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OAPEC

The Organisation of Arab Petroleum Exporting Countries


News Bulletin


Vol. 2 No. II



November 1976


Published by the Information Dept., OAPEC, P.O. Box 20501, Kuwait.

EDITORIAL

The Developing Countries’ Balance of Payments Deficits Whose Responsability ?


The industrialized countries steadfastly carry on their campaign of disruption between the oil producers and other developing countries by emphazing that the payment problems which the latter encounter are caused by the price rise of petroleum.


It is obvious that such premeditated attempts, supported by a continued campaign of vilification, aim at creating disunity in the rank and file of developing countries. The ultimate purpose is a double one : to weaken negotiating power with developed countries and to prevent the developing countries from consolidating their ranks to organize their trade export of basic commodities.


Proponents of this campaign stress that the oil producers first caused huge balance of payments deficits in the developing countries and then did little or nothing to alleviate their financial burden.
Evidence of the deficit problem, however, dates back to the early fifties, when it was frequently a bone of contention between the developed and developing countries in the U.N. and many of its specialized agencies. With regard to the extent of aid given by the oil producers to developing countries, as corroborated by the published figures of the IBRD and other international organizations, it exceeds by for the assistance given by the industrialized countries in proportion to their respective GNPs.


The fact remains that the aid of the developed countries to developing is still 0.3 % of their GNP ; this inspite of the many U.N. resolutions adopted since 1960, with the start of the first development decade in 1970, to raise their assistance to 1 % of their GNP. The developed countries are thus shifting the blame for their failure on others. This being the case, the developing countries should persist in asking for better deals from the developed countries and urge an increase in aid contribution.

NEWS & INFORMATION


Meeting of OAPEC Executive Bureau


The Executive Bureau of the Organization of Arab Petroleum Exporting Countries held its 25th meeting October 17-18, 1976 at OAPEC head-quarters in Kuwait.

Discussion of the 1977 budget will be resumed at the Bureau’s forth-coming meeting in Kuwait on Nov. 20. Kuwait will also be the locale for the 17th meeting of the Council of Ministers on Nov. 23.

The Executive Bureau approved changes in certain laws and regulations regarding personnel.


Meeting of the Joint Arab Strategy Committee

Assistant Secretary General Dr. Fadhil Chalabi was a member of the committee which met to lay a strategy for joint Arab action. The meeting was sponsored by the Arab League and held Oct. 23 and 24 in Cairo.


Changes in APIC Board



The Board of Directors of the Arab Petroleum Investments Corporation, which is due to meet Nov. 16 and 17, has announced the following changes in its composition :

Mr. Mahfouz Zerouta was named the Algerian representative and elected vice-chairman of the Board.

Mr. Issa Abdullah Bou-Rashed was appointed as member for Bahrain ; while Mr. Ahmed Mansour was named as alternate member for the same country.




Recommendations of the Committee of Training Experts


The Committee of Experts on Manpower Training, which met at OAPEC head-quarters Oct. 3-7, has made a number of recommendations in connection with a study submitted by the OAPEC Secretariat on the establishment of an oil training institute and on criteria for selection of the institute’s premises.


The Committee, which consists of experts on manpower training and development from the member countries and the Organization, will submit its recommendations and a revised draft of the report to the next meeting

DOCUMENT

PERSPECTIVE ON THE PRICING OF OIL

OAPEC participated in the Energy Commission Meetings of the Conference on International Economic Cooperation held in Paris last April.

During discussions, the OAPEC delegation presented the following paper.



PAST


There is a broad consensus that the pre-1973 price of oil was low.
The reason it was low due two interdependent premises :

The first premise had to do with the improper concept of costs to be applied when evaluating an exhaustible raw material. The cost of production and capital charges for equipment in place were taken as the main indicators for the value of oil. Even today one comes across reference to the production cost of oil in certain regions of the world being cited as an indication that the price of oil is too high.

The second premise has to do with the concept of capacity of production.
Undue weight was given to the mechanical ability to pump oil from the ground in determining the capacity of production. A nil or even negative value was given to the oil underground in the form of the capital charge on the unutilized capital equipment in place. Commercial considerations designated a given life span to an oilfield, and oil was pumped irrespective of its price.

It was because of these two concepts that the world paid too little for oil, which, in turn, led to its inordinate use, and which today continues to obligate some oil exporters to produce oil in quantities exceeding their immediate requirements for fuel and capital so as to avoid world havoc.


FUTURE

The relevant cost which should concern the exporter of oil is the opportunity cost of keeping his oil underground. The cost of production and capital charges for equipment in place should be treated as overhead costs. The main cost of keeping oil underground is the forsaken opportunity to transfer an illiquid asset into more rapid economic development.


The opportunity cost of pumping oil is low if the possibility for transferring the liquid asset into concrete development above ground is not available.


The relevant concept of production capacity would subject production to criteria which emphasizes the developmental needs of the exporting country on the one hand, and the economic needs of the world for oil on the other. It would be folly for an oil producing country to allow the technological ability to pump oil from the ground to be the main determinant of the level of production. Oil is too important to be subjected purely to a return on investment considerations.


The pertinent economic price of oil sold as crude should equate the opportunity cost of producing the oil with that of preserving it under-ground. To arrive at such a price the following should be among the elements included :


1. An increment to compensate for the value added forsaken by the oil exporter who sells his oil as crude rather than refining it locally and selling it as products.


2. An increment to preserve oil for non-energy uses which would reflect value added forsaken by the exporter for not reserving for himself a wider use of oil as a raw material for developing a petrochemical-based industry.


3. An increment for forsaking the industrialization of the non-oil sector of the oil exporting country due to having forsaken the value added in numbers 1 and 2 above.

The increments in 1, 2 and 3 above should reflect the foregoing of :


a positive employment effect ;


a positive training effect ;


a positive productivity effect ; and


a resultant higher GNP effect.

In addition, a forsaken trade effect should be reflected, in that the products traded internationally would be of a higher value if industrialized in the country of origin.
This would raise global welfare through thr mechanism of comparative advantage, specialization and division of labor.


Finally, two more increments should be included :


4. An increment to meet the escalating costs of future industrialization. A closely connected problem is that of protecting the value of the net liquid monetary assets

of the countries producing oil at rates beyond their immediate needs for development capital. The suggestion that the price for oil should include an escalator clause tied to the price of imports is useful, but does not protect the monetary assets once received by the exporters of oil. The stability of the price of oil during the last two years in relation to the rising costs of industrial imports has means that the present real price of oil is lower than its level at the beginning of 1974. Such a loss in value of the monetary asset adds to the forsaken rise in labor productivity and growth in GNP.


5. An increment which would reflect an adequate depletion allowance for the oil-producing country. This increment would represent the replacement value for oil to the producing country, and would be related to :


a) the value inherent in the unique characteristics of oil ;


b) the speed with which alternative sources of energy and feedstocks for hydrocarbon products could come on stream ; and


c) the cost of transforming machinery to use alternative fuels and raw materials.

This increment, in other words, would be sensitive to the progress made in developing alternative sources of energy and materials.


COOPERATION


OAPEC as an organization is concerned with what oil is replaced by.
The most appropriate replacement would be the formation of an industrially developed society. To that end the Secretariat of OAPEC is continuously endeavoring to identify areas of complementarity between the oil sectors and the economies of its member countries. It is at this juncture that the proper incremental values for oil can be determined. This is where the Conference on International Economic Cooperation can be instrumental in laying the grounds for the necessary long term cooperation among the developed and developing nations. Such cooperation must be based on adequate realization of the costs involved, and if successful can contribute significantlt to raising the general standard of living of the wold as a whole.

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