Oil Price Volatility: Challenges & Opportunities

Speech delivered by HE Mohammad Sanusi Barkindo, OPEC Secretary General, at Petrotech 2016, Panel: Uncertain Oil Prices, 5-7 December 2016, New Delhi, India.

Ladies and gentlemen,
Mr. Chairman,

I am delighted to be here today – in the bustling city of New Delhi, in the dynamic and ever-growing country of India.  As one of the world’s largest consumers of crude oil, India is of great importance to OPEC and non-OPEC oil producers alike.

Its vibrant economy currently enjoys the fastest growth in the world with a rate of 7.5% in 2016. At one level, India represents an important source of rapidly growing oil demand that appears to now be the highest, at nearly 300 tb/d − a rate that surpasses China. This expansion is being generated by the country’s transition to modern fuels in households, as well as rising demand in the transportation sector and in the petrochemical industry.  This has provided a great incentive to the world’s oil producers, OPEC Member Countries in particular, to ensure that India’s future demand needs are met.

At another level, India is also home to one of the most important single consumers of crude oil, Reliance Petroleum, the world’s largest oil refinery.  The new Jamnagar refinery has an annual processing capacity of about 1.2 million b/d.  That is truly impressive.

There is, therefore, no doubt that India has emerged as a global player on the energy scene. And as a large oil consumer, India also shares with us and other global oil producers another important goal:  oil market stability.  The flip side of this is, of course, oil price volatility.

Hence, it is very timely indeed that I headed to this great country almost immediately after our OPEC Ministerial Conference on Wednesday, the 30th of November, to share recent developments in the oil market and provide OPEC’s perspectives, particularly in view of the OPEC Ministers’ landmark agreement, which, once again, demonstrated the Organization’s steadfast commitment to market stability in the interest of all producers and consumers of oil.

This also fits perfectly with the theme of this session and will hopefully provide food for thought and stimulate deliberation.

The oil markets in recent years, as we all witnessed with anxiety, have been characterized by a sustained drop in crude prices, accompanied by volatility.

The current downward cycle in prices, which is one of the longest in history, began its precipitous decline in June of 2014 and reached a low of $20/b in early 2016, a massive decline of 80%. This downward spiral has given oil prices increased visibility in recent years – both in the media, in major economic centers and in various industry fora.  It is only recently that we have started to see encouraging signs of a reversing trend upwards.

However, if we refer to low prices and volatility, it is helpful to step back and recall our recent history. As they say, those who ignore the past are destined to repeat it.

Let us briefly recall the impact that the low oil price environment of the 1980s and 1990s had on producing countries – and the global oil industry in general.

During both cycles, low prices achieved only one thing:  they dramatically choked off investments.  Research and development spending was reduced.  And drastic cost-cutting strategies were put into place across the board.  Young people also lost any interest they might have had in making a career in the oil sector.  And, in the long term, global supplies were put at risk.

This, of course, sounds strikingly similar to the conditions we have been seeing lately – with global investments falling, oil revenue decreasing and impacts on the global economy, including declining trade. In fact, global exploration and production spending fell by around 26 per cent in 2015, and a further 22 per cent drop is anticipated in 2016.  Combined, this amounts to more than $300 billion, and this trend is expected to extend into its third year, which is unprecedented in the history of oil industry.

This is a stark contrast and challenge when we all know that, apart from the development aspirations and healthy economic growth of many producing countries, our capital intensive industry always requires huge investments for the production of new barrels, not only to meet growing demand but also to accommodate for decline rates from existing fields.  With the current state of the oil market, the industry will simply not be able to comply with the massive oil-related investment requirements that are estimated to be around $10 trillion in the period to 2040.

As in the previous downward cycles of the 1980s and 1990s, it has been necessary to find a way to expedite the long-delayed rebalancing of the market in order to restore stability.  This current cycle’s recovery process has taken far too long, and the risk of delaying the adjustment any longer would be costlier and more complicated with a host of negative implications in the coming years.

Over the busy months of 2016 and after a show of unity and cohesion of the kind we just experienced last week in Vienna – OPEC countries were able to reach an agreement on the implementation of the Algiers Accord.

With efforts that were constructive, comprehensive and timely, OPEC’s Members were engaged in extensive bilateral and multilateral consultations over the past months that culminated in the Algiers Accord on 28 September 2016 and then finalized with a consensus decision of its implementation last week on 30 November 2016 in Vienna. The Vienna Agreement!

These were landmark decisions, and they included the participation of non-OPEC countries, who declared their resolve to join OPEC in achieving an accelerated realignment of global oil supply and demand. We will have our joint ministerial level meeting with non-OPEC countries this coming Saturday, the 10th of December, at the OPEC Secretariat in Vienna – the first such meeting since 2002.

Mr. Chairman, Excellencies, distinguished delegates, with an enormous sense of responsibility and humility; I want to declare that the world is on the verge of turning a historic page in global oil.

Let me briefly underscore some of the characteristics of this historic achievement and the outcome of the 171st Meeting of the Conference:

  • It is the first production adjustment since Oran 2008;
  • Iraq is effectively part of the production management for the first time since 1998;
  • Iran has accepted a compromise solution that takes into account its temporary special circumstances with a cap on its production;
  • Participating non-OPEC countries, for the first time, are committed to a joint agreement for production adjustment;
  • An OPEC and non-OPEC Ministerial Monitoring Committee has been established to monitor the implementation and compliance of the agreement and to demonstrate the joint commitment to and collaboration in production management;
  • The Vienna Agreement has institutionalized a framework for structured, sustained and transparent partnership with non-OPEC countries;
  • The Vienna Agreement is openly shared with the public to reflect its credible, equitable, transparent, measurable and verifiable features.

Overall, it was a collaborative action to address the prevailing market realities and, more importantly, a commitment to the global community in an effort to restore and sustain market stability with positive and broad implications on the world economy, on the oil industry and on the oil producing countries.

This is a message OPEC has always emphasized in its discussions with major stakeholders, including producers, consumers and the industry.

Throughout this process leading to the Vienna Agreement, constructive dialogue, along with flexible yet effective cooperation among OPEC producers have played a key role.  This is the ongoing and evolving work that the OPEC Secretariat has tried to facilitate – and which I, as Secretary General, have been participating in and supporting since my arrival in Vienna on the 1st of August.

Let me stress that OPEC Member Countries maintain a steadfast commitment to ensuring the long-term supply of the market.  Our Member Countries continue to invest heavily in both the upstream and the downstream, despite recent increases in costs and despite a continuing shortage of skilled labour across the industry.

I should like to add that the global macro conditions have continued to offer numerous other challenges as well.  These have ranged from questions about global economic growth to environmental policies and political uncertainties in both oil consuming and producing countries.  Such forms of uncertainty can be very costly for oil producers.

Looking forward to the medium and long term, however, we remain confident that demand for oil will continue to rise steadily in the foreseeable future. In fact, according to our recently published 10th edition of the World Oil Outlook 2016, global demand is forecast to increase by nearly 17 million b/d until 2040 – at which time it could reach around 110 million b/d.

In this, a pivotal role will be played by Asia, which is set to be the engine for future growth in world energy demand.  In fact, emerging and developing economies in Asia are expected to make up roughly 70% of this growth – which is being spurred on by the region’s population growth, a rapidly expanding middle class, urbanization and industrialization.

India is projected to see its population grow by 317 million, surpassing that of China by 2030, and reaching 1.6 billion by 2040. This would correspond to around 18% of the world population, compared to 16% for China, during the same projection period in 2040.

GDP growth in India and China is especially noteworthy, with rates estimated at 6.9% per year and 4.9% per year, respectively, over the forecast period up to 2040.

In particular, China ($41.3 trillion) and India ($31.6 trillion) will together contribute more than half of the total global economic growth between 2015 and 2040.

India will also see dramatic increases in its real GDP over the next 25 years. It is anticipated to surpass OECD Europe in 2034 and, by 2040, India’s real GDP is estimated to be about the same size as OECD Americas.

Alone in India, oil demand is projected to rise to more than 10 mb/d by 2040 compared to 4.1 mb/d in 2015.

Such a substantial expansion in India and other fast growing economies in Asia will require supplies from all producing regions.  Thankfully, OPEC Member Countries will play a crucial role in fuelling this dynamic growth.  But for this to happen, continued investment in our Member Countries’ energy industries is required.

There is thus a clear need to ensure that prices are supported and stabilized.  This is something that can only be achieved together, by sharing outlooks and through collaboration among the world’s producers, particularly as the world continues to evolve towards more inter-dependence and more tightly integrated energy markets.  And it is exactly this spirit of cooperation that guided the actions of our Member Countries when they found firm and common ground during the Meeting of the Conference on the 30th of November in Vienna.

Such thinking also lies behind the establishment of active, formal and ongoing dialogues with the European Union, China and Russia, as well as with a number of other non-OPEC producers.

In fact, in December of 2015, OPEC held the first OPEC-India Energy Dialogue with the participation of India’s Ministry of Petroleum and Natural Gas.  This meeting was considered a milestone in setting such a dialogue in motion.  While the discussions mainly focused on trade between OPEC Member Countries and India, and energy consumption in India, special importance was given to India’s crude oil demand and gas requirements.  Roughly 85% of crude and 90% of gas going to India are sourced from OPEC Member Countries.

This dialogue was the first step in the development of what we hope will be a long-lasting, symbiotic partnership.

Ladies and gentlemen,

I am optimistic about all these laudable activities, as they could lead to more transparent security, stability and sustainability.  But nothing can be taken for granted, and we must continue to work together:  producers and consumers, OPEC and non-OPEC producers, and those working in the upstream as well as the downstream.  We all have something to gain by working together – and much to lose if we do not.

I am sure you will agree that today’s complex energy markets require open communication and collaboration in order to ensure that the world’s future energy needs are met.

This 12th edition of Petrotech is one of the most important initiatives taken by this fine country of India to enhance and promote such open communication. And I am certain that through continual dialogue, collaboration and the exchange of information, we all stand to benefit − producers and consumers alike.

So, with that said, allow me to once again thank you for the opportunity to share with you our outlook and perspectives, and I wish you all a productive and successful time here at Petrotech.

OPEC Secretary General, HE Barkindo at Petrotech 2016 in New Delhi, India

OPEC Secretary General, HE Barkindo at Petrotech 2016 in New Delhi, India

OPEC Secretary General delivers his speech at the Panel: Uncertain Oil Prices

OPEC Secretary General delivers his speech at the Panel: Uncertain Oil Prices