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Friday, 11 October 1985
Page: 1091

Senator MAGUIRE —I refer the Minister for Resources and Energy to the Organisation of Petroleum Exporting Countries whose activities in 1973 and 1978 disrupted world economic activity. I ask the Minister: Can he report on the implications for Australia of the recent Vienna meeting of OPEC, particularly the pressure from six of its 13 members to exceed their production quotas for crude oil? What are the possible budgetary consequences and implications for Australian coal and other energy industries of the moves at the OPEC Conference?

Senator GARETH EVANS —It has been widely reported in the Press that the two-day OPEC meeting on 3 and 4 October in Vienna broke up in disarray. As expected, the major stumbling block was the question of production quotas, or the division of OPEC's share of the market amongst its members. No new agreement was arrived at, the major stumbling block being Saudi Arabia's indication that it was no longer prepared to produce at below its quota level and also its revelation confirming reports in recent weeks that it had entered into arrangements to sell quantities of oil at what were effectively discount prices. The inability of OPEC to make clear decisions with regard to production quotas certainly does not augur well for the Organisation. A number of nations are likely to increase output whenever the market permits. Among those reportedly seeking increases in their production quotas were Iraq, Iran, the United Arab Emirates, Qatar, Gabon and Ecuador, with Ecuador threatening to leave OPEC unless its quota was increased. All this could add significantly to available world supplies over the coming months.

It is the case that recently the oil market has been stronger as a result of increasing demand due to the onset of the northern winter and the disruption flowing from Iraqi attacks on Iranian oil institutions. But it can be expected that this situation would be reversed if OPEC production discipline is weak, as seems presently to be the case, and a steep fall in prices could consequently result in the latter part of the northern winter if not sooner. It has been the case in recent weeks that a number of OPEC officials, including Sheikh Yamani and the President of OPEC, Dr Subroto, had been warning OPEC and non-OPEC countries alike to restrain output to avert a major reduction in prices. The consequences for Australia of a major oil price drop would, in the Government's estimate, be mixed.

There are a number of negatives. First, in the short term, there would be a major decline in government revenue which would either blow out the deficit or force new or increased taxation elsewhere. In the longer term we face difficulty with our energy exports-petroleum, coal and liquefied natural gas, coming on stream soon-with potentially lower prices and possibly lower volumes. That, in turn, flows through to the prospect of diminution in oil exploration activity. Further, with our trade concentrated in agricultural and mining products rather than manufactures or services, we could not be expected to share proportionately in the benefits that would flow to the large industrialised nations from a major drop in oil prices, although it is true that to compensate for that there could be a lagged improvement in market conditions for minerals and metal products.

On the negative side, there would also be a potentially massive pressure on the world's banking system if a price drop were of such a magnitude that it so reduced the revenues of countries such as Nigeria, Mexico and Venezuela that they became unable to service their huge external debts. The effects of this would then flow through to all the Western economies, including Australia.

On the more positive side, a substantial drop in oil prices-apart from being of benefit to motorists and consumers-would lead to some lowering of inflation and the cost structure for industry, an effective increase in income by all petroleum product users and a likely increase in economic activity in at least some sectors of the Australian economy as well as in the international economy in general.

In summary, this is an important issue; it has certainly been the subject of a lot of newspaper comment in recent days. There would be winners and losers flowing from such a situation. Australia's energy-producing industries would certainly be harmed, but there could be subsequent improvements for some other industries, including minerals production and processing, as economic activity picks up around the world.

Senator Sir John Carrick —What about agriculture and the benefits to farmers?

Senator GARETH EVANS —I referred to motorists as consumers, but of course the farming sector is also a very significant consumer of petroleum products. It might be expected that, overall, difficult short to medium term problems of structural adjustment would arise and on balance it is difficult to predict the net result.