At different periods throughout history, certain specific issues have come to occupy for a time a focal position in the interplay of power between nations, groups or individuals. Such issues have included land, food, religion, treasure, and trade. Over the last 20 years, and at first unnoticed, energy-more specifically oil-has moved into this central role. While energy cannot be expected to hold such a position forever, over the next several years it will remain at the center of interaction of world forces.

It is now some five years since what might be called the energy discontinuity of 1973-74-the abrupt price rise that signaled a massive shift in the power relationships centered on oil. However, the balance of the evidence still indicates that the forces involved are far from completely understood, so that surprises still occur. Consumers and suppliers continue to talk past each other, unable or unwilling to understand each other's positions, let alone to make the necessary accommodations to reduce the tensions of their relationship.

One reason for the lack of understanding is that most of the voluminous discussion and analysis has been concerned with the economics of the situation, as if this were the only major factor involved. To the consumers, who write most, this may be so. For the producers, the politics of energy are vital, and for them the situation is much more complex. Economics is but one of several factors that determine and lie behind the power relationships involved in global energy supply and consumption. What these other factors are and how they affect the exercise of energy-related power are in need of better understanding-which is the objective of this article.

While everyone knows something of power, many find it difficult to define their understanding of such an abstract concept. Bierstedt has compared it to St. Augustine's problem with time: "We all know perfectly well what it is-until someone asks."1 However, Ralf Dahrendorf, in this journal, has provided a practical definition which serves very well: "the capacity to assert interest effectively, or more simply, to make others do what one wants them to do . . . ."2

As we examine how energy has become a focus of power, four key themes emerge:

1. If power is to be real, it must both be perceived and believed. Thus, other power holders-nations, groups or individuals-must recognize it and believe that it would, if necessary, be used. For example, while military might is still seen by many as supreme, the political consequences may be such as to render it unusable, as in the case of so-called limited weapon wars.

2. There is no monopoly of power. It is widely shared and the alignment or groupings of power holders can change. Indeed, as William Bundy has observed, "Real power-the ability to affect others-seems in fact more widely dispersed than perhaps at any time in the world's history."3

3. To take actions which make others powerful can have serious effects. Machiavelli, the supreme analyst of Realpolitik and perhaps the inventor of the "case study," had no doubts: "Whoever is responsible for another's becoming powerful ruins himself."4

4. While we have tended to think of national power as a balanced mixture of military, economic and political strengths, there are many examples today of power deriving largely or almost entirely from one predominant factor-economic capacity and financial strength in the case of Japan, sheer mass in the case of China, control of strategic resources in the case of Saudi Arabia. Not only does this kind of unique strength give its possessor the capacity to affect others, it also tends to make the holder less subject to at least certain kinds of military threats. While the military factor remains immensely important for many countries (notably the U.S.S.R. and Israel, to take disparate examples), in the modern world the existence of special strengths in other areas tends to play a greater role than in the past.

With these four themes as background, the story of energy-related power can be seen to have developed in cycles somewhat reminiscent of former power struggles among nations. An apparently settled power structure is changed by underlying factors of relative power, and there is a steady buildup, within the structure, of tensions that are not accommodated either by events or deliberate decision. Then, often abruptly, realities assert themselves, and there is upheaval followed by a period of adjustment and at least apparent accommodation. However, one or another side then fails to maintain its position, so that the power relationship again fails to reflect reality and there is renewed tension-leading in turn to renewed upheaval and adjustment.

In this paper I shall argue that just such alternating cycles have existed-tension in the rise of the Organization of Petroleum Exporting Countries prior to 1973, adjustment and apparent accommodation in 1973-74, renewed tension in 1975-78, and now a second period of adjustment. But does the adjustment now in progress reflect underlying interests and concerns, as well as the realities of power? Is there a basis for lasting accommodation, or are we likely to fall back into a third period of tension? How can we move from an excessive preoccupation with short-term advantage to a longer term view of the problem that both balances the power factors and takes into account the needs of the world as a whole?

These are hard questions. I raise them primarily in their broad form, for it is only in that form that they can be properly understood and handled. But they are vividly illustrated by my own country of Venezuela-once the world's largest oil exporter, currently the supplier of only six percent of OPEC oil volumes, but which might have a very different long-term future because of its heavy oil deposits. So I shall speak also specifically of Venezuela: its needs, its resources, its future hopes, and how its situation might fit into a lasting overall accommodation.

II

The Organization of Petroleum Exporting Countries was born in 1960 out of the frustration of the producing countries, led by Venezuela and Saudi Arabia. The cause of this frustration was their inability to control the exploitation of their major and perhaps only asset, crude oil, and the realization that their political stability was entirely dependent on oil income. But in fact the price of this commodity was dropping, and the terms of trade were moving against them. Their frustration was also identified with what they perceived as the power of the multinational oil companies to reduce offtake from "difficult" suppliers.

On the other hand, the multinationals would not have agreed even then, or believed, that they held so much power. They saw themselves as driven by the forces of the market, which favored the companies with the cheapest oil, so that all were compelled to seek the cheapest sources. And the fact that their non-U.S. supplies were largely shut out from the U.S. market greatly increased competition in other areas, and forced prices down.

The decision, apparently taken in the early 1960s, to keep cheap foreign oil out of the United States could hardly be said to be economically determined; internal politics were very much to the fore. The result was that the United States sat, apparently safe behind its tariff barriers, with its production controlled by the Texas Railroad Commission. (The effectiveness of this organization was such as to serve as a model for any later energy cartel.) Despite the knowledge that domestic reserves were not unlimited, what went unnoticed at this time was that the United States was, by this means, establishing the ultimately very dangerous policy of "Drain America First." Also, in so doing, the United States unconsciously set in train the very process described by Machiavelli, of making OPEC powerful, thus leading to the consumers' problems of the present day.

The supplies excluded from the United States, a large part of which were produced by U.S. independents and originally intended for their home market, had to find an outlet. Market pressures forced prices for oil down to such an extent that Europe, and later Japan, turned to and rapidly became dependent upon imported oil. Indigenous coal industries could not compete and went into decline. Early problems in some areas, such as the Iranian and Suez problems in the 1950s and 1960s, were not crucial. The producers did not believe that they could triumph in any confrontation with the developed world, surmising that the United States and, in some circumstances, Venezuela would open their valves and ensure that Europe was supplied. There was also considerable mistrust within OPEC, stemming from the shutdown during the Mossadeq era in Iran, when Saudi Arabia had moved in to capture much of Iran's former markets.

However, the underlying driving forces in the supplier countries were not simply economic. They wished to be free from foreign domination. Instinctively they reacted against foreign "ownership" of their resources just as former anticolonial movements had reacted against foreign "ownership" of their nations. What they lacked was the means to achieve their political aims.

Meanwhile, consumers in the non-communist world had become so dependent on cheap oil that usage of petroleum products grew at a compound rate of seven percent per annum for some 20 years, from nine million barrels per day (mb/d) in 1950 to 40 mb/d in 1970, with the annual growth in total oil demand reaching two mb/d per year by the late 1960s.

Indigenous U.S. supplies could not hope to match this pace, even for the U.S. market alone. All of the growth was now in international trade, essentially OPEC trade, which also grew at two mb/d per year from 1966 to 1972. In the United States, after 1968, there were no longer any shut-in reserves to act as a buffer in times of trouble. The United States turned increasingly to imports and also rapidly became dependent. Thus imports, from essentially none in 1968, reached four mb/d by mid-1973, at which time they were growing at more than a million barrels a day each year.

Nevertheless, even at this time the producers and the consumers were slow to understand just how fundamental the change was, and just how much the power of the consumers had diminished when they could no longer shop around for supplies elsewhere. The industrialized world was firmly committed to economic growth and had great fears of interrupting the process, so that this fear gave great power to others. The controlling roles of suppliers and consumers were, indeed, poised for reversal.

Perhaps this was best perceived by Colonel Qaddafi of Libya, who was well prepared to take a strong stand in 1970. Such forces for fundamental revision of prices led to the negotiation of the overall Tehran Agreement of 1971.

Yet that very agreement showed how little the fundamentals had been understood. As a result of changing perceptions of power which seemed revolutionary at the time, it set prices to rise from $1.80 to only $3.00 per barrel over a period of four years. Power was perceived as in balance between producers and consumers. But this perception was wrong, as the events of 1973 and 1974 were so quickly to demonstrate.

III

The recovery from the mild recession of 1971 caused noncommunist world oil demand to rise by three mb/d between mid-1972 and mid-1973 to a total of 48 mb/d. Indigenous U.S. supplies were now in decline. Venezuela, following the decline in exploration efforts, had diminished reserves and therefore reduced its production. Libya had chosen to cut back production since it did not need the revenues. In the face of the Venezuelan and Libyan reductions, overall demand on OPEC nevertheless grew by an unprecedented four mb/d between mid-1972 and mid-1973 to a level of 31 mb/d. Despite an all-out buildup in the Persian Gulf, supplies became very tight. Under such increasing supply tensions, the events of 1973-74 might well have been inevitable, even without the Yom Kippur War.

Such circumstances placed all of the producers in a very powerful position, and the power was greatest for those who did not need all their oil revenues for normal development. But the Yom Kippur War was the trigger for change, and oil was used as a weapon. Resource factors of power were used in opposition to military factors of power, and to a large extent were seen to triumph. In the United States, it is widely believed that the outcome of the war would have been very similar even if the oil weapon had not been used. Even if this is correct, it is not the issue. What does matter is the world's sudden change in perception of the power of the oil producers.

The initial reaction in the Middle East was dramatic, but subsequent repercussions were much wider, and they influenced behavior throughout the world. Perceptions of the balance of producer and consumer power changed so drastically that within a month the U.S. antitrust laws were relaxed, and the multinational oil companies were allowed to meet to consider what they could offer to OPEC. The long-term costs of premium alternatives, then seen as some $7.00 to $9.00 per barrel of "oil equivalent" (in current dollars), were discussed as a possible ceiling. But OPEC broke off negotiations and set a price of $10.50, well above this level. In the ensuing panic to obtain supplies, cooperation between consumers broke down and bids in excess of $20.00 were made for marginal supplies. OPEC had been made very powerful indeed.

With such fundamental changes in perceptions and beliefs, the power of the multinationals appeared finally to be broken. OPEC resource power had effectively overcome consumer economic power in addition to neutralizing a military imbalance. It was indeed a heady triumph for OPEC. But did anyone really understand what was happening? In retrospect it can be seen that very few people did.

IV

It might have been supposed that, once OPEC had demonstrated its power to control volume and prices in 1973-74, the price of oil would simply have been related closely with the cost of premium alternatives-a measure any orthodox economist would have recognized. In practice, this would have meant price rises substantially exceeding the pace of inflation (whether measured in terms of the dollar or some broad average).

Yet in practice, in real terms of the reciprocal purchases they could command, oil prices dropped considerably from 1974 to the fall of 1978. Whereas the estimated cost of premium alternatives rose dramatically, in part because of more realistic studies-to a level of $20-$25 or even more per barrel of oil equivalent (again in current dollars)-the price of oil rose only to $12-$13 per barrel, an increase substantially less than the rate of inflation of the dollar currency in which prices continued to be quoted.

It seemed that the price of oil had little to do with market forces. While a few economic analysts in the industrialized countries have argued that substantial production at moderate prices was a reasonable market decision-that it optimized revenues over the long term in the light of the discount factors affecting future value-this kind of calculation had little influence on OPEC thinking. Indeed, most OPEC countries arrived at the opposite judgment, that the future value of oil left in the ground would actually be greater, notwithstanding discount factors, than its present sales value. The factors that affected OPEC's price decisions, and the production policies of its members, in fact, were largely political.

Perhaps one of the best understandings of OPEC as a political organization and not an economic cartel was provided by a Venezuelan, Arturo Uslar Pietri.

The problem resides in the fact that OPEC, as an organization, is somewhat sui generis, so that it becomes difficult to apply to it the rules and characteristics one would use to define a cartel as such. Cartels stem from agreements between companies with monopoly objectives for the maintenance of price levels or the carving up of markets. OPEC is not a cartel in this sense but is far more complex in that it is not an agreement among companies, but among countries, among governments. Apart from economic goals, governments have political interests and tendencies as well as domestic political realities which are rarely the same in every country. OPEC suffers from the peculiarity of not being an association of companies with a common economic goal but rather a group of countries with, primarily and fundamentally, political objectives . . . and certain economic goals on which they may coincide. It would be unrealistic to imagine that the members of OPEC will be guided at all times by considerations arising exclusively from economic needs as, say, the cartel which operated potash operations in the world some forty years ago.5

First and most obviously, whereas an economic cartel would have little concern for the economic health of its customers, with OPEC it was necessarily different. There could be no doubt that the world economic systems had been severely strained by the sudden increase in energy prices in 1973-74. Many people in and out of OPEC doubted that this was the basic cause of the recession; much more likely it was the last straw. But the camel's back was taking a long time to mend. Both the developed world and the non-oil developing countries had been greatly shaken.

Second, in response to domestic political demand or, in a few cases, to visions of new political power in regional or even global terms, OPEC countries entered upon very fast and very extensive industrialization programs, and in so doing became dependent on the energy consumers for technology, capital goods and, in some cases, cash. Some OPEC members, notably Saudi Arabia and Iran, had also become highly dependent on the United States for massive armament programs. Almost all the members of OPEC needed short-term revenues increasingly as time went on.

Third, key OPEC members needed the support of the West, and especially of the United States, for their security and for their political objectives. In effect, what in the hands of a true cartel might have been an unfettered exercise of economic power was restrained and counterbalanced by political factors; the price of oil came to reflect at least a temporary political balance of power.

As events unfolded, things did not go too well for the producer countries. Far from the monetary surpluses which followed 1974, most oil-producing countries were again in deficit. Libya and Algeria remained the hawks of OPEC, but their power had greatly diminished. OPEC itself experienced great tensions, with most members seeking higher prices; they were restrained, however, first by Saudi Arabia and then, for a time, by Iran.

In 1976-77, the situation reached a point where a duality of prices prevailed for a time-with a separate Saudi price acting as a brake-but the problem was finally resolved. OPEC is highly valued by its members, who had learned that hanging together was preferable to being hanged separately. Although Saudi Arabia was and is widely perceived as being able to control prices for the entire world, with that perception of power the Saudis had also assumed a great responsibility.

By the fall of 1978, most of the OPEC members were deeply disappointed with what had happened since 1974 and with their apparent lack of power to change things. Despite the fact that the West, and especially the United States, had done little to change energy policies, and despite continued economic weakness, somehow the relative power of the consumers to influence the price-setters, OPEC, appeared to have risen. It seemed that OPEC countries had fallen into the trap of giving much of their newly obtained power back, increasing the power of others.

In practice, Saudi Arabia had controlled prices very much as the United States might have wished, despite the fact that Saudi Arabia's goals with respect to Israel were far from achieved. The question arose of why or how the power had been handed back. Was it voluntarily, a new mistake or a new allegiance? Could it have been a conscious gesture? A Venezuelan proverb warns: "When you kill a tiger, don't be afraid of its skin." Most of the OPEC members were very dissatisfied with events, but indeed may have been afraid of the tiger's skin.

Yet the consumers remained dependent on OPEC oil. While their economic growth had been sharply reduced, the demand for OPEC oil remained, and indeed U.S. imports increased markedly. The premium alternatives cost so much more that little had been done for the longer term. Perhaps the oil weapon had been temporarily defused but certainly it had not been dismantled. However, the political factors that appeared to have neutralized it were now taken for granted by most Western observers, along with the assumption of political stability of the key OPEC countries. As in 1971, a balance seemed to have been struck, at least on a short-term basis, and as in 1971, such a conclusion was wrong.

V

As the situation unfolded in 1975-78, thinking in the industrialized countries tended to focus on the short-term balance of supply and demand-again as though economics alone were the determining factor. Through 1977 the many studies of the world energy situation (OECD, CIA, Workshop of Alternative Energy Strategies, Exxon, Shell, etc.) seemed to reach a common scenario of "tight supplies," that is, that marginal volumes of oil would cease to be available to balance the energy market by sometime between the early 1980s and early 1990s. The question was indeed not if, but when, and how this would influence energy difficulties ahead, as the developing nations continued their efforts to break through, and the less-articulate majority of the people in the developed world made it increasingly clear to their representatives that they wanted growth. When the ability of oil to meet marginal demand ended somewhere between 1980 and 1995, something else would have to take on the job, but all of the potential alternatives-synthetics from coal or shale, nuclear and solar energy, alcohols from biomass, tidal power-cost very much more than oil.

Even this analysis failed to come to grips with central long-term questions. How was the world to develop these alternatives? When would the consumers take action if oil remained relatively cheap? What would happen after the current glut and as Saudi Arabia approached its maximum chosen rate of production?

And, by 1978, an alternative "complacency" scenario was receiving wide support. Studies by Petroleum Industry Research, Inc., the National Economic Research Associates, and S.R.I. International, among others, suggested that the "energy crisis" was an event of the past. The reasoning for complacency included a combination of factors such as increased estimates of the energy resource base and its rate of development, enhanced recovery and improved efficiency in use.

More fundamentally, the "complacency" scenario failed to take into account the real needs and desires of the developing countries, and even the needs of the less fortunate people within the industrialized countries themselves. There was a common, indeed crucial, expectation that the overall rate of economic growth, and hence energy demand, would be reduced. Such reasoning, however, condemned most of the underdeveloped world to remain poor, that is, not to achieve what the developed world now takes for granted.

It was forgotten that only a few generations ago most people in the now developed world were also poor, and that it has been economic growth and industrialization which have banished the poverty that existed in Europe well into this century. It has been stated clearly by C. P. Snow: "The industrial revolution looked very different according to whether one saw it from above or below. It looks very different today according to whether one sees it from Chelsea or from a village in Asia."6 Walt Rostow quotes a black colleague: "The disadvantaged of this world are about to buy tickets for the show; they are quite unmoved by the affluent emerging from the theatre and pronouncing the show bad; they are determined to find out for themselves."7

There was and is a conscious or unconscious element of "pulling up the drawbridge" by many who seek to diminish the goals of economic advancement. While this may be most common in the already developed world, it is also emerging in developing countries, particularly among the "haves" of those nations. They ignore the enormous inequalities of income distribution in their countries.

It is a rationalization of failure to propose a return to a bucolic society in a world with three times the population of 1900. Such attitudes are, in fact, remarkably similar to those of the "haves" of much of Europe at the end of the last century. They too were content with society and saw little need for change or growth. The turmoil of Europe over the last century was the result. At least in the United States, the dissatisfied could move west.

Such issues are very dangerous for the developing world of today. The have-nots now know there is a "show" to be enjoyed; they hear about it on the radio and some see it on television. Expectations of eventually being part of that show are present. If not relieved, the pressures will build up and eventually explode. It is all very well for the haves of the world to question whether the developing countries should seek consumer economies; they already have their educations, medical resources, cars, houses, and appliances. The rest of the world also wants those things, and industrialization is the only route to them.

The energy needs of the developing world may well have been grossly underestimated in most of the recent crop of energy studies. Thus one typical projection for the year 2000 provides for some 62 barrels of oil equivalent per year for each North American, some 32 barrels for each European, some 10 barrels for each citizen of OPEC countries, and perhaps four barrels each for people in the non-oil-producing developing countries! Can anyone really expect this to happen?

There was another fundamental flaw common to both the "tight supplies" and "complacency" analyses. From the standpoint of the consumers, the "tight supplies" model could be deemed preferable, in that it should logically lead to the development of more expensive alternatives to oil, so that the psychological impact of their future availability might help to hold the prices of imported oil lower for a longer time. But even this conclusion rests on an assumption that as long as marginal supplies of crude oil can be made available the producers will be prepared to meet any demand.

It was and is misleading to concentrate the debate on whether marginal supplies come to an end in the 1980s, the 1990s, or even in the next century. The alternative possibility that OPEC would not be prepared to supply the required volumes at existing prices, along with what might need to be done to motivate the OPEC countries to do so, has received comparatively little attention.

The North-South debate of 1975-1977 seemed more like going through the motions of discussion rather than a real attempt at achieving an understanding between developed and developing nations. Also, the potential use of oil as a catalyst for change was essentially neutralized.

Even procedurally, for the consumers to seek to use the International Energy Agency for the dialogue was and is not welcome to OPEC. Its members perceive the IEA as an instrument founded to counter their new strengths developed in 1973-74. No matter how reasonably the IEA behaves, this cannot change the perceptions of the producers or allay their fears.

But basically the problem remained that consumers and producers spoke different languages-the former mainly economic and the latter much more political. Most analyses from the consumer nations were based on economic considerations, which showed "clearly" the short-term damage higher oil prices would cause, and why in a period of glut (prior to the Iranian problem) OPEC should not raise its prices even enough to match inflation and the relative decline of the dollar. Of course the consumers' considerations are not solely economic, but it "just so happens" that their political aims and economic reasoning have pointed in the same direction.

OPEC nations became increasingly dissatisfied. Whatever the logic of the economic debate, the driving forces were still political realities in their countries. The high hopes of 1973-74 had been replaced by disappointments. The OPEC nations felt cheated, and still do. They knew that what they could buy with their revenues was a lot less than was expected. It may well be that some had spent their new wealth unwisely, but expectations had been aroused which were now unsatisfied-and these were a real source of political pressure at home.

The passion of the frustrations in producer countries had either not been recognized or not fully evaluated by the consumers. The force of emotion should not have been discounted, for it is very much a factor in politics. The political forces to raise prices were growing strong. If OPEC should use the present power of its members to control supplies, it could certainly start an upward trend in real prices without reaching levels where the diverse consumers would be able to agree on justification for effective retaliation, military or otherwise.

In short, the underlying situation by the fall of 1978 was not one of balance, but one of tension and strain. A new situation had been created, and a new instability where no group was satisfied. This was a world in which power indeed appeared dispersed. Yet many groups perceived others as powerful, but not themselves. The developing countries saw the United States and Europe as having great power that could be used to hurt them or help them. Also, they saw the multinationals as powerful entities.

Paradoxically, the United States was concerned with its lack of power to get its own and the world's economy moving again. Indeed, it perceived its own power as being at a lower ebb than it had been for many years. The multinationals had never really believed in their power. Rather, they saw themselves as driven by the forces of the market and vulnerable to even the weakest national governments, who could nationalize them at a stroke-and had done so.

Within such a dispersal of power, the many holders of power, both social groups and nations, exerted power at different strengths and pulled in different directions. Even toward the end of 1978 it might have seemed that the forces were essentially balanced, and that society was changing only slowly. However, power can become polarized very rapidly, as has happened many times throughout history. The increasing level of dissatisfaction could well have been an early warning of change. Something had to give; all that was needed was a suitable push. Events in Iran provided that push, and the world is now in another cycle of rapid reaction as power has swung once again strongly toward the OPEC nations.

VI

The analogy between recent events and the so-called discontinuity of 1973-74 is remarkably close. Just as the Tehran Agreement of 1971 was planned to provide a moderate increase in real prices only to find itself overtaken by events, so the December 1978 pricing decision by OPEC also would have resulted in a moderate increase in real prices. Even this took the consumers by surprise and resulted in a flood of protest, mainly from the United States. However, the revolution in Iran and the cutting off of Iranian supplies soon overtook the implementation of the December decision and produced a much more drastic change. The reactions of the consumers did little to help their cause. They bid up spot crude prices to record levels, again repeating the experience of 1973-74. Sales at such prices, despite their tiny percentage of the market, received much media coverage in the producer nations, and gave rise to political pressure on producer governments to obtain the full market effects of these benefits for their people. Surcharges were the inevitable result.

When Iran returned to the market with only limited volumes but seeking very much higher prices than the other OPEC nations, the world faced the dilemma of whether or not to bid. For many companies, the penalties of not having oil were too great, significant volumes were purchased at around $18 per barrel, and spot prices continue to exceed $20. At the time of writing, negotiations for large Iranian volumes at prices between $16 and $17 are underway, well above the OPEC prices set in March of this year.

The adjustments are not yet over. U.S. companies, both by choice and apparently under some indirect influence from government, have been reluctant to bid in Iran. In the short term this may indeed have held prices down, but the result is that the building up of necessary stocks for inventory and reserves has been delayed. The stock situation is a real cause of anxiety to many, especially in the United States, and if continued into the autumn could cause a major market reaction, with even greater pressure on prices. The short-term prospect for 1979 must be one of instability, and power in the energy world lies firmly in OPEC hands.

If 1977 was the year of the "tight supplies" scenario, and 1978 the year of "complacency," then 1979 will surely become known for its concern with "instability." The growing awareness of the fragility of the world's supply system if only one of the major suppliers should experience internal difficulties is causing painful reappraisals. Could dissatisfaction with economic progress, or failure to achieve other national goals, be sufficient to affect any other supplier? Also, the Middle East conflict has not been settled. Instability is indeed a fair description of the current situation. It would be a surprise if the accommodation to change were not to continue for some time.

VII

Looking beyond the current situation, what further developments might lie ahead in the energy and power relationship? Perhaps two, or even three, possible scenarios can be envisaged.

The first is a continuation of the present, with instability remaining for a number of years, particularly should Iran continue to experience internal political problems. Indeed, in the current "tight supply" situation, it would only need one other major OPEC nation to encounter difficulties for any reason. Certainly it must be expected that the consuming nations are currently reevaluating their judgments of the long-term stability of each of the suppliers, and also their relationships with those whom they would judge to be the most reliable. However, it will take some time for any new assessment to be translated into political action, even given the necessary will to consider new accommodations with the suppliers.

Also, the political situation in the Middle East is far from resolved despite intensive efforts for an Arab-Israel agreement. As internal political pressures on Arab governments continue to build up, the prospects are that any available power sanctions might be used. These might well be cutbacks in production rather than outright suspension of supplies. They would certainly do little to improve stability.

For prices, the indications must be for continuing fluctuations as individual producers make their pricing decisions, with the overall outlook a rising trend. While power to control prices remains ultimately with the OPEC countries, the behavior of the consumers may be the key factor. Thus, at times of shortage or major uncertainty, if consumers bid prices beyond OPEC price settings, then it will only be a matter of time before the awareness in individual OPEC countries of the value of oil to the consumers is translated into political pressures to raise prices, then into individual surcharges and finally into a raised OPEC price.

Accompanying such a situation would be a climate of accusations by consumers and particularly consumer governments of price gouging and windfall profits against the oil companies, with calls for sanctions against them and the suppliers.

The "instability" scenario seems likely to continue for the balance of 1979 at least. Against such uncertainties, economic prospects cannot be other than difficult. The climate for international trade and for investment must be influenced by concerns to limit exposure and risk. Essentially, despite a widespread desire to stabilize the economic and energy situations, the power to do so would be beyond that of any of the parties involved. The impact on the economic situation of the developed countries, not to mention that of the non-oil-producing developing countries, can only be serious, over a short time frame. For the longer term, it would plainly be most unhealthy for all concerned.

The second scenario would be a return to the status quo, to relative stability in world oil trade, and oil prices, at whatever higher price level the market eventually settles, be it $16, $18 or, perhaps more likely, $20 per barrel. This new plateau would require a degree of stability in Iranian production sufficient to ensure production at moderate volumes, although below historic levels, and no other major supply upsets.

Resultant cutbacks in consumption, both as a shock reaction similar to 1975 until users become accustomed to higher prices, as well as from true demand elasticity and an economic slowdown, would remove the strain on supplies and allow a return to order. Indeed, a short-term oversupply situation could appear and with it, within a year or two, a resurgence of some form of the complacency scenario to "show" that there is no energy problem.

The world's economies would eventually accommodate the changes and commence a new and probably slower growth trend, but short-term prospects, especially due to the one-time but much heralded inflationary influence of the price increase, will have been damaged.

This scenario would also be expected to display the all too familiar polarization between producers and consumers. As long as the price plateau remains below the cost of alternatives, their development will remain inhibited, and even if crash programs were initiated by political forces, their time scale is so long that it would be the end of the 1980s before they had much effect on volume of demand. Consideration of prices would most likely return to the familiar short-term debate on current year settings and their influence on consumer economies.

But once again the problem would not have been faced in its fundamental aspects, and, of course, the strains will start to build up again for the next cycle of the energy confrontation.

While OPEC is a very loose association with sovereignty fully retained by each individual member, there are signs that it could choose to become a much more coherent force. Already the Arab members, and some other Arab states, have chosen to work together through the Organization of Arab Petroleum Exporting Countries (OAPEC). The OPEC nations could learn from history-that of the Texas Railroad Commission-and apply a much stricter system of pro-rationing and control of output. It would be difficult, but the possibility should never be ruled out. Under this scenario, the power to control prices remains with OPEC, but it carries the continuing responsibility to avoid serious damage to the world economy.

Or might a third scenario become possible? Might the world have finally learned enough from painful experience to make a "resolution" scenario credible? In such a scenario the energy power struggle would at last be resolved into a state of balance between the interests of the producers and consumers. Understanding the factors of power involved to achieve this is complex, yet never in the past did so many opportunities for analysis and understanding exist as there do today. Recent history has provided all of the necessary material-men should be able to draw the conclusions.

The consumer nations still do not realize that the OPEC nations are producing their irreplaceable resources much faster than they would choose based on long-term national considerations, or the concern in OPEC nations that their development needs have led them into this trap. Somehow the suppliers must back away before most of their oil is gone. Meanwhile, they must at least ensure adequate compensation in exchange for their oil, and they do not see that being achieved at prices well below the costs of alternatives. Instead they see OPEC subsidizing the developed world.

The producer countries have not helped their cause too much. The undreamed-of wealth after 1973 has, in many cases, not yet been well used to develop the infrastructure of these countries so that they can continue to produce wealth after the oil is gone; yet, for most, the years of financial surpluses are over. The producers' need was and is for long-term pricing and other contractual arrangements which would enable them to do a better job in developing their economies, but they remain far from certain what these are.

What is needed is a long-term understanding under which OPEC would now supply the volumes the world needs, at prices that consumers can afford in exchange for future considerations, financial assets, markets, prices, technology transfer and trade, in which the OPEC producers can have some confidence. There have been very few genuine efforts to understand or achieve such an accommodation.

On the one hand, the producers recognize their power to raise prices and to lower output-while at the same time they understand that their long-term interest lies in recognizing the need for the developed nations to continue their rate of growth, at a level that is not so low as to result in world stagnation. This could mean that some producing nations may have to make available their natural resources at a faster pace than required for the generation of the revenue necessary for the orderly economic development that will meet their political imperatives. And they need the cooperation of the industrialized consuming countries to achieve that kind of development.

On the other hand, the consumers must turn increasingly to alternative sources to conventional oil supplies, and must adjust their economics to the use of such sources, while guaranteeing to the producers a mechanism that will return to them in the long term the revenues generated but not required in the short term.

This scenario recognizes that a period of transition is required before the objectives of producer and consumer countries reach, if not a perfect match, at least a workable arrangement. In this situation, as far as price is concerned, surely the course of reason is to have the price of oil determined by long-term considerations. The only meaningful long-term price is the cost of replacement of conventional oil by other premium alternatives that are effectively not limited by the availability of natural resources. And the least disruptive development would be for the real price of oil to rise gradually to that level-some $20-30 (in 1979 dollars)-over a period of, say, ten to fifteen years.

Such a scenario would mean higher prices coming about over a period of time that would permit the consumers, developed and developing, to adjust to them. If it was clear that this was in fact the price trend, it would ensure that the new and otherwise marginal alternatives to oil would be ready when needed. And, more basically, it would open the way to a stable balance of power between producers and consumers.

Unfortunately, no consumer government has yet been able to encourage this kind of thinking. The pressures of short-term considerations, such as this year's trade balance, are too great. The world's political systems have not as yet developed that far. The power of the consumers is concentrated on the short term to keep today's energy prices down as far as possible. The world and its power interactions still function within a very short-term horizon.

For such reasons, the credibility of the resolution scenario must be suspect. However, without the necessary understanding and accommodation of long-term issues so that a balance of power is achieved, the alternative will be a continuation of the now familiar cycles of growing strain and then painful adjustment under a ratchet of increasing prices-until at last the level of premium alternatives is reached. The problem is that this could be a long, painful and dangerous time for the world.

VIII

Let me turn now to the case of my own country, Venezuela, as an illustration of the problems both of power and adjustment that the producer countries have faced, and will face in the future.

In one respect, Venezuela is the classic case of an oil-producing country in which increased wealth led to development programs and social spending that could only be maintained by high and sustained oil revenues, leading in turn to a rate of production exceeding the long-term capacity of its conventional oil resources. A cumulative total of 34 billion barrels has already been produced from Venezuelan fields, leaving proven reserves of conventional oil at only 18 billion barrels. Necessarily, in recent years, Venezuela has first stabilized and then reduced its oil exports, from a peak of 3.4 mb/d in 1970, to a present level of two mb/d. This means that, although Venezuela was primarily responsible for the founding of OPEC and sees itself as an elder statesman of that organization, it is currently perceived as holding very little power on the world scene. And it has not achieved a solid overall economic base for continued growth.

In another respect, however, Venezuela represents the future-the development of premium alternatives to conventional oil. Its reserves of heavy oil are vast, and should logically be developed as oil prices rise worldwide. Yet the timely development of those resources raises the very questions of prospective price levels we have just been discussing. In a situation of perennial instability, or continued focus on short-term economic factors, those resources might not be brought into play as they should be, both for the sake of Venezuela and for the sake of the consuming countries that will need the heavy oil we can produce, notably the United States. And, finally, it so happens that the proper development of our heavy oil could be, unlike most oil development, substantially labor-intensive and thus satisfactory in terms of a long-term national development program.

To put in perspective the potential resources of heavy oil in Venezuela, perhaps we should give some relevant data. The oil is concentrated in what is known as the Orinoco Oil Belt, which is about 600 km. long and the width of which varies between 50 and 80 km. Oil in place has been estimated from a range of a possible 700 billion to as much as 3,000 billion barrels. Recoverable oil using primary methods can be estimated at around 10 per cent. Primary methods plus steam soak (the approved method used for many years in the recovery of heavy oil on the east coast of the Maracaibo Lake) could raise that to about 15 percent. Final recovery using steam soak and steam drive could be as high as 35 percent. Therefore, from the low combination of the lowest estimate of oil in place plus the lowest recovery factor using primary methods, to the high combination of the highest estimate of oil in place plus the most optimistic recovery numbers, we get a range of producible oil from 70 billion to 1,050 billion barrels. The latter figure is higher than the currently known world reserves of conventional oil, and several times those of Saudi Arabia. Whether Venezuela ultimately finds itself at the lower or at the higher end of the range-and it will probably be somewhere in between, tending toward the higher end-there is no doubt that the reserves are huge.

The costs, while subject to some uncertainty, are below those of Canada's heavy oil and tar sand projects and certainly well below any known oil alternatives such as liquefied coal, solar, etc. The initial investment required to generate one-barrel-per-day production ranges from $2,700 to $10,000, depending on whether primary or secondary recovery methods are utilized. This compares with an estimate of $16,000 per barrel a day for the Cold Lake Project in Canada. In certain experimental modules currently being developed, the cost per barrel a day for the case of steam drive is around $6,000.

In assessing per-barrel production costs, given most favorable conditions, where self-pressurization by structural collapse permits production by steam soaking, costs might be as low as two dollars per barrel. If steam drive is required, production costs might be six to eight dollars, including the use of perhaps one barrel in steam-raising for each three or four produced. Upgrading of the heavy oil initially produced (incidentally, the part of the production cycle that makes it more labor-intensive than simple drilling and pumping) could also cost three to five dollars for each barrel of product. However, the heavy residues and gas produced would provide the thermal requirements of production and upgrading.

In the end, a high quality synthetic crude, costing perhaps something in the range of five to 13 dollars per barrel, would move from the field. In terms of production facilities required and ease of production, it is perhaps worth mentioning that several tests on producing wells, of which some 140 have been drilled, resulted in a daily production range from around 45 b/d to a high of 430 b/d, with a gravity ranging between 8° API and 10° API. Therefore, from a point of view of technology of production, cost of adding reserves and cost of production, the Orinoco belt is undoubtedly the cheapest energy alternative to today's lighter crude oils.

Perhaps the most vital consideration is security of supply. Orinoco Belt oil requires a high capital investment prior to production and, as mentioned before, should be developed against long-term considerations. There is a great deal of work to be done. It has now been initiated and a full quantification of oil in place and best methods for its extraction has already started.

In order to change current perceptions of Venezuela's power, it is essential that the Oil Belt potential be perceived and believed. It will also require from Venezuela a coherent and credible explanation of its national needs, priorities and plans to achieve its goals. Notwithstanding all the efforts that are currently being made to quantify the resources of the Oil Belt, the dilemma of establishing a production policy which meets the country's best interests will be a continuing one in the absence of a global long-term energy policy. At the end of the day Venezuela wants development, which means the ability to transform natural resources or money into wealth. Theoretically, it should make no major difference whether natural resources are kept as an instrument of wealth or whether the money generated by the sale of those resources is used judiciously, except for the following issues:

(a) What is our guess on future world inflation and monetary policy?

(b) If too much money is available too soon, will the country fall again into the trap of too much expenditure at the wrong time on the wrong things?

(c) The really vital one: Will the world have a long-term energy policy that will assist the producing countries in correcting the potential problems mentioned in (a) and (b)?

However, in the short term, the important thing for Venezuela is that these resources are there. They can and should be made credible, and they should allow Venezuela to use the present value of the power of such resources for its immediate development. As in economics, power has a current value based on expectations of the future.

IX

Energy remains a sensitive focus of power interaction. There are, regrettably, few signs of long-term stabilization of the energy situation. The OPEC countries are still essentially developing countries and they have yet to understand fully how to use their power effectively. As long as the consumers are content to remain dependent rather than interdependent, they remain vulnerable and diminish their power. The present competition involving consumers, OPEC and the non-oil developing countries is destructive to all.

The world is producing wealth far below its potential-perhaps some 20 percent or $1,000 billion each year, below what would have been possible if growth had not been constrained since 1973. Interdependence is the only way out, but only the developed nations can really take the necessary steps leading to partnership with the developing world. This will be particularly difficult for the United States, whose whole history and culture have developed around independence rather than interdependence. However, the current position of the United States is close to a dependence on OPEC, and surely that is not something the United States will enjoy.

What has to be understood is that there is no balance between today's energy requirements of the developed nations and the need, in social, political or economic terms, to produce these same requirements by the underdeveloped world. If the industrialized world were to reduce consumption of natural resources in order to keep pace with the long-term resource extraction policies by the underdeveloped producer nations, then world growth would come to a standstill and stagnation would result. If the underdeveloped world were to produce its resources at the rate required by the developed nations, it would exhaust its one element of power, natural resources, and would still sit at the tail end of the growth line in the future. So it seems that the time frame against which these fundamental social and political decisions are being made is wrong. As we can see, whatever the oil price, it is a symptom, not a cause, of differing needs. The producers need the understanding of the consumers, for whatever short-term benefits can be obtained will be short-lived, as has been demonstrated by recent events.

Under current perceptions of power, long-term arrangements which correct the time-frame imbalances are difficult, since the representatives of current political systems live short political lives. There seems to be no answer but to change the perceptions of power-as a result of a recognition of the need to view them against a longer term time frame. Perhaps the institutions involved need not be changed. They could survive for a very long time if they were to change to a focus which is wide and long-term. For a long time the world has understood the need for a "master plan" that would include the have-nots of the planet in the benefits of growth. The alternative inevitably will be social upheaval. Of course, every generation believes this will never happen in its own lifetime but, with increased desire for continuing growth, we may be approaching the fatal date more quickly than we think.

Footnotes

2 Ralf Dahrendorf, "International Power: A European Perspective," Foreign Affairs, October 1977, p. 72.

3 William P. Bundy, "Elements of Power," Foreign Affairs, October 1977, p. 2.

4 Niccolò Machiavelli, The Prince, Chapter III, trans. George Bull, Penguin Books, 1977.

5 Alfredo Peña, Conversaciones con Uslár Pietri, Caracas: Editorial Ateneo De Caracas, 1978 (present author's translation).

6 C. P. Snow, The Two Cultures and the Scientific Revolution, New York: Cambridge University Press, 1960, p. 29.

7 W. W. Rostow, The World Economy: History and Prospect, Austin: The University of Texas Press, 1978, p. 575.

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  • Alberto Quirós Corradi is President and Chief Executive of Maraven, S.A., an operating company of Petróleos de Venezuela, S.A. since nationalization of Venezuela's oil industry in 1976, and successor to Compania Shell de Venezuela, of which he was also President. This article was developed from a working paper presented at the Oxford Energy Policy Club in November 1978, subsequently updated to reflect recent events. While it reflects something of the responses at the Oxford meeting, the views expressed remain, of course, the sole responsibility of the author.
  • More By Alberto Quirós Corradi