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Volume :1 Issue : 1 1975      Add To Cart                                                                    Download

TOWARDS OPTIMUM OIL PRODUCTION POLICIES

Auther : Naiem A. Sherbiny

 
         In formulating their oil policies, oil-producing countries must balance international with domestic considerations.  Specially, the dynamics of conflict in the international oil game must be weighed against present and future demands of social and economic development.  The oil game has undergone important transformations: in the focus of conflict and in the players of the game. The paper distinguishes between two phases: the original conflict between producing countries and oil companies, and the present conflict between OPEC and oil importing countries.

         The original conflict centered around the division of oil revenues. Four factors may be cited to explain the shift in the bargaining position of the players in favor of host governments:

         1)     large oil findings,

         2)     rising tide of nationalism in the oil countries,

         3)     erosion of the advantages of vertical integration in the oil industry and the subsequent weakening of barriers to enter the industry, and

         4)     the eventual rise of OPEC as a powerful cartel of producing countries.

         In contradistinction, the present conflict is between OPEC and the oil importing countries and focuses on the formulation of production, pricing, and exporting policies.  The concerns of oil importing countries are with the stability of oil flows and oil prices and with increasing future oil supplies to satisfy increasing consumption.  Four elements combine to explain the potential reluctance of oil producers, especially small countries, to expand their production in line with increased consumption:

         1) the price-revenue effect,

         2) the absorptive-capacity effect,

         3) the surplus-capital effect, and

         4) the resource-exhaustion effect.

         Based on these factors, the paper develops a social cost-benefit framework to guide policy formulation in oil producing countries. The central hypothesis stipulates that while the social benefits of increased, oil production increase at decreasing rates, the social costs increase at increasing rates.  Optimal social management of petroleum production is reached when marginal social benefits equal marginal social costs.  Thus, the relevant decision criterion is to maximize net social benefits rather than maximizing social benefits regardless of social costs.

         Indications point to the possibility that present production rates in small oil producing countries, like the Gulf States, are well above production rates consistent with maximization of net social benefits.

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