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Transnational Oil: Issues, Policies and Perspectives These are troubled times for the oil business. The dramatic fall in petroleum prices in recent months has sent tremours through the finance ministries of producer-country governments and the boar- drooms of the industry’s corporations, culminat- ing most visibly in scrapped development projects and widespread layoffs. Certainly, the pace of these developments has been far more rapid than most analysts had expected, but the overall turn of events has not been much of a surprise. As economic theory predicts, the presence of excess profits in a concentrated market that is unprotected by high barriers to entry begets new competitors, who drive prices, and hence profits, down. When that market is also characterized by appreciable bar- riers to exit (because sunk costs are large), the new marginal producers will stay in business longer than they otherwise would and thus, all other things being equal, low prices will be relatively long lived. However, this is not to suggest that the evolution - or isit the revolution?-in the world oil market can be explained simply in terms of economics. Rather, an analytical framework in- corporating institutional and political factors, as well as economic ones, is required. Transnational Oil attempts to devise such a framework. It is composed of six core chapters, and concludes with a seventh that provides a summary of some of the key issues that arise earlier. The first chapter focuses on the objectives of companies, private as well as state-owned, oper- ating in the international petroleum arena, documenting the pronounced heterogeneity in competitive strategies pursued by these firms from the standpoint of size, vertical integration, geographical diversification, and so on. The second chapter traces intertemporal changes in oil demand, supply (including stocks), and prices, with an emphasis on the last two in the post-1973 period, and also reviews the determinants of these factors. The third and fourth chapters are companion chapters: they concentrate on the interests and policies of the two major groups of actors in the world oil market, OPEC and the industrialized countries. Between the two, the discussion is quite diverse, ranging from an assessment of whether OPEC actually behaves as a cartel to a description of US energy security and regulatory policies. The impacts of the rise in the price of oil throughout the 1970s and the early-1980s on the world financial system are taken up in the fifth chapter. The topics covered include: (i) the petrodollar recycling activities and changes in the current account balances of OPEC members; (ii) the ways in which non-OPEC countries finance oil imports (including a discussion of the mount- ing concern over the lending policies of large US commercial banks in this regard) and (iii) the various instruments used to finance oil explora- tion and development projects in traditional, as well as in non-traditional, producing areas. The sixth chapter examines the relationship between the development of energy resources and economic growth in a variety of countries, although there is a clear emphasis on members of OPEC. Attention is centred on the challenges to developing broad-scale industrialization and di- versifying away from almost exclusive reliance on the oil sector, the trade-off in land use between agricultural and energy development and the problems that oil wealth poses, for example, maintaining national security through large-scale military expenditures and reducing government corruption through fundamental regulatory re- form. It should be clear from this summary that, despite its title, this book covers much more than how the world oil market works. This is the one shortcom- ing of the book. Its scope is too broad. In attempting to cover so much material in a relatively short space (177 pages), it was not possible for the author to cover all of the issues discussed in equal detail. Natural Resources Forum @ United Nations, New York, 1987.

Transnational Oil: Issues, Policies and Perspectives

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Page 1: Transnational Oil: Issues, Policies and Perspectives

Transnational Oil: Issues, Policies and Perspectives

These are troubled times for the oil business. The dramatic fall in petroleum prices in recent months has sent tremours through the finance ministries of producer-country governments and the boar- drooms of the industry’s corporations, culminat- ing most visibly in scrapped development projects and widespread layoffs.

Certainly, the pace of these developments has been far more rapid than most analysts had expected, but the overall turn of events has not been much of a surprise. As economic theory predicts, the presence of excess profits in a concentrated market that is unprotected by high barriers to entry begets new competitors, who drive prices, and hence profits, down. When that market is also characterized by appreciable bar- riers to exit (because sunk costs are large), the new marginal producers will stay in business longer than they otherwise would and thus, all other things being equal, low prices will be relatively long lived.

However, this is not to suggest that the evolution - or isi t the revolution?-in the world oil market can be explained simply in terms of economics. Rather, an analytical framework in- corporating institutional and political factors, as well as economic ones, is required. Transnational Oil attempts to devise such a framework. It is composed of six core chapters, and concludes with a seventh that provides a summary of some of the key issues that arise earlier.

The first chapter focuses on the objectives of companies, private as well as state-owned, oper- ating in the international petroleum arena, documenting the pronounced heterogeneity in competitive strategies pursued by these firms from the standpoint of size, vertical integration, geographical diversification, and so on. The second chapter traces intertemporal changes in oil demand, supply (including stocks), and prices, with an emphasis on the last two in the post-1973 period, and also reviews the determinants of these factors.

The third and fourth chapters are companion chapters: they concentrate on the interests and policies of the two major groups of actors in the world oil market, OPEC and the industrialized countries. Between the two, the discussion is quite diverse, ranging from an assessment of whether OPEC actually behaves as a cartel to a description of US energy security and regulatory policies.

The impacts of the rise in the price of oil throughout the 1970s and the early-1980s on the world financial system are taken up in the fifth chapter. The topics covered include: (i) the petrodollar recycling activities and changes in the current account balances of OPEC members; (ii) the ways in which non-OPEC countries finance oil imports (including a discussion of the mount- ing concern over the lending policies of large US commercial banks in this regard) and (iii) the various instruments used to finance oil explora- tion and development projects in traditional, as well as in non-traditional, producing areas.

The sixth chapter examines the relationship between the development of energy resources and economic growth in a variety of countries, although there is a clear emphasis on members of OPEC. Attention is centred on the challenges to developing broad-scale industrialization and di- versifying away from almost exclusive reliance on the oil sector, the trade-off in land use between agricultural and energy development and the problems that oil wealth poses, for example, maintaining national security through large-scale military expenditures and reducing government corruption through fundamental regulatory re- form.

It should be clear from this summary that, despite its title, this book covers much more than how the world oil market works. This is the one shortcom- ing of the book. Its scope is too broad. In attempting to cover so much material in a relatively short space (177 pages), it was not possible for the author to cover all of the issues discussed in equal detail.

Natural Resources Forum @ United Nations, New York, 1987.

Page 2: Transnational Oil: Issues, Policies and Perspectives

106 H.G. BOARDMAN NRFVOL. 11, NO. 1,1987

Nevertheless, the book does provide a very good introduction to petroleum matters and to energy policy in particular. As such, it should prove to be quite useful as a reading for a course in energy policy.

Transnational Oil: Issues, Policies and Perspec- tives Author: Zuhayr Mikdashi Publisher: St Martin Press, New York, March 1986

Details: ISBN 0-312-81482-8, 280 pages, price $29.95.

HARRY G. BOARDMAN Department of Economics and Kennedy

School of Government, Harvard University, 79 John F. Kennedy Street,

Cambridge, MA 02138 and

Energy and Materials Division, Resources for the Future,

Washington, DC, USA