Section 6. Resources and Energy
1. International Oil Situation
(1) Sharp Fall in Oil Prices
Following OPEC's decision in December 1985 to "secure and defend for OPEC a fair share in the world oil market" and the subsequent sharp oil production increase by its member countries, oil prices began to decline steeply from January 1986 with North Sea Brent, which traded at $26/bbl at the end of 1985, plunged to $12/bbl in April. At an extraordinary OPEC meeting in mid-April, no conclusion was drawn due to a confrontation between a majority group giving priority to the restoration of market shares and calling for increased production and a minority group of Iran, Libya and Algeria emphasizing the need to push up oil prices through reduced production. On the other hand, non-OPEC oil producers, especially, the U.S. oil industry, suffered from falling oil prices, resulting in reduced production due to the closure of small-scale oil wells, and the sluggish oil exploration and development activities.
(2) Change in OPEC Policy
OPEC's production surpassed 20 million bbl a day in July with the result that oil prices fell to $8/bbl in the latter-half of July. In the intervening period, OPEC held a meeting in June, but it got suspended as no conclusion was drawn. At its extraordinary meeting held between the latter-half of July and the first-half of August, however, an agreement was reached on the observance of the production ceiling of 16 million bbl a day, which is equal to the figure contained in the October 1984 agreement and was proposed by Iran, for two months starting in September with the sole exception of Iraq. At another extraordinary meeting of OPEC in October, an agreement was reached on the extension of the provisional production cutback agreement through December and an early return to the fixed pricing system. In the background of the agreement was a shift in OPEC's policy to the recovery of past high prices away from the placement of emphasis on market shares. At the end of October, the Saudi Arabian Government dismissed Oil Minister Ahmed Zaki Yamani and appointed Planning Minister Hisham Nazer as Yamani's successor, impressing the world with the shift of its oil policy. After the agreement on oil production cutback was reached, oil prices rose to $14/bbl.
(3) The 80th Meeting of OPEC Conference in December 1986 and Subsequent Oil Situation
At the 80th meeting on December 20, OPEC members agreed on the adoption of the $18/bbl fixed price system from January 1987, lower the production ceiling for the first-half of 1987 by about 5% from the provisional production ceiling, and set the overall quotas, including that of Iraq, at 15.8 million bbl a day (Iraq was not a party to the agreement). It can be said that at the meeting, OPEC clearly came up with a policy of restoring high prices, abandoning the fair market share policy. In the wake of the agreement, oil prices rose to the upper-half of $18/bbl in January 1987. In mid-February, oil prices fell to the $16/bbl range as oil-consuming countries reduced crude purchases from OPEC by dipping into their oil reserves. But the oil price soon picked up as OPEC members observed their production quotas, returning to the $18/bbl range in early April.
2. International Energy Agency (IEA) and Its Activity
(1) As a glut persisted on the world oil market in 1986, oil prices fell sharply in the first half of the year and then rose gradually toward the end of the year.
Taking into account such a situation, the IEA analyzed the effects of the market conditions and low oil prices on the IEA member countries and international energy policies.
(2) The outline of the IEA's main activities in 1986 are as follows:
(a) monitoring and analysis of the international markets for oil and other energy source
(b) analysis of short- and long-term effects of low oil prices on energy supply-demand at OECD member countries
(c) strengthening of IEA emergency preparedness (achievement of optimum reserve levels by member countries and reduction of oil consumption)
(d) review of member countries' energy policies
(e) research on energy conservation; review of renewable energy sources; long-term gas supply-demand outlook; studies on low oil prices and the outlook of electricity demand after the accident of the Chernobyl nuclear power plant
(f) preparations for 10-year review of energy research and development; implementation of workshop activity on information system and clean use of coal based on the ministerial meeting decision in 1985
(g) analysis of energy development in non-IEA countries and an exchange of technological information
(3) In view of a new development of energy situation including the slackening oil prices in 1986, the IEA scheduled a ministerial meeting after two years interval since July 1985, to discuss the world energy situation.
3. Pacific Energy Cooperation
(1) With a view to providing a forum for a free exchange of views to those concerned with energy problems in the Pacific region, the second Symposium on Pacific Energy Cooperation (SEPCII) was held March 5-6 in 1987, following the first meeting last year. The meeting was chaired by Toyoaki Ikuta, president of the Institute of Energy Economics, Japan. A frank exchange of views was conducted with the participation of energy experts both at home and abroad. Indonesian Mines and Energy Minister Subroto and Vice Minister Huang Yicheng of the Chinese State Planning Commission delivered lectures as guest speakers. At the gathering, conferees cited five areas of energy cooperation in the Pacific region "promotion of energy development projects," "stressing cooperation in software aspects," "promotion of stockpiling," "making energy flow optimum," and "promotion of electrification."
(2) Meanwhile, the first Mining and Energy Forum (MEF) was held in Jakarta in July 1986 within the framework of the Pacific Economic Cooperation (PECC) for debate on energy data and electrification.
4. Energy Consultations
(1) Though the energy supply-demand is basically following a trend of relaxation at the moment, the International Energy Agency forecasts a tightening of the supply-demand in the future. The establishment of better mutual understanding among countries concerned is all the more important at a time when the supply-demand has been relaxed.
(2) From such a viewpoint, various bilateral energy meetings were held besides multilateral meetings in the International Energy Agency in 1986. Japan and the United States held two meetings of the energy working group. Between Japan and Australia, the third high-level energy meeting took place in Tokyo in October 1986 and the fourth meeting in Canberra in March 1987.
(3) As for Persian Gulf countries, Japan had an exchange of views with the Gulf Cooperation Council (GCC) in Tokyo in January 1987.
5. Problems of Resources Other Than Energy
(1) Primary Commodities Issue
(a) The primary commodities issue in the 1970s centered on the tight supply-demand situation and rising prices. But in a major turnaround, protracted sluggishness of prices has become a serious problem in the 1980s. The cause of sluggish prices differs from product to product with a complicated mixture of cyclical, structural, and supply- and demand-side factors observed. In general, weather and other natural conditions tend to cause fluctuations in the production of foodstuffs and beverages. Excess production and accumulated reserves tend to exert downward pressure on their prices, while slack prices of agricultural raw materials and mineral resources are attributed to the slowdown in the economic growth and falling demand as a result of technological innovation in developed countries. At any rate, weak primary commodity prices not only incur damage to domestic economies of developing countries and reduce their foreign currency earnings, but accelerate snowballing external debt problems now facing many developing countries and make the solution to the problems more difficult.
(b) 1986 saw further weakening of primary commodity prices on the whole. According to a World Bank survey, real prices of non-fuel primary commodities dropped to 73 in 1986 against the base figure of 100 in 1980. A breakdown of product group shows that beverages rose to 102 from 86 the previous year due to a temporary spurt in coffee prices and agricultural raw materials stayed flat at the previous year's level of 79. But both foods and minerals fell from the previous year to 66.
(c) On the basis of such a primary commodity situation, Japan has been proceeding with various kinds of bilateral economic cooperation to help developing countries diversify their production and export structures and extricate themselves from a heavy dependence on primary commodities. It has been also actively taking part in consultations on commodities at the United Nations Conference on Trade and Development (UNCTAD), the Organization for Economic Cooperation and Development (OECD) and other international forums. Further, Japan has been playing an important role at international commodity organizations to help various international commodity agreements, covering individual primary commodities, function effectively.
(2) Trends of International Commodity Agreements
(a) 1986 was a turbulent year for international commodity agreements as traditional agreements with economic clauses followed a difficult course and the International Tropical Timber Agreement launched its activities.
(b) As to the International Tin Council which saw a financial collapse the previous year due to chronic overproduction, efforts were made to tackle the impasse, suspending buffer stock operations, but to no avail. Suits were later brought up by creditors. As for the International Coffee Agreement, reintroduction of export quotas, suspended temporarily following the price surge, emerged as a major issue, but no agreement was reached among member countries. Though past four negotiations failed to produce a assettlement, a new International Cocoa Agreement was concluded in July 1986 after the amelioration of the economic clause for the introduction of a withholding scheme and went into effect provisionally in January 1987. Negotiations were also held for the conclusion of a new International natural Rubber Agreement, but rubber producing and consuming countries haggled over ways to improve the economic clause. However, a new agreement with higher effectiveness than the old one went into effect in March 1987.
(c) Among commodity agreements designed for research and development and exchange of information, the International Tropical Timber Agreement was the most recently established agreement. A decision was made in June 1986 to set up its headquarters in Yokohama and the new secretary-general took up his post in November. In March 23-27, the International Tropical Timber Council was held in Yokohama for the first time. At the outset of the gathering, Foreign Minister Tadashi Kuranari delivered a speech and stated Japan's readiness to contribute about $2 million to the organization's projects in fiscal 1987. At the meeting, a decision was made on the implementation of 13 preparatory projects, the start of work for the collection of economic information on tropical timber and a stepped-up improvement of the organization. The Yokohama meeting marked the virtual start of the International Tropical Timber Agreement, a new-type commodity agreement chiefly designed for research and development.
As for the International Jute Agreement, a new-type commodity agreement in the same category as the International Tropical Timber Agreement, prospects have emerged for the start of a research and development project on top of the promotion of consumption. Among agreements providing for exchange of information only, the International Wheat Trade Convention went into effect in July 1986, (approved by the Japanese parliament in November of the same year), while the effective period of the International Sugar Agreement, originally scheduled for expiration at the end of 1986, was extended by one year.
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