Energy Dialogue: Talking Oil

Rising oil prices and the dangers of climate change drove the debate over energy security at the 4th Energy Dialogue between the European Union (EU) and the Organisation of the Petroleum Exporting Countries (OPEC) in mid-June in Vienna.

Both sides seemed willing to adjust: The EU came prepared with a proposal for a new Energy Policy. And the heightened awareness of the need for security of demand as well as supply combined to ease fears and keep both parties at the negotiating table.

"The series of dialogues OPEC has initiated with consumers reflects the common desire to work in tandem," said Dr. Karin Kneissl, an independent energy analyst. "The interdependence between consumers and producers should theoretically result in more co-operation."

OPEC statements appear to confirm this view.

"We are a friendly organisation," said Abdullah Al-Badri, the Secretary General of OPEC, in June prior to the conference. And he explained that the organisation has undertaken persistent and active attention to climate change; nevertheless, security of demand is essential to ensure the stability of the global economy.

Security of supply is an issue for consumer countries, and in Europe there is growing concern whether OPEC will be able to expand output to meet expected growth. At the same time, oil producing countries - most of which depend heavily on oil revenues - want at least approximate figures of worldwide demand of oil for the next 10 to 15 years.

With oil prices at nearly U.S. $70 a barrel and increasing demand further pushing prices up, the EU is applying key policy initiatives that include increasing the use of fuel efficient vehicles, better labeling of appliances, improved standards for insulation, and a redoubled effort to negotiate a new international agreement on energy efficiency. One of the most important external EU energy policies is enhancing relations with external energy suppliers.

But for OPEC to deliver the world’s demand of oil, negotiators stress the need to know what the medium-term demand for oil will be.

Some of the pressure on prices is coming from emerging economies. With the increasing strength of China’s  economy in 2004, for example, oil prices jumped from U.S.$28 a barrel in 2003 to $50, making it the second largest oil consumer in the world after the U.S.

The same applies to India; and economic growth simply means more automobiles, factories, and more demand for oil.

Another factor is the shortage of refinery capacity, admitted OPEC’s Monthly Oil Market Report in July. "Every refinery would like to run as much crude as possible, but they simply can’t," agreed David Greely a senior energy  economist at Goldman Sachs in an interview with The New York Times.

As OPEC used  oil as political leverage in the 70s, geopolitics still continue to play a role in the prices of oil today. Most of the world’s oil reserves are concentrated in the Middle East, and the seemingly endless war in Iraq and other conflicts in the region increase pressures to find other energy sources.

OPEC is scheduled to reconvene on Sept. 11 in Vienna, although an increase in production remains unpredictable.

"If we are convinced from the figures that we will get from different organizations here and in the States, that there is a drawdown in the stocks, then there is a shortage in the market, of course OPEC will react," Al-Badri said at the Reuters Global Energy Summit in London in June.

Observers predict that oil prices will continue to rise as long as the current global situation doesn’t change. However, OPEC appears optimistic.

"There is no shortage as far as crude is concerned," Al-Badri explained at the Summit. "I don’t think the price will go up to U.S.$80. There are no fundamental problems in the market."

Nevertheless there have been recent predictions that growth will slow in China and India in response to tightening monetary policies, according to OPEC’s recent Oil Market Outlook.

Dr. Kneissl, however, remains skeptical about concrete results because of the lack of a common voice among European countries when it comes to dealing with the world.

"We have to bear in mind that the EU does not dispose a common foreign policy and consequently cannot agree on a common energy policy, in particular when it comes to external relations and energy," she said. "Such a dialogue serves certainly for a nice exchange of views and may even lead to common research. However, it is doubtful whether it can yield results beyond that."