Keynote speech to the "Middle East and North Africa Energy 2014"

Delivered by HE Abdalla S. El-Badri, OPEC Secretary General, at the Chatham House Conference: Middle East and North Africa Energy 2014, Theme: 'New Uncertainties and New Opportunities', Session One: 'Gulf Region Scenarios', London, U.K, 27-28 January 2014

Your Excellencies, Ladies and Gentlemen,
Good morning.

I am delighted to be speaking again at Chatham House’s ‘Middle East and North Africa Energy’ conference.  It is always a pleasure to be here.  I look forward to some interesting and lively discussions.

This morning I will focus on the question: ‘How can longer-term oil price fluctuations be managed?’  This is obviously an extremely important issue, and one that requires the close attention of both producers and consumers.

It is easy to appreciate why.

The size, scope, and complexity of the global oil market make it almost unique among physical commodities.  Currently more than 90 million barrels of oil are produced and consumed every day.  Beyond the scale of this trade, the strategic importance of oil and the crucial role that it plays in the global economy make it a commodity like no other.  It is the backbone of the global transportation sector, and is used to develop and produce a vast array of everyday products.

The price of oil is, of course, a central component to all this.  In fact, how oil prices evolve in the future matters to every one of us.

Whether you are a consumer purchasing a petroleum product at the pump, or the refined products for your airlines, ships and trains; or whether you are a producer looking at oil investments and future prices, a stable and fair oil price is vital.

High oil prices, for example, are bad for consumers today and lead to situations that are bad for producers tomorrow.  And low oil prices are bad for producers today and lead to situations that are bad for consumers tomorrow. 

Thus, as I have often said, extreme prices – either too high or too low – are not in the interests of either producers or consumers.

I think it is important to initially stress that past experience has shown us that no one country or institution can set or control prices. 

However, it is crucial we better understand how the market can help realize a stable and fair oil price and eliminate excessive fluctuations.  It means looking at the price from both the short- and long-term perspectives.

Clearly there is always much focus on the ups and downs of the price on a daily, weekly and monthly basis.

Short-term price fluctuations caused by such issues as geopolitics, supply disruptions, economic developments and weather are natural.  They are expected.  They are unavoidable.  They are absolutely normal.

However, it is important that we differentiate between such normal fluctuations and those that can be viewed as ‘extreme’.

Over the past decade, we have witnessed the increased financialization of oil markets.  Oil has increasingly being treated as an individual asset class by financial investors.  Speculative funds flowing into – and out of – the commodity futures markets, have exposed the physical oil market to financial market volatility.

Since 2005, the total open interest of the NYMEX and ICE futures and options has increased sharply.  And what has evolved is a close link between crude oil prices and speculative activity.

This has meant that some price movements have not been driven by fundamentals or the normal ebbs and flows of the market.  They have been driven by market speculation.

This was starkly apparent back in 2008, when crude prices escalated from around $90/b in January to a peak of over $145/b in the middle of the year, before sinking to a low of around $30/b in December.

It is clear we cannot avoid speculation and volatility altogether.  But extreme price fluctuations on this scale are clearly not conducive to the effective functioning of the market, particularly given the long-term nature of investments in our industry.

In 2013, we generally witnessed prices move in the $100-$110 range.  This is a range that is acceptable to producers and consumers alike.  Outages, supply disruptions and improved macroeconomic indicators have driven price increases, while lower refinery appetite, production increases and generally higher inventories have weighed on prices.

However, speculative activities continue to play a role – and have widened both upside and downside price movements.

That is why it is important to keep a watchful eye over speculative activities, particularly with the relaxed monetary policies seen in a number of major markets today. 

It is vital for the market to focus on actual market fundamentals, and to continually look to mitigate extreme volatility and excessive speculation. 

Given the long-term nature of our industry, especially when looking at investments, we need to also pay close attention to future years and what can be done to help provide more stability in the long-term price.

Let me stress here that long-term oil prices and fluctuations cannot really be managed, and that any price forecasts cannot be made with absolute certainty.  No-one has the capacity to do this.  There are always unknowns.

What can be done, however, is provide a strong framework for the future.  And this begins with the short-term I have just mentioned.  

We need to continually work towards a balanced market between supply and demand – a market with adequate and flexible spare capacity and storage for both crude oil and refined products to counter any short-term turbulence.

Looking at the market today, we believe fundamentals remain balanced.  There is more than enough supply to meet demand.  Spare capacity and stocks are at healthy levels.  And prices are at comfortable levels for both producers and consumers.

Stability and a balanced market today will be helpful in providing stability and a balanced market in the future.

In addition, there are evidently a number of other factors that can help to deliver a balanced market, with stable and fair prices, in the years ahead.  This is not an exhaustive list; but I hope to provide some key points.

It is important that we look to provide rational and impartial supply and demand forecasts.

We need to continually strive for more reliable and transparent data, to help alleviate uncertainty and volatility.  This can be done through dialogue between all stakeholders, and through initiatives such as the Joint Organisations Data Initiative – or, as it is better known, JODI.

For oil producers, it is also critical to have a better understanding of demand side developments, particularly policies that might discriminate against oil.  At the heart of this is security of demand.  This is just as important to producers, as security of supply is to consumers.

We need to remember that all investments require certain conditions.  These can obviously vary, but in general, the focus for producers is on stability.  Its absence can lead to investment uncertainty, and, in turn, future market instability.

To put it simply: producers do not want to waste precious financial resources now on infrastructure that might not be needed in the future.  At the same time, however, if timely and adequate investments are not made, then future consumer needs might not be met.

And of course, both under- or over-investment can lead to future price fluctuations, with potential knock-on consequences.  In this regard, and specifically in terms of lower prices, we need to think about the cost of the marginal barrel.

Given the complexities of the oil market, it is difficult to establish a single number that represents the marginal cost.  But it is evident that the cost of some oil sands projects, tight oil plays, deepwater and Arctic fields are the most likely to represent the marginal cost.

This raises the question: at what price levels would some of these projects become unworkable?  It is clear that for some projects it may not be far below current price levels.

It is in no-one’s interest to have an industry where investments are ‘on, off, on off,’ every time prices witness extreme fluctuations.  It is wildly changing prices that can most affect investments – and do most damage to both producers and consumers.

Let me stress here that OPEC Members are committed to invest, and to ensure that consumers receive oil when they need it.

These investments are important as we expect to see the call on OPEC liquids increase by over 10 million barrels a day by 2035 – which is greater than the expected increase in non-OPEC supply over the same period, at just under 9 million barrels a day.

However, as with any investments, they will obviously be influenced by various factors, such as the price of oil, as well as the overall economic situation and policies.

I should also like to highlight one other issue that is often overlooked when we talk about prices.  This is the amount of taxes paid by end-consumers at the pump.  In many cases, such as in a number of EU countries and Japan, the amount of taxes paid is more than 50 per cent of the overall cost. 

It is thus clear that the taxation of oil products has the potential to significantly impact end-prices and accentuate price fluctuations for consumers.

To conclude, it would be wrong for anyone to provide any guarantees to eliminate long-term price fluctuations.  All we can do is look at our forecasts and try to put the best framework in place to arrive at a future that works for us all.

This requires producers and consumers to work together with innovative thinking, collaboration and swift action, where and when appropriate, on key issues.  And it means further evolving data transparency and clarity and making sure that price extremes are kept in check.

Given the long-term nature of our industry and the need for clarity and predictability – I would like to leave you with three words – ones that have been central to my speech today: ‘stability, stability and stability’.

Stability for investments and expansion to flourish;
Stability for economies around the world to grow;
And stability for producers, allowing them a fair return from the exploitation of their non-renewable natural resources

And, of course, long-term price stability is a fundamental element to all of this.

Thank you for your attention.

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