Oil and the fuel price: The link to market stability

Keynote address by Mr. Mohammed S. Barkindo, Acting for the OPEC Secretary General, to the Opening Ceremony of the 30th World Congress of the International Road Transport Union, Dubai, UAE, 14-16 March 2006

[Slide 1]
Excellencies, ladies and gentlemen,

Let me begin by thanking the organisers of the 30th World Congress of the International Road Transport Union (IRU) for inviting me to deliver this keynote address on the highly topical subject of “Oil and the fuel price — the link to market stability”.

[Slide 2] As representatives of a major consumer and end-user of oil products, I am sure that the IRU is keenly aware of the challenges facing the oil market over the last two years.

[Slide 3] The first has been meeting exceptionally high levels of growth in oil demand from large emerging economies, especially China and India, as well as from some developed economies, such as the USA. High oil demand by itself is good news: it is a reflection of a healthy world economy, better social progress in many parts of the world, and, maybe, some success in poverty eradication, as this inevitably translates into higher energy consumption. Nevertheless, this sudden surge in the demand placed great stress along the entire supply chain of the oil market, especially those areas like the downstream that over the years had been allowed to become bottlenecks.

[Slide 4] This brings the second challenge: ensuring that there is sufficient supply in the market to match or exceed the increase in consumption. The surge in demand that took place over 2004 was adequately met thanks to the existence of OPEC spare capacity. [Slide 5] Since then, OPEC has maintained a high level of output to ensure that market needs are meet, even in times of large weather-related supply disruptions, as were witnessed last year in the USA. [Slide 6] Additionally, OPEC Member Countries have accelerated their plans to bring on-stream new production capacity to meet continued demand growth and to ensure a comfortable level of spare capacity.

[Slide 7] The downstream, however, has been less responsive, and it is now widely accepted that much of the price volatility over the past two years has been driven more by downstream constraints in consuming countries than by shortages the upstream.

These challenges have only been compounded by the increased speculative activity in the financial markets, which can greatly exaggerate the impact of external events on the market — such as geopolitical and related concerns about future supply disruptions — to the detriment of producers and consumers alike and with likely repercussions further afield in the global economy.

[Slide 8] In the face of these challenges, OPEC has demonstrated time and again its commitment to market stability, with secure supplies and reasonable prices that are consistent with healthy economic growth, especially in the developing countries. Indeed, this commitment lies at the heart of OPEC's very existence. Our Organization's first resolution, adopted at our formative meeting in Baghdad in September 1960, refers to the assurance of "an efficient, economic and regular supply" of petroleum to consumers. This principle is enshrined in the OPEC Statute, adopted in 1961, and has remained a guiding light for our Organization ever since.

These founding principles have also served as the basis for the development of OPEC’s Long-Term Strategy, which was adopted last September to provide a coherent, consistent vision as well as framework for OPEC’s future efforts.

The OPEC Long-Term Strategy recognises the important role of oil in meeting expected global energy demand as well as providing for the socio-economic development of OPEC Member Countries. The core objectives for the Strategy are to ensure the long-term petroleum revenues of Member Countries, the stability of the world oil market with reasonable prices, and the security of regular supply to consumers, as well as the security of world oil demand.

However, these objectives face a number of key challenges. A major hurdle relates to the uncertainties surrounding future demand for oil in general and OPEC oil in particular, stemming from future world economic growth, consuming countries' policies, technology development as well as from future non-OPEC production levels.

[Slide 9] In an effort to deal with these uncertainties, OPEC’s Long Term Strategy considers three possible scenarios regarding the future developments in the global energy scene. The first is a Dynamics-as-Usual, where global economic growth is robust but no different to average growth rates observed over the past 15 years. In this scenario, oil demand increases by an average of 1.5 mb/d annually, with around three-quarters of the increase to 2020 coming from developing countries. The transportation sector is the single most important source of this increase and represents close to half of future oil demand. Within the freight component of this sector, road transport has the largest contribution of around 70%.

However, depending on developments in the world economy, global oil demand growth could turn out to be considerably different, rising 5 mb/d more than the base case in a persistent tight market scenario or falling 7 mb/d lower if the market remains soft for an extended period. Thus, these scenarios show a considerable range of uncertainty around 12 mb/d, although it should be stressed that the risks are predominately on the downside.

[Slide 10] In addition to economic growth, the energy policies of consuming countries are another factor greatly affecting oil demand. Taxation of energy products is often seen as a means of raising revenue and generally demonstrates a significant discrimination against oil. For example, in the four major European Union economies of France, Germany, Italy and the United Kingdom, around two-thirds of the price of a litre of unleaded gasoline goes to the governments in taxes. It should be noted that the substantial sums generated by such taxes are not spent on improving the transportation infrastructure, despite the pressing need to ease traffic bottlenecks, which themselves cause a substantial waste of fuel and unnecessary pollution.

[Slide 11] I know that members of the IRU like to say that the very last drop of oil in the world will be used for transportation. While this may be true, I am happy to inform you that such a day won’t be coming any time soon. Oil resources are large and sufficient, and will be able to meet the needs of consumers for many decades to come.

Over the longer-term, OPEC will be relied upon to supply most of the incremental barrel demanded. However, the uncertainties over future oil demand and non-OPEC supply translate into a broad range of levels of demand for OPEC oil of as much as 10 mb/d or more. [Slide 12]This complicates the planning for appropriate and timely investments in OPEC countries and, consequently, increases the risks associated with under- as well as over-investment.

[Slide 13] The need for appropriate investments is not just confined to the upstream but instead extends along the entire supply-chain, particularly the downstream. Given current trends, tightness in the downstream sector could be expected to remain a potential source of volatility, especially if the necessary investment in the refining sector is not undertaken in a timely manner. [Slide 14] Of course, it is important to remember that the primary responsibility for downstream investments remains with major consuming countries and international oil companies.

[Slide 15] Given the central role played by transportation in expected oil demand growth, OPEC has worked hard to enhance its capabilities in analysing and forecasting fuel consumption in the transportation sector. A recent workshop organized by the Secretariat highlighted a number of important issues concerning transportation sector, which is expected to remain a major source of demand growth for the foreseeable future. Vehicle ownership is set to rise throughout the world, but particularly in developing countries, where the potential for increase is obviously very large. [For example, Chinese ownership alone is expected to rise to 110 per 1000 inhabitants in 2030 from just 20 in 2002.]

Efforts by governments in consuming countries to reduce oil’s share of primary energy consumption through fuel substitution have had less impact in transportation than in the two other principal sectors — power generation and the residential/commercial/agricultural sector. This is because no true viable economic substitute has been found for transportation in the abundant — and relentlessly growing — quantities that are required.

This has not been for want of trying, as far as consuming countries are concerned. Indeed, over the past two decades, many government programmes around the world have encouraged the use of substitute fuels in the transportation sector. While these programmes have resulted in annual growth rates for substitute fuels that are much higher than for oil in the transportation sector, the overall share of substitute fuels in road transportation remains marginal, at around 2%. As a result, gasoline and diesel are expected to continue to dominate the transportation sector. In the meantime, it should be noted that environmental impact of the products used in transportation have been improved dramatically over the past, and this trend was set to continue in the future, with developing countries expected to approach the standards set elsewhere.

[Slide 16] Although increases in demand in the transportation sector have given rise to calls for reductions in CO2 emissions, the fact remains that the major source for CO2 emissions is from stationary sources, such as power stations. As a result, rather than taxes on road transport, governments should focus efforts on promoting carbon dioxide capture and storage technology which could be used to dramatically reduce emissions from where it is most needed and most practical — at power plants and other stationary sources.

[Slide 17] While the workshop taught us many things regarding the transportation sector, it also made us keenly aware of how much more there is to know. This brings me to the ongoing dialogue between OPEC and the IRU. Over the past two years, OPEC has met with top officials from the IRU on several occasions to share information and exchange views on many issues of mutual interest. This has been at several venues, including the visit to the OPEC Secretariat by a delegation led by the IRU Secretary General.

These exchanges provide an excellent example of one crucial element of OPEC’s Long-Term Strategy, which is dialogue—dialogue among producers and between producers and consumers such as the IRU. It is through dialogue that we are able to share our concerns as well as identify areas of common ground. For this reason, OPEC seeks to widened and deepen its dialogue with other players in the market to cover more issues of mutual concern and to further understanding of the positive role that OPEC plays in the world at large.

[Slide 18] Thank you.

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