Rebuilding trust in the global economy

OPEC Bulletin Commentary October 2008

The turmoil that has hit major financial markets in recent weeks has sent shock waves through the world economy, striking at a time when there was already much uncertainty about the global outlook. In doing so, the turmoil has added greatly to that uncertainty, and the oil sector is becoming caught-up in the fallout from this.

Sound banking and investment institutions are an essential part of a well-functioning, growth-oriented economic landscape. And so, when deep cracks appear at their very heart, then the contagion quickly reaches global proportions, affecting a vast spread of the world economy.

Many people believe that we are now entering a new era of global banking, with a fundamental change in attitudes to regulation and other longstanding practices, as well as a notable shift in the balance among the leading international centres of finance.

The oil industry must do everything it can to limit the impact of the financial turmoil and to accommodate, in a timely and effective manner, any changes to the banking system that may emerge.

The harsh realities of the present situation are already apparent, with the massive swings in oil prices witnessed this year. We hardly need reminding that the price of OPEC’s Reference Basket climbed to a record level of nearly $141 a barrel in early July, before falling by more than half by mid-October. Recently, some international crude prices rose by an unprecedented $16/b in just one day. What is more, this has all happened while the market has remained well-supplied with crude.

There is enough uncertainty in the oil industry as it is. The financial crisis, and the withering of confidence that accompanies it, is now compounding this uncertainty, with regard to both the supply of capital for investment and the level of future energy demand, should the turmoil seriously impair world economic growth, as some people fear. The depth and the duration of the crisis remain to be seen, and one can only hope for a quick and effective process of damage-limitation.

Importantly, one must call to mind here the most vulnerable members of the global community, the least-developed countries, and ensure that they are not ultimately hit hardest by the crisis, as they continue their pursuit of the Millennium Development Goals.

At times like these, when there is a fundamental breach in what has long been considered a solid, supportive structure, as we are seeing now in the financial sector, it is necessary for the other parts of the world economy to seek to compensate for this, by whatever means is available to them.

In this respect, as far as the oil industry is concerned, OPEC Member Countries will continue to ensure that the market remains well-supplied with crude at all times, in the interests of producers and consumers alike.

To this end, we called an Extraordinary Meeting of our Conference in Vienna, on October 24, to discuss in depth the changing outlook for the oil market, in the uncertain times we are witnessing.

We hope our endeavours will be supported by the early emergence of a revitalised, healthy and well-regulated international financial environment, which will make the severe volatility experienced this year a thing of the past.

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

OPEC Bulletin (October 2008)

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