Speech by OPEC's Conference President to the World Economic Forum

by HE Sheikh Ahmad Fahad Al-Ahmad Al-Sabah, OPEC Conference President & Minister of Energy for Kuwait. World Economic Forum, Davos, Switzerland 26-30 January 2005. Session "Tomorrow $80?" - 27 January 05

Mr Chairman, ladies and gentlemen, good morning. It gives me great pleasure to be at this year’s meeting of the World Economic Forum, an event that has become one of the most important and influential gatherings on the annual calendar. I am particularly pleased, as OPEC’s Conference President, to address this important Meeting of Governors on energy and to share with you OPEC’s views on some topical issues.

The year 2004 was, without doubt, very unusual, if not unique, for the oil market. It witnessed a rapid rise in crude oil prices, as a result of an exceptional combination of factors — in particular: the unanticipated demand surge in Asia and the United States; refining and distribution industry bottlenecks; temporary supply disruptions; as well as geopolitical tensions. All of this was compounded by speculation in the futures market. In mid-October, the OPEC Reference Basket price hit a record high of US $46.6 per barrel. At the same time, WTI reached $56.4/b, nearly $10/b above the Basket price. This was in sharp contrast to the drop in oil prices in the late 1990s and the relative stability of 2000–03, following the introduction of the OPEC price band in 2000. For most of that period, the Basket price remained comfortably within the band of $22–28/b, averaging just over $25/b.

Consistent with its key objective of maintaining market stability, OPEC responded to the surge in oil demand and rapid price escalation in 2004 by increasing its official production ceiling by a total of 3.5 million barrels a day. This allowed the Basket price to fall by around 25 per cent, to about $36/b by the end of December. In addition, OPEC member countries speeded up implementation of plans to expand production capacity so that adequate spare capacity is maintained at all times; Currently, OPEC spare capacity stands at around 1.5 mbd and is expected to reach 2.5 -3.0 mbd by year end.

It is important to note that such a price, although high in nominal terms, is about 50 per cent below levels reached in the early 1980s in real terms — not to mention the reduced purchasing power of oil revenues, as a result of the depreciation in the US dollar. It should also be noted that many OPEC Members produce heavy crudes which attract much lower prices than other widely traded crude benchmarks and that of the OPEC Basket.

Notwithstanding all this, many people ask: Is the current high oil price here to stay? And how will this affect world economic growth? I should like to examine the latter question first. I believe many of you will agree that, 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, as a result of the structural changes seen in the last couple of decades. The strong growth of the global economy last year, in the face of rising oil prices, supports this statement. On whether high prices have come to stay, 2004 was, as I have already noted, an exceptional year. Though it is unlikely that we will see prices reverting to the very low levels of the nineties, the extent to which the changes in the oil market have been of a transient or cyclical nature — as witnessed by the $10/b price drop in the final quarter — or whether, in fact, they will be more lasting, is unclear at the present time. OPEC is studying the whole situation very carefully, keeping in mind especially the need to maintain the well-being of the global economy and long term energy security and stability as key objectives.

Despite OPEC’s persistent efforts to achieve order and stability and the fact that the market remains well-supplied, we have continued to experience high price volatility since the start of this year. This is, to some extent, a reflection of seasonal market characteristics. We foresee continued healthy economic growth in 2005. Much of this growth will come from the developing countries, particularly those in Asia, whose economies will also register higher oil demand growth. Similarly, the oil demand increase in 2005 will remain strong, but much less than in 2004. In OPEC’s reference case scenario of sustained and robust economic growth, medium-to-long-term oil demand is likely to grow at an average annual rate of 1.6 per cent, reaching around 115 mb/d by 2025.

OPEC will increasingly be called upon to supply the incremental barrel. Our Member Countries have the resources, the willingness and the capability to meet the rising demand, as they have successfully done in the past. OPEC possesses around four-fifths of the world’s proven crude oil reserves, but currently accounts for only about two-fifths of global output. The implication is clear. There is enough oil to service the global economy for decades to come and perhaps well into the second half of this century, if account is taken of the potential of unconventional oil, as well as likely additional conventional discoveries. For the world at large — but particularly for the emerging economies of Asia, Africa and Latin America — there is enough oil to support their growth, in the same way that this important hydrocarbon fuelled the economic growth of today’s industrialised countries in the last century.

This brings me to the issue of security of supply. Given the crucial role that oil has come to play in the lives of ordinary people, it is natural for them to be concerned about security of supply.

However, there has never been a lack of oil in the world market in recent decades, even at the most difficult of times, such as during the first and second Gulf Wars or when there have been supply disruptions from major producers. It is important to ensure that there is always sufficient capacity to meet the expected rises in demand, and this requires adequate and timely investment. While the level of this investment will be considerable, it will not be much different to that seen in the recent past — to the order of $100 billion per year. Fortunately, on a per barrel basis, much less investment will be needed in OPEC’s Member Countries than in other oil-producing countries, since OPEC oil is more abundant, more accessible and cheaper to bring to market, yielding more than a fourfold multiple in terms of new production capacity for the same investment.

Before concluding, some further remarks are appropriate regarding energy security. To begin with, it should be stressed that, just as security of supply is important to consumers, security of demand is a key concern of producers. OPEC maintains that the best strategy to ensure energy security is constructive dialogue, leading to cooperation and partnership. This has been demonstrated by the International Energy Forum, which, since the early 1990s, has served as a platform for dialogue on energy issues among consumers and producers. Most recently, under the umbrella of the IEF Secretariat, a roundtable of Asian Oil and Gas Ministers was held in New Delhi, with the aim of extending regional cooperation in the oil and gas sectors.

Such efforts show that, together, producers and consumers can give each other the mutual understanding and assurance required for the industry to achieve sustained growth and stability. Market order and stability is a shared responsibility for all parties. It remains imperative that all players associated with the industry — producers, consumers, governments, oil companies and financial institutions — join hands in cooperation.

As OPEC President, I can assure you that OPEC is committed to meeting its responsibility to the market to the full, just as it has always done.

Thank you.