OPEC's View on the Outlook for Oil Supply/Demand

Speech by Mr. Mohammed Barkindo, Acting for the Secretary General, to the 7th International Oil Summit, Paris, France - 7th April 2006

(Slide 1)
Ladies and gentlemen,

Let me begin by thanking the organisers for this invitation to present at the 7th International Oil Summit. I see from the list of speakers that this is a highly respected event and I look forward to hearing many more of the presentations today.

Let me start my presentation by offering you a brief review of the last 12 months. During this period we have witnessed, amongst many other things, some major natural disasters with which the market has had to cope at short notice, escalating geopolitical tensions in some parts of the world and periods of extreme cold weather in Europe and Asia. Yet the oil market has been well-supplied with crude, which in part is very much as a result of OPEC’s reasoned, proactive and timely actions in the market.

So the title of this session, the ‘Outlook for Oil Supply/Demand’, offers me an excellent opportunity to look out beyond the past 12 months, review where the oil market currently resides and present OPEC’s views on global supply and demand issues. It is also apt given the recent publication of OPEC’s Long-Term Strategy document that lays out a coherent and consistent framework for the Organization’s future, with the recognition of oil’s importance in meeting future global energy demand and its significance to the future socio-economic development of OPEC Member Countries.

(Slide 2) As you would expect two of the key issues addressed in OPEC’s Long-Term Strategy relate to security of supply and security of demand. Indeed, global energy security is a topic on everyone’s lips today. The increased visibility of energy security was observed at the recent G8 summit talks in Moscow, where the subject was top of the agenda, and it will also be an important topic of discussion at this month’s 10th International Energy Forum in Doha. It is an issue that has a bearing on today and tomorrow; our futures and our children’s futures.

I believe it is necessary at the outset to stress the strong linkage between security of supply and security of demand. In a nutshell, the two are intertwined and one cannot be achieved without the other. It is not just a question of whether there will be enough supply to meet demand; it is a question of whether there will be enough demand to meet current and predicted supply. Thus the basis for ‘global energy security’ is a balanced and mutually supportive supply and demand network. This platform provides the stability from which consumers and producers can develop, build on, and adapt both short- and long-term supply and demand strategies to meet the market’s needs.

(Slide 3) Talk of supply and demand, for any resource-based industry, initially leads to the question of whether the world has enough resources to meet the levels of demand that have been forecast for the coming decades. OPEC’s unequivocal response to this question is undoubtedly: yes. There is no physical shortage of the required resources. This view is shared by a wide variety of respected energy industry institutions. Oil is also expected to maintain its leading position in meeting the world’s growing energy needs for at least the next two decades. All this leads to the question: how will oil supply and demand develop over the short- and long-term?

Short-term, OPEC projects average world oil demand to grow by 1.5 million barrels a day for 2006. North America, especially the US, will contribute the bulk of demand growth within the OECD countries rising by approximately 0.3 mb/d. Demand growth is highest, however, in developing countries where an additional 1 mb/d is expected. Almost 80 per cent of this growth is anticipated to fall in the non-OECD Asian countries and the Middle East region.

(Slide 4) To meet anticipated increases in demand, OPEC Member Countries have already increased production by around 4.5 mb/d since 2002. This has led to a steady rise in OECD commercial oil stocks with inventory levels increasing monthly and as of now sit above their five-year average. To meet continued demand growth and to reestablish a comfortable level of spare capacity, where possible, Member Countries have also accelerated plans to bring on-stream new production capacity.

(Slide 5) More increases in capacity have also been planned — and are being implemented — for the rest of the decade. Together with the expected growth in non-OPEC supply and OPEC natural gas liquids, this means that cumulative world liquids production capacity will rise by around 12 mb/d or more over the next five years — well above the expected cumulative rise in demand of 7-to-8 mb/d over the same period. These figures point to significant increases in spare capacity over the coming years. OPEC capacity growth is underpinned by over 100 E&P projects totaling more than $100 billion and is a demonstration of its continued commitment to oil market stability, and security of supply.

There are some who still question whether upstream production is adequate, given that recent price levels have hovered around the $50-to-$60 mark. Though I should point out that in real terms these prices are below those of the early 1980s. So in response to those who suggest constraints in supply are an upstream conundrum I would like to offer up a short vignette. In September 2005, OPEC moved to make available to the market spare capacity of around 2 mb/d, should it be called for, following the US supply disruption. The spare capacity was not required.

Intimation that supply constraints are an upstream concern is not borne out by this recent event. It is more a market perception, than based on any reality. Recent OPEC research has sought to enhance the understanding of what is driving current price levels. Since 2004, the traditional approach to assessing the tightness of the oil market, based on oil inventories as an explanation for oil price movements, has not been applicable. Despite continual rising inventory levels on the back of OPEC’s additional capacity, prices continued to increase in 2004 and 2005. (Slide 6) Research points to downstream tightness, as well as the perception of upstream constraints, which has led to increased activity in the futures market and a significant rise in open interests, namely the number of outstanding contracts for which an entity has not yet made an offsetting sale or purchase. Geopolitical concerns obviously play a role too.

OPEC's Member Countries, although traditionally associated more with the upstream, have themselves taken the initiative to invest in downstream projects; this has been on their own and in partnership with others. Currently, 0.6 mb/d of new refinery capacity is under construction, with an additional 1.9 mb/d planned. However, all of this does not escape the fact that downstream investment is primarily the responsibility of the international oil companies and consuming countries.

Inadequate past investment and increasingly stringent product specifications have been major factors behind this lack of effective global refining capacity and today investments in the refining sector are also coming at a considerably slower pace than is warranted by expected growth in demand. Thus, the downstream sector could very well remain a source of market instability over the coming years.

(Slide 7) As well as these downstream concerns, OPEC’s Long-Term Strategy underlines a number of challenges that may impact future world oil demand, such as world economic growth and expanding vehicle usage, country demographics, consuming countries’ energy and environmental policies and technology development. Questions over how future non-OPEC production might evolve further compounds the uncertainty regarding how much oil will be needed from OPEC to achieve a supply and demand balance. These uncertainties are explored in the Long-Term Strategy by three consistent scenarios, the first of which envisages a future following previous oil demand patterns, with the other two exploring futures leading to lower and higher rates of oil demand growth respectively. The difference between the lower and higher rates of oil demand growth out to 2020 is more than 12 mb/d.

Let me initially focus on global economic growth. This is very much a major unknown and an obvious leading driver for future demand. In recent years, extremes of economic activity have demonstrated the difficulty of assessing what might reasonably be expected to occur over the next 20 years. The average rate of world economic growth in 2004, over five per cent per annum, had not been experienced since the early 1970s, while economic growth in 2005 was the third fastest over the past two decades. On the other hand, as recently as 2001, world economic growth was at its lowest for more than a decade, while 1998 also saw weak global growth in the wake of the Asian financial crisis.

By far the greatest increase in future demand is expected from developing countries. The recent rapid economic growth of countries such as China and India are cases in point. With a combined population approaching 2.5 billion, the two countries have recently witnessed significant demand increases. And in the future demand is expected to rise further.

(Slide 8) For example, in China and India, there are now just 10-to-20 vehicles per 1,000 inhabitants, compared with more than 500 vehicles per 1,000 inhabitants in the OECD region. With the transportation sector expected to be the single most important source of demand increase, there is clearly enormous potential for the transport sector growth in these two countries alone. It is important to stress, however, that the OECD region is still expected to be consuming more oil than developing countries by 2025. Moreover, there will remain large differences in consumption per head, with developing countries consuming on average five times less oil per person by 2025 compared to the OECD. It will also be critical to monitor whether developing countries follow similar paths to those already taken by developed countries.

(Slide 9) Yet predicted faster economic growth only offers up the overlying story. The underlying one is that of energy poverty. In the developing world, the lack of basic energy services is a severe impediment to the alleviation of poverty. Halving the proportion of people in the world whose income is less than $1 a day was actually the first declared ‘Millennium Development Goal’. Bringing people out of energy poverty is a focus for us all, and the benefits for those involved are obviously huge. For OPEC, the goal of eradicating poverty is close to the heart of OPEC Member Countries, being developing countries themselves. Yet energy poverty eradication can only be achieved through international collaboration so that these consumers have continuous access to the modern energy services many of us take for granted.

(Slide 10) In the transportation sector further uncertainty stems from the impacts on oil demand of technology development. For example, conventional internal combustion engines could continue to achieve significant fuel economy improvements, while hybrid vehicles may witness a significant growth.

Demand is additionally driven by demographics. The world’s population has risen by almost 10,000 in the last hour and almost 250,000 over the past day. In India over the past 15 years the population has risen by more than 250 million and in China the figure is approximately 160 million. However, as has been witnessed in many developed countries, changing demographic structures may also lead to a drop in the rate of population increases. China is anticipated to have much lower population growth rates in the coming years. All demographic movements, both an acceleration and a slowing, can have a significant impact on demand for oil and exactly how changes in demographic structures will affect oil demand is a further uncertainty.

Oil demand is also greatly affected by consuming countries’ policies. Taxation of energy products is often seen not only as a means of raising revenue, but also a means of controlling demand in addressing environment and energy security issues. Policies demonstrate significant discrimination against oil, involving not only higher tax rates, but also subsidies for competing fuels. Great uncertainty exists in relation to future developments of consuming countries’ policies and is considered one of the main constraints in ensuring adequate security of demand. Scenarios developed at the OPEC Secretariat show that such policies alone could potentially introduce demand uncertainty of the order of 5-to-10 mb/d to 2025.

(Slide 11) At this juncture, with talk of countries' environmental policies, I feel it is appropriate to add a few thoughts on OPEC and the environment. Although OPEC is concerned about the impact of environmental policies from consuming countries, this does not alter the fact that it remains committed to working with all parties to achieve sound and balanced environmental policies that do not undermine the ability of developing countries to pursue their legitimate goals of economic and social advancement.

OPEC also recognises that its Member Countries need to play an active role in addressing climate change concerns and as an Organization welcomes the Kyoto Protocol. Though renewables can and will make a further contribution to the energy mix, their likely limited role for the foreseeable future leads to an expectation of expanded use of fossil fuels, at least over the next few decades. In this light, there is a need to emphasise the role of cleaner fossil fuel technology. In particular, carbon capture and storage is a promising technology that is cost effective and can allow the continued use of fossil fuels in a carbon-constrained world. In conjunction with enhanced oil recovery, it also offers a win-win opportunity. Steps need to be taken to move this and other advanced and cleaner fossil fuel technologies forward.

(Slide 12) Returning to uncertainties, both singularly and taken as a whole these all represent significant challenges. If there is no particular departure from past trends, oil demand might be expected to grow by something of the order of 1.5 mb/d annually over the next two decades. Yet supply and demand of OPEC oil is also impacted on by the development of non-OPEC supply. This further complicates making appropriate and timely investments in OPEC Member Countries. It is anticipated that although non-OPEC supply will continue to expand during this decade and further, it will eventually reach a plateau.

Given the uncertainties, the amount of oil that OPEC is projected to supply over the next 10-to-15 years could range by as much as 10 mb/d or more and somewhere between $230 billion and $470 billion in investment terms. This vast range in oil demand and investment becomes even more acute when taking into account the long lead and pay back times involved and it must also be noted that uncertainties are overwhelmingly skewed to the downside.

(Slide 13) The way forward is dialogue and cooperation. To this end OPEC continues to devote much effort in this direction, with dialogue now being widened and deepened in an open and constructive spirit. As you may know, the most recent result of this was the establishment, last year, of energy dialogues between OPEC and, respectively, the European Union, China and Russia. And as I mentioned earlier, this month producers and consumers will meet at Ministerial level at the 10th International Energy Forum in Doha, in order to discuss at length the latest developments affecting the industry. Indeed, close involvement with the International Energy Forum and the establishment of its Secretariat in Saudi Arabia demonstrates clearly OPEC's commitment to this ongoing process.

(Slide 14) OPEC is committed to ‘global energy security’, both today and in the future and its most recent actions, both upstream and downstream, bear witness to this. This is no empty statement. It needs to also be recognised that the revenues oil-producing countries receive from petroleum sales are essential for financing their economic and social development.

Yet without the confidence that demand for OPEC's oil will emerge, the incentive to undertake investment can be reduced, which, in turn, can exacerbate concerns over eventual sufficiency of capacity in the future, and hamper the drive towards long-term oil market stability. Thus, more transparency and predictability in the evolution and implementation of economic, energy and environmental policies in consuming countries, and how they will affect future demand growth is essential. High-quality, timely information underpins well-functioning markets and today there is a particular need for better data on the evolution of demand and stocks.

As an industry we have to be inclusive: to think and plan ahead and to look at the needs of the world market, not just this year and next, but over the next decade and beyond. That is the timescale on which the industry has to think, and to invest. ‘Global energy security’ and its twin pillars of supply and demand may be checkered with uncertainties, but future market stability resides in all our hands.

(Slide 15) Thank you.

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