Introduction of Ahmed Zaki Yamani:
Graham Allison, Dean of Harvard’s John F. Kennedy School of Government, welcomed His Excellency Sheikh Ahmed Zaki Yamani to Harvard for the 350th-anniversary celebration symposium. Bill Hogan, Director of the school’s Energy and Environmental Policy Center, introduced Sheikh Yamani and moderated the symposium.

Historical Context:
Harvard has a long history of focusing on energy problems, thanks to the work of predecessors like A.J. Meyer. The symposium was held in the Arco Forum in the Kennedy School as part of the celebrations and under the auspices of the A.J. Meyer Foundation.

Format of the Symposium:
Initial presentation followed by a question period. Participants were provided forms to write out questions and submit them to the marshals for collection.

Introduction of Ahmed Zaki Yamani:
Bill Hogan highlighted Sheikh Yamani’s 30th anniversary of his degree from Harvard Law School and his contributions to energy research. Sheikh Yamani presented a challenging analysis at Harvard’s Dunbarton Oak Conference in 1979, emphasizing mutual security and reciprocity in international energy problems.

Ahmed Zaki Yamani’s Background:
Yamani’s philosophical perspective draws from Islamic law and contemporary issues, seeking sophistication in handling business and trading activities. He began his career as a legal advisor to the Council of Ministers in Saudi Arabia and rose to become the Minister of Petroleum and Mineral Resources in 1962. Yamani also served as Secretary General of the Organization of Arab Petroleum Exporting Countries in 1968-69.

Yamani’s Contributions:
He is considered a premier analyst, diplomat, and businessman in the world oil market. Yamani’s reflections on his personal observations over a period of unprecedented experience provide valuable insights into past, present, and future oil markets.

Yamani’s Response:
Yamani acknowledged the difficulty of talking about the future due to contradicting forces, especially political ones. He expressed willingness to explore the topic further during the question-and-answer session.

OPEC’s Reaction to Accusations:
OPEC’s response to accusations of causing oil price shocks in 1973-74 and 1979-81. Yamani emphasizes Saudi Arabia’s belief in free enterprises and forces of supply and demand. He highlights the importance of uninterrupted oil supply and setting prices that ensure this objective.

Oil Price Collapse and its Effects:
Yamani refutes the term “oil price collapse,” stating that prices have not totally collapsed and may not collapse at all. The positive impact of cheap oil on consuming countries’ economies is often overlooked.

Impact of Cheap Oil on Indigenous Production:
Cheap oil prices negatively affect indigenous energy production, discouraging exploration and development of local reserves. Yamani mentions the possibility of import restrictions and their potential adverse effects on exporters like Mexico, Canada, Venezuela, the UK, Norway, and Russia.

Selective Applicability of Trade Barriers:
The proposal for selective applicability of trade barriers to exempt certain countries from restrictions. Yamani cautions against discrimination in world trade, which can lead to retaliatory measures, trade wars, and the end of free trade practices.

Price Fluctuations and Market Instability:
Yamani points out the significant price fluctuations in the past 16 years, causing instability in the world market. These fluctuations impact both producers and consumers, creating uncertainty and hindering long-term planning and investments in energy.

The Need for Price Stability:
Yamani emphasizes the importance of price stability in the long term for the oil industry. He highlights the need for producers and consumers to plan with confidence and allocate resources efficiently to achieve economic objectives.

Oil Prices Determined by Oil Companies:
Mainstream crude oil prices in the Arabian Gulf were fixed by oil companies from 1950 to 1970. Prices ranged between $1.75 to $1.95 per barrel, with a brief increase to $2.08 in 1957 due to the Suez Canal closure. Despite protests from oil producers, prices were reduced again to $1.90 in 1959 and $1.75 in 1960.

Oil Companies’ Argument Against Price Increases:
Oil companies maintained that product prices in the market did not allow for a netback value FOB price of export greater than $1.80 per barrel. This argument was challenged in May 1970 when oil companies increased prices unilaterally.

Events Leading to Price Increases:
In May 1970, oil companies unilaterally increased prices, nullifying their previous argument. Libya, Algeria, and Iraq took action to raise prices further. By the end of 1970, the price of oil had reached $2.18 per barrel, a significant increase from the previous fixed prices.

Background:
In January 1971, a damaged oil pipeline in Saudi Arabia caused supply disruptions and increased product prices. In December 1970, OPEC decided to raise income tax and oil prices, increase annual price increases, and eliminate certain allowances.

Negotiations and Price Increases:
OPEC and oil companies reached an agreement in February 1971 to increase prices and raise income tax. Subsequent negotiations led to further price adjustments and the use of a basket of currencies to determine oil prices.

OPEC’s Control over Pricing:
In October 1973, OPEC assumed control over pricing and increased oil prices significantly. OPEC set international crude oil prices from 1974 onwards, resulting in a direct conflict between producers and consumers. OPEC continued to adjust prices, reaching a peak of $34 per barrel in 1981.

Market-Oriented Price System:
In December 1985, OPEC decided to abandon its role as the price setter and adopt a market-oriented pricing system. This shift led to a decline in oil prices from $22 per barrel to $9 per barrel by July 1986.

OPEC’s Historical Role:
OPEC’s control over pricing was a response to the underpricing of oil by companies in the 1960s. OPEC’s actions resulted in increased prices, but demand continued to grow due to insufficient price increases.

Changing Demand Patterns:
Demand for oil peaked in 1979 and resumed slower growth in the 1980s, reflecting changing market dynamics and the impact of price increases.

Slowdown in Growth and OPEC Supply Stagnation:
The underlying growth rate in the period of 1973-1979 experienced a significant slowdown to 1.3% per annum, compared to the 7% average rate from 1960-1973. OPEC oil supplies also faced stagnation during this period, remaining virtually unchanged at around 31 million barrels per day from 1973 to 1979.

Supply-Demand Equilibrium and Price Stability:
Total world oil supplies exceeded demand by a small margin of 7% from 1973 to 1979, indicating a state of equilibrium between supply and demand. The oil price remained relatively stable during this period, increasing slightly from $11.75 per barrel in early 1974 to $14.55 per barrel by May 1979.

False Perception of Demand and Price Increases:
In 1979, OPEC faced a false perception of high demand due to concurrent stockpiling efforts by oil companies and supply security concerns following the decline in Iranian production. This scrambling for crude oil purchases led to a temporary increase in demand for OPEC oil, reaching close to 31 million barrels per day in 1979.

False Impression of Unlimited Demand:
The steep increase in oil prices created a misleading impression that buyers would be willing to pay any price for oil, regardless of how high it went. Prices in the spot market reached or exceeded $40 per barrel, leading OPEC to believe that a price of $34 per barrel for its crude exports was reasonable.

OPEC’s Isolation and Warnings of False Anomaly:
Within OPEC, Saudi Arabia stood alone in recognizing the false nature of the high demand and warned against excessive price increases. They emphasized that the high prices were an anomaly and could not be sustained in the long term.

OPEC’s High Prices and Subsequent Decline:
OPEC charged high oil prices from 1979 to 1981 due to various factors. These high prices were sustained for four more years until the end of 1985. The high prices created an imbalance between supply and demand, benefiting non-OPEC suppliers.

Non-OPEC’s Response and OPEC’s Countermeasures:
Non-OPEC suppliers increased their production of oil, coal, gas, and nuclear energy, capturing a significant share of OPEC’s oil exports. To counter the declining oil prices, OPEC implemented supply control measures by reducing its production voluntarily in 1981-1982 and setting a production ceiling thereafter.

Consequences of OPEC’s Actions:
The supply-demand gap narrowed, leading to a tendency for prices to firm up and increase. OPEC’s production share in total world supplies declined to an unacceptable level in 1985. OPEC could no longer bear the burden of supporting the price structure and needed a fair share in the world oil market.

Impact of Low Oil Prices:
Oil producers faced huge revenue losses, with OPEC countries experiencing a significant decline in net government revenues. Consuming countries enjoyed savings in their import bills, leading to positive effects on their balance of payments and economic indicators. The economies of oil-exporting countries were indirectly affected by the decline in exports to OPEC countries.

Conclusion:
OPEC’s high oil prices during 1979-1985 led to an imbalance in the oil market, stimulating non-OPEC supplies and prompting OPEC to implement supply control measures. The resulting decline in oil prices had varying impacts on producing and consuming countries, highlighting the need for equilibrium in the long term to achieve stability in the world oil industry.

Long-Term Equilibrium and Price Stability:
To achieve stability in the oil market, price setters must interpret supply-demand factors and set prices that promote long-term equilibrium. Departing from market-determined prices can lead to cyclical upheavals for exporters and importers, similar to those experienced in the past.

Avoiding Past Mistakes:
In the past, there were periods of underpricing in the 1960s and overpricing in the 1980s, disrupting market stability. The 1970s, contrary to popular belief, was a period of relative equilibrium and stability.

Long-Term Price Range for Equilibrium:
Assuming a long-term period from 1980 to 1992, the equilibrium price range for world oil markets may fall between $34 per barrel (1981 peak) and $14 per barrel (1986 low).

Gradual Price Increase for Stability:
A gradual increase in price from $14 per barrel in 1986 to $20 per barrel in 1992 is projected to result in a weighted average price of $23.8 per barrel for the period 1980-1992.

Projected World Demand and Supply:
World demand is expected to grow at 1.5% per annum until 1992, reaching approximately 90.9 million barrels per day. World potential supply is projected to stagnate at around 55 million barrels per day, creating a manageable supply-demand disequilibrium.

OPEC’s Long-Term Revenue and Pricing Strategy:
If OPEC had charged a fixed price of $23.8 per barrel from 1980 to 1992, they could have earned revenue equivalent to the combined earnings from 1980-1985 and 1986-1992 at an average price of $18 per barrel. This suggests that a stable intermediate-term price of $18 per barrel could lead to long-term equilibrium at a price of $23.8 per barrel.

Projected OPEC Exports and Revenue:
Under this pricing scenario, OPEC’s exports are projected to increase from 14.9 million barrels per day in 1986 to 20 million barrels per day in 1992, generating revenue comparable to that earned in 1984.

Impact on Demand and Non-OPEC Supplies:
At a stable price of $23.8 per barrel, demand would have moderated its decline, potentially staying above 45 million barrels per day. Non-OPEC supplies would have been maximized at 1 to 2 million barrels per day below their peak, preventing oversupply.

Market Fluctuations and OPEC’s Financial Instability:
OPEC’s income would have been stabilized at around $153 billion annually if market fluctuations had not occurred, rather than ranging from $282 billion to $76 billion. Market fluctuations led to instability, leaving OPEC in a challenging situation.

Achieving Long-Term Market Stability:
Cooperation between OPEC and non-OPEC producers is necessary to establish a price structure that balances supply and demand, leading to long-term market stability. Avoiding drastic interference in market forces is crucial to maintain long-term stability.

Challenges to Stability Within OPEC:
Achieving cohesion and stability within OPEC is difficult due to the diverse interests and perspectives among its members. Some members may disagree with the need for stability and equilibrium in supply and demand.

Saudi Arabia’s Strategy:
Saudi Arabia’s increased oil exports in 1986, despite lower prices, were not a strategic move but a necessity to finance their budget. Saudi Arabia’s production level was forced to decrease due to declining oil prices.

Impact of Import Tariffs on Oil:
Imposing import tariffs on oil could have negative consequences, such as discrimination against certain countries and loss of market share for countries with higher energy costs.

Saudi Arabia’s Economic Development:
Saudi Arabia achieved significant progress in industrial development and infrastructure. The country’s focus shifted to maintaining existing infrastructure rather than further expansion due to the decline in oil prices.

Impact of Individuals in Public Service:
The impact of individuals in public service varies depending on the specific context and circumstances. There are common rules and principles that can be discussed, but the application may differ across countries and cultures.

Equilibrium Price and Cost of Production:
There should not be a direct relationship between the price of oil and the production cost due to varying production costs across different countries. Pricing oil based solely on production costs could lead to the exclusion of certain producers from the market.

Soviet Union’s Role in Oil Production:
The Soviet Union has a vested interest in higher oil prices as it generates a significant portion of its hard currency earnings from oil sales. The recent reduction in Soviet oil output is likely motivated by the desire to generate more revenue in the face of declining oil prices.

Net Back Pricing Policy:
OPEC has a committee studying the continuation or phase-out of net back pricing, with the goal of returning to a fixed price, as preferred by Saudi Arabia.

Oil Policy Development in Saudi Arabia:
The process is informal and flexible, adapting to changing circumstances.

Appreciation for the Discussion:
Bill Hogan expresses gratitude to His Excellency for sharing insights into the history of the market and future thinking.

Conclusion of the Symposium:
The program ends, and attendees are encouraged to exit through the windows to the park and the podium. Another group is expected to arrive later.