OAPEC
Novembre 77

(November 1977)

The Impact of Energy Transition
On the Oil-Exporting Countries

by

Ali A. Attiga, Secretary General

Mr. Chairman, I am pleased to be able to participate in this important energy conference whose sponsors have taken the lead in promoting better understanding of the many national and international issues affecting the energy problems of today. Our Conference Chairman, Professor Ragel El Mallakh, has never spared any effort to persuade us in the oil exporting countries of the importance of this Annual International Energy Conference.

I think the International Research Center for Energy and Economic Development, under whose auspices the Conference was organized, is making a significant contribution to the concept of energy and economic development. Its semi-annual-journal, The Journal of Energy and Development.

Prepared for the Fourth International Energy Conference, University of Colorado, Boulder, Colorado, October 17-19, 1977. which deals with this highly complex and challenging subject, has attained a high level of professional competence. Thanks to the efforts of professor El-Mallakh, the journal is now widely known among specialists in the oil exporting countries.

Mr. Chairman, this Conference is convening only three weeks after the Tenth World Energy Conference, which I had the privilege to attend. Although the theme of that Conference was the availability and rational utilization of energy resources, its main deliberations were largely related to energy options and conservation, the theme of your Conference. But whether we refer to the theme as energy or energy crisis, it all comes down to the impending.

Shortage of conventional oil and gas during the energy transition to new sources of fuel. It is this shortage which greatly limits the world’s energy options, and which requires a careful examination of the place of oil in the energy transition process. In this regard, the OPEC member countries are to be credited for their wise decision to raise the price of oil at the end of 1973. Without their action, the world would have continued to consume about 7 billion tons of oil per annum, which would have depleted proven oil reserves within 15 to 20 years. But the increase in oil prices has not only given the world a longer "warm" period, it has also given rise to an intensive worldwide search for appropriate energy policies at the national and international levels. The study groups, research centers, books and jounals, national, regional and international conferences dealing with energy all are now too much for even the most energetic scholar to follow.

The impending energy crisis consits of highly complex technical, economic and socio-political problems obstructing the inevitable process of energy transition from oil to other sources of energy. But energy transition has characterized man’s quest for a higher standard of living through-out his recorded history ; why are we so alarmed then about the dangers of present-day energy transition ? Maybe the answer can be found in the fact that the major energy transitions of the past came about as a result of man’s invention of mechanical and electrical power, which replaced human and animal power during the industrial Recolution. The transition required the exploitation of fossil fuels, beginning with coal and later shifting to oil and gas for economic and technical reasons. Although these transitions were voluntary, today’s energy transition has been forced upon the world because of the impending shortage of oil.

At the turn of the century, coal provided about 90 % of primary energy input. By 1960, its contribution and dropped to 34 % (excluding the U.S.S.R. , China and Eastern Europe), and at present its share is about 20 %. Oil, on the other hand, began to make a major contribution after World War II, with the discovery of significant deposits in the Middle East, and particularlu in the Arab world. Throughout the fifties and sixties, the rapid increase in energy demand wzs met by oil and gas which today provide about 70 percent of the world’s primary energy. Of course, this does nat take into account the energy self-sufficient countries, the U.S.S.R. , China and some of Eastern Europe.

The energy transition from coal to oil represented a shift from low grade, less convenient sources of energy ti high quality, more efficient fuels. Normal market forces and technological developments were highly responsive to this kind of transition, but its basic support came from the oil reserves of the Middle East and North Africa.

Yet, even that transition required a deliberate pricing policy. The international oil industry, induced by the strategy of the Marshall Plan for the reconstruction of Western Europe, followzd a policy of cheap oil, taking full advantage of the profilic oilfields of the middle East and the highly favorable terms of its concession agreements. This pricing policy eccelerated the transition from coal to oil throughout the world but especially in Western Europe, Japan and United-States. At the same time, the oil industry was making sufficient profit to induce further exploration, which led to significant oil discoveries during the fifties and sixties. These discoveries in turn depressed oil prices further.

The decrease in nominal oil prices, and the impact of continuous inflation in the industrialized countries, greatly aggravated the fiscal problems of the oil exporting countries. Their only means to obtain more revenue to meet their consumption and development needs was through higher oil production. This then led to improve their return per barrel under the terms of th Jakarta Agreement of 1965. Even after that Agreement, oil prices were still too low to induce any significant reduction in the process of energy transition from coal to oil. The result was the continued wasteful depletion of scarce oil resouces.

Undoubtedly, the price of the cheap oil policy pursued by the industrially advanced countries was fully paid by the oil exporting countries in terms of the rapid depletion of their most important resource base. At the same time, rheir limited earnings from oil exports and their relatively low state of development left them wothout the necessary capital and knowhow required for their socio-economic growth. On the other hand, the indutrially advanced countries benefited greatly from the cheap oil policy through rapid economic development and the conservation of their local energy resources, particularly coal. In this sense, the losses of the oil exporting countries were the gains of the oil-importing industrialized countries.

Yet, if this situation is seen in a global perspective, and in terms of future dimensions, it is easy to argue that the cheap oil policy has resulted in serious losses for the world at large. These losses can be measured in terms of wasteful uses of essential but highly scarce hydrocarbons, excessive delays in the search for new souces of energy and the prolonged economic stagnation in the oil exporting countries, whose economies are heavily dependent on the export of crude oil. Even the oil importing countries, not with standing their gains from cheap oil, are now faced with high risks resulting from their heavy dependence on the importation of oil and gas.

To leave the past requieres that we examine the present stage of energy transition and its global prospects during the next 40 yo 50 years. I am confident that other participants, more qualified than I, will help us better understand the challenges which face us all. It is already quite clear that our options are limited. the expected shortage of oil and gas requires rapid development of other sources of energy to meet expected demand in the advanced and the developing countries during the next 30 yo 50 years. The objective of the present-day energy transition is to move from depletable energy resources to sources with more abundant supplies and ultimately to renewable energy sources.

Oil and gas contitute the cornerstone of present-day energy supplies, while coal and nuclear power provide the greatest promise as transitional fuels that may bridge the energy gap arising from the expected exhaustion of conventional hydrocarbons and the time required to develop renewable energy sources such as solar energy, the fast breeder reactor and nuclear fusion. These and other less important sources of energy, such as geothermal, wind and tidal wave power, hold great promise for the world’s energy requirements during the next century, provided sufficient planning and investment are made between now and the end of the century.

Bowever, for the period before the next century, the critical question is : Will there be sufficient oil to supply the energy needs that cannot be met by coal and nuclear power and other sources of energy ?

Judging from many recent forecats made by various national, regional and international authorities, the most likely answer to this question is no. Let us assume this to be the case, then what can be done to prolong the life span of oil resources in order to promote a smooth energy transition to new renewable sources ? It is obvious that whatever options are taken in this regard, there will always be the need for reducing the rate of demand for oil, increasing its supply, and promoting substitution of coal and nuclear power for oil wherever possible.

Fortunately, there is considerable margin for reducing the rate of demand for oil through proper conservation measures in which high oil prices can play a decisive role. The role of adequate oil precing became evident after yhe price adjustment brought about considerable restraint in the use of oil and gas. It also induced a more intensive search for oil in many parts of the world and was responsable for more investment in enhanced oil recovery and the utilization of associated gas.

The conservation Commission of the World Energy Conference recently conducted a Delphi Poll which revealed that, to the best judgment of many experts, the ultimate recoverable oil resources in the world total about 260 billion tons, excluding sources considered to be unconventional, such

as from deep offshore areas and the polar regions. If these are included, the estimate rises to about 300 billion tons. This figure is three times the estimate of proven reserves and is based on the realization of ambitious exploration and anhanced recovery targets, with the rate of recovery expected to rise from 25 % et present to 40 % of oil in place. In this estimate, the OPEC countries have about 65 % of proven reseves and more than 50% of ultimate recoverable ressources. They also have the greatest potential for the export of natural gas for the remainder of this century.

All this points to the need for greater research and investment in exploration and enhanced recovery in the OPEC countries. I strongly believe that this area offers the greatets promise for increasing the world’s hydrocarbon ressources. But its will require, among other things, considerable cooperation between the oil exporting and importing countries in which capital, technology and expertise will have tobe mobilized for common benefit of all participants, including the less developed countries. In view of the great promise this energy option holds, it is regretful that little or no progress has been archieved along this line. Perhaps the main contribution the Conference can make is by focusing attention on the reasons for this distressing failure and by ouylining the necessary conditions for success in this field.

It is the considered opinion of many experts that continued lack of progress in this area would mean the greater waste of scarce exploration resources in marginal and highly expensive areas, with rather low probability of finding significant deposits. On the other, OPEC countries have the greatest potential for adding to known reserves through new discoveries and anhanced recovery.

Another way to increase oil and gas supplies in the medium and long terms is through the exploitation of oil shale, tar sands, coal and biomass, but at investment costs of $ 25 per b/d. Such high cost figures, which do not include profits, royalties or state tax, give an indication of how low oil and gas prices are today. If these lowe prices continue for long, the world would run the risk of exhausting its proven oil reserves while losing the necessary incentive for developing the more expensive and unconventional souces of hydrocarbons. The same situation applies to the development of alternative souces of enrgy, particularly coal and nuclear power.

The Conservation Commission of the World Energy Conference in its report on coal resources for the period 1985 -2020 states the following :

" At present, the main problem seems to bethat potential markets for col rd not yet sufficiently being developed, since other energy sources ar stll plendiful and offered at low prices. This leads to a lack of willingness on the part of potential

investors to commit themselves for the development of coal ". Conservation Commission of the World Energy Conference, Report on Coal Resources, Executive Summary (1977), p. 3.

This rather iùportant conclusion of the Conservation Commission points to the urgent need for proper oil conservation and pricing policies in both the oil exporting and oil importing countries. For the former group of countries, such policies should be based on a balancing of their production programs with actual world consumption, based on competitive prices calculated according to the replacement costs of alternative sources of energy and taking into account the unique advantages of conventional hydrocarbons. It is no exggeration to state that without faithful adherence to such policies in both groups of countries it would not be possible to achieve any significant conservation in the use of oil resources or the consumption of energy in general. In a recent report published by the Working Group on Alternative Energy Strategies (WAES), it is stated that :

" Energy conservation is generally not limited by technology, but it is limited by economic factors. For rxemple, consumer preferences for home insulation and more efficient automobiles and appliances are influenced by energy prices, and not by technology. Even heat pumps involve relatively simple and known technologies. This is a significant advantage in view of the technical and economic uncertainties surrounding many energy opttions ". Massachusetts Institute of Technology, Energy : Global prospects 1985-2000 (New York : Mc Graw Hill, 1977) pp. 108-109.

All this substantiates the wisdom of emphasizing oil and energy conservation. Oil exporters and importers satand to benefit from more effective oil conservation measures since such measures would help both, groups of countries to reduce their heavy dependence on oil. Conservation would prolong the life span of oil and gas and would promote a smoother transition from oil to other sources of energy, especially coal and nuclear power. It can also help to save oil and gas for specific uses in transportation and as feedstocks in petrochemical, for which no substitutes are available in the foreseeable future.

While oil and energy conservation are in the interest of both oil exporting and importing countries, it does not represent a policy option for the developing countries as a group. Although they contitute about 60 % of the world’s population, their energy consumption is no more than 15 % of global energy demand. As their economies are at a low state of development, their rate of economic growth should be much higher than is the

case in the more advanced countries. Also, their energy co-efficient (ratio of energy consumption to rate of growth in GNP) is greater than one, which would mean higher rates of energy consumption per unit growth in GNP than is the case in the more developed countries.

For the developing countries as a group, the main energy options lie in their development of indigenous energy resources, the promotion of regional economic cooperation and integration amog themselves, and greater economic and technical assistance from the more developed countries. The OPEC countries, being members of the less developed group, have been quick to respond to the needs of oil importing countries through various bilateral arrangements as well as through international funds. Lately, OPEC has etablisshed the Special Fund for the purpose os assisting energy-importing developing countries. As a percentage contributed by the more advanced countries. But if oil prices do not keep pace with world inflation, and if the cost of their development projects continues to increase, it is very doubtful that they would be able to maintain this high level of assistance. At present, nine out of the 13 member countries of OPEC are net borrowers for their own development and defense needs. They cannot be expected to contribute more to international aid without further cooperation from the more advance countries that possess renewable wealth ; advanced technomogy and are richly endowed with conventional and unconventionalsources of energy.

Mr. Chairman, the oil exporting and importing countries are heavily dependent on crude oil and gas for their economic development. Such heavy dependence on oil and gas places the OPEC countries in a rather difficult position. Domestically, they are faced with pressing economic and social problems, some of which were either created or aggravated by the predominance of the oil sector in their economies. Internationally, they have had to deal with highly advanced and regoinally, organized oil consumers that constitute the most powerful economic and political bloc the world has ewer known. Most, if not all, western specialists and commentators omit or minimize these critical aspects of the present-dau relationship between oil producers and consumers. Also, they exaggerate the recent monetary gains of oil exporting countries and erroneously attribute cartel features to OPEC, while presenting the powerful, industrialized and highly organized oil consumers as poor victims of the manipulation of oil prices.

In fact it is the oil-importing industrialized countries that have the power to make important decisions. This is reflected in their global energy programs and forecasts based on their energy options and policy assumptions regarding their own economic growth and strategic objectives. In all this it is generally essumed that the response of the oil exporting

countries and other less developed countries will follow a predictable pattern, consistant with the objectives of the major oil importing countries.

In the recent past, the oil exporting countries have occupied a rather peripheral place in the decision-meking circles of energy strategists. Yet, it is these countries which are presently suppliying the world with its major source of energy and which will continue to do so for the foresseeable future. Several of them are producing oil at levels much higher than is required by their domestic needs for consumption and investments. In doing so, they are risking the rapid depletion of their oil resources. On the other hand, what kinds of energy options would develop if some OPEC countries follow production policies sonsistent with their absorptive capacities for capital and the need for conservation of their vital oil resources ? Is it reasonable to expect these countries to continue the presently high rate of oil exploitation in spite of the declining reserve-production ratios of their oilfields ? To assume that this will happen is to conclude that the oil exporting countries will once again bear the full burden of the energy transition from oil to other sources of energy. If they continue a high level of oil production they would rapdly deplete their oil resources and risk much of their financial savings in the turbulent currents of world money markets. Worst of all, perhaps, is the prospect that the oil exporting countries may face the next century with no oil, no capital and no alternative sources of energy.

In order to avoid a dismal future, the oil exporting countries have to balance their investment needs for healthy economic and social development with the need for the conservation of their oil resources. Such a policy wouls also promote the conservation programs of the oil importing countries by removing the present glut in the oil market, and thereby forcing implementation of the best possible energy options now, not in 1985 or later when it may be too late.

For the oil importing countries, energy options involve the diversification of energy sources, and energy conservation consists of a more rational use of energy higher thermal efficiency in the use of primary energy. For the oil exporting countries, the major policy options are concerned with the diversification of their national aconomies, and energy conservation means the developmnet and proper use of their hydrocarbons resources for as long as possible. Obviously, energy diversification and energy conservation in the oil importing countries would greatly reduce the pressure on the exploitation of the limited oil ressources of OPEC countries. Similarily, sound economic development in these countries combined with conservation exploitation of their finite oil deposits would reduce the heavy dependence of oil importing countries on oil for primary fuel. This would help save scare oil and gas resources for essential uses in transportation and petrochemicals.

In order to archieve these promising and mutually beneficial objectives, there is need for greater cooperation from the oil importing industrialized countries. They can take the lead in establishing new relation-ships between them and the less developed countries. Wide application of modern technomogy, removal of trade and technology barriers, improvement in terms of trade for the less developed countries and the promotion of regional cooperation are some of the essentiel elements of this kind of relationship. Global energy supplies and energy markets can play a vital role in this regard, but they must be seen as an integral part of an overall international economic order in which the much neglectes interests of the less developed countries are adequately protected.

I hope this Conference will help us better understand the reasons for our past failures and the prospects for our common future.

Thank You.