,9Ê",1 A QUARTERLY JOURNAL FOR DEBATING ENERGY ISSUES AND POLICIES CONTENTS Issue 64 February 2006 Economic Implications of the Oil Price Increase Roger Van Noorden Hassan Hakimian We are starting 2006 with a look at the way in which the high Walid Khadduri − page 3 current price of oil might affect our economic expectations and Environmental Issues how the oil producers are dealing with this sudden increase in their Malcolm Keay revenues. This will be a subject of particular interest to those of our Benito Müller − page 10 readers who can easily recall the experiences of the 1970s. We also have two articles dealing with aspects of environmental policy, one The Role of Technology in reducing E&P Costs that looks at the role of technology in reducing EP costs and one Mark Andersen − page 14 that looks at Gas Strategies for suppliers of the Atlantic Basin. The Strategies of non- Roger Van Noorden looks macro- syphoned off into stabilisation OECD Gas Producers economically at the oil price funds rather than being spent. Hadi Hallouche, Michael increase. He picks out three Nevertheless, the way in which Tamvakis and Bryan Train − apparent problems, sets out an the very extensive remainder is page 16 answer to each and then discusses spent is crucial. It is needed in Personal Commentary these answers. The three problems social expenditure generally rather Charles Henderson – page concern the United States’ trade than in the over-supplied military 19 deficit, the persistent budget investment. Youth unemploy- deficits of many Western econo- ment is the most acute challenge Asinus Muses − page 20 mies and the absence of inflation. for Middle East governments. Although all three have so far Inflation remains a threat, as do been under relative control and property and local stock exchange have not as yet upset international prices. The outlook remains un- economic balances he concludes certain. that we are not necessarily out of Walid Khadduri considers the situ- the wood. ation of the Arab oil producers, Hassan Hakimian looks at the particularly in their ability to ab- problem of managing the new sorb the new streams of revenue. wealth from the producers’ point One hopeful sign is the privatisa- of view and questions whether tion of state companies and public this time they can make a positive investment opportunities provided and lasting effect on their do- by family firms, although the mestic economies. He finds some national oil companies themselves evidence that this is so. One remain out of bounds. Another is hopeful sign is, for instance, that the policy focus on debt reduction some of the extra revenue is being and restructuring. While money OXFORD ENERGY FORUM FEBRUARY 2006 is for the most part being invested locally or with gas rather than oil reserves, those with regionally there is, however, a grave danger undeveloped gas reserves and those who are from stock market and property speculation, niche players. Their geographical location and and there is always the threat presented by the the extent of state involvement in their opera- ever-present problem of regional politics. tions are further elements in defining how best individual countries should develop their gas Looking to the environmental issues, Malcolm reserves. Keay raises the important question of how to measure progress. As he points out, govern- Lastly, the Personal Commentary in this issue ments are at present unable to measure outputs is by Charles Henderson who muses on the from policy decisions even though the desired nature of the so-called Gas Crisis in the UK, a outputs are easy enough to state. He gives the particularly appropriate subject in the light of examples of energy efficiency and renewables the more recent problems highlighted by the and shows how neither is subject to any mean- actions of Gazprom in Ukraine. ingful measurement. His message is brutal – if governments want to take climate change seri- ously they will have to start taking measure- Contributors to this issue ment issues seriously. A more enthusiastic message comes from MARK ANDERSEN is Executive Editor, Benito Müller in his report from the latest Schlumberger Oilfield Review, Houston ‘Kyoto’ meeting (working under the peculiar HASSAN HAKIMIAN is Associate Dean, Cass acronym of COP/MOP) in Montreal. First, Business School, City University, London the Marrakesh Accords were adopted; second, a compromise was reached on the question of HADI HALLOUCHE is at the Centre for Shipping, compliance with the Kyoto targets; third, the Trade and Finance, Cass Business School, City Clean Development Mechanism was improved; University, London and, finally, an agreement (of sorts) was reached CHARLES HENDERSON recently retired as on negotiations for a post-2012 regime. None Chairman of Total in the UK of this was certain before the delegates arrived. MALCOLM KEAY is Senior Research Fellow at the Turning to the capacity of technology to reduce Oxford Institute for Energy Studies E&P costs, Mark Andersen points out that WALID KHADDURI is Economic Editor of al- from 1981 to 2003 E&P costs reduced by two- Hayat newspaper thirds. Now they are rising, but he describes some of the ways in which technical develop- BENITO MÜLLER is Senior Research Fellow at ment has been able (and hopefully will continue the Oxford Institute for Energy Studies and to be able) to reduce these effects. Furthermore, Managing Director of Oxford Climate Policy some of these new developments are the result MICHAEL TAMVAKIS is at the Centre for Shipping, of research by the service companies, so that Trade and Finance, Cass Business School, City there is now good reason for a greater and University, London more willing cooperation between the oil and service companies. BRIAN TRAIN is at the Centre for Shipping, Trade and Finance, Cass Business School, City We also have an article by Hadi Hallouche, University, London Michael Tamvakis and Bryan Train on the strategies of non-OECD gas producers in the ROGER VAN NOORDEN is a Fellow in Economics Atlantic and Middle East. Their analysis leads at Hertford College, Oxford and a Governor them to define gas producers in terms of those of the Institute for Energy Studies 2 OXFORD ENERGY FORUM FEBRUARY 2006 Economic Implications of the Oil Price Increase Roger Van Noorden Domestic Product suggested by the other contrasts. In 1973 the North Sea Maastricht agreement. If a single Continental Shelf had not been devel- considers some country operated at this level it would oped, so there were not the benefits to have been under pressure to reduce offset the rise in the price of oil. The macroeconomic government spending, but the recent main difference, however, in the UK implications deliberate weakening of the Growth is that in the labour markets of the and Stability Pact suggests there 1970s union power and wage indexing Three Problems is safety in numbers. In Italy, for implied that price rises fed quickly example, which has had 20 percent into rises in earnings, and this second- While my undergraduates learn their more inflation than Germany since ary effect then had a major impact macroeconomic theory they are the Euro was established in 1999, a on prices. The wage indexation came encouraged to follow three real life conventional macroeconomic response from a particular form of incomes problems, as the statistics emerge would be a cut back in spending policy, the ‘threshold’ in operation month by month. The good students and a raising of taxation to induce a from November 1973 to November ask whether and how the three slowdown of the economy. With so 1974, whereby increases above 7 problems are connected. many countries in the same position percent in prices led to matching in- The first problem is why the dollar no collective pressure is being applied creases in wage rates. So far in the UK remains strong when the US trade to individual countries which can during this period of oil price rises deficit has just established a new promise to bring down their budget there has been no appreciable feeding monthly record of $68 billion. The deficits over a period of years. While through of energy prices to earnings. second is how so many Western it might be expected that interest rates This has been due in part to the lack economies function with persistent should rise in countries with persistent of pressure on the labour supply. Net government budget deficits of more budget deficits − so that governments immigration is running at 200,000 a than 3 percent of their Gross Domes- can induce private sector lending to year, and this is about the same as the tic Products. The third is to account cover their deficits − governments annual job creation. Earnings figures for the non-emergence of inflation, have in fact been fortunate in being are rising only at around 3.9 percent given the similarities between the cur- able to borrow at record low real per year − a level justified by adding rent rises in energy prices and those of interest rates. The nominal yields on productivity gains to the inflation 1973−74 and 1978−79. ten-year government bonds are below rate − and are not an independent 3.5 percent in the Euro area. source of inflation. In the Euro area The Immediate Answers as a whole wage inflation is likely to be gentle and price inflation subdued. There is an immediate and well That argument would however suggest understood answer to the first prob- “With so many countries that higher energy prices would have lem. Although the US current account a greater impact on the United States, deficit has risen to about 6 percent of in the same position no collective pressure is being where growth above 3 percent a year Gross Domestic Product, and there continues and the labour market is are also deficits in the UK and Eastern applied to individual tighter.