.&lregv Vol. 11, Nos. 4J3, pa. 327-334, 1986 Printed in Great &it&.

0360-5442186 s3.00 + .oo PRepmon Plea? Ltd.

EXECUTIVE SUMMARY

FEREIDUN FESHARAKI, MARK J. VALENCIA and KIRK R. SMITH Resource Systems Institute, East-West Center, I777 East-West Road, Honolulu, HI 96848, U.S.A.

(Received for publication August 1985)

Abstract-It is expected that the Asia-pacific region will increase its demand for petroleum products at a greater rate than any other part of the world over the next two decades. Indonesia, an OPEC member, as well as Malaysia, Brunei, and China (Beijing),t will remain or become sign&ant suppliem of oil, but tbe region as a whole will continue to depend on the Middle East for most of its oil imports. Meanwhile, major structural changes are occurring downs&am. Large-scale refining build-ups in the Middle East, Indonesia, and to a lesser extent Malaysia will result in changes in product movements that will have an impact on the balance of the entire market in petroleum products. The purpose of the APEX VII Conference was to examine these anticipated changes in the supply and demand patterns of regional petroleum products, to identify options and o~~u~ti~, and to explore possible future modes of cooperation between Asia-Pacific countries and OPEC oil exporters.

THE CONTEXT

The Asian countries are among the most open and market-oriented of developing countries and as a result have become much more integrated into the world economy. This high degree of inte~ation~ involvement, however, makes the Asian economies very sensitive to external conditions. In particular, the two oil shocks and prolonged recessions that have occurred since 1973 have had severe negative balance-of-payments effects on the oil-im- porting developing countries. More recently, the pronounced softening of the world oil market has created difficulties even for the oil-rich Asian countries of Malaysia and Indonesia (p~c~arly the latter).

In adjusting to the external shocks of the last decade, developing countries throu~out the world have faced difficult choices and dilemmas. Some combination of export expansion and import reduction through substitution and reduction of aggregate demand was required to overcome balance-of-payments disequilibrium in deficit countries. The other alternative was to finance deficits by external borrowing, provided the capacity for repayment could be built up through investment.

The newly industrializing countries (NICs) placed special emphasis on export expansion, avoiding an excessive reliance on external borrowing (with South Korea as a possible ex- ception). The oil-importing Southeast Asian countries relied more on external borrowing. External borrowing also figured prominently in the response of oil-exporting countries to the prolonged world recession and the oil glut of recent years.

The quick and flexible policy responses of many of the countries of East and Southeast Asia to adverse external conditions have been impressive. These responses, combined with a market-oriented, outward-looking approach, explain in large part why Asian countries have continued to grow at real rates of 2% to 6% annually with rapid expansion of exports and low inflation rates, while other developing countries in Latin America and Africa have stagnated.

Oil will remain a significant feature of Asia’s energy landscape well into the 1990s; lower oil prices and relative stability in the world oil market will prevail in the medium term, stimulating world economic recovery. Thereafter, global demand for energy will recover, with oil initially leading the pack. New non-OPEC oil exporters such as Alaska, Europe, Mexico, and China (Beijing) will respond to the changing demand structure of consuming countries and conspire to re-configure traditional relations among oil-trading nations. OPEC may lose its predominant role as Asia’s energy supplier; however, it may assume a new role as the region’s strongest trade partner in refined petroleum products, either dominating that trade or increasingly owning the refineries.

t This awkward term is the one agreed upon by both China (Beijing) and China (Taipei) for international comparisons.

327

328 F. FESHARAKI et al.

Non-oil alternatives will gradually make quantum encroachments into traditional oil shares. Oil’s share of the primary energy supply will drop to 36% gas will increase to 16%; both nuclear power and coal demand will rise rapidly. Exciting developments in coal/water technology that utilize existing oil infrastructures and the strong nuclear commitments of northeast Asian countries-which affect energy markets significantly-promise to redefine Asian relations. Security and stability considerations will override purely pricing parameters for certain northeast Asian countries, and geographical domination of supplies may not be as concentrated as before. More countries will be seizing control of their energy destiny rather than leaving outcomes to the multinationals or the marketplace. There will be closer in-country monitoring to allow for strategic fine-tuning as political developments warrant.

The decade ahead will be one of continuing change and uncertainty with regard to energy supply, demand, and price. Much will depend on the capacities of blocks of nations- OPEC, OECD, and the less developed countries (LDCs)-to adapt to the changing situation or to relate to one another. How they confront the uncertainties ahead-uncertainties that entail unavoidable costs-will be one of the fundamental issues. How these costs will be apportioned within and between nations will help establish the basis for national stability and equitable international collaboration.

THE FUTURE OF THE WORLD OIL MARKET

The world economy is expected to grow at a rate of 3.5% per year. Energy consumption is expected to increase by 2.4% per year, continuing to unlock the 1: 1 GNP/energy con- sumption ratio. As shown in Fig. 1, oil consumption is predicted to rise by 1.5% per year- a slower and more gradual increase than that previously forecast. The gas market is growing; resources, estimated to increase by 2.8% per year, are growing faster than consumption, owing in part to the distance of natural gas deposits from consumers.

Most of the energy and oil consumption growth in the non-Communist world will occur in countries outside the United States, Canada, Western Europe, and Japan. Oil consumption in these countries is expected to increase by an average of 2.2% annually. Energy consumption will increase even more rapidly, averaging growth of 4.1% per year. In Southeast and East Asia, the oil-importing countries are striving to develop indigenous resources to substitute for oil; the oil-exporting countries are seeking to limit domestic consumption to preserve their status as oil exporters. As a consequence, oil consumption growth will average 2.4% per year.

70 -

60 -

% Annual Change

1994-2000 % Chenge

1963 2000

U.S. 0.6 33 31 Other W. Hemis 2.0 13 15 w. Europe 0.9 26 24 Africa 2.0 4 4 Mnddla East 2.2 5 6 Japan 0.7 10 9 Other S. & E. Asia 2.4 7 9 Oceania 1.6 2 2

Total 1.2

Western Europe

United States

0 1 I I

1970 1980 1990 2000

Fig. 1. Forecast of oil consumption in the noncommunist world (million barrels per day). Source: Thomas G. Bums. The World Energy Outlook.

Executivesummary 329

Crude oil production will continue to be dominated by OPEC. Although the contribution of OPEC to oil production will drop in the 1980s and 1990s as other parts of the world’s production of crude oil grow, particularly in the late 1990s OPEC production will once again be the swing volume as the more mature oil-producing areas, such as the United States and Europe, begin to produce less oil. The comfort range concept, which matches production with desired income, prescribes a level of 70% to 80% of current OPEC capacity. Currently, OPEC is below its comfort range, producing 16 MMb/d. Production is not likely to reach the comfort range of 20 MMb/d for a number of years, implying weak prices during that period. In the comfort range, prices rise with inflation. If production exceeds the comfort range, real price increases will occur, which is not predicted to happen until the 1990s.

In response to the first oil crisis, the Asia-Pacific region looked increasingly to other energy sources to meet the demands of growth. In spite of this, oil consumption increased to 6.6 MMb/d as its peak in 1979. The two price shocks of 1973 and 1979-80 provided incentive to reduce dependency on oil through conservation, efficiency improvements, and diversification to other forms of energy-particularly coal, gas, and nuclear power. Future demand is still uncertain, depending on economic growth rate, fuel mix/supply availability, the composition of GNP and imports and exports, the efficiency of energy use, the future rate of urbanization, and the substitution of commercial energy for noncommercial energy.

From 1982 to 1990 a growth rate of 1% to 2% per year in oil consumption is expected for the region as a whole. By 1990, fuel oil would constitute around 26% of total oil con- sumption, a drop of 8% compared with 1982. The net effect is a further lightening of the demand barrel. This is due primarily to major consumers turning to other fuels for power generation-South Korea to nuclear, China (Taipei) to coal and nuclear, and Japan to nuclear, coal, and gas. Development of natural gas discoveries in such countries as Thailand, Malaysia, and Indonesia will also contribute to the further decline of fuel oil consumption.

The average primary utilization rate of refineries in the region will be below 80% until 1990. If primary capacity additions are made in Malaysia, Indonesia, and Thailand, the 1990 utilization rate could be lower. Total secondary capacity will rise from 700 barrels of oil per day in 1982 to 1.1 million b/d by 1990.

Growth in refining capacity may be absorbed, however, by rapid economic growth, although product mixes may not match market demand, thereby stimulating interregional trade to balance the mix. A lighter crude mix would yield more light products, making it easier to match the product demand pattern. Conversely, a heavier crude mix would yield more residual fuel oil and could conceivably create a shortage of secondary upgrading ca- pacity. An oscillation between these two conditions is possible, depending on refiners’ re- sponse to the price differentials between light and heavy crude oils. With the emergence of new source refineries, a significant amount of products will move into the Asian region, adding pressures on an oil industry already suffering from low demand, refinery overcapacity, and poor growth prospects. With demand prospects in Europe even more depressed, the pressure on the East to take product imports will be even stronger. There will also be additional large volumes of liquefied petroleum gas (LPG) and condensates available from field process plants looking for markets in the region. Against this background of excess refining capacity, ample crude supply, and an increasing number of participants, the Asian oil market will experience intensifying competition that will bring about pressures for some rationalization of existing capacities and deferment or cancellation of future construc- tion plans.

Quality differentials between light/sweet and heavy/sour crudes increased dramatically both during the 1973 Arab oil embargo and the 1979-80 Iranian political upheaval. The difference between spot prices for Mideast heavy crude (3 lo American Petroleum Institute, or API) and African light crude (37/40” API) averaged only $0.98 per barrel (/b) in 1972, but jumped to $2.67/b in 1974. The increase was even more pronounced during the 1979 crisis, when the gap widened from $1.95/b in 1978 to $5.03/b in the following year.

Along with the rapid increase in crude oil quality differentials, there emerged a widening gap between the prices of light and heavy products. For example, in 1972 gasoline com- manded a premium of only $2.14/b over fuel oil in the U.S. wholesale market, but the difference skyrocketed to $9.75/b in 1979 and over $18/b in 1980. This rapid increase in

330 F. FESHARAIU et al.

product differentials was due primarily to the difference in price elasticity of demand for gasoline relative to heavy fuel oil. Coal and natural gas were readily available as substitutes for heavy fuel oil, but there was virtually no short-term substitute for gasoline.

The huge gap between light and heavy crude prices on the one hand and the growing difference between light and heavy product prices on the other created an environment conducive to the many refinery upgradings that have taken place in recent years. The in- vestments involved have been heavy, particularly in the United States, where in the last few years billions of dollars have been spent to either upgrade existing facilities or add new capacity, totaling 960 thousand barrels per day (Mb/d), for converting heavy crudes and residues to lighter products.

The economics of these upgrading projects have now come under attack on two fronts: 1. The quality differential between light and heavy crudes has dwindled to about $3/b for

African light compared with Mideast heavy, and only about $1/b for African light com- pared with Mideast intermediate crudes (e.g., Arab light).

2. Although the differential between light products and heavy fuel oil has narrowed con- siderably, the premium once enjoyed by gasoline relative to distillates has also virtually disappeared.

If these developments prove to be permanent, the rates of return originally expected from these refinery upgradings will not be realized.

The explosive growth of energy futures trading-from less than 150 Mb/d in their first year ( 1978-79) to levels of over 40 MMb/d in 1984-reflects a fundamental shift in the structure of the world oil market. Oil has become a true commodity. Since 1978, the New York Mercantile Exchange has traded several hundred billion dollars’ worth of oil and has delivered over 65 million barrels. An important aspect of futures markets is the high degree of regulation by the exchange itself, by its members, and by the U.S. government. The guarantees that underlie futures trading offer far greater financial security than many cash market transactions. Throughout the long history of futures trading, the economic purpose of these markets has been challenged by U.S. congressional committees, academics, the courts, and the press. The futures markets, however, have been found to serve three invaluable functions: 1. They are the most efficient means yet devised for price discovery. 2. They serve as a risk management tool, allowing both buyers and sellers to lock in prices

and thereby shelter themselves from potentially adverse movements. 3. They provide an investment opportunity for speculators, who endure price risk in return

for profit potential. Expectations are for a rapid growth of energy futures trading over the next few years,

eventually reaching levels of several 100 MMb/d. In addition to the Singapore markets, the energy futures market will evolve to include options on crude oil and heating oil, unleaded gasoline, heavy and sour crude, and natural gas. As the futures/cash market relationship evolves, the futures markets will become a necessity, taking their place as major institutions in the oil market in the Pacific Basin and in the world. Contract prices will first follow futures prices at a respectable distance and then incorporate pricing formulas that use the futures markets as the pricing base. Hedging will become routine, first for the smaller com- panies and then for the largest ones-including the national oil companies of both importing and exporting countries. Futures trading will help smooth out some of the price volatility and will tend to make markets more evenly and quickly responsive in both directions.

In summary, changes are occurring in the world, and the oil companies, the producing nations, and the consuming nations must respond. Market factors are cyclical, yet irreversible structural changes have also occurred. The industry is still struggling with the loss of control of upstream operations following the nationalizations of ten years ago. The consequences have been price volatility; price autonomy, in which the companies are no longer in control of the main players and prices are no longer administered; the growth of the spot market and of its influence on prices; a change in the time profile of supply commitments to the short term; the growth of futures markets; a rise in trading, in which supply-driven companies have been replaced by market-driven companies; and, in many ways, a disintegration in the operation of the major oil companies. It is as though a pin had been pulled from the

Executive summary 331

middle of a complex machine, which has been shaking itself to pieces ever since. In an industry so resistant to innovation, the entrance into the market of futures trading is an omen.

Under what conditions can prices be stabilized? Exertion of market power might work, but by whom and in whose interest? When power is not in the producers’ hands, because of a slack market, what happens? Does the market then move toward “free market” con- ditions? Lately, OPEC has been unable to hold prices by itself and has been joined by disparate interests acting together to cause a price recovery. An implicit coalition has formed of what were previously assumed to be opposing interests.

Another consequence for the future will be deintegration of the industry. It is difficult for large, diverse companies to exercise control over far-flung interests when affiliates are dealing with turbulent conditions. Split-second decision making in these times will necessitate a movement of control from corporate headquarters to branches, from the center to the periphery. There will also be a rise in trading. Trading serves to mediate between a company and the marketplace, as well as to create a pool of liquidity that helps the majors deal with supply problems. In the Pacific Basin, the market will become increasingly unbalanced, particularly in the refinery sector, as the fuel oil glut increases. Classically, this leads to trading. The arrival of products from the Middle East as their new refineries come onstream will add to the confusion. There are two avenues of resolution for this situation-government policy and trading. Of the two, government policy is more important. In this region, Japan’s government policy will have the greatest impact, and the question of greatest interest to refiners currently is: Will Japan close its doors to increased product trade?

MAJOR FACTORS IN THE ASIA-PACIFIC OIL MARKET

OPEC’s refined products from the Gulf and Indonesia will enter the Asian market at a time of excess capacities and poor refining margins and thus have a profound impact on regional and global refining balances. The first Saudi joint-venture refinery, the Petromin- Mobil export refinery at Yanbu, came onstream in August 1984. The facility will process 250 Mb/d of Saudi light and has capacities of 70 thousand barrels per calendar day (Mb/cd) of catalytic cracking and 13 Mb/cd of alkylation, making the facility overwhelmingly geared toward gasoline and naphtha production, with substantial output of middle distillates as well. The projected output pattern is about 30% gasoline, 3 1% diesel, and only 22% fuel oil. The next joint-venture plant expected onstream is the Petromin-Shell refinery in Jubail. The facility, like the Mobil plant, is designed for 250 Mb/d of Saudi light and, also like the Mobil facility, has a sophisticated configuration consisting of 23% gasoline/naphtha, 17% kerosene/jet fuel, 30% diesel, and 25% fuel oil.

Kuwait has Shuaiba, which is already a highly sophisticated plant with facilities for hydrocracking both vacuum gas oils (60 Mb/cd) and residuals (40 Mb/cd). Kuwait has now launched a major modernization program for its other two refineries, Mina Abdullah and Mina Al-Ahmadi, and by 1986-87 will have the most advanced nationai refining complex in the world, with a capacity of about 650 Mb/cd. Kuwait will then have a higher ratio of hydrocracking-to-distillation capacity than the United States (at 25%), both hydrocracking and major coking facilities, and far higher capacity utilization in the future.

Current expansion in Indonesia takes the domestic demand slate into consideration, and substantial amounts of hydrocracking, visbreaking, and coking are being added along with new crude distillation units. A total 110 Mb/cd of hydrocracking, split between two refineries, will put the sophistication of Indonesian refineries on a par with those of the developed world. Indonesia will have a large and growing refining sector throughout the decade and possibly through the end of the century. Because of Indonesia’s large population, however, refining will remain oriented toward meeting local needs.

Almost all of what Indonesia can export will go to the Pacific Basin. The key product- flow question lies in the way the Gulf product exports will move. The OPEC Downstream Project at the East-West Center projects that eventually-if not immediately-about half of the Gulf product exports will go to the Pacific Basin. Overall, around 450 Mb/d of new Middle East exports are expected to enter the Pacific, and combined with a net effect of 300 Mb/d from Indonesia’s new domestic refineries this means a minimum input of 750

332 F. FESHARAKI ef al.

Mb/d between 1985 and 1987. Japan is the single most important country affecting OPEC product flow. If Japan accepts product imports, much of the new products could go to Japan in larger product carriers at the expense of Japanese refiners-without significantly affecting the Pacific market.

OPEC Downstream Project studies indicate that product output from the new Middle East refineries has a definite economic advantage over the Far East refineries (e.g., in Japan) and a marginal advantage over the European refineries (Rotterdam), but it faces a disad- vantage compared with U.S. refineries. Much will depend on the pricing policy of OPEC product exporters. The Saudi pricing formula is the most complex-the components today include product prices that are set the same for joint-venture partners and third parties; third-party sales available only on a term basis of preferably three years or more; product prices determined either by Petromin postings or the market; market-related prices deter- mined by average product prices for two to three weeks as reported in Platt’s Price Service in Rotterdam and Singapore netted back to determine FOB ex Yanbu or Jubail. Essentially, this formula opens the possibility of selling at spot prices with term contracts.

The most crucial consideration may be the timing of the introduction of the products into the market. If Saudi products actually do enter the market on a large scale in the second quarter of 1985-when demand for OPEC oil is again supposed to be at its weakest annual point-product prices under the currently envisaged price system may significantly under- mine crude and product prices worldwide. Saudi Arabia and other OPEC product exporters should ensure that the entry of their products into the market does not coincide with weak global demand and that their pricing and delivery policy is flexible enough to withhold volume from the market or to raise product prices to avoid a major drop in crude prices.

The Asian demand slate is unbalanced with respect to supply, and the current refinery configuration will not be able to make the match. Product imports are needed and most will have to come from the Middle East. It is unreasonable to expect to have access to Middle East crudes but to shut out products; on the other hand, Mideast OPEC nations could consider the possibilities of refinery acquisition, joint ventures, or the upgrading of investments in Asia. Potential long-term benefits wiIl be substantially greater in the growing Asian market than in the mature European or U.S. oil markets. At the same time, Asian nations could consider opening their doors to product imports and OPEC investment in refining.

The Saudi perspective in this regard is instructive.t The geographical proximity of Saudi Arabia to Asia has led Petromin to regard Asia as a natural market, since lower freight costs and faster delivery help make Saudi Arabian exports competitive there. Over the five years from 1977 to 1982, an average of 960 million barrels of crude oil per year were exported to Asia and the Far East, accounting for roughly one-third of total Saudi crude exports. Crude exports to Asia and the Far East have held up well during 1980-85; although total crude exports have dropped by 34% exports to Asia and the Far East fell by only 3%. The Asia/Far East market is even more important for refined products, absorbing an average of 56% of total Saudi refined products (104 million barrels per year out of a total 186 million barrels). Over the period between 1977 and 1982, total Saudi exports of refined products grew by only 4%, yet exports to Asia and the Far East grew by 25%.

Asia is also an important market for other Petromin products such as LPG and sulphur. Japan purchases around half of the LPG from Petromin’s Master Gas System. Eighteen Japanese companies have signed five-year contracts for LPG for a total volume of 3.35 million tons per year. Two other Far Eastern companies have also signed five-year contracts for LPG, bringing the Far Eastern total to 3.85 million tons per year or 46% of total Saudi LPG export volume. In 1982, Petromin began exporting sulphur and found Asia (particularly India) to be a major importing area, absorbing 382,000 tons in 1982 and 537,000 tons in 1983 (63% and 32% of the years’ total export volume, respectively).

Petromin has embarked on an extensive program of export refineries. Table 1 shows both the size and the product-mix capability of the old and new Saudi refineries. The yields of lighter fractions are well above those obtained in other modem refineries, indicating the

t The following paragraphs were ahtmcted from the oral remarks made by Mr. Mohammed Rahaimi, managing director, Petronal/Petromin London.

Executive summary 333

high level of technical sophistication involved. For two refineries, Yanbu (export) and Jubail, the projected cuts of gasoline and naptha exceed that of heavy end, i.e., fuel oil. In addition to greater emphasis on lighter cuts, the refineries will have higher yields of middle distillates, which many forecasters expect to be the most rapidly growing product. The technology of these refineries also allows more flexibility in varying the relative yields according to changes in the market.

Petromin has endeavored to be a moderating influence in the Persian Gulf and hopes to market its refined products in a fair and orderly way. Many factors affect market price, and Petromin believes that it has worked out a reasonable formula for product pricing. Experience will suggest improvements and amendments, with input from buyers playing an important role. Petromin is interested in long-term relationships with customers and would like to emphasize that it does not plan to base product prices solely on published spot market quotations. Further, Petromin does not expect that increased export activity will seriously disrupt the world oil market, since most forecasters envisage changes in the world supply/demand balance.

The Iran-Iraq war and its possible aftermath are major factors in Gulf oil supply and prices. When the war first broke out, many thought it was only a minor escalation of the border clashes that had gone on between the two countries for some time. When the war escalated and major cities and oil installations on both sides came under attack, many thought that exports from these two countries-and possibly from others in the region that might be drawn into the war-would come to a halt and that a supply shortage was imminent. When the conflict tilted against Iraq in mid- 1982 and the Iranian army entered Iraqi territory, most analysts predicted the downfall of the Iraqi government and a quick victory for Iran.

In fall of 1983, when France announced its intention to deliver Exocet missiles and the Super-Extendard warplanes to Iraq and Iran threatened to close the Strait of Hormuz in retaliation, the complacency that had resulted from the stalemate was suddenly replaced by panic, and reports were out that some 5 to 7 MMb/d of crude would soon be lost and the superpowers might also be drawn into the war. Finally, when the attacks and counter- attacks on ships destined for Iran and Iraq began early in 1985, speculations again ran high and some predicted that oil installations and terminal facilities in several neighboring coun- tries would soon come under attack. None of these fears was realized, yet they triggered undue stockpiling that was followed by rapid destocking as fears of shortages dissipated.

If the war ends before 1987, Iranian exports may remain stable or increase by some 500 Mb/d. Iran will need less money after the war than it needs now to finance it. As for Iraq, if the Syrians decide to reopen the pipeline through which Iraq used to export its crude to the Mediterranean Sea, Iraq’s export capability could increase by some 300 to 500 Mb/d within weeks. The looping of the pipeline through Turkey and the installation of single- mooring facilities in the Gulf will also add to Iraq’s export potential by another 500 Mb/d

Table 1. Saudi refining capacity.

Sita

catalytic w** lbermal Catalytic/ eirat crude IBCYU cre3kln# craoklng crsckin.g Alkylation RemIming OprPtion

('000 b/d) ('000 b/d) ('000 b/d) ('000 b/d) ('000 b/d) ('000 b/d) ('000 b/d) (year)

s.lbtot*: 1980-85

Total

410 100 -

570

130 170 250 325 250

-

1,125

100 15

-

115

50 __

110 120 70

350

465

__ __ __ __

- - __ __

45 __ __ 70 __ __ __

40 -

70 es

70 85

_- __

- __

5 __ __

;o -

35

35

__ 40 __ 5

- - __ 45

35 1960 __ __ 1983 IO 1984 __ ;: 1986 __ 20 1985

- -

10 115

10 160

334 F. FESHARAKI et al.

to 1 MMb/d, resulting in an additional 1 to 1.5 MMb/d within weeks. It will also add to Iraq’s export potential by another 500 Mb/d to 1 MMb/d. This means an additional 1 to 1.5 MMb/d export potential from Iraq, but it does not mean that Iraq will be allowed by OPEC to increase its export to this extent if no markets exist. The overall increase at the early stages of the postwar era probably will range between 0.5 and 1.5 MMb/d. Kuwait, Saudi Arabia, and the United Arab Emirates (UAE) will most likely accommodate part of this increase by cutting back production. The financial strain on Kuwait and Saudi Arabia resulting from this cutback will be minimal, as they are currently using part of their oil revenues to assist Iraq. Thus, an end to the war does not necessarily mean disarray and the end of OPEC.

If the Saudis are forced to cut back their production to 3 to 3.5 MMb/d in order to accommodate further production increases from Iran and Iraq, however, the Saudis will no longer be capable of playing the role of swing producer if future market conditions demand it. With that production level the Saudis could be a powerful swing producer if demand surges unexpectedly upward, but they will not be capable of playing an effective swing role if the demand drifts downward for cyclical or seasonal reasons. Both the market and OPEC will be vulnerable and unstable if there is a sudden drop in demand-be it seasonal, spec- ulative, or otherwise. This is the real potential danger for OPEC and the current price structure. Perhaps discipline, cohesion, and political harmony will prevail and the original founding members of OPEC-Iran, Iraq, Saudi Arabia, Kuwait, and Venezuela-will col- lectively assume the swing producer’s role that is currently being played by the Saudis alone.

The energy policy of the United States is obviously a major factor in the Asia-Pacific oil market. The goal of the U.S. national energy policy is to foster an adequate supply of energy at reasonable costs. Strategies to achieve this include minimization of federal control and involvement in energy markets and the promotion of a balanced and mixed energy resource system. The present administration has no plans to introduce import restrictions or to interfere with the market. Important elements are conservation as a resource to free up energy supplies; research and development to advance new and alternative energy re- sources; and energy security through working with allies to diversify sources of foreign

supply. The United States has made great progress in reducing its reliance on imported oil,

mainly as a result of increased domestic production, improved energy efficiency, and con- servation. An energy emergency affecting the Asia-Pacific region, however, would have significant effects on the United States as well. The region as a whole will increase its demand for petroleum products and is likely to remain a net oil importer. If the United States modifies its energy use patterns, it can ensure that Asian and Pacific countries will not be deprived of the adequate and affordable energy supplies necessary for growth and survival.

For example, current U.S. law prohibits the export of crude oil. Removal of this barrier would serve to increase economic incentives for oil production in the United States and help to diversify Asia-Pacific imports from other sources, strengthening the energy security of the region. The United States is working closely with Japan and South Korea to foster energy trade and cooperation in oil, natural gas, and coal. The Department of Energy has cooperative technology agreements with Japan and South Korea in nuclear and fossil energy and in energy conservation, and it is exploring cooperation with China (Beijing).

INTRODUCTION TO THE PAPERS

The papers given at the conference are arranged here starting with the general economic situation of the region and the future of the world oil market. This is followed by a section on the important trends developing in the Asia-Pacific oil market. The last sections are devoted to papers on the oil supply and refining situations of the individual countries in the region.

Coming from a wide range of institutions, the authors of these papers are among the region’s and the world’s most influential experts on the downstream oil market. Knowing, however, that not all of the readers of Energy will be familiar with the names in this industry, we believe it would be worthwhile to include a list of the authors and their titles and affil- iations. It should be mentioned, however, that in most cases the authors present these papers on their own behalf and not as official representatives of their organizations.