Developments in international energy markets and the impact on Arab countries

A Speech by Mr. Mohammed Barkindo, Acting for the Secretary General, to the 8th Arab Energy Conference, Amman, Jordan, 14-17 May 2006. The theme of the conference: "Energy & Arab cooperation".

[Slide 1]
Excellencies, ladies and gentlemen,

As recently as three years ago, few people, if any, would have predicted the turn of events we have subsequently witnessed in the international oil market.

[Slide 2] Oil prices have more than doubled during this period, there is much uncertainty about their future movements and there has been a need to revise perceptions about the true state of the market and of the oil industry generally. The world economy, however, has also shown surprising resilience to the high price environment.

Nevertheless, it should be noted that, in real terms, prices are still well below the levels of the early 1980s,when the OPEC Reference Basket would have reached US $85 a barrel, at today’s prices. Also, we should not forget that, over the last two years, there has been a strong increase in non-energy commodity prices, sometimes at rates greater than that of oil. This is an often overlooked fact.

It should also be recalled that petroleum-exporting countries suffered from very low oil prices just seven-to-eight years ago, when the OPEC Basket fell to as low as $10/b. Today, these countries are recovering and, at the same time, reinvesting large amounts of capital to increase their production capacity. However, petroleum-importing developing countries are facing larger energy import bills and this is a matter of much concern to us.

We clearly recognise in OPEC that extreme price levels, whether too high or too low, are detrimental to both producers and consumers, and this recognition underlines our longstanding commitment to market stability.

[Slide 3] Our actions reflect this commitment. The market remains well-supplied with crude, as, indeed, has been the case throughout the present volatile period. This has owed much to the decisions and actions of OPEC, whose Members have, where possible, increased production and accelerated plans to bring on-stream new production capacity to meet continued demand growth and re-establish a comfortable level of spare capacity [Slide 4]. As a result, stocks have been increasing to levels above their five-year average.

[Slide 5] As is already well-known in the industry and particularly here in the Middle East, a convergence of factors has caused the volatility and rising prices. There have been; the exceptionally strong economic growth and, in turn, oil demand growth, especially in developing countries; the slow-down in non-OPEC supply growth; tightness in the downstream sectors of major consumer countries; geopolitical concerns; major natural disasters; and heightened levels of speculative behaviour.

How far will all of this go?

[Slide 6] Turning first to oil demand, the OPEC reference case scenario forecasts a 30 mb/d rise in demand by 2025, to reach 113 mb/d. This is an annual average rise of 1.5 mb/d. Consumption of the incremental barrel will be dominated by the developing countries, in particular, Asian countries. By 2025, we expect Asian oil demand to rise by 17 mb/d. Despite this growth, by 2025, OECD countries will remain the dominant oil consumer, and the United States of America, for example, will continue to use five times more energy per person than China.

[Slide 7] From the supply perspective, let me first say that the resource base is sufficient to satisfy expected world oil demand for decades to come. Non-OPEC supply will continue to increase, in particular over the next five years, and is eventually expected to reach a plateau after 2015. Thus, most of the new demand will be met by non-OPEC in the short-to-medium term and by OPEC in the longer term. By 2025, OPEC production, including natural gas liquids, will reach 54 mb/d, according to these projections. However, even then, non-OPEC countries will still account for the larger part of world production.

There are two important observations to make here.

[Slide 8] First, large uncertainties are associated with the future levels of demand for OPEC oil. Security of demand is, indeed, a matter of genuine concern for OPEC. We face a heavy burden of risk, especially since investment requirements in the oil industry are very large and are subject to long lead-times and pay-back periods.

[Slide 9] For example, as shown in this slide, for the period up to 2020, there is an estimated range of uncertainty of as high as $240 billion for the required investment, which is an enormous sum, even when spread over a decade and a half.

Uncertainties over future oil demand growth stem from a number of factors, including economic, energy and environmental policies in consuming countries, as well as technological progress.

More transparency and predictability are, therefore, essential in the evolution and implementation of policies and how they will affect future demand growth. This is why we have been calling for a "road-map" for oil demand, to reflect the need for security of demand as a legitimate concern for producers. Security of supply and security of demand must go hand in hand at all times.

Reflecting on the volatility of the past two years, it is clear that there is much greater awareness in the industry at large about the need to invest more heavily in the downstream sector — especially since, in the coming decade, a rising volume of crude oil will need to be refined and there will be a continuation of the trend towards lighter, cleaner products.

A more orchestrated effort is required, therefore, to ensure that sufficient capacities are in place in the future in the downstream. Even though our Member Countries are traditionally associated more with the upstream, they have themselves taken the initiative to invest in downstream projects, on their own and in partnership with others. However, this does not escape the fact that the primary responsibility for investment in this sector lies with the richer nations. Needless to say, the uncertainties over future demand growth also apply to the downstream.

[Slide 10] Let me say at this point that continued scaremongering among certain members of the international community only has the effect of talking-up prices and increasing volatility. OPEC has repeatedly given assurances about security of supply and the history of our Organization fully supports our commitment in this regard. It is written into the OPEC Statute and rigorously adhered to at all times.

As far as speculation is concerned, this cuts both ways. There has been much discussion over the true impact of speculation on the recent volatility and rising prices, but the general feeling is that it has been substantial. Like all markets, the international oil market is cyclical in nature and, when it eventually turns, speculation is almost certain to magnify the downward trend. Once again, the industry should be prepared to address this issue as it arises.

Finally, in the short time available for me to speak, I have focused on the international oil market, because this is OPEC’s principal area of interest. Our Organization, however, also possesses around half the world’s proven natural gas reserves and, as you know, many of our Members are already highly active in this sector.

With regard to the impact of recent market developments on Arab countries, I hope one of my distinguished fellow panellists will elaborate upon this important issue. I have just four general — and brief! — observations to make, which also, incidentally, apply to oil-producing developing countries worldwide.

[Slide 11] First, while many Arab countries are receiving higher revenues from their oil and gas sales, this is not the case for all of them, since some are not producers. For example, only around three-fifths of the members of the League of Arab States produce more than 100,000 b/d of crude, although, in total, the League accounts for nearly a third of world output.

Secondly, the increased revenues have provided oil and gas producers with the opportunity to give added impetus to their economic and social development, with particular regard to diversifying their domestic infrastructures away from such heavy dependence on hydrocarbons. This has had a positive impact on neighbouring countries, in particular by providing much-needed job opportunities.

Thirdly, the higher revenues have also enabled many producers to increase their investment overseas, particularly in the petroleum industry. There is also a greater capability to assist other developing countries.

And fourthly, the recent market developments have underlined emphatically that two areas require much greater attention from producers — the downstream and the Asian market, particularly India and China.

[Slide 12] Thank you for your attention.

Speech Slides

Download document