International Developments in the Oil and Natural Gas Markets and their impact on Arab Countries

Speech by OPEC Secretary General, HE Abdalla Salem El-Badri, to the 9th Arab Energy Conference, Doha, Qatar, 9-12 May 2010

Mr Chairman,
Excellencies,
Ladies and gentlemen,

Good afternoon:

I am delighted to be back in this dynamic and expanding city of Doha and I am deeply honoured to participate on this panel.

I should like to share with you OPEC’s views on recent developments in the energy scene and their impacts. The changes that the energy scene has witnessed over the last few years have been dramatic. They stem from two main causes: the global financial crisis, and the subsequent economic downturn, and the inefficient functioning of oil markets in terms of price discovery.

The financial crisis, which began in the summer 2007 and reached its height in September 2008 with the near collapse of the global financial system, has had a profound impact on the real economy. The world has faced its longest, deepest and most-widespread contraction in more than six decades.

This, in turn, adversely affected the energy sector.

The years 2008 and 2009 were the first time since 1981 that global oil demand declined in two successive years. The cumulative impact was a fall of 1.8 million barrels a day. The price of a barrel of crude lost almost 100 dollars in less than six months from mid‐2008. The demand for OPEC crude fell sharply and the resulting supply adjustment by OPEC Member Countries led to a significant increase in unused production capacity. Today, this figure is 6 million barrels a day.

Natural gas demand also declined, at a time when conventional and unconventional gas supplies were increasing, which led to a sharp downward trend in gas prices.

The financial crisis, the economic downturn and lower petroleum prices have had visible adverse effects on Arab Countries. This has been through many channels, such as trade, declines in the value of stock markets and investments portfolios values and lower economic growth. It has shown how deeply interconnected these economies are with the rest of the world. It underlines the need for even more diversified economies and the importance of policies to mitigate the effects of economic cycles and volatility in commodity markets.

Yet we should also remember that while there is a richness and diversity about the economic culture of the Arab world, in both the traditional and modern sectors, it is an undeniable fact that a viable petroleum industry provides an important economic stimulus for the area as a whole.

Regarding oil exports revenues, the crisis demonstrated once again the positive role that OPEC plays as a producer organization in contributing to stable oil markets, for the benefit of all.

Today, thanks to massive monetary and fiscal stimulus packages, the global economic recovery is proceeding at a satisfactory pace, in particular in developing countries. Oil demand is growing again, albeit at an expected modest rate of 900,000 barrels a day for 2010. And prices are at a reasonable level that is satisfactory to both producers and consumers.

However, the risks remain high. They relate to the high levels of public debt in some OECD countries; the unsustainable rates of unemployment in many places; credit tightness and the still fragile financial system; the shaky recovery in private demand that is not yet sufficient to fully support economic expansion; and the associated government support exit strategies.

We therefore need to remain vigilant and avoid complacency.

The other cause that I mentioned earlier is the inefficient functioning of oil markets.

Indeed, oil markets have over the past few years been characterized by excessive volatility and large price swings. Many recognize that the emergence of oil as a financial asset traded through a diversity of instruments in futures exchanges and over-the-counter markets may have helped fuel excessive speculation to drive price movements and stir up volatility. It led to a situation where futures prices were, to a certain extent, detached from the supply and demand fundamentals of the underlying commodity.

This was discussed in detail at the recently held International Energy Forum meeting in Mexico, and we welcome the Cancun Ministerial Declaration, which is a clear indication that nobody wants a repeat of 2008 — neither producers or consumers.

As I said earlier, fortunately the oil market situation has steadily improved over the past year. The more reasonable price levels we see today support investment to provide the much-needed future production capacity. Shelved projects are now being restarted, there is a noticeable rise in activity and in general, there is a more optimistic mood than a year ago. It means we can now return to focusing our attention on the important longer term energy challenges.

Economic growth, expanding populations and higher standards of living mean that energy demand is set to rise in the future, despite significant improvements in energy efficiency. We expect energy use to increase by more than 40 per cent by 2030, according to OPEC’s World Oil Outlook reference case. Fossil fuels, and in particular, oil and natural gas, will continue to satisfy most of the world’s energy needs. This means that the Arab world, with considerable petroleum resources, will continue to play a leading role in the energy scene, far into the future.

And we should never forget that the global need for modern energy services is huge. Here I am thinking about the 1.5 billion people who do not have access to modern energy services and the 2.5 billion people who use solid fuels for cooking and heating, with severe health problems resulting from indoor pollution. In this regard, I wish to emphasize the extremely beneficial role played by Arab Country aid institutions and by our sister organisation, OFID, in contributing to the alleviation of poverty and an improvement in energy access in many developing countries.

However, while we know that energy is set to grow over the long-term, the actual pace of this growth remains highly uncertain.

OPEC’s World Oil Outlook shows that as early as 2020, demand for OPEC crude could be as low as 29 million barrels a day or as high as 37 million barrels a day. This translates into an uncertainty gap for upstream investments in OPEC Member Countries of over 250 billion dollars. There is, therefore, the very real possibility of wasting financial resources on unneeded capacity.

These daunting uncertainties stem in part from consuming countries announcing policies that are geared towards reducing oil demand, subsidizing alternatives and putting heavy tax burdens on the use of oil. Inconsistent, unrealistic and wishful-thinking policy announcements can only provide the wrong signals to markets and investors, creating a lack of certainty and predictability that undermines the ability of the oil industry to invest to meet future energy demand.

This has been epitomized in recent climate change negotiations, where fundamental principles that are enshrined in the United Nations Framework Convention on Climate Change, such as the principle of equity and common but differentiated responsibilities, have run the risk of being watered down by some developed countries. These attempts should be resisted. Historical responsibility of developed countries regarding the state of the Earth’s atmosphere cannot be ignored, as the provision of the UNFCCC that the first and overriding priorities of developing countries are socio-economic development and poverty eradication.

Without the confidence that there will be additional demand for oil, there may be no incentives to invest. And if investments are not made in a timely manner, then future consumer needs might not be met.

Returning to Arab countries, it is clearly evident that huge and successful efforts have been undertaken by many countries to diversify their economies. This includes investing in industries that bring more added-value energy-intensive products, developing tourism and creating logistical port hubs. Many have also recognized the importance of human capital and have invested in advanced universities and research centres in cooperation with some of the best global institutions. This also includes investing in other energy sources, such as solar and nuclear.

All these efforts and achievements are to be praised.

Nevertheless, these economies often remain highly sensitive to both price volatility and to the uncertainties surrounding future energy demand. This underscores the importance of continuing to push economic diversification, especially given the needs of a younger population and the ensuing huge need for job creation in many countries.

Excellencies, ladies and gentlemen,

The recent difficulties in the energy scene and the challenges that I have described are not new for OPEC.

Since it was established in 1960, the Organization has faced many crises and challenges. It has, however, always survived and has successfully overcome many challenges. It has not only learned from these, but it also gained resilience.

When OPEC was born, the Middle East was already an important and growing crude supply region, while North Africa was in the early stages of developing its newly found oil reserves. At that time, the five Founding Members of OPEC held a total of around 200 billion barrels of reserves or two-thirds of world reserves. On average, they supplied 8 million barrels a day of crude to world markets, representing more than one-third of the total world production.

Today, 50 years later, OPEC is even more important.

OPEC reserves have increased by a factor of five to reach one trillion barrels and its daily production has multiplied by nearly four, to reach 29 million barrels a day. Its production capacity exceeded 35 million barrels a day in 2009.

Of course, this growth is partly due to the fact that OPEC went from having five to 12 Members. But, even if we limit the comparison to the five original Founding Members, the growth is still impressive.

The increased importance of OPEC has been accompanied by a growing recognition of its positive role and by greater trust and confidence in its actions.

OPEC has broadened its dialogue with producers and consumers alike. We are an active partner in the International Energy Forum. We have a high-level of cooperation with many international institutions.

We firmly believe in genuine dialogue and cooperation between energy producers and consumers. This is key to ensuring a stable and predictable energy scene for the benefit of all.

Thank you