Energy supply security: inclusive approach needed

OPEC Bulletin Commentary March-April 2006

Recently, ministers of energy of the Group of Eight (G8) industrialized nations met in Moscow to discuss oil market issues and challenges — especially as they relate to energy supply and security. The forum was used to take stock of the situation and to appraise measures and mechanisms currently in place for ensuring steady and ample supplies of energy.

The hosting of such a meeting in the Russian capital underscored the relevance of the issue of energy security. It especially pointed to the need for adopting a much broader perspective to address supply concerns, given Russia’s importance as a key energy player (it is ranked second in both global oil reserves and production).

Indeed, the coming together of key players — producers, consumers and investors — could not have come at a better time, particularly since oil prices continue to be influenced by a variety of factors, some of which are not governed by market fundamentals, such as geopolitics, natural disasters and refinery constraints. But while consumers are concerned about security of supply, producers are themselves worried about the future of demand uncertainty and the underlying risk of making investment capital available without having a clear picture of the extent of the world’s future energy needs.

Oil producers are also concerned about the role of speculative buying in the market which has tended to push prices to levels not justified by supply and demand fundamentals. This has ultimately led consumers to look at energy alternatives, even though fossil fuels today continue to be the cheapest and most readily available energy resource, and will remain so for the foreseeable future.

Energy security is viewed differently by different people, depending on where one stands. OPEC Member Countries, in holding two-thirds of global proven oil reserves, believe there is sufficient oil to meet the world’s needs in the years ahead. OECD countries will continue to account for the lion’s share of forecast demand. However, nearly 80 per cent of future demand growth will come from the developing countries. OPEC has consistently shown its willingness and capability to meet any rise in global oil demand by putting extra barrels onto the market, as and when required. It has also been making additional investment to ensure that the necessary increase in production capacity takes place.

The Organization equally recognises that concern over security of supply stretches well beyond the upstream sector to incorporate the entire oil supply chain, including refining. But while OPEC is committed to ensuring adequate crude oil supply, it feels the responsibility for providing consumers with the refined products they need falls primarily with the consuming countries. A definite correlation now exists between crude and petroleum product prices to the extent that refinery bottlenecks have been instrumental in driving up crude prices. This recognition clearly demonstrates that the task of ensuring energy security is the responsibility of all market players.

The G8 energy ministers’ meeting also underscored the fact that crude oil will continue to play a central role in fuelling world economic growth for decades to come. There is simply no current alternative to its availability, accessibility and ease of transportation.

However, we still need to gain a better understanding of the challenges and obstacles facing the industry both now and in the future. Co-operation and dialogue among producers, consumers and investors is the key to realizing that goal. In the changing world of today, increasing interdependence of nations reinforces the issue of energy security. Undoubtedly, this subject and the role fossil fuels play in the global energy mix will continue to dominate discourse on energy and development in the future.

As for OPEC, it will continue to seek equitable means of harmonizing global energy needs to serve the interests of the producers, consumers and investors alike, with respective returns that are reasonable and fair to all parties.

This Commentary is taken from the March-April 2006 edition of the OPEC Bulletin, which can be downloaded free of charge in PDF format from the OPEC website.

OPEC Bulletin (March-April 2006)

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