contact, offi cial or unoffi cial, between institutes, experts and consultants, and price. I was asked to work in London the two organizations and set in the media). He used to say that the during the month of August. My main train a relationship that is completely energy market and industries are not responsibility was to be in close unrecognizable today. fragmented, they are truly connected. contact and daily communication with And in the long term, he said that oil international media, oil consultants, ‘HE WAS AN IMPORTANT PLAYER, producers, consumers, and industry and the market at large, and also with BRINGING TOGETHER THE DIFFERENT should – and would – converge. This Jeddah, where I would speak with OPEC, NON-OPEC, AND IEA PARTIES.’ was also the belief of former Oil HE Minister Nazer and HRH Prince Minister Hisham Nazer and Abdulaziz. Mabro was in consultation with all oil HRH Prince Abdulaziz. We therefore In London, I communicated closely parties during these developments. started developing relationships with with Mabro. He was fully supportive He was an important player, bringing other actors; these gradually led to of holding the extraordinary OPEC together the different OPEC, non- bilateral annual discussions with many meeting and of efforts to end the OPEC, and IEA parties. This led later specifi c countries including the USA, OPEC production ceiling – allowing to the creation of producer–consumer Japan, Korea, the UK, France, Russia, oil producers to increase production. ministerial dialogues; the fi rst meeting China, Norway, among others. It was Through his connections and because was held in Paris in 1991, evolving later the right approach. Getting to know of the high esteem in which he was into the International Energy Forum. people and being well connected is held – both within OPEC and by the very important, and you never know international media – he was of great Collapse of oil market in 1998 when you might need these connections. help in persuading the Algerians The second important occasion where and some other OPEC members of Mabro contributed to international Events following the 1990 Iraqi invasion the importance of having an offi cial offi cial dialogue and communication of Kuwait meeting to increase their production. came in 1998. At the beginning of that He used to tell them privately: ‘it is On 1 August 1990, Iraq invaded and year, oil prices collapsed. Two major good for OPEC and for you and your occupied Kuwait. As a result, the problems needed to be solved before image’, adding that if they did not international oil market lost about recovery was possible: do it, the Saudis might go it alone 5 million b/d of supply, and the oil regardless. After a lot of persuasion Non-OPEC producers must be price jumped from US$20 per barrel to through many channels, the president persuaded to cut production in line US$35. Saudi Arabia was working day of the OPEC Conference agreed to with OPEC. and night to re-balance the market and have a ministerial meeting. It was held bridge the gap. But King Fahd wanted Venezuela must be brought into line in Vienna at the end of August, 30 days an OPEC agreement before Saudi with OPEC. after the Iraqi invasion of Kuwait. Arabia could increase its production. The Venezuelan government was We called for an extraordinary meeting. At this time, there was no adopting a policy of increased communication at all between OPEC production and their priority was market However, at that time, the Algerian and the IEA, offi cial or unoffi cial. Each share over any OPEC discipline. minister was president of the organization did its business as if they Its policy was a major factor in the Conference and was against holding were enemies. collapse of the oil market, in addition to such a meeting. He was supported by the Asian fi nancial crisis. one or two countries and OPEC cannot At the beginning of the OPEC meet and take decisions without the meeting in Vienna, we had a big and Prince Abdulaziz started thinking and agreement of all members. Therefore, unexpected surprise. The Iranian oil working with Mabro to fi nd a solution to we had to work hard to pressure others minister called, through the media, for the problem. Mabro was a close friend to agree. We also needed to make sure IEA members to release their strategic of Adrián Lajous (then president of that international media and other reserve before OPEC increased its Mexico’s national oil company, Pemex) actors supported such a meeting, with production. The IEA responded, who, together with Prince Abdulaziz the clear goal of allowing members to also via the media. Prince Abdulaziz was a member of the board of the produce what they could. Countries was instrumental in forwarding Oxford Institute for Energy Studies.

12 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

Lajous had a clear infl uence within the unconstrained production policy. consumers, oil companies, industries, Mexican government. At the same time, and fi nancial institutions. Mexico had a leading role and ‘THE WORLD NEEDS MORE ROBERT infl uence within Latin American MABROS TO MAKE FURTHER Conclusion countries, including Venezuela. So OUTSTANDING CONTRIBUTIONS …’ Mexico could reduce its production, It is clear to me that Mabro’s and could pressure the Venezuelans to This effort led to a major meeting in contribution and importance go beyond reduce their production, in order to Riyadh in March 1998 between the being a distinguished scholar and adhere to a new OPEC quota. three countries. Many more meetings author, and an honest and frank, free- Mabro, who had great relationships took place during that year and the of-charge advisor to all. He played, with all parties, and with no personal following year, with more countries as an individual, an important role interest whatsoever, lent his joining the group wishing to reduce in global energy policies. The world assistance. He and Prince Abdulaziz production and rebalance the market. needs more Robert Mabros to make both helped to put pressure on In the end, it worked. Oil prices rallied further outstanding contributions, and Mexico to be part of any production from mid-1999 to the present day, to help foster communication and cut, and on Venezuela to end its and this was welcomed by producers, understanding between all parties.

The current oil price cycle and refl ections on Mabro’s work Bassam Fattouh

Between 2011 and mid-2014, the ‘MABRO HAS ALWAYS ARGUED THAT aside transient factors; it goes without oil price traded within a very narrow OPEC’S OUTPUT DECISIONS … MATTER saying, he had very strong views about all these fundamental issues. range, with quarterly average Brent THE MOST IN A “WEAK” AND “OVER- prices exceeding the US$100/bbl SUPPLIED” MARKET …’ mark for 14 consecutive quarters. This The problem of excess supplies relative stability has been remarkable Every oil price cycle has its own special The root to any sharp fall in the oil price given the various shocks – ranging features and this one is no different: is ex ante ‘excess supply’ whether from macroeconomic shocks, to the advent of the US shale revolution, actual or perceived. This oil price cycle geopolitical shocks, to unplanned the associated shifts in crude oil and is no different. A period of high and outages, and to supply shocks – that product trade fl ows, the entry of a new stable oil prices generated demand, have hit the oil market. This relative set of players with a new business supply, and investment responses price stability, however, was disrupted model, and the changing nature of (though with a lag) strong enough and since June 2014 the oil price the geopolitical risks are just a few to shift market perceptions from has fallen sharply and price volatility of them. However, there are some oil scarcity to oil abundance. While has intensifi ed. While multiple factors fundamental features that have run geopolitical disruptions and unplanned can account for the recent fall in the across all previous cycles: the problem of excess supplies, rising levels of supply outages masked some of these oil price, the role of OPEC and its inventory, the over-investment question, demand and supply responses for a dominant player, Saudi Arabia, has OPEC behaviour and its relation with prolonged period of time, the high oil received special attention. This should non-OPEC producers, the fundamental price (and technological developments) come as no surprise. Mabro has trade-off between maximizing revenues unleashed powerful forces that had always argued that OPEC’s output and maintaining market share, and a profound impact on oil market decisions (including the decision not the role of market sentiment. Mabro’s dynamics. Slower oil demand growth to adjust output) matter the most in intellectual edge in analysing the oil than originally expected, high non- a ‘weak’ and ‘over-supplied’ market, market can be attributed in part to his OPEC supply growth driven by US and not in a tight market when OPEC extraordinary ability to understand and shale oil, the easing of disruptions in is producing close to its maximum identify the fundamental questions the second half of 2014, and OPEC not capacity. facing the oil market while brushing adjusting its output resulted in large

OXFORD ENERGY FORUM 13 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

stock-builds in 2014 which continued willingness to sell exceeds the willingness to cut output on its own to well into the fi rst half of 2015. willingness to buy prices fall, as this infl uence the course of oil prices could is the only way in which an imbalance not be taken for granted. In fact nobody Mabro has always been very precise between ex ante intentions can yield could realistically expect to see such about causality, which runs from excess an ex post equilibrium. On this count willingness ever emerging again.’ In this supplies due to a disequilibrium in too prices immediately fall.’ In Mabro’s current cycle, the message also took a supply/demand, to inventories, to thinking, negative sentiment is induced long time to sink in: up until the OPEC prices. In a seminal paper1 (quotations by changes in market fundamentals meeting in November 2014, many from which appear in this article), and changes in perception about the market analysts believed (or perhaps he argues that it is ‘excess supplies behaviour of key producers. were hoping) that Saudi Arabia would which initially cause stock levels to come to the ‘rescue’ and put a fl oor rise, and it is excess supplies which under the oil price. depress prices at the near-end of the Was Saudi Arabia’s response unexpected? term structure, and ultimately may Mabro recognized that any future For Mabro, it was very clear that it is the cause a contango to obtain.’ But for cuts should not be limited to OPEC, marginal barrel that sets the oil price, Mabro, the problem does not stop but should be shared by non-OPEC regardless of the size of the spare here as the contango ‘in turn provides countries for the simple fact that ‘OPEC capacity in the system. Producers an inducement to build stocks’. As a no longer includes in its membership should therefore avoid forcing ‘excess result, ‘a vicious circle is set in: excess all the relevant exporting counties supplies’ into the market as this policy supplies through this causal chain and therefore it only provides a partial is self-defeating: the decline in the create a situation in which new demand framework for effective policy making’. oil price will offset the impact of any exceeds consumption requirements Therefore, he advocated that OPEC increase in volumes and as a result and adds to stocks. Excess supplies producers fi nd ‘imaginative ways [to total revenues would fall. The quickest lead to further excess supplies. The secure] the involvement of outside and most effective way to clear excess contango feeds on itself until storage exporters in policy making without supplies is for producers to cut facilities, including tankers, become attaching them to the Organisation with production, reversing the trend of rising so full as to raise the marginal cost of formal ties’, which remains an elusive inventories. No producer disagrees with additional stocks to very high levels.’ goal as recent events have shown. this simple principle. The disagreement He argued that ‘the co-operation issue There is one aspect of Mabro’s arises as to who should bear the does not concern large exporting reasoning that is quite problematic. burden of the output cut, especially if countries exclusively … production Demand for inventories for speculative the needed cut is large. purposes should support the front increases by small producers, in price, and rather than widening the aggregate, can also cause similar ‘FOR MABRO, IT WAS VERY CLEAR THAT size of the contango, it should have damages. And small producers are IT IS THE MARGINAL BARREL THAT SETS the opposite effect. Mabro, however, equally vulnerable to the reduction in was of the view that a high level of THE OIL PRICE …’ revenues stemming from a fall in price. inventories, together with concerns They have a fundamental interest in that storage tanks can reach their Mabro was very much aware that co-operating; not as we are often told maximum limit, reinforces the market producers, both within and outside to take a free ride.’ While this logic perception of over-supply, exerting OPEC, would try to shift the burden of applies to small players such as shale downward pressure on the front the cut to Saudi Arabia, the dominant producers, the decentralized decision- end of the price curve, widening the producer within OPEC. But he was making process and the fact that these spread, and giving private players the sceptical whether this would ever are private players make it very diffi cult, incentive to accumulate more stocks. work, especially in the aftermath of if not impossible, to cooperate on This problem of large stock-build, the 1986–8 events, which saw Saudi output cuts. rooted in ‘a disequilibrium in the supply/ Arabia’s production fall to very low demand relationship is aggravated levels in an attempt to defend the oil The perils of market share … by the “sentiment” that producers price. As he puts it, ‘the point that Saudi intend to pursue aggressively an output Arabia has been making consistently Mabro was very critical of those objective’. Negative sentiment will push since 1985, backed by its policy in producing countries seeking market punters in futures and other derivatives 1986 which was a genuine price war, share whatever the cost, as the markets to sell and ‘whenever the seems to have sunk in. Saudi Arabia’s interest of exporting countries should

14 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

be ‘in revenues, not in volume as price (avoiding a large loss of market surplus capacity followed by periods of such, and not in prices as such for share to competitors). A trade-off shortages of capacity relative to demand. the simple reason that there is an will always emerge for any country Furthermore, these alternating states of interdependence between prices and faced with multiple objectives but a the oil market affect investment volumes’. Specifi cally, ‘attempts to limited number of tools. Mabro’s main decisions and, hence, future supply increase volumes against an inelastic concern was that under certain market availability and long-term productive demand would cause prices to fall by conditions, the ‘market share over capacity. While OPEC is not an more than the volume increase. And revenue’ trade-off could prove very organization which aims to coordinate changes in oil prices do not necessarily costly with no clear benefi ts. investment plans among its members, result in commensurate changes in oil Mabro was wary of producing countries production.’ Mabro was very cynical of ‘PRICE WARS … CAUSE HUGE increasing their productive capacity people ‘who persistently advocate that LOSSES AND DO NOT ACHIEVE THEIR without any consideration of global OPEC should pursue a market share demand or other producers’ investment OBJECTIVE, WHICH IS TO ELIMINATE THE policy come what may, that is maximise plans because ‘an investment race COMPETITION.’ volumes without worrying about the pursued blindly can have similar effects price impact’ and that these people ‘are to those of a price war’. Therefore, ‘if While accepting that price wars are not offering sensible advice’. exporting countries want to protect their unavoidable to enforce discipline and revenues through co-operative action However, he was pragmatic enough cooperation among producers, Mabro they need to address the price, the to recognize that there are some was very aware of the costs involved in volume and the investment issues in exceptions and for a dominant such a strategy. He argues that ‘price their interaction’. producer – such as Saudi Arabia wars … cause huge losses and do with a large reserve base and idle not achieve their objective, which is to Communicating to the market capacity – there are other objectives eliminate the competition. To succeed that would shape their oil policies. in eliminating competition, prices have Mabro was very aware that in a more Therefore Mabro argues that ‘there to fall below costs. But this may not complex oil market with a more diverse are situations, as in 1986 for example, prove to be enough. Expectations also set of players, many of whom have no when the collapse in Saudi Arabia’s matter and therefore prices have ‘to fall interest in the physical commodity, an export volumes was so signifi cant as to a long way and price expectations have effective communication strategy is key require a drastic price war to improve to remain depressed for a long time for to a successful oil policy. After all, OPEC the position on the volume front’ but a signifi cant improvement of the market is in the game of signalling its intentions he adds that ‘outside these specifi c share of those who launch an oil price to the market, in the hope that the instances the pursuit of market share by war’. He was sceptical whether any market would react to such signals, an oil exporter or a group of exporters is oil-exporting country ‘has the fi nancial smoothing the adjustment process. not a sensible policy because the costs resources which enable it to sustain Therefore, Mabro argues that ‘the involved can be very high during its such a policy’. The current cycle shows presentation of a policy or an agreement implementation and the future benefi ts that some producing countries have is important. This requires skills and too distant and too uncertain.’ managed to accumulate large fi nancial more particularly a deep understanding Thus, while recognizing that the buffers and thus the ability to withstand of how the oil market functions, how it revenue objective remains key for a period of low oil prices; this ability, forms its views, and how it responds to any producer (given such countries’ however, varies tremendously across news.’ Therefore, he calls on exporting high dependency on oil revenues) the producers, which in turn affects the countries to invest resources in personnel revenue objective should not be treated incentive to cooperate. with these particular talents. But for in isolation from other objectives (such Mabro, it is not only a matter of as maintaining production volumes ‘at presentation, but also a ‘matter of The investment question reasonable levels’) for big producers substance’ otherwise the market would such as Saudi Arabia. Maintaining For Mabro, oil market conditions at a consider OPEC signals as cheap talk. reasonable levels of production would certain time should not be treated in Surprisingly, he advocates ‘transparency’ ensure that idle capacity is not so low isolation from past investment in oil policy and provision of data, as it that prices could not be stabilized in decisions. The adjustment mechanism ‘may serve better the interests of case of disruption, while not so high in the oil market is far from smooth: the oil-exporting countries than the leaking to keep downward pressure on the oil oil market can witness long periods of of distorted information on production,

OXFORD ENERGY FORUM 15 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

‘IN A MORE COMPLEX OIL MARKET … Conclusion ‘mind set which determines the AN EFFECTIVE COMMUNICATION conception of policy has been shaped Mabro was visionary in many respects. by old experiences and traditional ways STRATEGY IS KEY TO A SUCCESSFUL His deep understanding of the structural of approaching problems. This mind set OIL POLICY.’ challenges faced by producing is far too rigid and does not appear to countries enabled him to look beyond be suffi ciently relevant to the challenges investment plans and the like’. He also transient issues and appreciate the posed by the oil market.’ Throughout recommended ‘silence’ when there is constraints on oil policy. His deep his career and in his writings, Mabro nothing to say as it ‘has great merits understanding of the oil market and the has always tried to identify these when there are misunderstandings evolution of the behaviour of players challenges, drawing lessons from past between major players [as] public also enabled him to detect changes cycles, challenging the conventional statements in such a situation only and emerging trends well before they wisdom and established truths, and deepen the rift to the detriment of all became apparent to others. More than proposing ‘imaginative’ ways to parties’ interests.’ a decade ago, he recognized that the broaden the mind set.

Note 1 ‘The Oil Price Crisis of 1998’, Robert Mabro, OIES Working Paper SP10, 1998.

Saudi Arabia and the limits of signalling

Giacomo Luciani

‘Exporting countries, and more generally, market at prices that have for too long basis for this belief – as was recognized the industry, have much to learn from oil remained unreasonably high. by all those who said that the price developments in recent months. Lessons really should be lower, and attributed The dynamics of the oil market are can be derived from an analysis of the the difference between actual and characterized by a succession of causes of the oil price fall …’ Robert equilibrium prices to a so-called ‘political delusions and corrections. Trading in Mabro wrote this in 1998, and added: risk premium’. But why and how such a paper barrels feeds some widespread ‘An opportunity has now arisen for oil- premium should be paid was not clear. delusions – beliefs that cannot possibly exporting countries, both from within and It was especially unclear how prices withstand critical analysis, yet which come outside OPEC, to re-think the framework higher than equilibrium prices could to be accepted as received wisdom. and substance of their co-operative avoid leading to overproduction. policies. … The oil price crisis may Such delusions are not promptly corrected in a market which – rather than prove deeper than initially thought and ‘THE DYNAMICS OF THE OIL MARKET ARE may remain immune for a while to the moving towards an equilibrium of global CHARACTERIZED BY A SUCCESSION OF remedy which OPEC and other oil- demand and supply – allows profi ts to be DELUSIONS AND CORRECTIONS.’ exporting countries are trying to apply.’1 made by those able to guess in which direction collective sentiment will go. For at least three years it was evident The ‘oil market’ – this diffi cult-to-defi ne As the price is driven further and further not just that supply was exceeding collective entity, which, through its away from equilibrium by invented collective ‘sentiment’ or ‘consensus’, demand, but also that the balance of explanations, eventually reality catches determines the going prices for various possible developments was clearly in up and a sharp correction ensues. contracts or ‘paper barrels’, which in turn favour of further increases of supply in conditions the prices of physical barrels excess of demand. For several years Events and beliefs leading to overproduction – has an extraordinarily short memory. we kept hearing that oil shale in the Several commentators have rushed to Between 2010 and 2014, the market was USA would constitute a revolution, argue that today’s situation is different infl uenced by the belief that the Arab but somehow it was assumed from that in 1985–6, and again from 1998, Spring and consequent political turmoil that the revolution would have no while in fact there is a simple common in the region would affect global oil consequence on prices. Or we had feature: there is too much oil in the supply. There was little or no empirical the IEA stating that almost all potential

16 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

resources, including such high cost speech given by Sheikh Zaki Yamani to expected to decrease yours] is not a and speculative plays as the Arctic, the Oxford Seminar on 13 September pleasant experience. … Sooner or later would be commercially viable at current 1985: ‘The message, which is also the Saudi Arabia was bound to respond.’4 prices, while no one believed that key to a correct assessment of Saudi Why is it, then, that ‘the market’ prices could drop signifi cantly. Arabia’s position was simply that “Saudi systematically appears to misread Arabia is no longer willing or able to the intentions of Saudi Arabia? Mabro take that heavy burden and duty, and The position of OPEC – and Saudi Arabia then wrote: ‘To reduce the likelihood, therefore cannot be taken for granted.” or at least the intensity of future price Behind this inconsistency was the The burden was placed by “the non- crises, the exporting countries need to mistaken belief that OPEC – read OPEC producers relying on OPEC to improve their understanding of market Saudi Arabia – would cut production protect the price of oil” and by “most of behavior and to develop the skills of to defend the price level. The notion the OPEC member countries [which] how to talk to markets.’5 The problem of ‘fi scal break-even’ was put forward depend on Saudi Arabia to … protect lies in the fact that Saudi Arabia, to justify the belief that oil-producing the price of oil.”’2 together with all other major oil- countries needed a certain minimum exporting countries, is not active in the level of prices, as if there is any good Ever since, Saudi Arabia has market, it just talks to the market. Saudi reason why market prices should consistently rejected the role of swing Arabia and other such countries have validate what individual producing supplier – one which somehow keeps thus confi ned themselves to the role of countries think they need. In the case being attributed to the Kingdom. Again ‘price takers’ when they should in fact of Saudi Arabia, the assumed fi scal in 1998 Mabro noted: ‘Saudi Arabia, in be ‘price makers’. break-even point was in any case a very unusual way, has been playing signifi cantly lower than prevailing the role of fi xed-volume supplier, very prices, but ‘the market’ found comfort different in essence from that of a swing Signalling and active engagement with in the knowledge that government producer who varies output according the market expenditure was increasing rapidly in to changes in world demand, since a The art of ‘talking to the market’ is one the Kingdom. big fi xed-volume producer does not mitigate the impact of excess demand that loses effectiveness as it is practiced, because the market comes ‘LESSON ABOUT THE LIMITS TO SAUDI or supply which emerges from time to 3 to expect certain statements and no time on the world market.’ ARABIA’S DEFENCE OF PRICES SHOULD longer takes them at face value. The HAVE BEEN LEARNED A LONG TIME AGO.’ strategy of signalling is doomed to The role of ‘price takers’ failure if it is not coupled with active Expenditure was indeed increasing In fact, the Kingdom has repeatedly engagement in the market. One rapidly simply because the money demonstrated that it feels responsible cannot blame Saudi Arabia for not was available, and it is diffi cult for a for increasing production whenever trying. In fact, in May 2009 King government to refrain from spending there are unforeseen supply shocks Abdullah took the very unusual step of when a very large reserve has already elsewhere in the global oil system and declaring that a price of US$75–80/bbl been accumulated, at a time when for this reason it maintains a reserve would be ‘fair’ for both exporters and several societal demands remain to of unutilized capacity of approximately importers. This was a very important be met. This does not mean, however, 2 million b/d. But Saudi Arabia is not statement – obviously of more that a certain level of prices is needed; ready to decrease production below importance than similar statements this is because expenditure can, to what it considers ‘normal’, and in any habitually extracted by journalists from some extent, be reduced, reserves case it makes any decrease conditional the Minister of Petroleum whenever he drawn down, and even possibly some on cooperative behaviour on the part appeared at a public event. The price government debt issued. Hence of other producers, OPEC and non- band indicated by the King was also the notion that Saudi Arabia would OPEC. ‘At some point during this period strikingly close to the level of prices necessarily reduce production to [1997] Saudi Arabia began to observe then advocated by major political sustain prices was wrong. that a small number of OPEC countries, leaders in industrial countries. The lesson about the limits to Saudi and many more outside OPEC, were Arabia’s defence of prices should have benefi ting from substantial production ‘THE ART OF “TALKING TO THE MARKET” been learned a long time ago. Writing increases. … To see others increasing IS ONE THAT LOSES EFFECTIVENESS AS IT in 1986, Mabro commented on the production while you are staying put [or IS PRACTICED …’

OXFORD ENERGY FORUM 17 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

But the market was not impressed. signals responding to physical barrel much. The price target will therefore be Prices climbed well beyond the higher transactions would be generated missed. Furthermore, market’s views end of the band indicated by the King, accordingly. about what production policy ought to and nothing much happened. Rather, be rather than what the policy actually is Price discovery is a game of equilibrium on several occasions the Minister have a signifi cant bearing on the price between expectations and current just declared that whatever price was outcome.’8 It is clear today that the realities. Today, however, expectations prevailing at the time was ‘perfect’, thus fi ne-tuning of OPEC’s quotas is not an – embodied in the price of futures – ratifying the collective wisdom of ‘the effective instrument for steering prices generate a much stronger signal than market’ and implicitly acknowledging and for avoiding excessive fl uctuations. current realities, which are frequently that the Kingdom was powerless to unknown. We do not know how much steer prices in the desired direction. ‘THE LONG-TERM PROSPERITY OF THE physical oil enters into, or is withdrawn INDUSTRY … REQUIRES GREATER PRICE It is clear that ‘talking prices down’ from, the market on a daily basis, nor is something that Saudi Arabia fi nds what the change in stocks is (except STABILITY AND PREDICTABILITY.’ diffi cult to do, because this attitude is for the weekly US data). Being blind to easily interpreted as being politically (or ill informed about) current realities, At the same time, it is also clear that we motivated and subservient to outside the market responds to inappropriate are witnessing excessive volatility. Price interests. Even now, notwithstanding signals: thus, for example, information shifts of such magnitude have real costs in terms of: losses in the value of the evidence of excess supply, there about the declining number of rigs multiple assets, increased uncertainty, is no lack of proponents of various active in the USA causes an increase of and negative impact on long-term conspiracy theories, according to front month futures prices, even though investment decisions. The long-term which the Kingdom has engineered it is not at all clear that this decline will prosperity of the industry, and indeed a collapse in prices to break the cause a decline in production, and of the global economy, requires back of this or that country in order in any case not in a month’s time! greater price stability and predictability. to please Washington, or to pursue ‘Another fallacy,’ Mabro again wrote ‘Stability does not imply fi xed prices. its own regional goals. Signalling in 1998 ‘is to believe that withholding A certain amount of fl exible variations is, by defi nition, something that can information, say on production, is both necessary and benefi cial. What only be done from time to time and investment or stocks, improves the is required is a market that signals entails discrete policy shifts, it is not producer’s position vis-à-vis the market. correctly the state of the current and the an effi cient way to steer the market on Transparency pays much higher expected future balance of the demand a day-to-day basis. The latter requires dividends.’7 This calls for better and for and the supply of oil. There is clearly being active in the market – in other more frequent statistical information; a need for a fundamental market reform. words, being a price maker rather but fi rst and foremost it calls for This will require the co-operation of all than just a price taker and occasional producers to be seen to be active in the the major players. We are not yet there: commentator. market, engaging in transactions that the understanding of the issues leaves will generate the desired and needed much to be desired and the political will price signals. Approaches to active engagement and is very weak. Sooner or later, however, ‘price discovery’ the adverse effects of excessive volatility Mabro’s proposal for price management and damaging price shocks will induce I have argued elsewhere6 that Saudi a search for remedial action.’9 Arabia should resort to frequent In September 1999, Mabro proposed (weekly) auctions of its crude on a that prices should be managed within It is patently far-fetched to expect that forward basis (three to four months a band. He wrote: ‘In a market that some kind of international negotiation in advance of delivery) in order to naturally causes prices to collapse encompassing OPEC and non-OPEC generate price signals that would or to explode in response to either exporters, and now also US shale oil balance and infl uence the price ill-informed expectations or small producers, may reach a consensus signals generated on Nymex and Ice physical imbalances between supply about the stabilization of oil prices. on a continuous basis. This approach and demand, production policies are The necessary remedial action can would be especially effective if other unlikely to yield the desired price effect. only come through the initiative of the major Gulf producers did the same; Exporting countries, unhappy about a leading exporter (Saudi Arabia) in this way, an auction would take particular price situation, may change possibly with the support of place almost every day, and price production volumes by too little or too neighbouring countries such as Kuwait

18 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

or the UAE. Others may follow in past. Once the market regains a traded and set the stage for such adopting the same methodology – as credible equilibrium, the Kingdom trading, in order to stabilize prices and they have done so many times in the should accept that major crude oils are give credibility to its signalling.

Notes 1 ‘The Oil Price Crisis of 1998’, Robert Mabro, OIES Working Paper SP10, 1998, page1. 2 OPEC and the World Oil Market: The Genesis of the 1986 Price Crisis, Robert Mabro (ed.), Oxford: OUP/OIES 1986, page 8. 3 ‘The Oil Price Crisis of 1998’, page 17. 4 ibid. 5 ibid., page 2. 6 Giacomo Luciani, ‘From Price Taker to Price Maker? Saudi Arabia and the World Oil Market’, in Haykel, B., Hegghammer, T., and Lacroix, S. (eds.), Saudi Arabia in Transition: Insights on Social, Political, Economic and Religious Change, Cambridge: Cambridge University Press, 2015, pages 71–96. 7 ‘The Oil Price Crisis of 1998’, page 2. 8 ‘Managing oil prices within a band’, Robert Mabro, Oxford Energy Comment, September 1999. 9 ‘Does oil price volatility matter?’, Robert Mabro, OIES Monthly Comment, July 2001.

Saudi Arabia and its role in oil markets Mark Moody-Stuart

A core element of the Oxford Energy historical effects of the effective price rise and the return of OPEC to Seminar has always been discussion nationalization of IOC operations by dominance. on the infl uence which OPEC in general OPEC countries, with the resulting fl ow This long historical perspective puts the and Saudi Arabia in particular has had of capital and technology to the North present rise of shale oil production in on the oil price and its environment. Sea and the Alaskan North Slope in the context. Once again, a period of high This is due in part to the Seminar’s 1970s and 1980s and the resulting oil prices, with a perceived fl oor at the unique mix of attendees from both growth in non-OPEC production. They cost of marginal barrels, has fuelled the national oil companies (NOCs) and could also savour the irony that development of technology. Once international oil companies (IOCs); OPEC-driven price rises in the 1970s again there are questions as to how Robert Mabro had always been able to and early 1980s saved the investments long the increase in production enabled ensure the attendance of eminent in new high-cost non-OPEC in North America by this technology speakers at the Seminar from developments from the economic can be maintained and to what extent throughout the industry, selected both consequences of huge cost over runs the uniquely favourable US conditions from former attendees and through his resulting from the application of untried own formidable networking capabilities. for the development of this kind of technology and industry cost infl ation. Mabro used to remind attendees in the production can be replicated in other These developments drove a supply opening session of the Seminar that the parts of the world. How fast will the growth which caused the later price heads of almost every major energy drop in oil price lead to a reduction in collapse. Seminar attendees would company, including Saudi Aramco, non-OPEC capacity? As before, I suspect also be aware of the long period in the had attended the Seminar at some that the result will surprise us. History late 1980s and throughout the 1990s point in their careers. All had thus been teaches us that the oil price is when non-OPEC production was exposed to the discussions on oil price notoriously diffi cult to forecast in the repeatedly forecast to decline about and supply and demand which he medium term, being affected by a would quietly steer to ensure balance. fi ve years out from the forecast date. complex interplay of estimates of Technology in the form of improved supply and demand infused by a large seismic imaging, deep water drilling, dose of sentiment. A major infl uence on Historical perspective on factors and horizontal wells repeatedly pushed sentiment is an estimate of OPEC infl uencing supply and pricing of oil this decline further into the future, intentions and in particular the Younger players could thus see the postponing for years the expected oil intentions of Saudi Arabia.

OXFORD ENERGY FORUM 19 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

Saudi Arabia within OPEC – provision of capacity policy is by no means the only major fi elds. There has long been a reserve capacity factor underpinning its leading position policy of open cooperation with the in OPEC. The unique position of Saudi major global oilfi eld service companies, Saudi Arabia has long played both a Aramco as a truly leading global most of whom have joint research leading and also a moderating role in company in technology and effi ciency facilities in the Kingdom. OPEC. The wish so often expressed by must be a source of admiration and Saudi Minister of Petroleum Ali Naimi Technology development is not limited some envy among other OPEC (and has been to achieve a price acceptable to the conventional oil and gas fi elds. non OPEC) nations and NOCs. Almost to both consumers and producers Saudi Aramco has a major programme without exception, other OPEC state – a price high enough to satisfy the looking at production of shale oil and oil companies have been used by their reasonable needs of producers with shale gas, as well as programmes for governments as sources of funds and largely oil-dependent economies replacing fossil fuel-generated electricity subsidies, starving them of the capital and yet not so high as to choke off with solar photovoltaics, and for solar needed for development of production, growth and development of the global thermal programmes to be used in the as well as of people and technology. economy and incidentally reduce the generation of steam for power, process, In the worst cases, such as PDVSA demand for energy. and tertiary production, in order to and NIOC, this leads to fl attening conserve hydrocarbon resources. or declining production and even to ‘SAUDI ARABIA HAS LONG PLAYED BOTH a downwards spiral from which it is A LEADING AND ALSO A MODERATING diffi cult and time consuming to recover. Importance of Saudi conventional ROLE IN OPEC.’ production Saudi Aramco’s unique position is Historically, Aramco rapidly adopted The infl uence of Saudi Arabia within no accident. Successive rulers and OPEC stems in part from the policy of governments of the Kingdom, assisted and adapted the technological holding a signifi cant buffer of readily by the leadership of Aramco, have advances made by western accessible production capacity. ensured that Saudi Aramco has been international companies when The world should be grateful to the largely defended from depredations stimulated by their loss of major Kingdom for this policy: a gratitude and demands of other elements of production in the Middle East. Apart seldom expressed. During times the state. Aramco has thus developed from its own considerable (and when oil prices were peaking, the world-class standards of employment successful) research and development deployment of this spare capacity has and effi ciency, with a remarkable efforts, it would appear that Aramco is had a moderating effect. Saudi Aramco corporate ethos of meritocracy, work also internalizing, and adapting rapidly has argued that the cost of holding this ethic, and standards of integrity. This to Saudi conditions, technological capacity is offset by the income gained enables Aramco to attract and retain developments in alternative energy when the capacity is used at times the very best Saudi engineers and and shale production from elsewhere of very high prices. Be that as it may, earth scientists, and to employ global in the world. However, such efforts and one might question whether the systems of fi nance. need to be put into perspective. While computation truly refl ects the economic development of the Bakken, Eagle cost, it is certainly true that no purely ‘SAUDI ARAMCO’S UNIQUE POSITION IS Ford, and Permian shales in the USA commercial organization would NO ACCIDENT.’ has resulted in some 3 to 4 million b/d sometimes hold more than 2 million of oil from shale, continuous drilling by barrels a day (b/d) (some 20 per cent The company’s approach to production some 200 rigs and the mobilization of of total capacity) in reserve without has been equally farsighted, with an very large fl eets of fracking trucks is payment of a signifi cant capacity fee, emphasis on maximizing ultimate required to maintain this production. such as that seen in The Netherlands recovery from every accumulation For comparison, in the last six years, for the Groningen gas fi eld or in several rather than short-term DCF Saudi Aramco has developed three countries in the utility industry. calculations. Aramco regularly completely new conventional fi elds discovers and books, using audited (Shaybah, Khurais, and Manifa) each international defi nitions, more reserves of which will produce a million barrels a Saudi Aramco contrasted with other OPEC than it produces. It has probably the day at a fraction of the production cost state oil companies most sophisticated reservoir models of US shale. Such developments are Saudi Arabia’s unequalled combination in the world, allowing it to optimize major achievements; there have been of large production volume and spare recovery and track the production of no similar developments elsewhere,

20 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

although some are being planned in short-term commercial, reasons. The associated gas fi elds from which the Iraq. This suggests that the power of thinking behind this strategy (a switch gas is sold well below production cost. Saudi conventional production is far to the east) is evidenced by the number Saudi capital and project management from being a spent force. of Saudi students sponsored to study resources are diverted from other engineering and other subjects in the projects which could contribute ‘… THE POWER OF SAUDI CONVENTIONAL top universities of China, Japan, and positively to the national economy. PRODUCTION IS FAR FROM BEING A Korea. For example, there are now Some argue that the low energy and transportation costs have side SPENT FORCE.’ some 30 Saudis in Aramco who were educated in Korean universities and benefi ts, but they contribute to the who speak Korean fl uently. None of growth of an artifi cial economy built Price, security of supply, and relationships the majors has practised such a far- on uncompetitive use of energy and with customers sighted strategy of relationship-building fi ctitious profi tability. with key countries, not even within the Whereas consuming countries and This problem exists to a greater or countries of the Middle East. IOCs worry about security of energy lesser extent in all Gulf economies, supply, the habitual Saudi concern and in many other countries with has been to ensure relationships with Challenge of Saudi Arabia’s expanding hydrocarbon production. Cross-border reliable customers and security of domestic market differences lead to smuggling and encourage the development of other offtake. This security of offtake has So what could affect this overall Saudi forms of corruption. The solution will been achieved by building long-term position? The immediate threat is need, to some extent, to be collective, relationships with companies with that of uncontrolled domestic energy but bold action is required in each access to major consumer networks consumption in the Kingdom, driven country. There may need to be cash as well as by building selective stakes by subsidized fuel, electricity, and transfer payments of some sort to the in consuming country refi neries linked water prices. Saudi Aramco itself average family, based on reasonable to agreements covering a larger repeatedly draws attention to this usage, to cushion the effect of price percentage of the crude intake of threat, pointing out that if the current rises and avoid social tensions. Each that refi nery. These agreements and demand (domestic oil and gas family will then face a simple choice: relationships are strictly at market consumption of some 4.5 million b/d should they reduce usage by simple prices; customers have come to oil equivalent) continues to grow at effi ciency measures and spend the rely on the price being adjusted, 7 or 8 per cent a year, it will double by gradually reducing transfer payment on retrospectively if required, to be in line 2024. This is manifestly unsustainable. something else? Or do they continue to with the market. Thus, in times of low Saudi Aramco plays a leading role in use energy which rises in cost as the oil prices with producers competing for efforts to make power generation and subsidy is removed? It is probable that market share, Aramco can be assured energy usage more effi cient and in the such a fi nancial incentive would drive of maintaining offtake volumes at introduction of effi ciency mandates for a rapid change of behaviour, greatly competitive prices, whatever the market road transport. might determine that to be. This solid benefi tting both the economy and future government revenues. market access, built strategically over ‘THE IMMEDIATE THREAT IS THAT OF many years, is also part of the Saudi UNCONTROLLED DOMESTIC ENERGY infl uence on OPEC. Potential consequences of failure to CONSUMPTION IN THE KINGDOM.’ control demand Saudi Arabia has also gradually switched more of its supply to the The real solution has to lie in the Without a programme to address growing markets of the east, where removal, or signifi cant reduction, of this issue, over the next few years higher prices can also be achieved. subsidies. The problem with these the reduction in government revenue This far-sighted strategy long predates subsidies is not just their growing caused by the uncontrolled rise of the growing domestic production in cost to government – diverting funds domestic energy consumption will the USA. However, in spite of recent which could be spent in a directed make the subsidies unaffordable. decreases in prices in that market, way to achieve social or strategic The danger is that this would then Saudi Arabia has maintained a level aims. The growing energy requirement lead to unpleasant and unintended of supply to the USA for what would necessitates the investment of very consequences, as seen in other appear to be strategic, rather than large sums, which are used to develop countries, for example:

OXFORD ENERGY FORUM 21 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

Unplanned rises in the price of Such unfortunate developments sheep to hold. Confronted with this domestic energy or a reduction in would affect not only Saudi Arabia, but glaring evidence of the shortfall, the other generous social programmes other countries in the region. Saudi farmer declared that it was not his fault could put stress on social cohesion. Arabia would probably lose infl uence in that that policeman had been so slow OPEC. The world as a whole would that he could not catch one of the Attempts could be made to burden suffer from the loss of a rational and sheep. This story makes the point that Aramco with executing what are stabilizing voice in the energy market. we are all sometimes reluctant to essentially social programmes, in an The result would undoubtedly be accept the consequences of effort to preserve social cohesion. greater volatility and impacts on global something which we know logically to The government could attempt to economic growth. be true and to require action. This is extract more revenue from oil and more likely to be the case when the Mabro often told a joke in the way that gas production, reducing the response required will affect millions of only he could, with appropriate investment capacity of Saudi Aramco people and involve some disruption of gestures and convincing expressions. and gradually weakening a company the currently accepted status – while It involved an Egyptian farmer who was which is not only a proud national the situation is not yet too asked by his neighbour to look after example of effi ciency and uncomfortable and so action can be 12 sheep while the neighbour travelled. deferred for a little. effectiveness but the major source of On the neighbour’s return, there national revenue. This unfortunately appeared to be one sheep missing. Not just for the sake of Saudi Arabia has been the common fate of NOCs Repeated counts of the moving fl ock and the example that Saudi Arabia and elsewhere is the world where could not resolve the difference. In the Saudi Aramco have set within OPEC, economies have come under strain end the police were called and it was but also for the potential impact on and governments have taken a agreed that 12 policemen would each global energy supply, let us hope that short-sighted route to addressing catch and hold a sheep. Sure enough, a swift solution can be found to the underlying problems. one policeman found that there was no challenge of subsidies.

Déjà vu all over again: another oil price fi asco Nordine Ait-Laoussine and John Gault

OPEC: market share versus target price years. No one believed the ministers of crude oils had already declined to could do both simultaneously. about US$75/bbl, from US$108/bbl in It appears to us that the current oil June. A temporary cut in the ceiling market situation has a familiar and Many outside observers and analysts to 28.4 million b/d should have been disheartening ring. In September (including ourselves) expected OPEC suffi cient to reverse the price slide. 1986, we presented an analysis to the to pursue a price defence strategy by Many were surprised that OPEC chose Oxford Energy Seminar in which we reducing its ceiling of 30 million b/d to leave its ceiling unchanged. estimated the high cost of a decision (in place since 2011). A cut to taken by OPEC to pursue market share something nearer to 28.4 million rather than defend a target price. This b/d, OPEC’s own projected global Long-run cost to OPEC of market share analysis later appeared in a book, requirement for OPEC crude oil in defence The Oil Price Crisis,1 edited by Robert 1Q15, was a reasonable expectation Mabro. (Quotations in this article are Why the meeting made the costly taken from this book.) In November choice to defend market share rather ‘MANY WERE SURPRISED THAT 2014, OPEC oil ministers again faced than price is an important question to a similar choice: defend the oil price, OPEC CHOSE TO LEAVE ITS CEILING which we will return later. Meanwhile, which had been declining since June, UNCHANGED.’ we have estimated that the long- or defend the OPEC market share, run cost to OPEC of its decision which had been threatened by soaring By the week of the November meeting, ranges from US$343 bn to as high as non-OPEC oil production for several the average price of the OPEC Basket US$746 bn over the period to 2020,

22 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

Table 1 High The 2015–20 overall balance Price defence strategy Market share strategy 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 Net demand on OPEC crude mb/d 29.5 28.5 28.2 28.5 28.7 29.0 29.4 29.9 30.5 31.0 31.6 32.1 OPEC local consumption mb/d 9.7 9.8 9.9 10.1 10.2 10.3 9.7 9.8 9.9 10.1 10.2 10.3 OPEC exports mm/d 19.8 18.7 18.3 18.4 18.5 18.7 19.7 20.1 20.6 20.9 21.4 21.8 Average price US$/bbl 100 100 100 100 100 100 55 62 67 70 71 73 OPEC revenue US$ bn 723 683 668 672 675 683 395 455 504 534 555 581 Cumulative export revenue Price defence strategy US$bn 3420 Market share strategy US$bn 2443 Cost of market share strategy Undiscounted US$bn 977 Discounted at 12% US$bn 746

depending upon one’s assumptions Our lower estimate (Table 2) assumes years, or unresolved disagreements about how a price defence strategy, that the same cut in the OPEC ceiling among member countries on the new had it been adopted, would have been would face greater headwinds and price target. implemented. Our higher long-run cost would have been able only to stabilize In both our high and low estimates: estimate (Table 1) assumes that a the price slide at US$75/bbl on price defence strategy would have cut average for 2015, and to bring the We assumed the call on OPEC crude the OPEC ceiling suffi ciently to push price gradually back to US$100/bbl by oil over the remainder of the decade the OPEC Basket (reference) price 2020. There are many reasons why this under the price defence strategy back to US$100/bbl on average (in slower price recovery is plausible, such would follow the trajectory foreseen nominal terms) for each year 2015–20. as weak OPEC credibility due to past in the OPEC Secretariat’s World Oil OPEC would, in this scenario, have failure to enforce ceilings, unanticipated Outlook Reference Case, which had to adjust its ceiling to equal the adjustments of supply and demand assumed an OPEC Basket price of projected call on OPEC crude for the data, drawdowns of already high global US$110/bbl in nominal terms next few years. inventories accumulated over recent throughout the 2015–20 period.2

Table 2 Low The 2015–20 overall balance Price defence strategy Market share strategy 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 Net demand on OPEC crude mb/d 29.5 28.5 28.2 28.5 28.7 29.0 29.4 29.9 30.5 31.0 31.6 32.1 OPEC local consumption mb/d 9.7 9.8 9.9 10.1 10.2 10.3 9.7 9.8 9.9 10.1 10.2 10.3 OPEC exports mm/d 19.8 18.7 18.3 18.4 18.5 18.7 19.7 20.1 20.6 20.9 21.4 21.8 Average price US$/bbl 75 80 85 90 95 100 55 62 67 70 71 73 OPEC revenue US$ bn 542 546 568 604 641 683 395 455 504 534 555 581 Cumulative export revenue Price defence strategy US$bn 2902 Market share strategy US$bn 2443 Cost of market share strategy Undiscounted US$bn 459 Discounted at 12% US$bn 343

OXFORD ENERGY FORUM 23 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

We compared OPEC’s projected by Saudi Arabia who: Another way in which the challenge revenue under the price defence facing OPEC today is greater than doubted the willingness of other strategy with its projected revenue that in 1986 is that the mantle of OPEC members to abide by any under the ongoing market share ‘pioneer in asserting sovereignty agreed production cut, and strategy. The impact of the market over natural resources by developing share strategy on OPEC’s revenue is despaired of persuading non-OPEC countries’, which OPEC wore proudly refl ected in a recent IEA report,3 producers, such as Russia and during its fi rst three decades, has which assumes a much lower Mexico, to collaborate on a price worn thin. The opportunity to achieve trajectory of oil prices. This report defence strategy. a higher standard of living thanks confi rmed our own views on the very Saudi Arabia feared that they alone to enhanced export revenues has limited impact of lower prices on would bear the entire burden of a price clearly been squandered by some global oil demand and a delayed defence strategy, while the benefi ts OPEC members, while numerous oil- impact on non-OPEC supply growth. would accrue to others. importing developing countries have We adopted OPEC’s own projection outdistanced some OPEC members of domestic oil consumption in ‘THE DECISION LAST NOVEMBER TO DEFEND in many measures of citizens’ welfare. member countries4 (the IEA report MARKET SHARE WAS PRACTICALLY Some global observers who once viewed OPEC sympathetically as referred to above makes no IMPOSED BY SAUDI ARABIA …’ equivalent projection). a champion of the rights of former colonies now see the organization as We then calculated the difference in The November 2014 decision has being composed of super-rich ‘winners’ OPEC’s projected revenue from yielded a market situation that is and left-behind ‘losers’. The present petroleum exports under the price far from stable. If OPEC continues strategy split within OPEC does nothing defence strategy compared with its producing at present levels, exceeding to dispel this perception. projected revenue under the market the global call on OPEC crude oil, share strategy, and discounted the further price drops are likely. Some difference at 12 per cent. Our OPEC members such as Iraq (and Potential fi scal response by governments estimates ignore revenue losses Iran if sanctions are lifted) will expand of oil importing countries output, while global inventories will attributable to natural gas and NGL Compounding the challenge to OPEC swell, enhancing price weakness and exports. is the likelihood that the governments volatility. OPEC has abandoned its These hypothetical price defence of oil-importing countries will seize the primary raison d’être, namely price scenarios illustrate that a relatively opportunity afforded by lower oil prices stabilization, thus damaging the small, credible cut in OPEC output to increase excise taxes or diminish organization’s long-term credibility. (averaging less than 5 per cent below subsidies. Many governments need to the current 30 million b/d ceiling on expand revenue to balance budgets, average over the 2015–20 period) Today’s challenge compared with 1986 while some will also employ taxes on would have been suffi cient to avoid the petroleum products to discourage The challenge facing OPEC is even much larger (16–29 per cent) loss of consumption and reach emissions greater today than it was in 1986, when revenue now foreseen under the market targets. Other governments, urged by petroleum derivatives markets were still share strategy. the IEA and IMF, will reduce or eliminate in their infancy. Today, the volumes of subsidies to end users of petroleum All of our calculations of OPEC’s ‘paper’ oil traded on the principal futures products. Such modifi cations of comparative loss due to the adoption exchanges vastly outweigh volumes end-user price regimes are most of the defence of market share strategy traded physically. Financial investors easily implemented when consumers treat OPEC as a unit. The loss calculated now play an enormous role in oil price perceive prices to be relatively low. here is collective, and all member formation and their expectations (which countries bear part of this burden. govern the magnitude of their holdings In The 1986 Oil Price Crisis of futures contracts and other Mabro correctly anticipated such derivatives) can fl uctuate rapidly; this developments following the 1986 oil How did OPEC make this choice, and what happened last summer, contributing to price collapse. OPEC members will end could OPEC do now? the price decline. In the absence of a up with an even smaller percentage The decision last November to defend credible OPEC price signal, price of the end-user value of their principal market share was practically imposed volatility will only be exacerbated. export than they received prior to

24 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

‘… URGENT THAT OPEC RECONSIDER This will be diffi cult given that has not fl ooded the market with its ITS CURRENT STRATEGY AND ADOPT non-GCC OPEC members have, in own exports, driving prices even A PLAN THAT WOULD REVERSE THE the past, tended to produce at their lower in a competitive effort to respective capacities, regardless of expand market share. The Kingdom FORESEEABLE REVENUE LOSS.’ OPEC agreements. Temporary self- clearly understands and appreciates restraint will be required, particularly the potential benefi ts of cooperation. adopting the market share strategy – from Iran and Iraq, both of whom and this will be a permanent shift. While circumstances today are in many view themselves as having special ways different from those surrounding historical rights to expand output. the 1986 oil price war, what Mabro Possible future courses of action The initiative should be open to wrote then remains applicable today: For all of these reasons, it would participation by non-OPEC oil ‘The conclusions of this analysis are appear urgent that OPEC reconsider its exporting countries, but should not that a low oil price strategy is likely to current strategy and adopt a plan that be contingent on, or even be hopeful prove costly for OPEC in the medium would reverse the foreseeable revenue of, such cooperation. Non-OPEC term, and that such a strategy is totally loss. How could this come about? countries have never contributed irrational for non-OPEC exporting signifi cantly to OPEC price or revenue countries, particularly for those The initiative for such a change must stabilization efforts in the past. belonging to the Third World.’ come from OPEC members other than Saudi Arabia. Saudi Arabia has The initiative will lack credibility unless Our own 1986 conclusion was similar, shown no inclination so far to review the non-GCC OPEC members have and deserves to be reemphasized: the strategy adopted last November, already agreed, before approaching ‘We believe that [OPEC] should have and indeed is expressing an their GCC partners, on how to never expressed its objective in terms unrealistic confi dence that oil prices allocate their share of potential of market share only but rather in have stabilized and global oil production cuts among themselves. terms of overall revenues. As we have demand growth is accelerating. Saudi Arabia may welcome the seen, the losses already incurred, and The initiative must convince Saudi initiative more than recent Saudi those to follow in the future, exceed Arabia (and the rest of the world, statements would suggest. The any imaginable production sacrifi ce including fi nancial investors) that Kingdom continues to fi nd OPEC that OPEC would have had to make to other OPEC members are willing to useful; otherwise it could have left the defend the price prevailing on the eve abide by agreed production cuts. organization long ago. The Kingdom of the war.’

Notes 1 The 1986 Oil Price Crisis: Economic Effects and Policy Responses, Proceedings of the Eighth Oxford Energy Seminar September 1986, Robert Mabro (ed.), Oxford: OUP/OIES, 1988. 2 World Oil Outlook, OPEC, 6 November 2014, page 32. 3 Medium-Term Oil Market Report 2015, International Energy Agency, February 2015, page 12. 4 World Oil Outlook, op. cit., page 71.

Saudi Arabia’s complex relationship to the oil market: 1985 and 2015 Pedro Haas

In September 1985, during the Saudi Arabia. The fact that Yamani powerful and highest profi le of all the Oxford Energy Seminar, the Final had shown up for the Final Panel was OPEC Ministers, was attending had Panel assembled its usual set of not necessarily remarkable, as Robert a special signifi cance: after the price luminaries (Ministers and CEOs of Mabro had an unusual capacity to peaks of the post-1979/80 crisis, the oil companies), but on this occasion draw the top names in the industry to oil market was softening and OPEC it also included Sheikh Ahmed Zaki the events he organized, especially seemed powerless to arrest the slide. Yamani, the longstanding Minister of the Seminar. This year, however, the The presence of Yamani was a unique Petroleum and Mineral Resources of fact that Yamani, easily the most opportunity to hear what the Kingdom

OXFORD ENERGY FORUM 25 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

had in mind at this critical juncture. The similarities and the differences assertiveness: the more powerful the Yamani did not disappoint. between Tariki and Yamani reveal country and the stronger its oil policy, much about the changing role of the the more subtle the wielding of that Saudi oil minister and the direction of power had to become. As Sylvan Ministers and their style Saudi oil policy itself. Both men were Robinson of Shell once put it: ‘The Yamani is an imposing man, with partly educated in Western universities tougher the words, the sweeter the a sharp intellect and impeccable and had done their share of legwork music has to be.’ manners, who clearly relished the high- in the oil industry. One could say The current oil minister, Ali al-Naimi, profi le role he played in the international that they were both considered oil was born in 1935. He was an Aramco petroleum industry. He had become industry-knowledgeable when they ‘lifer’ – having studied geology in the minister in 1962, at the age of 32, at a were appointed. Tariki was 40 years old USA (BS at Lehigh University, MS at time when OPEC was a low-profi le club when he became minister, Yamani 32. Stanford) he became the fi rst Saudi of oil-producing countries which rarely But the differences between the two president of Aramco in 1983. After attracted media attention. A lawyer by are particularly enlightening: while being in that position for 12 years, training (King Fouad University, NYU, Tariki’s style was direct, outspoken, he became Minister of Petroleum Harvard), Yamani was a perfect fi t and confrontational, Yamani was a and Mines in 1995 and has held for the growing clout of Saudi Arabia consummate diplomat, rarely losing his the job ever since. Naimi is deeply among oil producers, oil companies, temper, and always trying to achieve knowledgeable about the oil industry, oil-consuming countries, and his goals in ways that others would not from the nuts and bolts of exploration international markets at large. fi nd offensive (although that changed and production to the subtleties of oil somewhat over time). Furthermore, Yamani had succeeded Abdullah Tariki, policy. He is a thoughtful and polite Tariki took sides in one of the many who had himself obtained a degree in man, unassuming to a fault, the perfect Saudi Royal family feuds; one could chemistry and geology from Cairo sherpa to his King. Unlike Yamani, question whether his mistake had been University and a master’s degree in Naimi does not relish the limelight and to back the losing Prince, or whether petroleum engineering and geology only uses the high profi le naturally it was his involvement in Royal family from the University of Texas. Tariki was accruing to a Saudi oil minister when it politics itself which had been the the fi rst Minister of Petroleum of Saudi suits the policy purpose he is pursuing. mistake. The Saudi Royal family has Arabia, a ministry which had been If there have been policy debates and always been careful to appoint non- founded in December 1960, right after discrepancies within the Saudi political family members as oil ministers (their the creation of OPEC in September hierarchy during his tenure as minister only allegiance is to the head of state 1960. Tariki had worked with Juan – and there must have been a few – and they can more easily be sacked) Pablo Perez Alfonso, the Venezuelan they have never come to light through and ministers normally steer clear of Minister of Mines, to create OPEC. He his statements. family politics (at least ostensibly). was especially critical of Aramco (the Although it clearly would be a stretch joint venture between Exxon, Chevron, to pretend that the succession of Saudi ‘THE MORE POWERFUL THE COUNTRY Texaco, and Mobil – to give them their heads of state had perfect foresight AND THE STRONGER ITS OIL POLICY, more contemporary names) and when they appointed their successive defended the right of Saudi Arabia to THE MORE SUBTLE THE WIELDING OF oil ministers, there is a certain pattern not only obtain a higher percentage of THAT POWER HAD TO BECOME.’ in the sequence of Tariki, Yamani, the economic rent accruing from oil Nazer, and Naimi (Nazer may be the production, but also to have a greater One can argue that Tariki was an exception, up to a point). The degree say in Saudi oil industry decision- essential component of Saudi Arabia’s of professionalization has deepened, making. Tariki was considered early break from its oil childhood: as has the self-control of the ministers confrontational by the oil industry founding and joining OPEC was a fi rst and the policy itself. Much as a (especially by the large US oil companies step towards recognizing publicly that central banker exerts infl uence over that comprised Aramco) and probably the interests of the nation and those of fi nancial markets in subtle (using one by the US government as well. He also the companies were not necessarily word instead of another, like the US got involved in internal Saudi royal aligned – or at least were not always Federal Reserve currently agonizing family politics, which eventually got him aligned. But one can also argue that over the word ‘patience’) and not so sacked as oil minister and as an Yamani was the right man for the subtle (by changing the interest rate Aramco board member. next step of Saudi Arabia’s oil policy unexpectedly) ways, Saudi Arabia has

26 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

accumulated a wealth of experience the single largest oil player in the gas at 25 per cent in round numbers); about how to interface with the oil international oil market. The scale of its OPEC’s share of global oil demand is market. In the meantime, Aramco has production and its exports means that it about 30 per cent and Saudi Arabia’s become Saudi Aramco and the top can push the markets in one direction share of OPEC production is about echelons of the company (down to a or another, but it also means that it has 30 per cent. Because of its size, Saudi pretty signifi cant level) are occupied by to be careful to avoid being actually Arabia knows that its economic welfare competent and self-confi dent Saudis. seen doing so. The answer to this is is tied to the growth of the world OPEC. As Yamani once explained, economy, to the share of oil in primary energy consumption, and to the OPEC Policy continuities and discontinuities OPEC is to Saudi Arabia what the UN, the IMF, and the World Bank were to the share of global oil demand, as long Every student of macroeconomics USA just after World War II: a screen as its own share of OPEC production 101 is taught how diffi cult economic behind which one could attempt to remains more or less unchanged. While policy is because the policy objectives shade the raw power of the leading a smaller oil producer may believe that (such as: employment, trade, income country. During meetings of the OPEC it can avoid the crush of macro trends, distribution, growth, industrialization, Conference, Saudi ministers are Saudi Arabia knows that it cannot. This and regional development) are many, invariably polite and listen attentively to means that in pursuing its national while the instruments (essentially the utterances of their colleagues from interest it must take into account the monetary and fi scal policy, although countries which produce comparatively impact of its policies on the larger nowadays regulation should also small volumes of oil, or which have no economic climate. be counted) are few. In the case of spare capacity, and thus no policy Saudi Arabia, the number of policy fl exibility or infl uence. In the end, ‘ITS ECONOMY IS ALSO INEXORABLY TIED objectives is very broad: foreign policy, however, Saudi Arabia generally gets its TO OIL, WHICH REPRESENTS 45 PER CENT defence, urbanization, employment, way because the smaller players know OF ITS GDP.’ industrialization, agriculture, religious that pushing the Saudis too hard (as in affairs, energy, social development, 1985–6) ends up damaging the weaker Unlike many other oil producing Royal family affairs, and more. These players more than the stronger ones, countries (including several OPEC are all to be addressed through the and none less than the strongest one, members) Saudi Arabia has very large lever of a single policy instrument: Saudi Arabia. The exceptions to this reserves of oil, probably signifi cantly oil production. rule are the Iraqis (a special case since upwards of 300 billion barrels. Its The only way in which Saudi Arabia can the Desert Storm campaign) and the economy is also inexorably tied to use oil production as a policy instrument Iranians (a damaged but powerful oil, which represents 45 per cent of is by having the ability to ramp production regional contender). its GDP, 80 per cent of its budget, up or down from a large base. This has and 90 per cent of its exports. Saudi led to Aramco keeping anywhere ‘BUT SAUDI ARABIA HAS A PROBLEM: IT Arabia thus wishes to extend the between 2.5 and 3.0 million b/d of IS THE SINGLE LARGEST OIL PLAYER IN global economic use of oil for as long unused oil production capacity (more as possible, while maintaining an oil THE INTERNATIONAL OIL MARKET.’ at times, but generally unwillingly). price that can satisfy the economic The political importance of maintaining requirements of the nation (a nation Saudi Arabia also knows, rightly or not, this available capacity is revealed by that collects practically no taxes from that the oil price is also seen as a key the signifi cant cost entailed by investing private citizens or companies). These factor in the general economic welfare and maintaining the capacity: one does two imperatives can sometimes (like of the entire world, especially of the not maintain idle oil production capacity today) be very hard to harmonize. OECD countries. It can impact GDP unless there is a very compelling growth (through the equivalent of a tax Finally, Saudi Arabia is a close ally of reason to do so. A complement to this hike or rebate, as the case may be, the USA. This arrangement has been unused capacity is the accumulation of plus the recycling of petro-dollars) and in place since the famous meeting monetary reserves: Saudi Arabia is said infl ation rates (through retail fuel prices, between King Saud and President to currently possess about although these are infl uenced as Roosevelt. Notwithstanding the natural US$750 billion in reserves, an essential much by local fuel taxes or subsidies ebbs and fl ows of such a relationship, element of their current oil policy (to as by the international oil price). The the mutual security interest is riddled which we will return). oil share of total energy consumption with complexities, but it still remains the But Saudi Arabia has a problem: it is today stands at about 30 per cent (with bedrock of Saudi foreign policy.

OXFORD ENERGY FORUM 27 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

1985 and 2015: what 30 years of was not immediately understood by all, Much as domestic political imperatives experience can do to a policy or at least its consequences were not. require increased spending by the Mabro himself, on the other hand, was Saudi state, and thus a high price of oil, In September 1985, Mabro introduced entirely clear: the Saudis had reached the requirements of such a policy are his guests on the Final Panel as he the end of the road and could not hold clear: Saudi Aramco would need to cut usually does: respectfully, but with a dose the fort any longer by themselves, which production back by 1.5 to 2.0 million of humour and a degree of lightness. meant that the price softening would b/d for a period. This might maintain Final Panel guests are all big movers quickly become a rout. And it did. the price level around US$100, but it and shakers, with sizeable egos and would entail the possibility of Saudi big claws to match. Mabro needed their ‘MABRO WAS ENTIRELY CLEAR: THE Arabia fi nding itself in a quasi-repeat continuing support for the Institute and of the 1985 situation: cutting back its the Seminar, but he would also SAUDIS HAD REACHED THE END OF own production in order to (unwittingly, generally do as much as he could to THE ROAD … WHICH MEANT PRICE but surely) protect expensive oil prevent his exalted guests from lapsing SOFTENING WOULD QUICKLY BECOME A production, oil substitution, and energy into making banal statements, country ROUT.’ saving. Yamani had tried this policy, or company advertisements (or, even only to fi nd that it depleted Saudi worse, self-advertisements, of which Fast forward 30 years and one fi nds there were very few, to tell the truth). foreign currency reserves and shrank coincidences and differences between its oil production, to the point where Yamani stood up and quickly made the the two situations: just when the the only way out was a policy that point that Saudi Arabia had tried to market was getting used to prices of led to the destruction of the oil price. balance the market and hold prices US$100/bbl or higher, the inexorable In the summer of 1986, the situation steady by proposing that OPEC cut global rise in oil consumption led by was resolved by Iran reaching out to back its production, but it had had no China slowed, while the cost curve of the Saudi government in search of an success (Saudi Arabia had maintained oil production changed (as a result orchestrated production cut. It is not a its offi cial selling prices while its OPEC of the shale oil phenomenon in North stretch to imagine that Saudi thinking in colleagues did not and Saudi exports America). Between the low-cost 2014/15 is running along similar lines: if and production had collapsed – Saudi reserves of the Middle East and the OPEC (together with some non-OPEC produced 10 million b/d in 1980 and high-cost reserves in ultra-deepwater or countries) cannot be mobilized to trim 3.4 million b/d in 1985). He explained the Arctic, billions of barrels of shale oil production back, then Saudi Arabia by that Saudi Arabia was being forced to suddenly became economic, aided by itself cannot and will not do it by cutting abandon its offi cial price policy and high oil prices and technical progress. its own production. On the contrary, essentially join the netback bandwagon: Furthermore, US$100 oil depresses biting the bullet and accepting the pricing crude oil relative to its refi ned consumption of oil versus other consequence of OPEC’s inability to products realization, thus guaranteeing sources of energy and incentivizes coalesce around a new volume and refi ners’ margins and ensuring that the substitution of capital for energy, price policy may be the best course of Saudi exports volumes would remain thus accelerating energy productivity action for Saudi Arabia, especially at a competitive. Yamani was telling (OPEC growth, while generally diminishing time when its foreign currency reserves and non-OPEC) producers: since we the share of oil in the energy matrix, are high and a period of relatively can’t convince you to manage the the share of OPEC oil, and inevitably low prices can be withstood by the market by cutting production back, we – sooner or later – the share of Saudi Kingdom. The complexity in this case are going to join you. The rest is history: Arabia in OPEC’s production. Saudi is that no one – including the Saudis – prices proceeded to crash into single Arabia clearly has confl icting interests; really knows where the new equilibrium digits as the natural arbitrage that one can only imagine that these have will be. governs the crude-to-products led to internal policy debates: relationship disappeared, due to the Will the new price equilibrium gravitate guaranteed refi ning margin. The refi ners’ maximize the price and trim around US$50/bbl, US$70/bbl, normal incentive to run their facilities up production (some argue that this US$80/bbl? And just as importantly, to the point where the refi ning margin optimizes the cash gain over time, how long will this equilibrium last equalled zero gave way to an alternative since the volume sacrifi ce is lower before prices naturally climb back incentive to maximize volume. Yamani’s than the price sacrifi ce), towards the US$100/bbl level again? simple, straightforward explanation was or maintain market share and let the On the other hand, will oil prices ever so clear, direct, and unvarnished that it price of oil adjust downwards? reach that level again? If it is Saudi

28 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

policy to ensure that its reserves get quoted below US$300,000 per day. production) will also eventually result in produced at a reasonable rate (around Saudi production discipline essentially OPEC members’ acceptance of a new 9 to 10 million b/d, let’s say), can that resulted in cost infl ation and a transfer normal – producing a smaller volume at happen without accepting a permanent of rent from the oil producers to the a lower price point. Indeed, what would ceiling on the oil price? And where service and engineering companies. have been unacceptable to most OPEC should that ceiling be set? What has members a few months ago (namely But all these differences between the changed in the 30 years since 1985? the recognition that an oil price in the situation 30 years ago and now cannot Is Saudi policy essentially responding neighbourhood of US$70/bbl, let’s say, obscure the fact that current Saudi oil – just as it did then – to a potential is essential to the preservation of oil’s policy, more sophisticated and better loss of OPEC production quota, or share of primary energy) will now be articulated as it may have become, is the problem apparently similar but seen by most, if not all, members as a fundamentally different? shares its DNA with the Saudi oil pretty good deal in comparison with the policy of the 1980s: it is based on a current level of prices. The differences are not hard to deep understanding of the need to detect: shale oil is one, followed by preserve the role of oil and the Future Ministers cheap gas in North America and a corresponding Saudi production growing share of gas in the energy volumes. To that continuity the Saudis There is a new King in Saudi Arabia, matrix, a higher degree of attention have added the weight of experience, and a new generation of Princes is paid to environmental issues, and a which dictates that if bullets are going getting closer to exercising power. disappearance of oil uses other than to be bitten, they should be bitten early Ali Naimi will probably be replaced at those associated with transportation rather than late. some point relatively soon. One can fuels, gasoline and diesel. Technology only hope that the experience the and a high oil price have also made ‘… RESULT IN OPEC MEMBERS’ Saudi government has accumulated energy productivity a more attractive regarding oil policy will result in ACCEPTANCE OF A NEW NORMAL – proposition. It shouldn’t stretch the his replacement being yet another PRODUCING A SMALLER VOLUME AT A imagination to believe that the Saudis experienced civil servant with deep would consider every one of these LOWER PRICE POINT.’ experience and self control. The issues as a threat to the long-term challenges facing the oil commodity productive use of their extensive In addition to straightening out the over the next few years (gas, reserves. The US$100/bbl (and higher) oil production cost curve (goodbye renewables, energy productivity) will oil price also gave rise to an overheated Arctic, ultra-deepwater gas, marginal be matched by the challenges facing market in oil services and capital tar sands, and marginal shale), the Saudi Arabia’s oil policy. A very steady goods: semi-submersible rigs reached Saudi policy (or the absence of one, in pair of hands will be needed to steer US$650,000 per day and are now consonance with OPEC’s refusal to cut the main player in the global oil market.

The political economy of oil and economic diversifi cation: a neglected research fi eld Robert Mabro would certainly like us to revive Ali Aissaoui

Between 1993 and 2001 Robert prevailing renewed research trend. of individual countries in the context Mabro, in his capacity as Director The emphasis was on the role of oil in of history, political economy, and of the Oxford Institute for Energy shaping the political, economic, and international relations. As far as I am Studies, presided over the publication social dynamics affecting the major oil- aware, the rationale for the book series of a series of books on the political exporting countries of the developing was twofold – the obvious one being economy of oil (the series includes, in world. However, while most relevant to make a contribution towards fi lling publication order, Venezuela,1 Nigeria,2 publications of that period were of a research gap in the fi eld. Given the Indonesia,3 Libya,4 and Algeria5). In a a broad thematic nature, this series countries’ importance to the world’s way, this initiative was in step with the focused on the oil and gas industry oil (and increasingly gas) markets,

OXFORD ENERGY FORUM 29 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

deeper insight was needed to form a research fellow in the economics of These countries depend on petroleum better understanding of their policies the Middle East at the University of exports as a major source of income and institutional constraints. The less Oxford. His early research focused and growth. As a consequence, they obvious reason is that multiple country on the Egyptian economy and the are extremely vulnerable to the case studies can help refl ect the recurring theme of ‘diversifi cation instability and volatility of global oil diversity of contexts and conditions and of [its] productive structure.’6 As markets. Since the 1986 oil-price draw on distinct sources of evidence to Mabro’s interest in petroleum began collapse, such vulnerability has been a discern national idiosyncrasies. to develop and his focus shifted to the recurring risk and, because of the economics, politics, and international uncertain timing and magnitude of oil To be sure, Mabro appreciated and relations of oil, he must have (rightly) market downturns, a diffi cult one to acknowledged the quality of the thought that the concept had the mitigate. Among the risk mitigation research work the authors carried out potential to contribute to the economic tools available, fi scal stabilization funds (otherwise he would not have allowed are by far the most suited to a its publication). However, I remember development agenda of oil-exporting sovereign nation. Unfortunately, not from my experience of interactions with countries. Unfortunately, his attempt all countries have such tools or him, as the author of the last book in to align our research interests with the enough surplus assets to source them. the series, that he expressed concern theme proved premature. Those who do often fail the fi scal about some weaknesses in the This special issue of the Forum discipline test. analyses of the relation between oil and makes up for that missed opportunity. economic development – or the illusion To catch up with Mabro’s ‘OIL-EXPORTING COUNTRIES FACE of development as we perceived it. expectations, I will present in the STRUCTURAL THREATS THAT HAVE In particular, he regretted the lack remainder of this article a brief review THE POTENTIAL TO UNDERMINE THEIR of interest in the countries’ ‘efforts of issues and policies of economic to diversify their economies’ despite diversifi cation in oil-exporting countries. ECONOMIC GROWTH …’ this being explicitly mentioned in the The review, which draws in general on description of the series. Indeed, a some of my recent publications, is in Furthermore, and even more brief look at the books’ indexes reveals two parts: the fi rst highlights importantly, oil-exporting countries that neither my former colleagues nor dependence and vulnerability; the face structural threats that have the I actually said much on the theme. My potential to undermine their economic second provides some insight into the justifi cation, in the case of Algeria, was growth and wealth creation well into the policies and implementation strategies that economic diversifi cation was not future. The most far-reaching of these adopted across the higher-achieving an explicit objective of government threats are in three areas: contraction Gulf Cooperation Council (GCC) policies at that time. of petroleum export markets; countries. unsustainable fi scal patterns; and ‘MABRO WAS OFTEN AHEAD ON NEW severe unemployment. Dependence and vulnerabilities POLICY IDEAS. HE FIRST CONSIDERED The fi rst threat stems from the THE CONCEPT OF ECONOMIC Although now familiar and relatively irreversible contraction of the oil DIVERSIFICATION IN THE LATE 1960s …’ well explored, the concept of market, something that had not economic diversifi cation is open to previously been expected in This explanation could plausibly extend many defi nitions and interpretations. mainstream forecasts, when demand to the four other country case studies. It commonly refers to the process of growth seemed inexorable. Even today, Indeed, at that time the concept of structural transformation aimed at there is an undue expectation that economic diversifi cation was only reducing over-dependence on a single potential demand for petroleum in gradually entering the consciousness sector. More specifi c defi nitions have emerging economies will compensate of developmental economists and to factor in the nature of the dominant for declining demand in the OECD development planners. But Mabro was sector, the development stage of the region. For example, this expectation often ahead on new policy ideas. He economy, and the degree of exposure does not take into account the fact that fi rst considered the concept (or more to global markets. In the case of oil- China and India are seeking a similar precisely, the centrality of the concept exporting countries, a policy-relevant energy path to OECD countries, with, to economic development policy) of defi nition should further take into in addition, a pursuit of clean coal economic diversifi cation in the late account their vulnerabilities to both technologies to make better use of 1960s when he became a senior cyclical and structural threats. their massive domestic resources.

30 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

The major energy-consuming countries Policies and strategies in the GCC ‘… RAISES THE QUESTION OF WHETHER of the OECD–IEA have long shaped countries THE PETROCHEMICAL INDUSTRY their energy policies at the confl uence Dependence and vulnerability are more ACTUALLY CONTRIBUTES TO ECONOMIC of energy security and climate change acute in some countries than others; in DIVERSIFICATION.’ concerns. Accordingly, they have the GCC area, countries have pursued focused their efforts on the promotion more vigorous economic diversifi cation with strong policy support, including of energy effi ciency and low-carbon or policies. Their overall strategies involve very low feedstock prices, in order to renewable energies. Furthermore, in a three-pronged approach: increase its competitiveness by considering their security of supply, enabling a low-cost structure. In so they have emphasized independence 1 vertical integration – developing relinquishing the state resource rent, from petroleum imports in general, and businesses in the midstream and they have unintentionally encouraged from the Middle East in particular; the downstream sectors of the petroleum rent-seeking behaviour. Hence USA has seen some success in this value chain; investors and entrepreneurs may be respect, thanks to the vigorous 2 horizontal integration – supporting the reluctant to become involved in the development of its shale resources. establishment of local private more job-creating, but much less oil providers of energy logistics and The second threat comes from rent fetching, activities derived from energy supply services; patterns of fi scal spending. Whatever the industry. the outlook for global oil markets, 3 diversifi cation into non-petroleum The implementation of these strategies current hydrocarbon export-based manufacturing and services. would have been ineffective without fi scal policies are unlikely to be These strategies have been supported state involvement – and the critical sustainable in the long run. This is with substantial fi nancial resources and role that governments have played particularly the case when oil revenues supply-side strengthening measures, beyond supply-side strengthening. are eroded by increasing costs, lower which include sustained development They have indeed been instrumental fi scal take and, in some countries, by of education, health, and public in developing consensual visions, the additional impact on per capita infrastructure. However, implementation devising policy frameworks, and revenues of a sizeable and rapidly of the strategies is still sketchy. What shaping national development plans. growing population. Long-term fi scal is clear from investment trends is that In particular, to the extent that a sustainability cannot be achieved more emphasis continues to be put on credible economic diversifi cation without rationalizing public spending the downstream sector, especially on should rely on a growth strategy (of which subsidies are a very large its petrochemical segment. geared towards engaging the private proportion) and diversifying budget This emphasis raises the question of sector in the development of non-oil revenues by reverting to general whether the petrochemical industry tradable exports, they have focused taxation. actually contributes to economic their efforts on three state-level factors The third threat is from rising diversifi cation. Advocates of this deemed most conducive to an enabling unemployment, the main cause of option often point to the petrochemical environment for enterprises: which is the dominance of the industry’s growth potential for higher creating and maintaining a economy by a highly technologically value-added exports. They also favourable and stable investment productive (and thus low job-creating) highlight the opportunities it offers for climate; petroleum sector. Oil-exporting further industrial development and accelerating reforms of the countries – particularly those under industry-relevant research and educational and vocational training demographic pressure – have long education. While these arguments systems; realized that reductions in may be valid and should not be ignored ensuring the availability of low-cost unemployment cannot be achieved it is also the case that the fi nancing from both the state without addressing two main economic petrochemical industry tends to exhibit development agencies and a and social dimensions: fi rst, by a pattern of performance, in terms of deepening regional capital market. encouraging non-petroleum sector business cyclicality and low job growth and private sector development; creation potential, which is similar to While much progress has been and second, by preparing the oil industry in general. achieved, many challenges remain. unemployed nationals to take full Furthermore, governments have Strengthening governance and creating advantage of job opportunities. provided the petrochemical industry an incentive structure that encourages

OXFORD ENERGY FORUM 31 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

competition and discourages rent- prominence over economic effi ciency, the GCC, Mabro would probably not seeking behaviour are among the most thus slowing down the momentum of admit the perception of a common important such challenges. governments’ economic diversifi cation ‘Gulf model’ that my generic and agendas. high-level overview seems to convey. ‘POLITICAL EXPEDIENCY HAS TAKEN He would surely refer to the rationale PROMINENCE OVER ECONOMIC Conclusions of the original country case studies he EFFICIENCY …’ once initiated (the series ‘The Political On reading this article Mabro would Economies of Oil Exporting Countries’, likely concur with the emphasis In this respect, one should not which did not survive his retirement) placed on oil-producing countries’ underestimate the diffi culties of policy to suggest that important variations dependence and their vulnerabilities in contexts and circumstances making and implementation in the face to the resulting threats. He would even critically affect each country’s policy of social and political realities in the argue that these countries have now and implementation strategy. In region. Success or failure depends to to deal with an obsolescent pattern of particular, differences in resource a great extent on political economy, savings, investments, and expenditures institutional and behavioural factors that was originally based on the unlikely endowments, institutional settings, including rent-seeking, and resistance assumptions of steadily growing and socio-economic dynamics are to reform by vested interests. In the global oil demand and safely rising key considerations in explaining the aftermath of the Arab Uprisings, even international prices. Today, with fl at observed different paths and paces the countries relatively shielded from demand, greater uncertainty about the of the process. This leads me to the subsequent turmoil – as has so far future direction of prices, and growing conclude that Mabro would certainly been the case for the GCC countries domestic fi scal needs, these countries like us to revive this once neglected – have found themselves grappling face even more dire threats. Turning his fi eld of research to give more weight with uncomfortable dilemmas. In the focus to the economic diversifi cation to an eventual new book series on the end, political expediency has taken policies being implemented within political economy of oil.

Notes 1 Venezuela, the Political Economy of Oil, Juan Carlos Boué, Oxford: OUP/OIES, 1993. 2 Nigeria, the Political Economy of Oil, Sarah Ahmad Khan, Oxford: OUP/OIES, 1994. 3 Indonesia, the Political Economy of Energy, Philip Barnes, Oxford: OUP/OIES, 1995. 4 Libya, the Political Economy of Oil, Judith Gurney, Oxford: OUP/OIES, 1996. 5 Algeria: The Political Economy of Oil and Gas, Ali Aissaoui, Oxford: OUP/OIES, 2001. 6 The Egyptian Economy 1952–72, Robert Mabro, Oxford: OUP, 1974.

Oil and Arab economic development Paul Stevens

In Robert Mabro’s extensive introduction to the book Oil in the continually suffi cient to cope contribution to the analysis of oil and Twenty-First Century: Issues, with demographic pressures and Arab economic development, three Challenges, and Opportunities1 increasing development needs’. themes are consistently present: (quotations from which appear in This view can be derived from two concern over sustainability; emphasis this article) Mabro argues that the separate concepts. The fi rst being on the central importance of developing ‘of any oil country is to establish the the fact that oil is a depletable human capital; and rejection of the basis of sustainable economic growth resource, while the second is the concept of ‘resource curse’. in the long run’. The underlying logic classic paradigm of economics of this view is that irrespective of the involving ever-increasing wants in a future evolution of oil prices and Sustainability world of constrained resources. export volumes, ‘it is likely that the Refl ecting on oil markets in 2006 in his level or growth of revenues will not be Oil is depletable in the sense of it being

32 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

an exhaustible resource (in geological Developing human capital creates a fundamental contradiction terms, it is no longer being created). for oil and development in the Arab Mabro saw the development of However, it is also potentially World. On the one hand, economic human capital as key to the process ‘depletable’ in value terms in a progress requires political reform; of economic development and technological sense as energy but at the same time, oil revenues progress, but at the same time he alternatives and improved effi ciency of accruing to the state reinforce the elite realized that this was a process that oil use emerge. Thus ‘peak oil’ will captured economy and therefore the ‘takes a long time to yield its fruit’. There happen because of a lack of demand status quo. is, however, an additional problem not supply. An alternative way of involved, apart from time lags. expressing this is that oil revenues are ‘MABRO SAW THE DEVELOPMENT OF Developing human capital inevitably NOT income in the conventional involves educating the population – HUMAN CAPITAL AS KEY TO THE economic sense of a continuous fl ow of in the broadest sense of the term. PROCESS OF ECONOMIC money derived from a reproducible However, once you begin to ‘educate’ DEVELOPMENT …’ factor of production. Thus a country people, they are less likely to accept has a national portfolio of assets, which political systems in which they have The Arab Uprisings, which began in includes oil below ground. Producing little or no involvement. An educated Tunisia at the start of 2011, offered a the oil and selling it simply switches a population is one that will demand a brief glimmer of hope. Sadly, for the component of the portfolio from ‘oil political say in some shape or form. most part, these glimmers have been below ground’ to another component, Thus in many of the Arab countries, extinguished, at least for the time ‘dollars above ground’. To be as the twentieth century unfolded, the being. However, if we are moving into ‘sustainable’, this revenue needs to be ruling elites were reluctant to allow the a lower oil price world – where invested in order to generate a future genie of education out of the government spending on jobs and source of income. Once the barrel is proverbial bottle. Education to produce subsidies will have to decrease – the produced it is gone forever. Only in this skills – such as those of doctors and ability of the current status quo to way can oil production be ‘sustainable’ engineers – was fi ne but not if it began survive may well be restricted. This is over time and form the basis of to breed political unrest which especially true given the growing continuing economic progress. challenged the position of the ruling demographic pressures of a young elites. population. For example, the IMF in ‘THUS OIL CAN BE SEEN AS A WINDOW At the same time, these same ruling 2011 pointed out that in Saudi Arabia OF OPPORTUNITY TO PROMOTE elites were in the business of capturing nearly half the population was under DEVELOPMENT.’ as much economic rent as they could. 15 years of age (compared to In many cases they created what were 20 per cent in Norway, Singapore, At the same time, acutely aware of in effect kleptocracies (‘government and the USA). This is a typical pattern the high levels of poverty in much of by thieves’). A key consequence of in the Arab World more generally. the Arab World, Mabro realized that this was that much of the private Whatever the outcome of the Arab expectations were developing for sector in the Arab World was Uprisings, Mabro was right. The future improved standards of living and all effectively stifl ed and excluded from of economic progress in the region the other paraphernalia of economic economic activity. There can be little will depend upon the ability of the and social development. Thus oil can doubt that economic development in ruling elites to invest in and promote be seen as a window of opportunity any country depends upon an active human capital development; this in to promote development; this and vibrant private sector. In the Arab turn will require political reform. development involves the diversifi cation World, with a few notable exceptions, of economies to create reproducible this has for the most part been Rejection of the concept of ‘resource income-earning assets over the long missing; political reform will be curse’ run. This however, is easier said than required if an effective private sector done. The challenges of diversifi cation is to emerge in the future. In the A third common theme in Mabro’s were the obstacles faced, which Mabro language of the debate in the Soviet writing on oil and development has saw very specifi cally as: a limited Union in the late 1980s: economic been his rejection of the presence of resource base outside the oil sector, liberalization (perestroika) in the Arab ‘resource curse’. The term ‘resource and an insuffi cient endowment of World will not be possible without curse’ argues that large windfall human capital. political liberalization (glasnost). This revenues from oil are a ‘bad thing’

OXFORD ENERGY FORUM 33 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

since they somehow damage the ‘ATTEMPTS AT DIVERSIFICATION ARE NOT is due to the fact that ‘oil reduces the existing economy, ultimately leaving ONLY FAILING IN THE REGION, THEY ARE incentive to introduce painful policy the nation worse off. The transmission ACTUALLY GOING BACKWARDS.’ reform’. In other words, oil revenues mechanism from oil revenue to have simply helped governments economic damage is complex but In other words this approach treats the to paper over the cracks of a contains a mixture of Dutch Disease; issue of a ‘resource curse’ in terms of failing economy. Arguably this view crowding out by the oil sector; and an opportunity cost, although it begs undermines his own argument about various sociopolitical issues revolving the question: how to defi ne a ‘better’ the absence of resource curse, since around rentier societies and rent impact? This brings the analysis the idea of oil revenues inhibiting capturing elites. Mabro argued that: back to the fi rst of Mabro’s themes: economic and political reform is ‘All oil-exporting countries although in sustainability. Sustainability for an oil central to much of the ‘resource different ways and degrees would be producer can only mean successful curse’ literature. However, whatever worse off today if they never had oil.’ diversifi cation of the economy away the reasons for previous failures, the The result of the revenues has been: from dependence on oil revenue diversifi cation of Arab oil producers’ and the creation of an economy not economies is now moving to the top of ‘improved health, nutrition, education, dependent upon the export of crude the policy agenda. Growing concerns housing, public utilities and more oil. While this has been a major (and about climate change and unburnable generally the standard of living of at oft-stated) aim of Arab oil producers carbon mean that the future of oil least part of the population’. For the since the fi rst oil shock of 1973, their revenues must be viewed as being producers of the Gulf Cooperation record for the most part has been extremely uncertain. Such uncertainties Council (GCC) countries this has abysmal. In 2011 the IMF claimed are reinforced if we really are moving certainly been the case. Given the that the GCC’s non-hydrocarbon towards a period of lower oil prices. state of the GCC members before oil sector had formed 61 per cent of its Thus the ability of any government – dire poverty based upon subsistence GDP in 1990, but that by 2010 the in the Arab World to maintain an economies with a little entrepôt trade – fi gure had fallen to 51 per cent. As for oil-dominated economy beyond the the simple ‘resource curse’ the non-hydrocarbon primary fi scal short term must be in question. The argument simply has no validity. defi cit – an excellent proxy measure challenge is: how to diversify these Without oil revenues the GCC for oil dependence – for Saudi Arabia economies and rebuild the income- countries would probably not even this rose steadily from a fi gure of (on earning portfolio of national assets to exist as sovereign entities. However, average) below 50 per cent in the meet the needs and expectations of with a more nuanced approach it is 1990s, to 140 per cent by 2010. In future generations? Mabro argues that, possible to turn the resource curse effect, attempts at diversifi cation are in the absence of alternative resources, argument on its head to accommodate not only failing in the region, they are the answer lies in developing human Mabro’s point, while at the same time actually going backwards. Apart from capital. This is undoubtedly true but, as anything else, this means that the oil raising important questions relevant argued above, a necessary condition sector has failed to fulfi l the role of a not only to the GCC but to other oil for this to happen is political reform. leading development sector (along the producers. Thus: rather than asking Such reform would have the additional lines of textiles in Great Britain in the if the oil sector and its revenues benefi t of unleashing the enormous eighteenth century or railroads in the caused damage to the rest of the talents, abilities, and imaginations of USA in the nineteenth century). economy (and why), instead ask why the Arab private sector, releasing it the oil sector failed to have a ‘better’ Mabro claims that part of the from the shackles of the kleptocracies impact on the countries concerned explanation for this failure to diversify that have dominated the region for (and why)? and promote economic development centuries.

Note 1 Oil in the Twenty-First Century: Issues, Challenges, and Opportunities, Robert Mabro (ed.), Oxford: OUP/OPEC, July 2006.

34 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

A perspective on Robert Mabro’s work and contribution to petroleum research Majid Al-Moneef

1970s and 1980s: perception of Arab- issue of oil pricing, production, and popular; this led to his fi rst co-authored dominated OPEC market structure for decades. work2 in 1974. Although the works of O’Conner, To many of my generation who studied Sampson, Blair, and Jacoby were economics in the West in the 1970s OEPC, Oxford Energy Seminar, and OIES widely read, their infl uence on research and 1980s, developments in the oil was limited. I myself did not come to know of market posed both research and Mabro’s work until after my graduation cultural challenges. In the early 1970s, The situation was similar across the from the USA. Back in those days, following what came to be known Atlantic, but the academic tradition when there were no Google search as the ‘fi rst energy crisis’, we were was somewhat different. Political tools, I came across his work when confronted with a barrage of media economy and development issues still studying the oil price episode of 1986. coverage about the ‘Arab dominated had some infl uence on research in Two of his papers3, 4 introduced me to OPEC’ who sought to ‘strangulate Britain and elsewhere in Europe. The the Oxford Institute for Energy Studies the industrial world’ by controlling works of Hartshorn, and Penrose and he had just established, I fi rst met him the price of oil. This perception Mikdashi had some infl uence on in 1989 after attending his other became more apparent following research into petroleum economics creation, the Oxford Energy Policy the transfer of pricing power from and relations. Club. In that meeting, I was fortunate to the concessionaire international oil meet the late Edith Penrose, whose companies to the governments of the ‘MABRO PROMOTED DIALOGUE research had already infl uenced many oil exporting countries of the Middle BETWEEN OIL PRODUCERS AND in the aftermath of the 1973 oil price East, North Africa, and Latin America. increase, and Wanda Jablonski, whose The Arab-Israeli war of 1973 and the CONSUMERS AT A TIME WHEN THE Arab oil embargo against the USA then ISSUE HAD NOT YET BECOME journalistic insight and coverage of oil market relations through the amplifi ed this media bias. POPULAR.’ publication, Petroleum Intelligence It is within this atmosphere that my Weekly (PIW), guided many researchers Robert Mabro, being from an Arab research interests – together with those since the 1960s. country and understanding the of many other Arab students of challenges of the region more than economics and political science Even then, Mabro was already critical anyone else, was surely also studying in the West at that time – were of many of the dominant narratives shaped. In the USA, we were faced with confronted with the western media’s around the oil market in the USA. For a very emotive debate directed against negative view of Arab oil producers instance, he thought that the Hoteling the Arab members of OPEC. We also following the 1973 crisis. After rule was irrelevant when looking at a had to contend with the dominant studying civil engineering in Egypt, country oil producer. He also thought mode of thinking in US universities and philosophy in France, and economics that for the oil-prolifi c Middle East, the research institutes which tended to be at London University, and specializing issue of peak oil was too distant to very US-centric, focusing on the impact in economic developments of the make an issue from. Mabro argues of oil price shocks on the US economy, Middle East at Oxford University, he that: ‘it is not suffi cient to say that an the theory of exhaustible resources, switched his research focus to the exhaustible resource will be eventually peak oil, the oligopolistic behaviour of economics and the politics of oil. exhausted and that its production will OPEC, and the Dutch Disease Since then, he has devoted his decline until extinction after reaching a Hypothesis. Those of us who had an research to understanding the various peak. These are not predictions. Such interest in the political economy of oil or issues related to the very big questions statements are of no interest whatsoever economic development had to fi nd our facing the oil market. Mabro also unless we are told the dates at which way through this US-centred research promoted dialogue between oil the peak will be reached, and the likely tradition. The seminal work of MIT’s producers and consumers at a time shape of the production curve before Adelman1 infl uenced research on the when the issue had not yet become and after the peak.’5

OXFORD ENERGY FORUM 35 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

‘MABRO NEVER BELIEVED IN ANY OF THE Mabro’s ongoing signifi cance world’s largest market for crude oil had VARIANTS OF THE “OPEC CARTEL” THEORY.’ been poorly understood. Mabro has also contributed signifi cantly to current understanding Furthermore, Mabro never believed in any ‘PRIOR TO MABRO’S WORK, THERE WAS of the concerns of oil producing of the variants of the ‘OPEC Cartel’ theory. countries, and of the challenges they LITTLE SYSTEMATIC ACADEMIC FOCUS Models of OPEC as a wealth-maximizing face in developing their hydrocarbon IN THE WEST ON ISSUES SUCH AS rational monopolist did not appeal much resources and utilizing them for their ECONOMIC DIVERSIFICATION.’ to him. Instead, he argued that: ‘the socio-economic development. Prior revenue maximization objective which to Mabro’s work, there was little Although the focus of his research theory postulates and core producers systematic academic focus in the has been the Arab World, Mabro would dearly like to achieve is not credible. west on issues such as economic understood the challenges facing One has to become content with a diversifi cation, or on the ways in other producers – such as Mexico, second best: to obtain through the pricing Norway, Venezuela, and Russia – very policy more revenues than would have which hydrocarbon revenues could accrued under a competitive market be used to maximize socio-economic well. He used his wide network – structure. This more may be much welfare outcomes. At the time, some established through the OIES, the better than nothing but is likely to be may have considered his research as Oxford Energy Seminar, and the very different from the optimum.’6 Mabro niche and of no relevance to prevailing Oxford Energy Policy Club – to bring came to formulate his understanding of mainstream research, in a market together producing and consuming oil market issues without any pre-set obsessed with the energy security governments, international and national hypothesis or prejudice. His annually debate and western independence oil companies, as well as producers of organized Oxford Energy Seminar was from Middle East oil. This quickly oil and those of other energy sources. a venue to understand the market by changed in 1993, when he published He is highly regarded as a central bringing together all stakeholders: his seminal book, co-authored with fi gure in the fi eld of oil research across academia, industry, governments, media, Paul Horsnell, on the Brent Market.7 Europe, Asia, the Middle East, and fi nancial community, consultants, etc. Prior to this time, the functioning of the Latin America to this day.

Notes 1 The World Petroleum Market, M.A. Adelman, Baltimore: Johns Hopkins, 1972. 2 Oil Producers and Consumers: Confl ict or Cooperation, Elizabeth Monroe and Robert Mabro, New York, 1974. 3 ‘On oil price concepts’, Robert Mabro, OIES, WPM 3, 1984. 4 ‘Netback Pricing and the Oil Price Collapse of 1986’, Robert Mabro, OIES, WPM 10, 1987. 5 ‘The Peak Oil Theory’, Robert Mabro, Oxford Energy Comment, OIES, September 2006. 6 ‘OPEC and the Price of Oil’, Robert Mabro, The Energy Journal, 13(2) 1992, pages 1–17. 7 Oil Markets and Prices: The Brent Market and the Formation of World Oil Prices, Paul Horsnell and Robert Mabro, Oxford: OUP/ OIES, 1993.

Robert Mabro and the theme of energy security John Mitchell

‘Energy security’ falls within the broad its geopolitical context and making sure importing countries to work together range of Robert Mabro’s work on that the position of the oil exporting in the development of a structure for energy, but it was not a leading issue. countries was examined and explained. oil prices, moderated by some kind The phrase is a label for policy debate His views were (and I think still are) of expert advice. Over the years, the focused on the interests of developed that security depends on co-operation, balance between states and markets oil importing countries. Mabro’s based on interdependence; that ‘the has shifted against his view. However, approach has always been broader, market’ is an insuffi cient basis for the recent collapse in oil prices and its with particular attention being paid to co-operation; and that there is a role repercussions may mean that the story understanding the global market and for governments of exporting and is not completely over.

36 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

‘THE BALANCE OF THE OIL WORLD Jack Hartshorn, Walter Levy, and Edith their former concessions even as the AND THE CONVENTIONAL WISDOM Penrose, had access to high players in host governments were carrying out SURROUNDING IT WAS TIPPED OVER both government and companies, the 1968 OPEC policy of ‘participation’ while in 1972 Morris Adelman of MIT – which led in most cases to complete DECISIVELY IN 1973 …’ had produced World Petroleum Markets nationalization. his great work of economic but My acquaintance with Mabro in the late apolitical analysis. 1970s developed into friendship and I ‘Energy crisis’ analysis – consumers’ worked closely with him in the Oxford hopes for energy security Institute for Energy Studies (OIES) 1973, the Arab oil embargo, and warnings Into this new situation stepped new during the 1990s after I had retired from of fi nite oil stocks experts from other backgrounds – employment in the thinking parts of an The balance of the oil world and the from economics, engineering, political international oil company (IOC). Mabro conventional wisdom surrounding it science, even particle physics, with had begun his career outside the oil was tipped over decisively in 1973 by ideas for ‘solving the energy crisis’. industry, as I had, and we both were the Arab oil embargo and the decision Funds became available to universities born and grew up in countries outside of OPEC member countries to break and institutes for work on energy, the OECD. He once told an interviewer off negotiations with the IOCs and but, in the OECD countries, this was (about a scheme to substitute a computer assume direct control of pricing and generally framed within the ‘energy room for the wine cellar of St Antony’s, oil production in their countries. At security’ paradigms: the search was for where he was Wine Fellow):‘I’ll be the same time, press and politicians solutions which would defend the USA blamed because I’m an outsider, not a picked up the idea that ‘oil is running and the OECD, rather than developing true Brit.’ This position gave him a out’, supported by geologists and a system for governing oil trade and vantage point beyond the conventional conniving oil company spokesmen. investment which both sides would fi nd wisdom of OECD governments and of The position of the few academic and it attractive to support. the international companies based political specialists was overwhelmed. there. Growing up in Alexandria allowed As Mabro wrote later: ‘Not that those ‘HE REALIZED THAT A “SOLUTION” Mabro to be at ease with people from involved in governments, companies, WOULD INVOLVE BOTH PRODUCERS AND other cultures. He collected pictures, consultancies, the media etc. are maps, and books about Alexandria, CONSUMERS.’ incapable of critical analysis. They lectured on its economy, and later just fi nd it more comfortable to adopt wrote a thoughtful review of the Mabro was perfectly placed to create the prevailing conventional wisdom. It nostalgia expressed by foreign writers a new role in this situation, both is easier to communicate with others who had spent time there. for himself and for energy analysis within a framework of shared views than generally. He had not been one of to stand alone on the fringes.’2 the pundits of previous conventional Waning infl uence of the ‘Seven Sisters’ The events of 1973 had been a wisdom (though he said to me Mabro came to oil at the end of the great shock to the western political much later that anyone who had 1960s as a development economist, establishments. They set up a not been in the game before 1973 with published work on Middle East confrontation between the OPEC could not properly appreciate later economies. (His book on Egypt1 is still countries and the OECD. The USA developments). He was not personally in print and a college text.) The oil world appeared a particular target, partly or institutionally committed to thinking (described by Anthony Sampson in the because of its role in provoking the of ‘energy security’ in terms of the USA early 1970s in his book The Seven oil embargo, but also because of its or the OECD; nor was he a ‘front’ for Sisters: the great oil companies and the rapidly expanding dependence on OPEC although, due to his personal world they shaped) was disintegrating, imports from the Middle East. Henry history and his work on the economies as were the neo-colonial relationships Kissinger persuaded the OECD to of the Middle East, he understood the between governments in the USA and create the International Energy Agency Middle Eastern oil producers, and took Europe and the ‘host’ governments of to manage and share supplies in the care that their interests were aired. He the developing countries – whose oil event of a similar supply crisis. During realized that a ‘solution’ would involve the seven sister companies had the 1970s, the IOCs were trying to sail both producers and consumers. He controlled. At that time only a handful of against the wind of change, to maintain personally had a very sympathetic people, such as: Wanda Jablonski, at least some of the economic value of manner (from cosmopolitan

OXFORD ENERGY FORUM 37 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

Alexandria?), which made it easy for Control vs cooperation domestic oil trade, although there are him to establish personal rapport still questions about the infl uence of The 1970s was an era of economic in both camps. He was extremely so-called speculators or fi nancial planning in Europe, and of prices intelligent and intellectually honest. investors on them. There are also and incomes controls in the OECD His Oxford base, and its tolerance (or commercial reporting agencies which generally. In the UK, nationalized power benign neglect) of new initiatives, gave estimate the prevailing daily price on and coal industries confronted strong him the freedom to move. the basis of interviews with traders. trade unions. Against this background Mabro found the person he considered Establishment of bodies promoting energy the ideal chairman for the OEPC: Development of the international oil market policy debate and mutual understanding Aubrey Jones who, from 1965 to 1970, Mabro viewed the rise of these had been chairman of the Prices and The result of Mabro’s involvement half-open markets with scepticism Incomes Board set up by the Labour was a series of innovations: the rising to suspicion. Were the markets Prime Minister Harold Wilson. In this Oxford Energy Policy Club (1976) for manipulated by the companies of the capacity Jones had been tasked to set senior executives, the Oxford Energy importing countries? Were the reporting the framework for price controls and Seminar (1978) for hopeful future senior agencies’ reports similarly interfered wage negotiations in the UK economy. executives, and the Oxford Institute with? Surely the price of Brent crude Jones was a classic in-between man: for Energy Studies (1982) for future is too important to be left to reporters? son of a miner, ex-Conservative minister advisers and experts. In every case Mabro and his colleagues carried for fuel, successful industrialist, a the idea was to bring together people 3 graduate of the LSE, and nearly a out a pioneering study at the Oxford from producing and consuming (in fact: member of the Labour Party. Institute for Energy Studies (OIES) into exporting and importing) companies, the Brent market which put some of governments, and institutes who I suspect that in Mabro’s mind, the these doubts to rest, but I think in his would otherwise meet only in bilateral OEPC was a kind of trial version of the mind ‘market forces’ were not the best negotiations and lobbying. Mabro’s council of experts which he believed answer to the pricing problem. Even skill was to preside over seminar should guide a cooperative oil price if the markets regulated in New York meetings and research programmes regime organized by governments. and London could be trusted, up to a with sympathy, academic rigour, and an The international oil market as we point, there remained the problem of attention to detail to induce participants know it today did not exist in 1976. the dominant producers and exporters. to share observations, on topics For decades, most international oil The relative stability of prices during trade had taken place between presented by relatively nonpartisan the period 1986–2005 refl ected the upstream and downstream subsidiaries experts, about the state of the energy ability of OPEC members to regulate of the major IOCs. During the 1970s, and oil worlds. supply from production capacity, which as national oil companies (including the typically exceeded demand. Was this When Mabro formed the Oxford Energy UK’s short-lived British National Oil a ‘fair market’? Mabro was infi nitely Policy Club (OEPC) in 1976 it met twice Company) replaced international intrigued by the question of how the yearly and was attended by very senior companies in producing their countries’ OPEC members would or should share company executives, offi cials, and a crude oil, they also took over the production quotas, and before every few ‘pundits’ such as Edith Penrose marketing of it. The increasing numbers OPEC meeting would test various and Jack Hartshorn. This was a forum of sellers and buyers made the idea of combinations against his contacts, but – unique at the time – where senior a closed trading system less realistic, no guiding principles emerged. people could exchange information but the open, regulated commodity and sense the mood among their markets we know today did not yet ‘I THINK IN HIS MIND “MARKET FORCES” peers. Over the years many forums exist. It was not until 1983 that the have come into existence for this kind New York Mercantile Exchange WERE NOT THE BEST ANSWER TO THE of contact, so the OEPC now has less launched its contract for West Texas PRICING PROBLEM.’ signifi cance – and a lower level of Intermediate, and not until 1988 that a attendance. At the time, however, the similar futures market for Brent crude The decision by Saudi Arabia in Club seem to be a raft in the somewhat was created by the International November 2014 to step aside from stormy sea of relations between Petroleum Exchange in London. These attempts to control the price in favour oil companies and their diverse markets have, over the years, become of ‘the market’ leaves many questions governments. the benchmarks for international and unanswered:

38 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

1 How long will they maintain this these will not last for long unless and others, raised the question of policy, which is similar to that which spending is cut. Austerity is at the door. a government-structured oil price they adopted in 1986? framework in a book published by 4 2 As long as it lasts, and there is no The need for stability Brookings in 2010. Such a framework, OPEC regulation of supply (because however, may not be wide enough. There are important differences of its inability to agree amongst its There is a case for combining issues between oil and other commodities. members on how to allocate relating to a form of price stability with In some countries, waves of austerity production cuts), oil faces a fairly some kind of economic stability for will be extremely hard to manage and typical commodity cycle in which export-dependent countries. future exports are therefore at risk from price movements affect investment, political destabilization. The stocks However, such issues are now which in turn affects supply and which have built up in the OECD on different agendas in different demand in a later period. countries, and which are being built up organizations (there is also an agenda, 3 The commodity cycle destabilizes oil in China and India, will provide some under the current UN Climate Change exporting countries which are critically protection for importers against short- negotiations, for countries affected dependent on their oil export revenues term disruptions, provided the stocks by climate mitigation policies). both to pay for their imports and to Perhaps some version of Mabro’s are used. However, in theory these support the government budgets OEPC needs to be evoked to look stocks are not supposed to be used which transfer income to the dependent for ways in which these subjects can to stabilize prices per se or to stabilize non-oil sectors of the economy. A be addressed holistically, without the economic development of the short period of US$100/bbl prices challenging the power or existence of exporters. Moreover, like the exporters’ had enabled some of these countries markets represented by the commodity fi nancial reserves, the importers’ oil to build up fi nancial reserves – there exchanges, or the sovereignty and stocks will not last very long. was hardly time to spend the new economic independence, such as it is, income before the fall in price – but Is this the only or the best way? Mabro, of the oil exporting countries.

Notes 1 The Egyptian Economy 1952–72, Robert Mabro, Oxford: OUP, 1974. 2 ‘The International Oil Price Regime: Origins, Rationale and Assessment’, Robert Mabro, The Journal of Energy Literature, Volume XI, No1, June 2005, page 2. 3 Oil Markets and Prices: The Brent Market and the Formation of World Oil Prices, Paul Horsnell and Robert Mabro, Oxford: OUP/ OIES, 1993. 4 Global energy governance: the new rules of the game, Andreas Goldthau and Jan Martin Witte (eds.), Washington DC: Brookings Institution Press and Global Public Policy Institute, 2010.

Energy security revisited David Robinson

Robert Mabro has written and spoken What is energy security? domestic solutions related to regulation widely on the topic of energy security. and investment. Still today, for Mabro, In 2005, Mabro made three points related His views are summarized in a 2005 the critical security issue is the potential 1 to this question. First, he argued that speech. Drawing on that speech for oil supply disruptions, fundamentally energy security had always been about and my recent interview with Mabro, in the Middle East. this article explores four questions disruptions in international oil supply. of current interest. They address the He did not think that Europe had a ‘FOR MABRO, THE CRITICAL SECURITY defi nition of energy security, how to natural gas security problem because manage energy security risks, whether there were so many actual or potential ISSUE IS THE POTENTIAL FOR OIL SUPPLY unconventional resources make the suppliers. Nor did he think that DISRUPTIONS …’ USA energy secure, and whether low electricity security was an important oil prices undermine energy security. issue because there were straightforward Second, he identifi ed two reasons for

OXFORD ENERGY FORUM 39 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

supply disruptions: political decisions for the Middle East. However, energy that the signatories would abide by the and uncontrollable events, like wars security is not just about supply agreement when it really mattered. But and revolutions. He argued that disruptions. It is about the balance of in practice, that would depend on each political disruption involving the use of supply and demand. This suggests individual country’s interests at the time the oil weapon was no longer possible, putting greater emphasis on the the emergency actually occurred. at least with respect to the countries effi cient operation of international Mabro also expressed the view that of the Middle East. The latter did not energy markets. there were limits to using international have suffi cient power to maintain On the third point, today energy fi nancial and oil markets to hedge pressure on the largest consuming security has a longer-term dimension against price movements and physical countries and regions; the power of related to sustainability. The science shortages. Prices could rise too high retaliation was too great. On the other clearly indicates the contradiction and there were physical limits to hand, uncontrollable events that hit oil between increasing consumption of storage at any given time. production or transport facilities could hydrocarbons and avoiding dangerous pose a real threat to oil supply security. interference with the climate. The ‘IT IS HARD TO ARGUE WITH MABRO’S He holds the same views today. problem is not about temporary or EMPHASIS ON THE LIMITS TO WHAT Third, his focus on energy security has long-term shortages of oil, but that MARKETS CAN ACHIEVE.’ been on the relatively short to medium burning hydrocarbons could well cause term. To the extent that Mabro refers to a climate disaster. All of Mabro’s views on managing the long-term energy security, he refers risks of potential supply disruptions mainly to investment cycles related to oil. How should oil importers manage the are sensible, but the conclusion on With respect to his emphasis on oil, risks? emergency sharing is provocative. He with the benefi t of hindsight, it is clear In his 2005 speech, Mabro warned seems to be arguing that countries, that in 2005 Mabro underestimated the that energy security concerns elicit including IEA members and non- security issues related to natural gas fear and that fear is a bad counsellor. members such as China, should sign and electricity. Today, there are real Although it was rational to take out up to relatively costless emergency risks associated with Russian natural some insurance against disruptions, sharing schemes, but meanwhile build gas supply to Europe. These refl ect a the costs could well be much greater up their own strategic storage in case more general problem: that reliance than the benefi ts. He recommended the agreement breaks down under on pipeline gas with major suppliers that the insurance include: strategic stress. (It is interesting to note that low can entail greater risk than reliance on stocks of crude oil and products; a oil prices are an opportunity to build LNG. Furthermore, there is growing clear scheme for releasing the stocks strategic stocks. China appears to be 2 concern over the prospect of electricity in case of emergency; diversifi cation of doing just that. ) In my view, this is one outages, for instance in the UK and oil and energy; and promoting energy further reason to question the future of Belgium, due to inadequate investment effi ciency in use. Today, Mabro holds the IEA, whose creation was sponsored in fi rm generation capacity. Mabro is the same view. by a country (the USA) that grows less right that solutions for electricity are concerned about energy security, while regulatory, but they are certainly not ‘MABRO ARGUED THAT THE IEA’S the largest and fastest growing energy straightforward. Moreover, in the EU, EMERGENCY OIL SHARING AGREEMENT consumers (such as China and India) they involve international agreements are not amongst its members. WAS SENSIBLE AND RELATIVELY among 28 countries whose interests COSTLESS.’ It is hard to argue with Mabro’s diverge widely. Proposed solutions, emphasis on the limits to what markets including the introduction of ‘capacity’ In our interview, Mabro argued that the can achieve. Nevertheless, liquid markets alongside existing ‘energy’ IEA’s emergency oil sharing agreement and effi cient markets are a critical markets, aim to encourage investment was sensible and relatively costless. element of energy security. Indeed, in in generation, but we are a long way However, he stressed that there was view of the possibility that emergency from a model where security of supply no guarantee that an IEA country sharing regimes could fail when is assured. would actually abide by the agreement put under pressure, governments On Mabro’s second point, the in a true emergency. In other words, should be fostering more liquid and emphasis on uncontrollable events a sharing agreement offered some effi cient markets to help cope with seems especially appropriate today comfort, provided the perception was emergencies.

40 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

Do unconventional resources give the USA Canada, and Mexico will together ‘MABRO HAS ALWAYS EMPHASIZED THE energy security? become a net exporter of crude oil. IMPORTANCE OF EXPECTED DEMAND AND However, a focus on net oil exports and In our interview, Mabro argued that the PRICES ON INVESTMENT.’ energy independence misses the point: USA overstates the degree to which the USA will not be truly independent the development of unconventional well as political decisions on revenue as long as its oil markets and prices are energy resources provides energy requirements, taxes, depletion, and intimately tied to world markets. security. He stressed the importance other factors. His point is that low of distinguishing between different Even if the USA does not become prices need not lead to a shortage of fuels. Shale gas is inexpensive in the independent of world oil markets, the production. USA and, consequently, the USA is reduction in imports from the Middle Mabro has always emphasized the now in a position to export this fuel East is changing US international importance of expected demand and and to use it for industrial markets policy. In particular, it facilitates the prices on investment. For instance, in such as petrochemicals. However, US ‘pivot’ towards Asia. In other his 2005 speech, he addressed the the USA still imports over 7 million b/d words, the USA can dedicate fewer question on everyone’s mind at the of crude oil and will continue to rely economic, political, and military time: whether prices of US$60–70/bbl on crude oil imports unless natural resources to the Middle East, leaving were sustainable. Prices at that level gas replaces signifi cant volumes of others to contribute more to ensuring were much higher than they had been. oil in the transport market, a view the security of oil and gas production 4 (The average WTI price in 1998 was espoused by Jaffe and Morse (who and transportation. Javier Solana has US$14.39; in 1999, US$19.31; in 2000, argue that 40 million b/d of the global argued in the Oxford Energy Forum that US$30.37; in 2001 and 2002, around 85 million b/d oil market is open to this creates a dilemma for China, which US$25/26; and in 2003, US$31.07. competition from natural gas).3 Mabro is now the main market for Middle East In 2004, it reached US$41.49 and in was especially sceptical of that view on oil and gas. If the USA dedicates fewer 2005 it reached a peak of US$69.85.5) the grounds that oil and gas are very resources to the Middle East, China will Mabro’s answer then was that it all imperfect substitutes, especially be obliged to dedicate more resources depended on the behaviour of world in transport. there, but by doing so they facilitate the US pivot into Asia. demand over the next four or fi ve Mabro also maintained that, even if years. If demand growth continued at imports fall from the Middle East, the 3.4 per cent per annum, prices would How do lower energy prices affect USA should still be concerned about rise to the range of US$90–100/bbl, investment and security? stability in that region and ensuring eventually choking off demand and oil and gas supply there. Reducing In our interview, Mabro emphasized world economic growth, leading to a US imports from that region does the difference between the current low sharp fall in prices. On the other hand, not make the USA more secure if the price of oil and how much rent there still if demand growth were much slower, alternative imports come from other is in the oil price. There is some very say 1.4 per cent per annum, non-OPEC countries that are ‘unfriendly’, such as low marginal cost oil in some areas, in production would rise faster than Russia and Venezuela. Furthermore, particular the Middle East. As long as demand and OPEC would have trouble even if the USA relied less on Middle that is the case, he argued, there would defending US$45–50/bbl. Either way, East oil, that region would continue always be investment. So low prices the conclusion appeared to be that it to be the low-cost oil producer this hurt oil producers and investment in would be diffi cult to defend prices at century and supply at least a third of high-cost areas, but that alone is not a US$60–70/bbl. the world’s crude oil. If supply in the reason to expect an oil shortage. Mabro’s views suggest that the region were curtailed for a sustained He also stressed that non-price issues relatively low prices we are currently period, world (and US) oil prices would are more important than most people experiencing ($50–60/bbl) are rise and threaten the health of the world think. For instance, the Saudis could consistent with continued investment economy on which the USA depends. produce 14 million b/d, but could and supply security, even if there is a I agree with Mabro that the USA is very survive with 4–5 million b/d; their level redistribution of oil supply to lower-cost unlikely to become a net exporter of of production is not determined solely regions. However, we need to interpret crude oil and that the USA exaggerates by prices. Indeed, production in most his message about expected oil the extent of its energy security. It is countries is a function of history (i.e. the demand in the context of the increasing of course conceivable that the USA, result of past investment decisions), as fl exibility of world oil supply. On the

OXFORD ENERGY FORUM 41 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

one hand, concerns over climate shortages. On the other hand, the for unconventional resources to come change could well lower oil producers’ growth of unconventional resources on stream. In effect, these fl exible forecasts of oil demand and prices in has introduced a new fl exibility on the resources are capping world oil prices 20 years, thereby reducing investment supply side. If shortages do appear while contributing to the security of and potentially creating oil supply and oil prices rise, it won’t take long world oil supply.

Notes 1 ‘Oil Security and Oil Prices: Implications for Asia’, by Robert Mabro, IEEJ Conference, Tokyo, 25 November 2005. http://eneken.ieej.or.jp/en/seminar/aef2005/Doc_Mabro_kityoukouen.pdf. 2 ‘China Boosts Buying For Oil Reserves Amid Drop in Global Prices’, an analysis by Michael Lelyveld, Radio Free Asia website, 26 January 2015. www.rfa.org/english/commentaries/energy_watch/oil-01262015105428.html (last consulted, 16 March, 2015). 3 ‘The End of OPEC’, Amy Myers Jaffe and Ed Morse, Foreign Policy, 16 October, 2013. http://foreignpolicy.com/2013/10/16/the-end-of-opec/. 4 ‘America’s Perilous Pivot’, Javier Solana, Oxford Energy Forum, 91, February 2013, page 3. 5 ‘Oil Security and Oil Prices: Implications for Asia’, op. cit.

European gas security in historical perspective Jonathan Stern

Nearly 30 years ago, Robert Mabro, In 2015 it is uncertain whether the most questions about the viability and timing on a rare excursion into European important security issues relate to gas of new infrastructure and the need for gas issues, wrote: ‘Gas trade in supply, demand, pricing, or fl ows. The new contracts. Europe also raises political issues. answer probably depends on which In this area a distinction must be region of Europe, and which part of the ‘OVERALL EUROPEAN DEMAND WILL NOT made between the risk of interruption value chain, is under consideration. RECOVER TO 2010 LEVELS UNTIL THE MID arising from disagreements about TO LATE 2020s.’ the implementation of contracts, and Security of supply – or demand? the risk of interruption arising from international hostilities. The former is a While all the discussion of European What are the alternatives to Russian gas? bargaining problem which is referred gas security in the press is about Thirty years ago Dutch production was to as political, although in reality the Russia and the ongoing Ukraine crisis, already close to its maximum, but the disagreements may be about economic gas market participants have many UK and Norwegian continental shelves clauses such as prices and volumes of other issues occupying their minds. were producing around one-third and exports. The latter is a problem which Preliminary data for 2014 show that one-quarter (respectively) of their may arise when the parties to a contract European gas demand fell 13 per cent eventual peak levels. Today we expect are in confl ict over issues unrelated to compared with the previous year; this 1 conventional gas production from the the gas trade.’ continues a decline which started in UK, Norway, the Netherlands, and What we face today in the Russia– 2009 and has reduced demand to the other continental European countries to Ukraine relationship is precisely a levels of the early 1990s. Many national decline by more than 100 Bcm/year (or combination of those elements. But markets have experienced double digit 40 per cent from 2013 levels) by 2030. we also face problems and conditions demand reductions with the power While the media is full of stories, both which could not have been remotely sector being a particular casualty: in positive and negative, about European foreseen in the mid-1980s. Thirty several countries, nearly new and highly shale gas, there is very little prospect years ago the major security issue effi cient gas-fi red generating capacity of signifi cant production over the next was whether and where Europe would has been mothballed, and some older decade – or probably over a much be able to secure suffi cient gas to stations scrapped. OIES projections longer time scale either. Much more meet demand – which had been suggest that overall European demand promising are the prospects for biogas rising steadily for a decade and would will not recover to 2010 levels until the production, despite the current need for continue to do so for another 20 years. mid to late 2020s. This raises diffi cult signifi cant subsidy.

42 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

As far as imports are concerned, ‘… AND BY 2014, HUB PRICING HAD pipe for South Stream, an additional Russia is the only major expansion BECOME DOMINANT IN NORTH-WEST AND very substantial Black Sea route, was source for pipeline gas. The situation CENTRAL EUROPE.’ about to be laid when it was cancelled in North Africa is not promising: Egypt due to uncertainty that EU regulation has switched from exporting pipeline would allow it to be built, and then to linked pricing in long-term contracts gas and LNG to becoming an LNG carry gas to Gazprom’s European cushioned customers against short- importer, Libyan exports are uncertain customers. The cancellation was term volatility, through averaging and due to ongoing political instability, and accompanied by an announcement that time lag mechanisms. But oil-linked the Algerian production and export the project would be replaced by pricing became untenable post 2008 outlook seems unlikely to improve Turkish Stream – a pipeline following an due to a combination of recession- in the wake of another relatively identical route for three-quarters of its induced demand decline, supply unsuccessful licensing round. In all length but with a landfall in Turkey surplus, oil price increases, (eventual) these countries, domestic demand is (rather than Bulgaria) which will deliver liberalization of gas transportation, and increasing rapidly, fuelled by subsidized gas to the Greek border, from where the emergence of market hubs. Gas prices which are proving diffi cult to Gazprom’s customers will be required became available at hubs at prices reform. The much-discussed Southern to arrange transport. that were 30–50 per cent below oil- Corridor will deliver a maximum of linked levels and by 2014, hub pricing 10 Bcm/year of gas starting at the end had become dominant in north-west The end of Russia/Ukraine sales and transit? of this decade, with the possibility of signifi cantly increasing that fi gure only and central Europe. In these markets, During the period up to 2020, the from the mid-2020s. conventional price risk-management European Commission will play an techniques have become the security important role in facilitating uninterrupted for larger customers, while smaller transit through Ukraine. Up to the end of LNG to the rescue? (residential/commercial) customers February 2015, both Ukraine and Europe The major prospects on the supply are protected from short-term volatility had got through the (relatively warm) side rest with LNG. European import by regulation in some countries and winter without any interruption of Russian terminals have been running at less retail competition in others (although gas, which in no small measure refl ected than 30 per cent capacity in recent in Britain the latter has become a the success of the 2014/15 ‘winter gas years, but with Asian demand growth controversial subject). package’ which the Commission had weakening and new supplies from negotiated with Moscow and Kiev. But Australia and the USA coming on Russia–Ukraine gas relations and gas fl ows Russian direct sales to Ukraine in 2014 stream over the next year, cargoes are fell to one-third of 2010 levels as To return to the Mabro distinction, the already returning to Europe. This will be ‘reverse fl ow’ deliveries, mostly 2006 and 2009 Russia–Ukraine gas good news for the next few years, but second-hand Russian gas (gas fl owing crises (which caused interruption of the post-Fukushima (2011–14) period from Russia to EU countries and then supplies to Europe) were mainly about demonstrated how quickly Europe back to Ukraine) increased. can lose LNG cargoes when Asian contractual, and specifi cally price, countries need them, and are willing disagreements. Events in 2014/15 are But just as elements of the Cold War to pay whatever price is necessary in also concerned with these issues, but in relationship between the Soviet Union order to secure them. the context of a complete breakdown in and Europe appear to be resurfacing, political relations, combined with military so a major element of Cold War gas hostilities in eastern Ukraine. Russia has fl ows – from Russia to Ukraine with Price security long taken the position that it is no onward transit to Europe – is likely to This brings us to the issue of pricing longer possible to rely on Ukraine for be phased out. Russia’s intention is and price security. Thirty years ago the transit of its gas to Europe. Volumes that when the transit contract between – with the exception of the UK where transiting through Ukraine to Gazprom’s the two countries expires at the end of the era of state ownership, with its customers have been progressively 2019, none of its exports to Europe combination of cost- and infl ation- reduced with the creation of alternative will be transported through Ukraine. related pricing, was just drawing to routes through Belarus (the Yamal How much of this plan is realistic from a close – oil product-linked pricing pipeline), the Black Sea (Blue Stream), a logistical, commercial, and regulatory dominated Europe and would do and the Baltic Sea (Nord Stream). perspective is uncertain, certainly so for the following 25 years. Oil- However, in December 2014 the fi rst prior to 2020. But signifi cant (albeit

OXFORD ENERGY FORUM 43 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

decreasing from 2017 when Turkish ‘RUSSIA/UKRAINE ISSUES SEEM LIKELY … but will there be demand to fi ll this new Stream is scheduled to commence TO DOMINATE EUROPEAN GAS … infrastructure? fl owing) volumes of Russian gas will SECURITY ISSUES IN THE 2010s.’ But at the same time as infrastructure continue to fl ow through Ukraine, at is evolving to accommodate greater least until the end of 2019, and the the exotic preserve of the few: in 1985 diversity, fl exibility, and market European Commission will probably three countries imported 13 Bcm of responsiveness, the fall in gas need to manage this relationship on a LNG; in 2013 nine countries imported demand casts doubt on the future of continuous basis. 43 Bcm and new terminals are opening the fuel in Europe – in contrast to the in the Baltic region hitherto dominated rest of the world which is recording Security infrastructure is being built and by Russian gas. Far greater strong demand growth. And ongoing new regulation is being introduced interconnection and two-way gas fl ows problems in the Russia–Ukraine between countries and national relationship, which continue to create Russia/Ukraine issues seem likely to transmission systems have been dictated dominate European gas (and perhaps by regulation and facilitated by EU security concerns in Europe, are general energy) security issues in the funds. A completely new commercial certainly not helping to promote a 2010s – just as concerns about Soviet EU gas transportation regime, recovery of gas demand. These are gas deliveries to Europe did in the governed by national and EU-wide developments that neither Mabro nor mid-1980s, although the context is network codes, is in the process of any other observer could possibly have different. In the 2010s, LNG is no longer being rolled out over the next few years. foreseen 30 years ago.

Note 1 ‘The Prospects for International Trade in Natural Gas’, in Mabro, R.(ed.), Natural Gas: An International Perspective – Oxford Seminar Proceedings, Oxford: OIES/OUP, 1986, page19.

The consumer–producer dialogue Walid Khadduri

Among the early energy research better understanding among the actors. public communication between OPEC subjects that Robert Mabro undertook Mabro’s thought were refl ected in a and the IEA at the time. was the producer–consumer dialogue paper,1 quotations from which appear Interest in Dialogue receded, but was – the topic that was at the top of the in this article. then revived by a joint France–Venezuela agenda during the late 1970s and early initiative which convened in Paris on 1980s. The markets were in turmoil at the ‘AMONG THE EARLY ENERGY RESEARCH 1 and 2 July 1991. The USA was time, lacking direction and vision as to SUBJECTS THAT ROBERT MABRO represented by a higher-level delegation how the new balance of powers between UNDERTOOK WAS THE PRODUCER– than had been the case at previous oil producers and consumers would turn CONSUMER DIALOGUE.’ out. Conferences among leading events. Although many at the time had given up hope of reaching successful producing and consuming countries ‘Producer–Consumer Dialogue’ was a results, Mabro set forth his views on the were held to no avail; delegates pursued subject much in demand at the time of an elusive agreement, while there was the establishment of the Oxford Institute meaning and worthiness of the Dialogue much misunderstanding between the for Energy Studies (OIES) in 1982. process, arguing that ‘ distinction two parties, along with signifi cant OPEC infl uence was rising at that time, needs to be made between dialogue differences of interest on which neither while the USA, led by National Security and a binding international agreement’. side was ready to compromise. Mabro Advisor Henry Kissinger, advocated He stressed that ‘the dialogue should had little, if any, interest in these formal the establishment of the International be conducted with an open mind and venues; he proposed instead the Energy Agency (IEA), an organization the aim of fi nding out whether multilateral importance of launching an informal representing the interests of industrial arrangements are relevant to the solution process, one which did not lead to any consuming states and countering of the problems at hand, not with the agreements, but which enhanced a OPEC infl uence. There was hardly any intention of negotiating from the start of

44 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

such an agreement’. Mabro envisioned How can the market be of assistance? Ways to establish better information the OIES and its activities as a venue for Mabro argues that the market ‘plays fl ows in investment. such an informal and ongoing dialogue; a very useful, yet imperfect, role in Review the issue of re-integration of the purpose being to advance knowledge allocating resources in the short run the oil industry in ways that publicize and foster a better understanding among but is unable to provide appropriate the many suspicions of both energy professionals through research price signals for investment decisions industrialized and oil-producing publications, lectures, or informal that infl uence the oil supply/demand countries regarding the intentions of discussions, rather than attempting to balance in the long run’. those who advocate access to their strike agreements among governments. Peculiar features surround the oil industrial sectors or resources. Mabro stressed the need for a ‘free market: a very low cost fl oor for crude The question of the oil price. thinking way’ of addressing the issues production, and a very high price ceiling What was the purpose of the oil producer/ which lie behind interest in a multilateral set by substitutes. He considers the approach towards energy problems; oil consumer dialogue? Is it to avert setting of a price level to be a ‘fairly emphasizing regional and bilateral excessive oil price instability, or gradually arbitrary affair’. This raises various strategies which are proposed by other to improve mutual understanding questions. Where does the market get parties as alternatives; and suggesting between the two groups? Mabro held guidance to set a price level? If it cannot an agenda for inter-governmental to the latter view, arguing that dialogue receive guidance from economics, discussions. helps in ‘removing certain psychological where should the price level be? barriers, dispelling some damaging Topics defi ned under the ‘Dialogue’ What should be done with the market? misconceptions and irrational fears’. He include: ‘oil price instability together According to Mabro: ‘Although nobody did not see the utility of a formal dialogue with its corollary, sharp variations in the should interfere with the market, other or of multilateral negotiations between revenues of developing and oil producing than removing imperfections, and leave sovereign states, since these are only countries’. Mabro distinguished two day-to-day movements entirely to its possible ‘when the parties on both sides types of instability: discontinuous and operations, the question arises as to signifi cant changes in oil price levels, of the exporter/importer divide each faces who should provide it with the signal as well as normal day-to-day market serious problems which they wish to about a desired price level?’ fl uctuations. He added that in the solve [adding that the] incentive to seek previous two decades (the 1970s and While Mabro does not at fi rst offer a a dialogue arises from the recognition 1980s) ‘oil prices moved from one to a viable/pragmatic answer to the question that agreed international measures may very different level on three occasions he raises, he proceeds to propose the ease these diffi culties and provide benefi ts as a result of shocks’. The causes of following areas as markers for market to both parties’. A few industrialized these shocks were either political developments: improvements to the countries expressed interest in a dialogue disturbances or economic behaviour fl ow of economic information necessary in the mid-1970s and in 1979–80 when (the investment cycle or aggressive for good investment decisions; OPEC appeared powerful – at these competition for market share), while provision of indicators to the market times the producers were not enthusiastic some were caused by both. (regarding a level around which prices for the idea. OPEC developed a strong interest in a dialogue in the 1980s, when Mabro believed that the effects of can fl uctuate freely in response to global oil markets glutted and prices fell, big shocks are ‘often very damaging. short-term economic forces). but the industrialized countries were They can cause economic recession Mabro proposed the following topics as unconcerned. in the world at large or destabilize agenda items for energy dialogue: oil-producing countries in the third The dialogue can no longer be limited Schemes involving both the creation world. [He observed that shocks] to ‘energy problems’ in terms of of a surplus capacity cushion in a due to political disturbances cannot investment cycles, supply disruptions, number of oil-exporting countries, be avoided by means of international and prices. Mabro proposed that and strategic stocks in a number of energy policy; shocks caused by recent concerns about the global oil-importing states. economic factors are avoidable; and environment should be added to the in both cases adverse effects can be Measures to improve the functioning agenda, as this is to the mutual benefi t signifi cantly mitigated.’ of the oil market. of both producers and consumers.

Note 1 ‘A Dialogue Between Oil Producers and Consumers: The Why and the How’, Robert Mabro, OIES, SP2, 1991.

OXFORD ENERGY FORUM 45 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

Robert Mabro and the consumer–producer dialogue Ian Skeet

Robert Mabro has always been a However, consumer–producer also individuals who were encouraging, realist. Maybe, if he had been brought relations have also, and more visibly, proposing, or pouring cold water on up in Beirut rather than Alexandria, he had a formal existence in offi cial and the whole idea of consumer–producer would have been a cynic. Anyway, by governmental circles. Indeed, they dialogue. 1969 he was, via SOAS, an economist are a continuing and integral process in Oxford, at St Antony’s. The later on almost every level on almost every Mabro’s paper promoting consumer– 1960s and the 1970s were, of course, subject of international concern. In the producer dialogue the years in which OPEC was at its context of energy, there have been peak of infl uence and energy, in its specifi c examples of attempts to create As might be expected, Mabro entered various manifestations, was at the a ‘Dialogue’ to achieve particular this debate and produced an OIES 1 forefront of public awareness. For an objectives – notably after the 1973 price paper on the subject in 1991. economist who happened to be fl uent takeover by OPEC and again in the late Quotations from this paper appear in in English, French, and Arabic, energy 1970s after the second bout of OPEC this article. was an obvious interest to cultivate. price increases. This paper offered a realistic, rather than an idealistic, programme for an This happened also to be the period ‘THE OIES … CAN ALSO BE SEEN AS AN attempt at Dialogue. Some elements in which Shell was developing, under EMBODIMENT OF CONSUMER–PRODUCER of the paper would, in part at least, Pierre Wack, its scenario planning. RELATIONS AND DIALOGUE.’ be relevant today – in the unlikely In 1973 the company was in the circumstance that anybody sought to position of needing to develop a I doubt that Mabro ever imagined reopen the debate, or even proposed better understanding of the thinking, that these offi cial Dialogue proposals such a thing, although the agenda aspirations, and motivations of oil would lead to any kind of agreement. would refl ect today’s problems producers, particularly those of the In reality, the intentions of both sides (whatever they might appear to be) Arabian Gulf – while Mabro lacked any – consumers and producers – were rather than those of 1991 which by now real understanding of the oil companies completely at odds. A majority of may seem embedded in history. and their objectives. So, in 1973, the consumers, led by the USA, was Shell Planning arranged for Mabro to The paper opened with a concise looking for a pricing system; the join them for a year and both parties statement about the necessary context producers were looking for a fi rmer benefi ted greatly. in which dialogue could be effective. position in the general international It says: ‘The need for a dialogue with trading and fi nancial system. The net a view to eventual agreement or co- OEPC, OES, OIES, and consumer–producer result of early negotiations was the operation between two parties arises relations formation of the IEA by the consumers without reference to the producers. when each of them faces problems Mabro’s experience with Shell enabled, Subsequently, the Conference on caused by the actions or policies of or at least greatly helped, him to International Economic Cooperation the other party, or both face common create the Oxford Institute for Energy (CIEC) experience covered everything problems caused by external factors; Studies (OIES) in 1982. The OIES, and achieved nothing. And OPEC while primarily a research institute, can and when there exists a belief that efforts to formulate its own Long Term also be seen, together with the Oxford these problems cannot be easily Strategy did nothing for the producers. solved (or that their effects cannot be Energy Policy Club (OEPC, established signifi cantly mitigated) by each party in 1976), and the Oxford Energy Apart from these heavily ambitious, acting on its own or through the Seminar (established in 1978), as an but practically fruitless, efforts at autonomous operation of market embodiment of consumer–producer governmental level to create some forces yielding rapid and relatively relations and dialogue. It has always sort of internationally workable set painless adjustments. been a centre in which both sides of policy guidelines or agreements, could meet, discuss, propose, and there were many voices in the energy In other words, there must be problems argue about their respective interests industry, producing companies, the for both parties (perhaps of a different on an informal and serious basis. academic profession, think tanks, and nature) that cause or threaten to

46 OXFORD ENERGY FORUM MAY 2015: ISSUE 100

produce signifi cant damages (perhaps in the market. The lack of consensus production levels (by the producers) to a different degree) to all of them. ... amongst consumers (in particular the and on stock levels and prices of When these conditions are satisfi ed, it difference in fundamental objectives market transactions (by the becomes legitimate, indeed rational, between the USA, Europe and, to a consumers/companies). for all parties to raise and attempt to lesser degree, Japan and the Far East) Discussion on the subject of explore the issue of co-operation.’ has always affected the international investment guidelines and potential scene strongly. It suggests the identifi cation of the – both for oil companies in the main features of the ‘oil problem’ as The paper concludes by suggesting upstream of producer countries and being either political or economic what the agenda might be for a useful for producer countries in the arising from: dialogue between oil producers and downstream of consuming countries. consumers. It makes the obvious (but civil commotion in the exporting The paper specifi cally excludes the not necessarily observed) point that a countries, international confl icts that environment as a subject for dialogue dialogue does not imply agreement, involve these countries and the – not because it was not of vital least of all a multilateral agreement importers, or regional confl icts; concern, but because in 1991 the issue between states. Dialogue is nothing was highly divisive and would have under-investment that threatens a but an exercise in exploration which price explosion; can lead to different types of discovery, guaranteed the failure of any dialogue that might be started. The paper is also a slack market that threatens a price or none. With this in mind, the paper collapse. suggests an agenda to include: cautious, to the point of ambivalence, about the general subject of price The design of schemes to fi nance the While the political aspects of the ‘oil level discussion. It accepts, however, holding of surplus capacity in the problem’ are generally distinct from somewhat unwillingly that price is producing countries, and strategic the economic, the effect of a sudden better avoided in the opening stages price increase or decrease can create stocks in the consuming countries. of any dialogue although ‘a permanent political instability for the producers The form in which exchange of taboo would be a fatal and unnecessary – the best example, perhaps, being information on investment, both by mistake’. the Iranian Revolution. The paper then countries and companies, could be concentrates on the nature of the oil usefully organized. No Dialogue took place then, nor has market, before returning to the political The form in which information could it since, but, of course, dialogue has questions that are inevitably intertwined be collated and published on always continued.

Note 1 ‘A Dialogue Between Oil Producers and Consumers: The Why and the How’, Robert Mabro, OIES, SP2, 1991.

OXFORD ENERGY FORUM 47 ROBERT MABRO: REFLECTIONS ON THE MAN AND HIS WORK

NEW OIES PUBLICATIONS

Recent Research Papers Key Determinants for the Future of The US Shale Gas Revolution and its Driving Forces of China’s Energy and Russian Oil Production and Exports Impact on Qatar’s Position in Emission Growths Between 2007 by James Henderson Gas Markets and 2010 – A Structural April 2015 OIES in collaboration with CGEP, Decomposition Analysis Columbia by Xin Li Gas Pricing Reform in India – March 2015 March 2015 Implications for the Indian gas landscape Evolution of Gas Pipeline A Brief Political Economy of Energy by Anupama Sen Regulation in Russia – Third Party Subsidies in the Middle East and April 2015 Access, Capacity Allocation and North Africa Transportation Tariffs by Bassam Fattouh and Laura El-Katiri US Coal Exports – The Long Road to by Katja Yafi mava February 2015 Asian Markets March 2015 by Sylvie Cornot-Gandolphe March 2015

Recent Energy Comments Europe’s ‘Energy Union’ Plan – A China – The ‘New Normal’ Reasonable Start to a Long Journey by Michal Meidan, Amrita Sen, and by David Buchan and Malcolm Keay Robert Campbell March 2015 February 2015

57 Woodstock Road Oxford OX2 6FA Direct Line: +44 (0)1865 889136 Reception: +44 (0)1865 311377 Fax: +44 (0)1865 310527 www.oxfordenergy.org

EDITOR: Bassam Fattouh CO-EDITOR: Laura El-Katiri Annual Subscription (four issues) £90.00 Oxford Energy Forum. ISSN 0959-7727. Published by Oxford Institute for Energy Studies, Registered Charity 286084. © Oxford Institute for Energy Studies, 2015.

48 OXFORD ENERGY FORUM