Striving for Stability in Global Energy Markets

Speech by OPEC Secretary General, HE Abdalla Salem El-Badri, to the 12th IEF Ministerial Meeting, 30-31 March 2010, Cancun, Mexico - Session Two: Global Energy Markets: Reducing Volatility and Uncertainty

[Slide 1] Excellencies, ladies and gentlemen,

Let me begin by thanking the Mexican Government for hosting this important meeting, the International Energy Forum (IEF) in helping our host organize the event and co-hosts Kuwait and Germany for their support.

I think it is perhaps appropriate to recall the last IEF Ministerial Meeting, held in Rome in 2008, on the theme: ‘Energy Dialogue to Respond to Global Challenges’. It was certainly a theme with good foresight, given that the last two years have witnessed a period of unprecedented volatility and much uncertainty in energy markets.

In fact, in the period since, there has been much positive global energy dialogue, with the Jeddah and London ad-hoc energy meetings, and, of course, there has been much discussion and debate among all stakeholders leading up to this meeting. OPEC has welcomed such dialogue and has been an active participant.

[Slide 2] The importance of dialogue and cooperation has never been more apparent, as the impacts of the global financial and economic crisis and excessive oil market speculation have been felt throughout the whole industry.

Prices have swung dramatically; demand dropped off in both 2008 and 2009; a number of investments have been put on hold, although some of these are now being revisited; and of course, jobs have been lost.

More importantly, confidence has been shaken and the future blurred with uncertainties.

The important initiative of OPEC Member Country, the Kingdom of Saudi Arabia, to hold the ad hoc energy meeting in Jeddah helped catalyze the synergies of producing and consuming countries to work together in order to better understand the factors underlying market instability; and then, take the appropriate actions to ensure that volatility and uncertainty do not return to the same extent. This can be viewed in the recommendations agreed at this meeting; for an enhanced IEF framework that further supports the producer-consumer dialogue; proposals to explore ways and means to help mitigate energy market volatility; and for specific areas of cooperation between the IEF, the IEA and OPEC.

[Slide 3] It is my hope that the large price swings and the extreme volatility that we have witnessed in 2008 and 2009 are consigned to the past. These types of events are detrimental to both producers and consumers. While markets have been more stable in recent times, it is essential we do not forget the price extremes that were witnessed only a short time ago. The price swings in oil markets saw days when the price of crude oil fluctuated by as much as $16/b. This cannot be justified by fundamentals. It was obvious and clear that it was speculative activity, as the regulatory proposals and measures underway in financial markets today suggest.

In an industry of long-lead times and high capital costs, such excessive speculation and price volatility makes for unsuitable investment conditions. It undermines the ability of the industry and its investors to adjust to market changes.

Addressing this concern has been to the fore of OPEC’s thinking. This has not only been reflected in its discussions with the IEF and the IEA, but in other fora, such as OPEC’s joint workshops with the EU on financial markets last year that called for an urgent response to the challenges posed by today’s financial markets.

I appreciate we cannot eliminate volatility altogether. It will always be part of the market. But we need to lessen the magnitude of the swings and I feel that there is now a common understanding that a price that is neither too high nor too low is favourable to all. More stability generates more certainty, for the benefit of consumers and producers alike.

It is also essential to underscore the importance of transparency. OPEC has played a significant part in the development of JODI, which in a short space of time has evolved into an internationally-respected initiative that enhances the transparency, scope, quality and timeliness of data and information flow. And we remain committed to furthering this project.

[Slide 4] These types of initiatives are essential, as we all know the oil industry will play a major role in the world’s energy future. In OPEC’s reference case projections, energy use increases by 42 per cent from 2007-to-2030. And oil will continue to play the leading role to 2030.

It is also evident that there are enough resources to meet future demand. Improved technology, successful exploration and enhanced recovery have enabled the world to increase its resource base to levels well above past expectations. And this will continue in the future. Resources are clearly plentiful.

Moreover, non-crude oil supply is, in fact, going to play a major role in satisfying future increases in demand. The key issue is not related to availability, but to deliverability and sustainability, as well as the uncertainties surrounding the extent to which increases in demand for crude will actually materialize.

[Slide 5] At this juncture, let me stress that OPEC remains committed to supporting market order and stability; as it has been in the first 50 years of its existence. This is enshrined in its Statute, its three Heads of State Solemn Declarations and in its Long-Term Strategy.

Today, current spare capacity in Member Countries already exceeds 6 mb/d. This represents a huge level of investment. And clearly demonstrates the seriousness the Organization attaches to the need for adequate production capacity to be in place, not only to meet the demand for its oil, but also to offer sufficient spare capacity. This largely answers the security of supply concerns of consuming countries.

But energy security is reciprocal. It is a two-way street. Security of demand is as important to producers as security of supply is to consumers. The two need to go hand-in-hand.

From the demand perspective, consuming countries must be clearer about the impact of their policies on future oil consumption levels and overall energy demand. There is a need for consistency with credible and reliable signals: one cannot ask for more crude oil investments, while at the same time advocating the need to reduce its use, increasing subsidies for alternatives, and calling for less oil imports from specific regions.

We all want to make sure there is enough oil made available to meet future demand, but it is important to appreciate that unclear or unrealistic policies and decisions can send the wrong signals to producers and investors. And this is true for both the upstream and downstream.

[Slide 6] These issues, alongside the current fears surrounding the pace of the global economic recovery, translate into an uncertainty gap for upstream investments in OPEC Member Countries. By 2020, the gap reaches $250 billion in real terms. And even to 2013, which represents a timeframe over which investments are effectively locked in, requirements could be as low as $70 billion or as high as $170 billion.

There is a very real possibility of wasting financial resources on unneeded capacity.

[Slide 7] Then there is the environment. Our Member Countries are continuing to work hard to increase the efficiency and environmental credentials of petroleum. In this respect, carbon capture and storage (CCS) has enormous potential and offers a real win-win solution. OPEC is proud to be at the heart of the new way forward, but we cannot, nor should we be expected to act alone. CCS needs to be commercialized quickly – developed countries should take the lead in this respect and in the greenhouse gas mitigation effort generally, given their historical responsibility and technological and financial capabilities.

And no one should forget the very first UN Millennium Development Goal: poverty eradication. Every six seconds a child dies because of hunger and related causes, and over 1 billion people do not have enough to eat – more than the populations of the US and the EU combined. A catalyst in helping alleviate poverty is access to modern energy services. In the developing world, 1.5 billion people have no access to electricity and 2.5 billion do not have adequate energy services. Thus, it is critical that the world community makes sure everyone has access to reliable, affordable, economically viable, socially acceptable and environmentally sound energy services. This issue needs the urgent and critical attention of world leaders, much as the attention given to climate change.

[Slide 8] With all this in mind, it is important that the IEF remains a platform for sharing insights and exchanging views about energy market trends, and also helps improve the understanding of the linkages between the physical and futures markets.

Excellencies, ladies and gentlemen,

We need to remember that energy is crucial for sustainable economic and social development in each and every country of the world – the world would not function without it. Thus, the world requires an energy market landscape that is stable and predictable. A setting in which investments and expansion flourish; economies witness stable growth; producers get a fair return from the exploitation of their exhaustible natural resources; and where better access to modern energy services helps make energy poverty a thing of the past.

 [Slide 9] Thank you for your attention.

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