OAPEC August 77

In dealing with the increasingly complex and rather unpopular subject of oil conservation , it may be useful to begin with the present and expected price of oil .

During the last four years , much was said and written about the negative aspects of the sudden price adjustment which took place in October and December 1973 . These aspects have been articulated time and again , and more often exaggerated by journalists , politicians and even specialists from the oil-consuming industrialized countries . Practically all the ills of the economies of these countries , including their normal business cycles, were attributed to the increase in oil prices . Many forecasts were made to the effect that the advanced countries will witness the dowfall of their civilization , unless oil prices were lowered to five or dollars a barrel.

However , now that the strom has subsided and the gloomy forecasts have not materialized , it is desirable to examine the positive aspects of the increase in oil exporting countries .

In a general way , it can be argued that had it not been for the increase in oil prices in 1973 , the world would exhaust its known reserves of oil before the end of this century without having had the economic incentives to utilize even associated naturel gas , or develop alternative sources of energy . This indicate that the survival of modern civilization has more to do with the physical availability of energy sources (for the present mainly hydrocarbons) than with low oil prices .

More specifically , the 1973 increase in oil prices has brought about the following positive developments with regard to conservation :

1. Reduction in the wasteful uses of oil and the promotion of higher efficiency in energy utilization .

2. The promotion of investments in various oil-recouvery methode in the traditional oil-producing areas , as well as more investments in marginal fields and high cost areas such as the North Sea and Alaska oilfields . The same can be said for the exploitation of coal mines .

3. The promotion of investment in the utilization of associated gas in OPEC countries which prior to October 1973 had to be largely flared for lack of a commercial alternative . The great consrvation significance of the this additional clean and efficient source of energy needs no explanation .

4. The promotion of investment in the development of alternative sources of energy .

These positive developments arising from the 1973 increase in the price of oil would indicate that high oil prices are essential for effective conservation ploicies in the both producing and consuming countries . This would imply that both OPEC and OECD member countries should cooperate in the field of oil conservation . At the same time they should promote more efficient exploitation of existing oil and gas reservoirs as well as more exploration in OPEC countries . Such an approach could change the nature of the existing conflict of interests between producers and consumers regaring the level of oil prices , by making both groups turn their attention and resources to their common long-term interest in prolonging the life span of the world’s depletable oil resources .

The this connection , it is reserves of Mideast OPEC countries would be exhausted in thirty or forty years at most . Even with the very optimistic assumption that during this period science and technology will overcome the many physical , environmental and economic obstacles facing the development of alternative sources of energy , there would still be essential energy and non-energy uses of oil for which , as yet , there are no know substitutes (transportation and petrochemicals ) . Is it not necessary therefore to conserve our scare oil resources for these essential uses , by making them too expensive to burn for ordinary energy consumption ?

Again I believe that such a policy would be in the long-term interests of both consuming countries de not subcribe to for the sake of argument , the consuming countries de not subscribe to such an approach , then what schould be the position of oil-exporting countries ? Should they simply produce what the market will take , or should they seek to balance their various national needs and development priorities in
such a way as to make the most efficient use of their oil resources ?

Although most oil-exporting countries have not yet articulated their national conservation policies , I would guess that n sooner or later , they would to follow the second approach . In fact , as far as the technical aspects of conservation are concerned , oil exporters have already adopted regulations conserning efficient reservoir management , largely based on OPEC recommendations made in 1968 . There is now greater awareness of this aspect of consrvation , and with the increasing number of nationals trained in this field we can expect more progress in efficient conservation techniques . Both OPEC and OAPEC are advocating greater cooperation among their members in this field. But, since the basic technology in this area is largely controlled by companies and institutions belonging to the consuming countries , it is desirable to organize joint efforts aimed at maximizing the percentage of recouverable oil from existing oilfield in OPEC countries . The benefits arising from such cooperation for both groups need not be discussed here , but it may useful to consider such an approach in a global conservation policy .

Having made these generalizations concerning the common interests of oil exporting and importing countries , it may be useful to consides the more immediate question of prudent conservation policies by oil exporters . While we all know that there are great variations in the resources , needs and development potentials of oil-exporting countries , I cannot escape the need to make some further generalizations .

First , I would divide the OPEC membre countries into two groups . One group of countries , all of whom are members of OAPEC , follow a policy of producing more than their needs for consumption and domestic investments . One member of this group , whith its large reserves , often states that it can easily manage with only one-third of its present level of production , if it were to follow a stricty narrow nationalistic policy . Other membres of tje group can , if they so decide , manage their affairs with only half their present level of production , even if we assume a constant level of present oil prices . Thus group of exporters , by choosing nearly one third of present OPEC production or about forty percent of OECD net imports in 1975 .

The other group of OPEC countries , which include significant oil exporters such as Iran , Venezuela , Nigeria and Algeria , although able to absorb their presently high level of production , are generally faced with declining reserves and may have to reduce their production in the interest of good reservoir management . In addition to these tevhnical limitations , there are some observers in these countries who advocate more gradual development policies with the object of reducing oil production in the interest of conservation . Thus , even this group of

countries have the policy option of greatly reducing their expenditure in favor of more prudent conservation policies . Moreover , the considerable potential for economic development in these countries will , in any case , greatly increase their energy requirements for domestic consumption , thereby reducing their net exports .

Suppose that both OPEC groups of countries decide to follow conservation policies based on their productive needs rather tham the physical concept of production capacity , then would be interesting to investigate what adjustments would have to take place in order to accommdate such a basic change of policies .

On the other hand , if we conclude that it is highly dangerous for the consuming countries to be faced with such a grave situation , then what action can comsuming countries take to induce oil exportes to continue their high level of production , especially as it applies to the first group ? Can such action be effectively accomplished through confontation ? Or is it more likely to succeed though cooperation with the producers in such areas as greater exploration efforts in OPEC countries , more stable and hospitable climate for long-term equity investments of oil revenues , freater interdependence in the development of the domestic economies of oil producers , including diversification of their resource base , the industrialization of their oil sector and the developement of alternative sources of energy ?

The present level of oil production in OPEC countries would indicate that , as yet , they are not giving conservation high priority in their national policies . Complicated regional and national politics , ambitious development targets and defense spending have so far limited their conservation policies to a set of technical principles governing reservoir management techniques . Whith very few exceptions , the social and economic aspects of oil conservation have not so far been seriously taken into account in their policy formulations .

Having said this ; however , does not mean that this situation will continue forever . On the contrary , it is very likely that oil-exporting countries will soon have to turn their attention to conservation policies as they watch the high rate of depletion of their most important resource base . Whein they do that it is invetable that they will substantially reduce their production targets , unless significant new oilfields are discovered in their areas . But such discoveries can come about only through more intensive exploration efforts. Unfortunateky , such efforts are not in much evidence . Instead , attention is largely turned to exploration in very expensive areas with very limited results. Yet specialists tell us that the chances of more productive investments in OPEC countries are far greater than in these so-called politically safe areas . In this

connection , it can be argued that OPEC oil is politically safe , provided that the consuming countries follow a policy of long-term inderdependence with the oil producers .