OPEC : Dependence is a two-way street

Dependence is a two-way street

OPEC Bulletin Commentary April 2007

Recently, leaders from consuming countries have spoken at length about the ills of oil dependence and the need for increased energy security. By this, they mean the need to secure abundant, uninterrupted supplies of affordable oil. The loudest calls for increased energy security and an end to oil dependency have come from the United States, which is not surprising given that US citizens consume one quarter of the world’s energy. According to the US Department of Energy (DoE), 40 per cent of this energy demand and over 99 per cent of transportation fuel needs are met by oil. Over 50 per cent of this oil is imported. As the DoE states candidly on its website, “oil is the lifeblood of America’s economy”. In the US and some other key consuming countries, the fear that supplies of oil might be interrupted is the main reason why governments have decided to support the development of alternatives, such as solar and wind power, nuclear energy and biofuels.

What the leaders and opinion makers of consuming countries seem to have overlooked in their frenzied search for energy security is that producing countries need security of demand since they too are dependent on oil. Maybe even more than they are. Producers need the revenue that oil exports bring in: in OPEC Member Countries, for example, oil accounted for 73 per cent of total exports in 2005. In some of these countries, the percentage was much higher: 95 per cent in Kuwait, 98 per cent in Nigeria and 99 per cent in Libya. In most of these countries, oil revenues are used to fund educational and health programmes, as well as to build crucial civil and communications infrastructure. Given this dependence, it would hinder, not bolster, their interests to withhold oil from world markets and to drive prices up so high as to hurt the global economy.

OPEC is committed to supporting oil market stability, a commitment that is built “upon the fundamental recognition that extreme price levels, whether too high or too low, are damaging for both producers and consumers”. As it has done since it was established in 1960, the Organization will continue to work towards ensuring uninterrupted supplies to consumers at reasonable prices. But in the light of recent developments regarding the stated move away from traditional fossil fuels — and oil in particular — OPEC Member Countries feel that they ought to review their future expansion plans. It would, in fact, make no sense for them to spend money unnecessarily on building or improving facilities when their customers are telling them they intend to minimize dependence on OPEC supplies.

The way forward is through increased cooperation and transparency, particularly with regards to data on demand. If consumers are clearer about their intentions, producers will be better equipped to meet current and future needs without disruptions. At the same time, greater transparency will also help them gauge how much capital should be invested in upstream activities to avoid plants remaining idle or over-producing.

This Commentary is taken from the April 2007 edition of the OPEC Bulletin, which can be downloaded free of charge in PDF format from the OPEC website.

OPEC Bulletin (April 2007)

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