There are few high-visibility people in the world whose words can-and often do-move markets. Alan Greenspan, chairman of the U.S. Federal Reserve Board, is one. OPEC secretary general Ali Rodriguez-Araque is another. Traders, investors, producers and reporters hang on his every word. Indeed, on February 25 on the New York Mercantile Exchange, oil for April delivery fell 3% or 59 cents a barrel after Rodriguez warned that if Russia doesn't adhere to its promised production cuts through the second quarter, prices will suffer. Then on February 28, he said OPEC would not increase production later this year, but rather, will maintain its current output quota of 21.7 million barrels per day. Oil immediately rose 60 cents to a four-month high. Can there be a more challenging job description than to manage oil production and prices on a global scale? Yet that falls to the 11 members of the Organization of Petroleum Exporting Countries, which supply 40% of daily world output. From OPEC headquarters in Vienna, the soft-spoken, professorial Rodriguez is the group's most public spokesman and negotiator, constantly traveling the time zones to meet with producers, consumers and governments. It's no easy job. In 2001 oil prices fell 26% and OPEC reduced its oil production quota three times, yet the slide in prices continued in the wake of a worsening global economy that threw several countries, including the U.S., the world's largest oil consumer, into recession. A speech in New York in January sums up OPEC's view. Rodriguez said, "...Boom-bust cycles serve no one's interest. Price stability, and the necessary cooperation to achieve it, is really the only way forward. Only stable prices produce sufficient investment to create enough supply...." With no rescue in sight, and fears of oil sliding as low as $10 per barrel, OPEC changed tactics. No longer was market share the objective; it was to stabilize the price. OPEC declared it would cut output by 1.5 million more barrels a day-but in a landmark move, it made that reduction contingent on key non-OPEC producers agreeing to contribute to the overall cut. Russia, Norway, Mexico, Oman and Angola were asked to share the pain by cutting an aggregate 500,000 barrels a day of their production. Globetrotting and posturing through the media ensued. This high-stakes poker game briefly left the oil world holding its breath until Russia, which balked at first, agreed somewhat half-heartedly to the scheme. In the end, these non-OPEC producers agreed to cut 462,500 barrels a day from New Year's Day. At press time, it was clear that they had not yet complied 100% with this objective-in fact in January, Russia, Norway and Mexico allegedly produced more oil than before, not less. As we entered the shoulder months between the heating and driving seasons, OPEC's benchmark basket of crudes was hovering between $23 and $24 per barrel, near the low end of OPEC's target. It remained unclear whether this was due to the production cuts taking effect since January 1, or it reflected world oil demand beginning to recover from its 2001 low. Rodriguez, a civil and labor lawyer by training, has been a member of the Venezuelan Congress and Senate since1983 and co-chaired a key committee related to La Apertura-the country's opening to foreign oil companies in 1997. He has been critical of some aspects of that opening, believing the terms favored foreign companies too much over the interests of Venezuela. A confidante and energy advisor of Venezuela's president Hugo Chavez, he served as energy and mines minister for the latter from February 1999 to December 2000, at which time the members of OPEC elected him to a three-year term as secretary general, beginning in January 2001. Oil and Gas Investor met privately with Rodriguez after he gave the keynote address at the 2002 New Zealand Petroleum Conference in Auckland in late February. There, he repeated his message that cooperation between producers and consumers is the key to price and supply stability. "Needless to say, volatility generates uncertainty and this disturbs the steady flow of investment, which we think is vital for the long-term stability of the market...It is understood that when left to its own parameters and forces, the oil market will perform erratically." He also told attendees that the band of $22 to $28 per barrel is still OPEC's target. Investor Since taking office about a year ago, you have repeatedly called for cooperation between OPEC and non-OPEC producers. Why is that so important? Rodriguez A low oil price does not discriminate between an OPEC and a non-OPEC producer. If we do not coordinate our policies, we all suffer the same consequences. It is much better to act together, proactively, before the price gets to that point. There are three actors in this market. Oil is an exhaustible resource. The first actor is the owner of that resource, the citizens of a country; the second is the investor [including national oil companies and multinationals] who needs a certain price to justify investment; and finally, there is the consumer who wants a low price. We have to harmonize these interests. I am a little bit optimistic now, as I believe we are approaching a dialogue. The next conference of consumers and producers is scheduled in September in Osaka, Japan. Investor And if you cannot harmonize these three actors? Rodriguez If the price is very low, as it was in 1998, what can happen? In the U.S., investment dropped. Ninety percent of the production there is marginal, with high costs, and producers had to close 136,000 wells-and the production dropped by half a million barrels a day. There were thousands of layoffs. Investment [in drilling] in the U.S. dropped by about 20% and 10% in other countries. Another problem is the very high taxes consumers must pay. In some places in Europe it is 70% or 80% [of the cost of fuel]. You go to the petrol station and in each liter you're paying 71 cents to the government and 18% goes to the producer. But everybody is blaming OPEC for the high prices-we are the scapegoat. Investor Realistically, given that the world economic outlook is much weaker, and has been for some time, does OPEC need to lower its price band of $22 to $28? Rodriguez No revision is planned. The EU Commission has stated that US$20 is a fair price, but the target of OPEC is $22 to $28. The performance of the world economy has been very poor, with a recession in the U.S. and a long one in Japan, so demand has been low and U.S. stocks are very high. At the same time, non-OPEC production has risen by 1.6 million barrels a day through 2000 and 2001. Investor Last July, before the attacks of September 11, OPEC estimated oil demand would grow by 850,000 barrels a day, but the world economy has certainly changed since then. What is your outlook now? Rodriguez Long-term, according to our reference case, world oil demand will rise from 76 million barrels a day in 2001 to 91 million a day in 2010. Our projections show OPEC producing 39 million barrels a day in 2010, 42% of global supply. North America will continue as the most important consumer-its economy is by far the biggest in the world. Maybe in 50 years Asia will be more like that. China and India's growth in consumption is around 7% or 8%. Even Russia, which will continue as an important oil exporter, has its domestic consumption growing 5% this year. This year the growth in world demand will be very poor, so we are fighting to maintain stability. Our main objective for the time being is...we seek to avoid a collapse. Normally in the second quarter, demand is very low. That was one reason for our visit to Moscow in early March [before the March 15 OPEC ministerial meeting], to analyze the situation and exchange views. We wanted to see if it is possible to obtain and maintain solidarity with Russia and the other non-OPEC producers such as Mexico, Norway, Oman and Angola. We are discussing all these matters with all the producers in Russia, in Africa. I believe we will maintain production for now. Maybe in September at our next meeting, or maybe in an extraordinary meeting.... Investor Does OPEC worry about how new technologies may change the amount of oil the world needs? Rodriguez The intensity of energy use, and particularly oil, has changed significantly in the last 30 years. In 1970 to produce US$1,000 of GDP, you needed 1.47 barrels of oil. In 1999, you needed 0.7 barrels. The impact of oil prices on GDP is less now. In real terms, $25 oil is the same price now as in 1973. The price has been very stable. I do believe it is very important to work on alternate sources, but the forecast for the next 20 years is positive for oil consumption. Other sources may reach 20% of total energy consumption. Investor What do you see as OPEC's biggest challenges, longer-term? Rodriguez Well, the world is changing. After the collapse of the Soviet Union, the production of its former members has been aimed at world markets, where before it was aimed at members of the old Soviet bloc. And other non-OPEC countries are also increasing their production. Individually they may add a small amount, but collectively that adds up to something more significant. There are also challenges related to the environment, particularly the Kyoto Protocol, which may affect OPEC with costs of $60 billion. And we are now living with the merger of some very powerful international companies. Now BP is the most powerful group in the world. According to our analysis, the main conclusion is OPEC will maintain its market share and be the primary source of oil. According to our projections, by 2020 OPEC's share will break the 50% barrier and we'll be producing 53 million barrels a day. The most important challenge will be for us to diversify the economies within our countries. Dependence on oil revenues is still very high. Our national problems are linked to international events. In the case of September 11 or the economic crisis in Argentina, these affect Venezuela and the other countries. Each one of our countries needs to increase the base of production, exploit new resources and improve productivity. Investor What was your initial reaction to the events of September 11? Rodriguez I was observing the TV screen in my office in Vienna. About two hours after the terrorist attack, the price jumped by about $3. My first reaction was to call the media and clarify that OPEC guarantees the supply of oil. More or less two hours after I spoke, the price declined by $5. This is one of the main problems we have to face-the speculation markets versus physical markets. The difference is really impressive. In physical markets we trade 76 million barrels a day but in the futures market, we see trading of 140 million to 200 million barrels a day. The effect some days is $4 a barrel and sometimes as much as $8. The irony is that the West Texas Intermediate brand of crude represents only about 600,000 barrels a day; Brent about 200,000 and Dubai, the same-whereas OPEC exports 22 million barrels on some days. Investor Will there be enough oil going forward? Rodriguez Yes, but I believe oil will be more expensive because the costs will be higher. Now you can find a barrel in the Gulf of Mexico, but it is necessary to drill in deep waters, and to go down 15-, 16-, 20,000 feet, so the cost is higher. A steady flow of investment is key. The issue is complex and, as with most problems in the energy world, is closely interwoven with international relations. Investor What about infrastructure-doesn't that also threaten oil production growth? Rodriguez Even if there is sufficient supply of new oil, we will suffer bottlenecks. There is not sufficient supply of capacity to get it to consumers. Some 40% of the transportation capacity is obsolete. The new vessels, according to environmental regulations, have to be double-hulled, which increases the cost. The U.S. needs to increase refining capacity by 2.7 million barrels a day and increase pipeline capacity, as [U.S. energy secretary Spencer] Abraham has said. In the next 20 years, the U.S. will increase its import of products by 5 million barrels a day, according to our forecast. The energy plan of President Bush maybe can reduce dependence on imports, but not entirely. Investor As non-OPEC production grows, will we see any of these countries join OPEC? Rodriguez In the case of Mexico, Norway, Russia, Oman and Angola, they send observers to our meetings. Equatorial Guinea and Syria are requesting to attend. OPEC is open to new members but that is a sovereign decision. We now have 11 members and seven observers. One interesting thing is the process of meeting with the gas producers. The first meeting was in Tehran last year and this year it will be in Algiers. They are talking about coordinating price, which until now has been indexed to the oil price. Maybe they will eventually form their own group. We think gas will make up 29% of total energy consumption by 2020. OPEC will represent more than 50% of energy supply and gas, 29%. Some of the OPEC members have a lot of gas. The Saudis plan to invest $40 billion in the exploration of gas. Iran is the second-largest producer after Russia, and Qatar and Algeria are not far behind. Venezuela is also increasing its investment and last year passed a new gas law.
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