Coping with the challenges of a bleak outlook

OPEC Bulletin Commentary January 2009

Two thousand and nine has witnessed the darkest New Year for the global economy for at least a generation. Indeed, parallels are being drawn increasingly with the Great Depression of 1929 and the early 1930s. Let us hope that these extreme concerns turn out to be misplaced.

Nevertheless, the widespread pessimism is easily understood, in the light of the malaise that has affected industry, trade and commerce over the past half year, highlighted by the crisis in the world financial sector, the onset of recession in many countries, bankruptcies, falling house prices, car industries on the verge of collapse, rising unemployment, shelved or abandoned investment plans — and the pervasive feeling that the worst is yet to come.

Much midnight oil has been burnt, as desperate governments — individually and collectively — wrestle with the deteriorating situation, as it expands globally, to at least limit the damage in the near term, while accepting that more solid and durable measures are needed for the longer term.

Importantly, attitudes are changing, with Keynesian interventionalist policies for stimulating faltering economies being favoured increasingly over the free market monetarist approach, which has been so prevalent in industrialized countries over the past quarter of a century.

The outlook for the international oil market in 2009 and beyond is governed, to a great extent, by these events on the global economic stage.

However, things cannot get much worse for the market than they were in 2008, with the price of OPEC’s Reference Basket falling by around $107/barrel in the second part of the year, after rising by nearly $50/b in the first part. Indeed, record levels were reached in early July. The unyielding volatility, which saw daily swings of as much as $16/b, was disturbing, disruptive and damaging for everything from day-to-day business to the investment that is so vital to the future of the industry.

As is well known, the main reason for that unacceptably high level of volatility was speculators treating crude oil futures as financial assets and increasing activity on futures markets by huge amounts, and then rapidly pulling out when the tide changed across the poorly regulated global financial sector.

As OPEC’s Secretary General, Abdalla Salem El-Badri, told the London meeting of energy ministers in December 2008, there is now a sense of urgency to improve transparency and regulation in the world’s financial markets. The hijacking of the oil-price mechanism by unruly, greedy elements of the financial community can never be allowed to happen again.

Thus, as we settle uneasily into 2009, we do so with apprehension about what awaits the oil industry during the year, at a time of much uncertainty about the market outlook and growing retrenchment in expenditure and resources across the board.

The dark cloud that hangs over the world economy is expected to continue having a dampening effect on oil demand this year. This, in turn, may put added downward pressure on oil prices, at a time when they are at about half the levels considered necessary to support investment in future production capacity. In short, sustained low oil prices today may mean volatile high prices not too far in the future.

There are no easy paths to follow, in handling the present situation, for parties like OPEC, which remain committed to sustained order and stability in a balanced, equitable international oil market, as well as the need for reasonable financial returns for its Member Countries, as would be expected for the owner of any economic resource.

Prioritizing is necessary. This is why, after careful and repeated consideration, backed-up by sound research, the Organization continues to focus on achieving sound market fundamentals, with secure, steady and adequate supply both today and in the future. This means, among other things, trying to handle, with vision, fairness and sustainability, the serious discrepancy between spot prices and the required investment-supportive prices of crude.

Nevertheless, despite this bleak start to the year, we remain confident about the ability of the oil industry to rise to the new challenges facing it, in support of an early return to sound world economic growth and the general enhancement of mankind. And here, we once again call upon the steadfast commitment of all parties in the market, to join OPEC in its efforts to achieve lasting order and stability.

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

OPEC Bulletin (January 2009)

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