Energy: the coming back of the Gulf

The following speech, attributed to Dr Adnan Shihab-Eldin, Acting for the Secretary General, was prepared for, & distributed at, the Aspen Dialogue on World Economy, Third international conference, "The West, the BRICs and the rest: a global agenda for the transatlantic economy".

Florence, Italy 8-9 July 2005

Ladies and gentlemen,

Let me begin by thanking the organisers of the Aspen Dialogue on World Economy for inviting me to join this illustrious panel, whose theme is “Energy: the coming back of the Gulf”. This subject is of much interest to the world energy community at the present time, and the topics for discussion focus on some of the areas that are likely to have a major influence on the evolution of the industry in the months and years ahead.

Some people believe that we may now be witnessing fundamental changes across the world energy landscape, and, if this is indeed the case, then this could have a significant impact on the Transatlantic economy.

How do we, in OPEC, view the situation? Let us look at developments in the leading energy sector, oil, over the past year or so, because the oil sector is generally seen as being, so to speak, the pace-maker for the rest of the industry. In doing so, we see the following.

Prices rise dramatically, even though the market remains well-supplied with oil. Downstream bottlenecks put pressure on upstream prices, particularly in the United States of America, where refining margins are large. There has been a fulcrum shift in energy demand towards Asia — especially China and, to a lesser extent so far, India — and we are talking about very large volumes here. Non-OPEC producers are having difficulty in keeping up with incremental demand — for the third year running, the growth in non-OPEC supply is falling behind that of world oil demand, and this new trend is expected to continue at least into 2006; Russian supply growth has almost vanished. The market is less responsive to OPEC’s market-stabilisation measures, however rigorously such measures have been conceived and applied. And there has been an unusually heavy influence of market psychology — at one stage in 2004, some analysts believed that speculation might be responsible for a premium on a barrel of crude of between US $5 and $15.

On the other hand, certain realities remain unchanged. In the final analysis and with the appropriate passage of time, the international oil market is still subject to the fundamentals of supply and demand, while experiencing cyclical movements in the short term.

In reality, it is difficult to know the true extent to which the market is experiencing fundamental change at the present time. The jury is still out. Perhaps we shall have to wait another five or ten years to find the answer, to a time when we will be able to view the situation with the benefit of hindsight.

However, there is one other outstanding point that should be made here.

Although prices have recently been at record-breaking levels in nominal terms, if we put them in their proper historical context, we will find that, in real terms, they are well below those witnessed two decades ago. In other words, if the OPEC Reference Basket-equivalent price in 1982 were adjusted for subsequent changes in inflation and exchange rates, it would have been $80/b in 2004, more than double the actual average for last year of $36/b. In addition, one must be aware of the fact that the world, especially the developed part, has become much wealthier since the early 1980s.

Moreover, there is no evidence that the recent high oil prices have, so far, had a significant impact on economic growth, which continues to be robust. If there is one lesson we have learned from the exceptional oil market conditions of 2004, it is that the world economy has become less sensitive to oil price increases than it was three decades ago.

Important here is oil intensity — the amount of oil required for a unit of GDP. Across the world at large, this has fallen by around 50 per cent since 1970, due to such factors as technology, government policies and changing consumer behaviour. Thus the world is less dependant on oil for its economic growth.

However, continued rapid oil price rises are clearly not desirable for any responsible party. In addition to the more obvious economic downsides, they can distort the distribution of returns from oil sales, with, in many countries, particularly in Europe, consumer governments benefiting the most, through the receipt of higher levels of extra revenue, from taxation, than either the producers or the refiners receive.

In the light of the present market uncertainty and demand pressures, the spotlight has been turned upon OPEC increasingly, and the Organization has responded on two fronts. First, it has raised its production ceiling on several occasions, by a total of 4.5 million barrels a day; this has, in turn, led to a steady rise in OECD commercial oil stocks, which are exceeding their five-year average, in both absolute terms and in days of forward cover. And, secondly, its Member Countries have accelerated their plans to bring on-stream new production capacity. These actions have been taken, in spite of the fact that the market — a pretty nervous market — has been well-supplied with oil throughout this period.

We are confident that, through OPEC’s actions, there will be enough crude in the market to meet robust oil demand growth in the near future. However, while OPEC’s spare capacity growth has been in line with the strong demand growth, this has not been the case downstream, where it has fallen behind. Perhaps it is time that more attention is paid to the downstream part of the supply-chain, in the interests of overall market stability. This is a responsibility that should be shared by all stakeholders in the oil market: consumers, producers and international oil companies. It offers challenges and opportunities to our Member Countries.

We have the same confidence when we look further into the future. Indeed, the world can rest assured that there should be plenty of oil around for decades to come. The world’s oil resource base is not a constraint, with regard to meeting future demand. Not only are we talking about conventional oil, but there is also unconventional oil, such as tar sands, oil shale and gas-to-liquids. Moreover, there is potential for making new discoveries, as well as increasing recovery from existing fields.

Using OPEC’s World Energy Model, our reference case scenario shows a continued rise in global oil demand up to 2025, by a total of 28 million a day to 111 mb/d — an annual average growth rate of 1.5 per cent, according to these projections.

OECD countries will continue to account for the largest share of world oil demand. However, more than three-quarters of the increase in demand over the next 20 years will come from developing countries, whose consumption will almost double. Asian countries will remain the key source of oil demand increase in the developing world, with China and India central to this growth. The transportation sector will account for almost 60 per cent of the rise in global demand over the next two decades.

Our projections show that there will be a slight swing towards oil and gas by 2025, to around two-thirds of the world primary energy mix. Separately, oil’s share will dip slightly to 37 per cent, while that of gas will increase significantly to 30 per cent.

Overall non-OPEC output will continue to increase, but more slowly, reaching a plateau of 55–57 mb/d in the post-2010 period; this represents a rise of 5–7 mb/d from 2004.

However, OPEC’s Member Countries, with around four-fifths of the world’s proven crude oil reserves, have both the capability and the will to continue expanding their oil production capacity to meet the rising levels of demand. In 2025, the reference case therefore sees OPEC meeting almost half the world’s oil demand, with 55 mb/d.

Clearly, dependence upon the Gulf will rise. For statistical purposes, we refer to the “Gulf” as the “Middle East”, which roughly covers the same, non-Africa area.

Since the early 1990s, the Middle East’s share of world crude oil production has fluctuated within an annual average range of around 29–33 per cent. But this share looks set to rise now, even more than OPEC’s share as a whole.

With gas, on the other hand, there has been a steady increase in the Middle East’s share of world marketed natural gas production throughout this period, rising from 5.1 per cent in 1990 to 9.6 per cent in 2003. This trend — which stretches back, almost unbroken, at least as far as OPEC’s establishment in 1960, when the share was just 0.6 per cent — is expected to continue in the future, as gas, generally, increases its share of the world energy mix.

Thus, taking oil and gas together, the world is expected to receive increasing amounts of its primary energy from the Middle East in the first quarter of this century, if current trends continue.

What does all of this mean for the consumer? To answer this, let us return to a broader OPEC perspective, bearing in mind the fact that the oil pricing and production policies of Middle East producers are heavily influenced by OPEC decisions.

OPEC is committed to achieving order and stability in the international oil market, with supply and demand that are steady and secure, and prices for consumers, revenues for producers and returns to investors that are fair and reasonable. Its actions in the market are centred around this commitment.

Market order and stability serve the best interests of OPEC’s Member Countries. Their economic fortunes are heavily dependant upon their oil revenue, which collectively accounts for around two-thirds of their total export revenue. Crude oil is a finite resource and these countries must do all they can to diversify their economies and develop the appropriate supporting infrastructure, while they have commercially viable reserves of crude, so that they can sustain the economic momentum generated by the receipt of these revenues and continue to prosper. Even though reliance on oil is expected to slowly decrease in the future, the reliance on OPEC oil is bound to rise. Thus there is every incentive for OPEC producers to do everything they can to ensure order and stability in the market.

But this is by no means a straightforward task, as witnessed by the difficulties of the past year, when many factors, that are beyond OPEC’s control, have had such a destabilising influence on the price level. Also, with regard to the future —which also features very much in OPEC’s calculations — there are vast uncertainties which make sound investment planning a hazardous business, in an industry where the lead times for new plant and equipment can be very long and the capital requirements enormous. Future economic growth rates, consumer government policies and technologies advances lie at the heart of these uncertainties. Over-investment implies heavy costs to be borne by producers, while under-investment will lead to severe price volatility.

Thus every effort must be made to reduce uncertainties and to share the risks involved. Dialogue and cooperation have a big role to play in this, and we welcome the big advances that have been made in these areas in recent years. Indeed, OPEC has been in the forefront of this for the past couple of decades, as part of its concerted efforts to promote a better understanding between producers and consumers, as well as among producers. Meetings such as this play an important part in the process, by enabling people to discuss issues of topical interest, exchange ideas and forge a common understanding of the challenges ahead for the oil industry. There is also a growing number of institutionalised fora aimed at enhancing cooperation and dialogue and these are appearing in the key energy centres across the world. The most recent of these is the European Union-OPEC Energy Dialogue, which had its first meeting in Brussels last month. Before that, OPEC was instrumental in setting up the specialist producer-consumer dialogue body, the International Energy Forum, which now has its Secretariat in one of our Member Countries, Saudi Arabia.

Whether or not the oil industry is now experiencing a process of fundamental change, we nevertheless wish to assure you that, for OPEC’s part, it is well-equipped to meet the challenges of both the present and the future. However, as I have just said, dialogue and cooperation will have an important role to play in this, as will the minimising of uncertainties. The fact that world oil supply is expected to be concentrated increasingly in the OPEC area — and, in particular, in the Middle East — means that consumers will continue to benefit from a vast resource base, an established infrastructure and an unwavering commitment to market order and stability.

Thank you.

Florence Accompanying Slides

Related Slides

Download document