The Role of OPEC in the 21st Century

Delivered by Dr. Alvaro Silva Calderón, OPEC Secretary General, to the European Energy Foundation, Brussels, 9 July 2003

Distinguished guests, ladies and gentlemen,

I should like to thank the European Energy Foundation for inviting me to address tonight’s dinner debate on the Role of OPEC in the 21st Century.

Origin and nature of OPEC
OPEC was created in 1960, based on principles which are as valid today as they were then — despite the vast number of changes we have since experienced in technology, economics, politics and many other aspects of our lives.

These principles revolve around the coordination of our Member Countries’ oil policies, so as: to ensure price stability in the world oil market; to obtain a stable revenue for oil-producing nations; and to provide a regular, reliable, efficient and economic supply to consuming countries and a fair return to investors in the oil industry.

Our commitment to these principles was reaffirmed as recently as the year 2000, in the Solemn Declaration that concluded the Second Summit of Heads of State and Government of OPEC Member Countries, which was held in Caracas, Venezuela.

OPEC’s activities are focused on oil, a commodity that has contributed more than any other form of energy to economic development around the world, over the past century and a half. Analysts agree that hydrocarbons will remain the most important source of energy for decades to come.

Moreover, we are dedicated to the ideals of last year’s World Summit in Johannesburg, to ensure that energy reaches all people and all nations, rich and poor alike, as an essential element in the sustainable development of mankind.

OPEC’s mission is not restricted by time or circumstance, however. It is, instead, a permanent one, which is centred around petroleum, but broadens out into the energy industry generally. It involves close cooperation and exchanges with other leading, influential parties in the sector at national and international levels.

The obvious conclusion from what I have just said is that OPEC is not a cartel, as some people still insist on calling us. Instead, it is an international organization of sovereign states, with a legitimate, permanent and essential mission for both its Member Countries and mankind generally.

Oil market stability
I believe that OPEC’s actions over the present difficult period provide a vivid demonstration of the important role the Organization plays in stabilizing the volatile oil market, a role that it will continue to play well into the future.

We all share a common interest in keeping prices in a moderate range and in avoiding extremes. Accordingly, OPEC developed its price band mechanism at the 109th Meeting of its Conference in March 2000. At that time, it identified US $22–28 a barrel as the price range that balances the needs of consumers and producers. The success of the mechanism can be judged from the fact that, since its inception, the OPEC Reference Basket has averaged $25.30/b, which is slightly above the centre of the band.

The price band mechanism has faced a stern test over the past seven months, in the light of the supply disruptions in Venezuela, Iraq and, to a lesser extent, Nigeria.

The Venezuelan oil industry strike, which began last December and extended into January, withdrew a startling 2.8 million barrels a day from the market. This pushed prices to more than $3/b above the band. In response, OPEC rapidly organized an Extraordinary Meeting of its Conference, which raised the OPEC-10 production ceiling by 1.5 mb/d and restored some balance to a potentially destabilizing market.

It is important to note that, while the price band mechanism allows for increments of 500,000 b/d to be added to the market when prices rise above 28/b, the OPEC Conference, recognizing the severity of the situation, agreed to add more than three times that amount. I believe this action shows OPEC’s flexibility, as well as the sincerity of its commitment to maintaining market stability.

However, despite OPEC’s best efforts, the oil price continued to sit stubbornly above the price band throughout the first quarter of this year. The main cause of this was the so-called ‘war premium’, based on speculation about the effect a possible war in Iraq would have on the oil market. At its 11 March Conference, OPEC provided assurances to the market that its Member Countries had sufficient capacity to cover any shortfall in supply that might occur. In response, consumer nations — such as Japan, members of the European Union and the United States of America — as well as consumer groups — such as the International Energy Agency — expressed confidence in OPEC being able to manage such a shortfall. Thus, OPEC could once again calm a jittery market and prevent prices from spiralling upwards.

Nine days later, the war began in Iraq, halting that country’s production of roughly 2 mb/d. This loss was compounded by an almost simultaneous disruption of supplies from Nigeria, due to unrest in its oil-producing Delta region. This resulted in a total withdrawal of more than 2.5 mb/d of crude from the market. OPEC rapidly convened a Consultative Meeting of its Conference on 24 April. Its Member Countries decided to raise the output ceiling to meet the needs of the market, with effect from 1 June, while at the same time reducing actual production to reduce the threat of over-supply heading into a period of seasonal low demand.

Throughout this period of high prices and supply disruptions, non-OPEC producers were, in the main, supportive of OPEC’s efforts, but were unable to put any additional oil to the market, because of export limitations and lack of spare capacity. This period demonstrated the direct benefit consumer nations derive from OPEC decisions to make the necessary costly — and risky — investment in spare capacity to prevent future supply disruptions. It clearly underlined OPEC’s commitment to security of supply.

Uncertainty about the situation in Iraq led OPEC to adopt a “wait-and-see” attitude at its most recent Conference in Doha one month ago, when it decided to maintain its previous production levels until it could reassess the situation at an Extraordinary Conference it arranged for 31 July. Assured that OPEC is constantly monitoring the situation, the market has responded favourably to this.

OPEC has also repeatedly demonstrated its commitment to ensuring that prices do not fall too far. The most notable recent case of this concerned the price weakness that followed the tragic events of September 11, when OPEC used the price band as a rallying point to coordinate efforts with several important non-OPEC producers — namely, Angola, Mexico, Norway, Oman and Russia — to stabilize the market by agreeing to make production or export cuts.

Although non-OPEC producers do not have the spare capacity to assist OPEC in covering supply shortages, they can at least cut production when prices are especially low. Such cuts are painful for all producers, non-OPEC and OPEC alike, and therefore should be shared equally among all producers. Fortunately, responsible producers recognize this fact.

I have just one last word to make about oil prices and stability. This is that many governments, especially within the EU, have the ability — even more so than producing countries — to substantially lower the prices their citizens pay for finished products. This is because, in some countries, only 20 per cent of the price of finished products, such as petroleum, goes to the producing countries, while as much as 70 per cent ends up in government coffers through high taxes. For this reason, it would seem reasonable, at times of high oil prices, for governments to develop a mechanism to adjust their tax rates on finished products to ease the burden on their constituents. I am sure that this would prove to be a very popular move!

Oil and the future
I should now like to turn to the challenges of the future. The latest projections from the OPEC World Energy Model, OWEM, indicate that fossil fuels will remain the world’s dominant energy source in the next two decades and that they will meet more than 90 per cent of world energy requirements. As for non-fossil fuels, nuclear energy is forecast to continue its decline, while hydropower is expected to grow rapidly in developing countries. Renewable energy will also increase from its very low base, although at rates lower than those set out in the EU green paper on energy security.

Among the fossil fuels, oil and gas in particular will continue to play the leading roles in meeting world energy demand. OWEM predicts that world oil demand will rise to 89 mb/d in 2010, compared with around 76 mb/d in 2000, and to 107 mb/d in 2020. As non-OPEC oil production reaches a plateau in the first two decades of the century, OPEC Member Countries — with more than 75 per cent of global proven crude oil reserves — are expected to be called on to satisfy most of the new demand. Our projections see OPEC producing 36 mb/d of crude in 2010, which is more than 40 per cent of global supply, rising to over 52 mb/d in 2020, when OPEC’s share will exceed 48 per cent.

Of course, with the projected expansion in both oil and gas use, there is a constant need for producers to not only replace depleted reserves, but also expand production to meet the world’s increasing energy needs. The level of investment our Member Countries alone will need to make is enormous. Our projections estimate a figure of nearly $100 billion by 2010 and a substantial $209 bn by 2020. However, for the high-cost, non-OPEC producers, investment forecasts are much greater than this — around $600 bn by 2010 and over $860 bn ten years later.

Oil and the environment
In speaking of the future, it is also necessary to dispel another common, but mistaken notion that fossil fuels are a dirty form of energy. Possibly this can be traced to the old days of coal. However, the situation has improved greatly in recent years and this will continue into the future. Currently, natural gas is a well-used, cleaner-burning form of energy, while new technologies, such as CO2 sequestration, will allow gas and other hydrocarbons, such as oil, to be burned at even the zero emissions level. It is important to remember that fossil fuels are a product — and gift — of nature. Technical advances are allowing us to use this gift without damaging nature in return. Today, it is only a question of cost.

Oil and cooperation
The task of stabilising the oil market and guaranteeing secure demand and supply, with reasonable prices and fair returns to investors, cannot be carried out by OPEC alone. Cooperation is necessary. Cooperation between OPEC and non-OPEC producers. Cooperation between producers and consumers. Cooperation among organizations.

Cooperation is central to OPEC’s thinking. Recently, eight non-OPEC oil-producing nations have become observers of our Organization’s activities and this includes attendance at our Ministerial Conferences. Before these Conferences, we hold meetings to exchange ideas among our Ministers and the representatives of observer countries. We also promote workshops and bilateral meetings between observers and OPEC.

Moreover, contacts and action plans are being made among producers and consumers. The Permanent Secretariat of the International Energy Forum has now been established in Riyadh. The relationship with the IEA has been strengthened through different events, such as high-level bilateral meetings, joint press conferences and the Joint Workshop on Oil Investment Prospects we held at our Secretariat in Vienna just a fortnight ago. We have also had meetings and seminars with the Energy Treaty Secretariat and have very close contact with UNCTAD and WTO, just as we do with UN bodies that deal with the environment, climate change and sustainable development.

So far, I have only touched upon the situation in Iraq. Two things are clear, however. The first is that Iraq is, without any doubt, a committed Member of the Organization. In fact, it is not only a Member but also a Founder Member of OPEC. And secondly, Iraq today is in an extremely challenging, transitory situation, where it is facing many difficulties. Its first goal will be to meet domestic consumption. Once this has been achieved, it will then work to restore its pre-war level of exports. The precise timing of this is unclear, although personally I believe it will be before the end of the year. Both OPEC and its individual Member Countries have a strong desire to see Iraq return to normalcy, as well as an expressed willingness to assist the country in overcoming the technical and managerial problems that have beset its oil sector.

Regarding Iraq’s participation in OPEC decisions, I would say that, since OPEC is an international organization of sovereign nations, it must be patient and wait until Iraq has formed a sovereign government. Once this has been achieved, then the country’s representatives can take their rightful places at the table with other Member Countries. We look forward to the time when Iraq is able to return in a fully active capacity to the Organization which it was instrumental in setting up more than 40 years ago.

At the beginning of my speech, I mentioned that producers and consumers share common goals. Throughout the course of my talk, I have touched upon these goals. In closing, I should like to spell them out more clearly. These goals are: stable prices, secure supply and sufficient investment. Stable prices allow consumers and producers to meet today’s needs. Secure supply prevents disruptions that can send prices spiralling and stall economic growth. And sufficient investment ensures that we will be able to provide the necessary oil to meet the growing energy requirement of the future.

These are the common goals we share — although at times this fact might be obscured when we view the challenges too strongly from one perspective. To achieve these goals will require the efforts of all of us. But I can assure you that the future looks very bright, if we seize the opportunity to work together.

Thank you.