Keynote Address to a panel discussion on "Energy & Transport"

Delivered by Mr. Mohamed Hamel, Head, Energy Studies Department, on behalf of OPEC Secretary General, HE Abdalla Salem El-Badri, to a panel discussion organized by the Austrian Federal Economic Chamber.

Vienna, Austria, 19 November 2008

Ladies and gentlemen,

Let me begin by thanking the Austrian Federal Economic Chamber for the opportunity to address such a distinguished gathering on behalf of OPEC’s Secretary General, His Excellency Abdalla Salem El-Badri. It
is indeed a pleasure to be here.

Energy use has been central to world economic development and social progress over many decades and centuries, providing light, heat and mobility. It remains crucial for alleviating poverty and expanding economic opportunities. More specifically, mobility, the subject of today’s roundtable discussion, has been fundamental to much of humanity’s progress over the centuries. And there is no doubt that it will remain so in the future.

Under all scenarios, energy use is set to rise. In OPEC’s World Oil Outlook reference case, it increases 50% by 2030. Renewable energy will grow fast, but from a low base. Realistically, fossil fuels will continue to satisfy most of the world’s energy needs, contributing more than 80% to the global energy mix over this period. And of all fuel types, oil will continue to play the leading role, although its share will be slightly lower in 2030.

Developing countries will account for most of these increases, by virtue of higher population and economic growth. However, energy use in developing countries will remain much lower on a per capita basis; for example, by 2030, a North American citizen will still consume on average five times more oil than a citizen of China. Moreover, a large part of the world population will continue to lack access to modern energy services.

At the sectoral level, transportation is the key for future oil demand growth, given the unique characteristics of this energy source. This potential is all the more so in developing countries, where levels of vehicle ownership are still very low. Indeed, four billion people live in countries with less than one car per twenty people. In OECD countries, such as here in Austria, this ratio is typically around one car for every two people, close to saturation.

It all clearly highlights why there is a need to focus on the transportation sector. It is critical to individuals, businesses and countries.

Now given this background, what are the challenges ahead?

In the transportation sector, a broad range of technologies will certainly be explored. However, it is essential to be realistic regarding what can be achieved in an affordable and sustainable manner. For example, it is evident that there is still room for significant efficiency improvements in areas such as powertrains and materials. This is something that is obviously welcome and which my colleagues in this roundtable will certainly cover.

I would like to now specifically focus on the oil supply perspective. Let me reassure you that the world has enough remaining oil reserves and resources to meet demand and satisfy consumers for decades to come. In addition to conventional oil resources, there is the huge potential for developing non-conventional oil, such as tar sands and shale oil.

Therefore, the issue is not one of availability; it is one of deliverability and sustainability.

On deliverability, standing in the way of turning resources into supply and implementing sound investment strategies is the large amount of uncertainty that exists about future oil requirements. This is a major challenge for oil producers in general and OPEC Member Countries in particular. On the one hand, there is the willingness to invest in sufficient capacity to ensure that future consumer’s needs are met, including the provision of an appropriate level of spare capacity. On the other hand, however, like in any sound business, there is no economic logic in committing vast amounts of capital to develop production capacities that may not be needed. It all underscores the importance of predictable energy policies, and reliable signals from the market and consuming countries.

Let me provide you with one example. This relates to what are increasingly being viewed as overly ambitious targets for biofuels. These have not only sent confused signals concerning oil industry investment needs, but have also led to their appeal being questioned due to unforeseen impacts in such areas as food prices and the diversion of land-use.

The other issue is sustainability, with its main two components: air quality and climate change.

I think we should recognize that the automobile and truck industries, as well as the refining industry, have a good track record in reducing the pollutant emissions of vehicles. For example, EU specifications for maximum sulphur content of petrol and diesel was reduced to 50 parts per million three years ago, and is set to fall to just 10 parts per million next year. And across the world I am optimistic that much can be progressively achieved in the near future.

Today, climate change is a central concern for us all, but there is no ‘silver bullet’ to solve this challenge. No doubt, addressing it will require a plethora of measures.

In this regard, reducing greenhouse gas emissions from stationary sources, such as power stations, the single largest source of emissions, could represent a significant low-cost path to climate change mitigation. Carbon dioxide capture & storage is a technology that has a high economic mitigation potential, and according to the IPCC, it could contribute to as much as 55% of the global CO2 mitigation effort needed to stabilise GHG concentrations in the atmosphere.

Of course, developed countries should take the lead in this mitigation effort, given their historical responsibility, as well as their technical and financial capabilities. This is in line with the United Nations Rio Summit and UNFCCC principles of common but differentiated responsibilities and respective capabilities, as well as the principle of equity.

Let me finally address a more immediate concern facing us today – the ongoing global financial crisis and its impact on the real economy.

It is still difficult to know how deep, how long, and how widespread this crisis may turn out to be. Clearly the short-term risks are skewed towards the downside. From an oil market viewpoint, all organizations including OPEC have reduced drastically their projections for oil demand in 2008 and 2009. And oil prices have declined by around US$90 in just four months, with associated increased volatility. Low prices send weak signals to investors in upstream and downstream oil projects, and, to a great extent, sow the seeds for possible sharp increases in prices and volatility. This was witnessed in the not so distant past, in both the 1980s and 1990s.

It is also important to recall events only a few months ago. We saw record high crude oil prices, which drew attention to the role of financial markets, as well as the then declining value of the dollar, in driving the crude oil price and volatility, in particular through increased speculative activity. Many believe that the proper functioning of futures markets has been altered by the various loopholes that effectively allow unlimited and undetected speculation, far beyond the limits of healthy liquidity-providing levels towards damaging price-distorting ones. The financial turmoil of the past two months has certainly provided more broad-based evidence of the possible adverse impacts of loosely regulated financial markets.

What I should like to add is that during these periods of price swings and volatility, the market has remained well-supplied. OPEC has, and continues to demonstrate its commitment to market stability at all times.

If I were to try to sum up, in one word, the future of energy, in line with what I have shared with you today, it would be: “interdependence”. And this is why we at OPEC believe that dialogue and cooperation is the way forward.

Thank you for your attention.