Security breeds Security

OPEC Bulletin Commentary January-February 2006

The rising oil market prices of the past two years have been accompanied by increased concern about security of supply in many consumer circles.

This has arisen in spite of the fact that, when the crude oil market has come under heavy pressure during this period, responsible players have ensured at all times that supply has been more than adequate to cover consumer needs. Late last summer, for example, prompt action by OPEC and the International Energy Agency — in close contact with each other — softened the impact of Hurricanes Katrina and Rita on the already tight United States’ oil market, as well as further afield in the international arena. This was a re-run of similar co-operation at the outbreak of hostilities in Iraq in spring 2003.

Throughout the present volatile period — that is, since around spring 2004 — OPEC has continued its longstanding practice of closely monitoring market developments and adjusting its production agreements as and when necessary, in the interests of secure crude supply and enhanced market stability generally. As is well-documented, other factors, over which OPEC has little or no influence, have been behind the volatility — notably downstream bottlenecks in consuming countries and heightened levels of speculation. Indeed, even here, OPEC has acted to ease the situation, with increased investment in downstream projects home and abroad.

This has been for the near term.

For the far term, the recent increased concern about security of supply has focused on the issue of whether the world will have enough oil to meet the high levels of demand growth forecast for the coming decades, especially from transitional economies and developing countries. As readers will see from the report, published in this OPEC Bulletin, of the recent speech by Mohammed Barkindo, Acting for the Secretary General, to the EUROPIA Conference in London, the response is a clear “yes”. As Mr Barkindo says: “The global resource availability is not a constraint to meeting this (growing demand) in full.”

In short, across all time-horizons for the foreseeable future, security of supply should not be a problem.

The emphasis instead should be on other key factors, notably in this case minimising the uncertainties that can be a blight on sound investment planning.

Alas, uncertainties are compounded by consumer government policies aimed at moving away from oil — moreover, oil from specific global regions — principally, as expressed by such consumers, for security of supply reasons. This constitutes veering away from the natural order of things in an already complex interdependent marketing environment. It makes it even more difficult than it is anyway to predict future demand trends and invest accordingly in production capacity.

In other words, actions taken as result of concern over security of supply are counter-productive, because eventually they reduce the level of security of demand that is central to the investment strategies of producers.

A unilateral approach to handling global energy issues is the last thing the world needs at the moment. As the President of the OPEC Conference, Dr Edmund Maduabebe Daukoru, said last month: “We all have to work together towards global energy security.” This reflects a broad consensus within the industry at large, an industry which is much more integrated than it was in the past. It is also consistent with the enormous, welcome advances that have been made in producer-consumer dialogue over the past two decades.

Security breeds security. A high level of security of supply, as we now have for the early 21st century, should be reflected in a high level of security of demand, ie a minimisation of market uncertainties. And vice versa. However, if some players choose to break the circle, then this could ultimately affect security of both demand and supply and perpetuate volatility, to the detriment of the market as a whole, as well as other sectors of the global economy.

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

OPEC Bulletin (January-February 2006)

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