"Meeting oil market challenges at a time of world economic slowdown"

Speech delivered by OPEC Secretary General, HE Abdalla Salem El-Badri, to the 13th Annual IIES Oil and Gas Conference, Theme: Energy Management: Policies and Experiences (Tehran, 30 November - 1 December 2008)

Excellencies, ladies and gentlemen,

I should like to thank the Institute for International Energy Studies for inviting me to deliver this keynote address in the capital city of one of OPEC’s five Founder Member Countries, the Islamic Republic of Iran.

This conference is being held at a critical time for the oil industry, with the plunging oil prices and high level of volatility, the turmoil on financial markets, and the steady slide into recession of many economies.

How did this situation arise?

Its roots can be found in the US subprime mortgage crisis, which began in summer last year, at a time of very little financial regulation, when loans were made beyond the true ability of many borrowers to service them in a credit-driven society.

To remedy the situation, the Federal Reserve Board tried to provide liquidity to the banking sector, through a series of interest rate cuts and other measures. However, these cuts, together with the worsening economic outlook, weakened the dollar and saw a flight from it into commodity markets, including oil, as investors around the world sought better financial returns.

Through hedging against the falling value of the dollar and inflation in this way, these international speculators were treating crude oil futures contracts as financial assets. Their actions greatly increased the amount of activity on futures markets and this had a big influence on crude oil prices.

These rose by an astonishing amount, from US $92 a barrel at the start of this year to a peak of $141/b in early July, for OPEC’s Reference Basket.

Significantly, this happened while the market was well-supplied with crude. In other words, prices were going firmly against market fundamentals.

During that period, we said many times in OPEC that the poorly regulated international financial sector was the main driving force behind the heavy volatility. And the global financial turmoil of the past two months has supported our statements.

The price collapse since July has seen the reverse side of the coin.

Without the support of sound market fundamentals, oil prices fell sharply, when the bubble burst and the world economic outlook weakened.

Ladies and gentlemen, there is no doubt that the sharp fall in oil prices within such a very short period, and the volatility that goes with it have serious implications for the future of the industry. With oil prices below half what they were at the beginning of the year, both producers and consumers should have cause to be concerned about the investment climate for the industry.

The short-term outlook for the oil market remains gloomy. The global economy is slowing down faster than expected, and it is looking more and more likely that world oil demand will actually fall next year. We need to take action or actions in this critical period in support of market order and stability for the short, medium and long terms.

OPEC Member Countries, being developing states, are heavily dependent on revenues from oil sales to meet their developmental obligations to their people, from social services to the provision of economic infrastructure for sustainable development. It follows naturally, therefore, that crude oil prices should be high enough to ensure that these countries receive reasonable and sustainable levels of revenue from the sale of their natural resources to assist them get on the path of sustainable development. In addition to meeting these obligations, these countries also need this revenue to invest in the industry.

OPEC has made it clear that it is prepared to act, whenever it considers it necessary in these critical, rapidly changing times. We shall continue to ensure that the market remains well-supplied with crude at all times, with sufficient capacity to cope with seasonal fluctuations and unexpected events, as well as meet the steadily rising demand over the longer term, provided that price is reasonable, widely acceptable and sustainable.

The reference case scenario from OPEC’s latest World Oil Outlook sees world oil demand rising by around a third in the coming decades, climbing from 85 million barrels a day in 2006 to 113 million barrels a day in 2030.

This is a big increase and it will create a major challenge for OPEC’s Member Countries, since they have more than three-quarters of the world’s proven crude oil reserves. Our Organization also possesses around half the world’s proven natural gas reserves.

Our host country, the Islamic Republic of Iran, is, of course, one of the world’s largest producers of both oil and gas, and is deeply involved in the challenges facing all of us.

Excellencies, distinguished ladies and gentlemen, allow me to observe that the organisers of this conference could not have chosen a better theme: Energy management. The high levels of price volatility and the worsening outlook for the world economy have made this a very difficult year for energy-managers. This is especially the case in developing countries, with their heavy reliance on oil revenue.

Few things are worse for a manager than uncertainty, and the volatility experienced this year has added greatly to the uncertainty that already exists in the market.

Indeed, in trying to reduce such uncertainty, we repeatedly call for greater transparency and predictability from consuming countries with their energy policies, as well as for better recognition of the legitimate concerns of other stakeholders in the industry.

Already, delays, cutbacks and cancellations of projects are being announced throughout the industry as a result of the fall in crude oil prices, and the fear that it is not going to be reversed soon. Moreover, this trend has been reinforced by the present severe restrictions on credit and the gloomy world economic outlook.

Our Member Countries are all affected by this, and there are tough decisions to make, at a time when we are all tightening budgets.

No one can really be sure how the situation is going to work out, either in the oil market or, more generally, in the world economy at large.

However, there are some measures that oil producers can adopt, and I believe these will ease the task of handling the present very volatile situation.

First is to remain focused. It is important at this critical time to retain a clear vision of the future direction of one’s oil industry. If one loses sight of this, then actions taken in the market may become disjointed and less effective, especially over the longer term.

Retaining a clear vision will also help prioritise areas where decisions and actions are needed, and sometimes this may occur at short notice and with reduced budgets, resources and personnel.

Second is to continuously monitor developments very carefully. This is very important at a time when events can change significantly overnight, as has happened sometimes this year. This monitoring should extend beyond the energy sector, to pick up signals at an early stage from the world economy at large. Developments in the world economy, as we have seen, can very quickly affect oil market behaviour.

Third is to be prepared to respond to signals at short notice in a considered and constructive manner.

My fourth advise is Do not Panic. Carefully study the situation, learn from past experience and take a rational decision. Rational decision-making, I believe, can benefit from having a good knowledge and understanding of the recent history of the oil industry. There are certain parallels, for example, between current events in the oil industry and those of the early 1980s.

There is a call for patience too. This year alone, prices rose quickly and they fell quickly. Who knows where they will be in three months’ time? If there is a ‘50-50’ situation and it is not necessary to make a decision, then there may be no harm in delaying the decision.

And finally, consult and dialogue. The present crisis provides an excellent opportunity to enhance dialogue and cooperation within the industry. Mutual help and support has an important role to play in unusual times like these, especially within the OPEC family. All parties stand to gain from this.

Conferences like this one, of course, are part of the process of dialogue.

Thank you for your attention.