The industry must be ready for the upturn

OPEC Bulletin Commentary March-April 2009

If there is one thing OPEC has learned in its long and illustrious history, it is that one cannot put a price on knowledge and expertise. They are the requisites for any successful business. And the Organization, which celebrates its 50th anniversary in 2010, has had to call on all its years of experience and professional standing to respond quickly and effectively to the global financial crisis, which has led to an alarming slump in demand for the world’s oil, the ‘bread and butter’ of our Member Countries. As the Organization’s Secretary General, Abdalla Salem El-Badri, said recently: “Two thousand and nine is probably going to be the most difficult year the world will face in the modern era.” He was speaking to the press at the end of the 152nd Meeting of the OPEC Conference on March 15, at which the Organization decided to leave its current production agreement unchanged.

Assessing the impact on the oil industry of the unfolding developments in the contracting world economy and the maligned financial sector, El-Badri stated that the situation was expected to get worse before it got better, with key global economic indicators forecasting continued deterioration. As a result, short-to-medium term projections of world oil demand were continually being revised down. “At the moment, everything we touch, everything we try to talk about, is negative. Everyday, we are receiving negative information,” commented El-Badri.

A gloomy outlook indeed, and one that informed OPEC’s decision to maintain the status quo through greater adherence to its existing production agreement, reached in December 2008.

It is maybe a little too early for OPEC to pat itself on the back, but there is no doubting the fact that February’s reported 80 per cent compliance to that accord has been instrumental in stabilizing prices, which, before the Organization’s intervention, appeared to be in freefall. Not surprisingly, OPEC has been widely praised for its actions. As El-Badri put it, OPEC, through responsible and concerted actions, was just trying to “balance up” the situation: “We did not want to add to any more problems that are going on,” he said of the worst world economic crisis since the Great Depression.

Clearly, while the global priority remains turning around the world economy and sorting out the financial sector, there are also pressing areas of concern for the oil industry that require special attention, to ensure that the respective recoveries dovetail, in the interests of the world community at large, now and in the future.

Notably, on March 15, El-Badri reminded journalists there was no way oil producers could invest sufficiently in meeting future demand with prices which, at that time, were around half the required levels for that task, adding that OPEC had not abandoned a price target of around $75–80/barrel. Prices, therefore, need to strengthen considerably to cater for the longer-term future.

Prices, however, are edging up steadily. Welcome though this development is, there is, nevertheless, an important caveat. Speculation. While futures markets perform a vital price-seeking role for oil — and other commodities — they need to be well-managed, and it is by no means clear yet whether a reconstituted international financial sector will have enough regulation to prevent recent history from repeating itself. The industry and the international financial authorities must be attentive to this, as the pick-up occurs, so that its benefits are not compromised from the very start by rampant speculation. We must break out of the boom/bust cycle once and for all.

OPEC would also welcome greater support for its market-stabilization measures from non-OPEC producers. We should not be expected to bear the burden alone of propping-up prices. This is not easy for our Member Countries; nor is it cheap, especially since they are all developing countries. All producers benefit from stronger prices, and all should be prepared to contribute to them.

Much progress has been made with dialogue in the oil industry in the past two decades. We must put this to good use now by ensuring that we are ready for the upturn when it comes, in whatever shape or form.

OPEC stands ready to honour its commitment. And throughout the learning curve of its near half century in being, it is better placed than most to know what is required to deal with current and future challenges. We just hope that all stakeholders will appreciate this and join in with our efforts. After all, in a world of ever-growing interdependence, there is no room today for the single-minded approach. We are all in this crisis together — together we can emerge from it, both stronger and wiser.

This Commentary is taken from the March-April 2009 edition of the OPEC Bulletin, which can be downloaded free of charge in PDF format from the OPEC website.

OPEC Bulletin (March-April 2009)

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