Intervention by OPEC Secretary General to the WEF Annual Meeting

Delivered by OPEC Secretary General, HE Abdalla Salem El-Badri, to the Annual Meeting of the World Economic Forum (WEF), Davos, Switzerland, 29 January 2009

[Session: Financial Crisis Impact on Energy Outlook & Prices]

Ladies and Gentlemen,

Let me begin by thanking the organizers for inviting me to share my thoughts with you on this important subject.

The world faces an unprecedented financial and economic crisis, not witnessed for many years.

The credit crisis, still unfolding, is now deeply affecting real economies across the world. Credit markets are under continuous stress and equity markets are in freefall. Oil prices are today around $40, which is 70% lower than their peak of last July.

Why are we in such a dire situation? It is the result of greed, poor management and inadequate regulation. This is all well-documented.

Facing the danger of a collapse of the international financial system, governments and central banks have responded boldly and swiftly, by using a series of mechanisms, including interest rates cuts, liquidity provisions, capital injections, tax cuts and economic stimulus packages.

It is still too early to say whether such actions will be sufficient to restore confidence and jump-start the economy. It is likely, however, that 2009 will remain a difficult year and it is not known if a recovery will come later this year or in 2010.

No economic sector is shielded. And the knock-on impact has far-reaching implications for the oil sector.

OPEC has frequently said that high oil prices were not an indication of a shortage of oil, but were the result of speculative money inflows, with the volume of paper barrels traded in regulated exchanges or over-the-counter rising dramatically. There has been a total disconnect between physical and futures markets; and price and fundamentals.

OPEC has repeatedly stressed that extreme volatility is in the interest of no one and that extreme price levels, both high and low, are damaging for producers and consumers alike.

More recently, as the financial crisis deepened and the state of the real economy worsened, the price of crude oil tumbled. The growth in oil demand turned into negative territory and projections for 2009 have been continuously revised downwards.

This has had a huge impact on the oil industry in general and oil exporting countries in particular. Between July 2008 and today, OPEC’s export income has reduced by approximately $365 billion.

Moreover, OPEC has had to adjust downward its output, leaving idle a large level of capacity, sometimes only recently put on stream. Since the end of 2003, around 8 mb/d of new capacity has been added. [Note: around 4.5 mb/d net]

We are already witnessing the reaction of the oil industry to this low oil price environment, with reductions in investments, project delays, and even layoffs.

OPEC, with its actions aiming at balancing the physical market and, thus, at avoiding extreme volatility, is helping escape a repetition of the past, where low oil prices led to low investments and thus to a shortage of capacity when the economy recovered.

But, more importantly, confidence has to be restored and the world economy put back on track. The needed regulations to rein in financial speculation have to be put in place, everywhere, and in a coordinated manner.

At OPEC, we are committed to ensuring stable, secure, reasonably priced supplies of crude oil to the market at all times, in support of sound economic growth. And this is done by continually monitoring all the various inputs, analyzing the information available, and then making informed decisions.

We have much to deliberate when looking at oil demand today and in the future. Take the key drivers of economic growth and consuming countries energy policies. Both create huge uncertainties over how much oil is needed in the future and how much capacity should be developed.

OPEC welcomes diversity in the overall energy mix, as well as the push to develop renewables and nuclear, but we need to give careful thought to how we proceed. Oil market stability requires predictable policies and a reasonable balance of interest.

Let me put forward a couple of questions in this regard. Should fiscal and policy incentives that push other sources of energy, also discriminate against oil, despite the widespread calls to majorly ramp up oil production? And should oil producers invest in projects that might best be described as a ‘consumer back-up policy’ in case proposed targets for other energy sources are not met?

I feel the answer to both questions is ‘No’.

To put the overall risks in some context, allow me to provide you with some figures. OPEC scenarios show that demand for OPEC crude by 2020 could be as low as 29 mb/d or as high as 38 mb/d. This is a huge range.

There is much to take on board. And whilst all this can be a headache at times, they are issues that must be dealt with. Investment decisions have to be made. And these can only be made on the evidence and market signals before us.

I would like to finish by looking at the final question posed by this session: what opportunities does the crisis bring for the energy sector? In all challenges, there are opportunities, and in this instance one of the biggest is the chance to further enhance cooperation.

We need to look at such issues as the projects on the table, the investments, the costs, the policy targets, market regulation and demand. The goal is to have better understanding of each other. This can only be beneficial in an increasingly interdependent world.

Thank you.