"Meeting the challenges in the international oil market"

An OPEC/IEA Luncheon Address to the 19th World Petroleum Congress, Madrid, Spain, 29 June - 3 July 2008. Delivered by OPEC Secretary General, HE Abdalla Salem El-Badri.

Mr Chairman,
Excellencies, ladies and gentlemen,

Let me begin by thanking the organisers for arranging this official OPEC/IEA luncheon and Aramco for sponsoring it. Let me also congratulate the World Petroleum Council on its 75th anniversary and for the outstanding contribution it has made to the industry during this time. Long may this continue!

Some of us here today attended the Jeddah Energy Meeting ten days ago. It was interesting to note how often the subject came up of the need for OPEC and the IEA to work together closely and take the lead in restoring calm to the oil market, with the IEF forming the third corner of the triangle.

As some of you know, there has long been a strengthening of relations between OPEC and the IEA, on both a formal and informal basis, especially in technical areas. This includes the holding of joint high-level workshops and OPEC’s participation in the IEA’s Greenhouse Gas R&D Programme. Also, we were both heavily involved in setting-up the IEF and the Joint Oil Data Initiative.

I am sure my friend Nobuo Tanaka will agree with me that, as a result of all this, there is much common ground between OPEC and the IEA on oil matters. And this is supportive of the continued healthy development and evolution of the industry in the years ahead.

Mr Chairman,
Excellencies, ladies and gentlemen,

I shall focus on four issues in this address.

The most pressing of these is oil price volatility, which has increased over the past ten months, with effects that are being felt, increasingly, in other parts of the world economy. Of special concern here is the impact on the least-developed countries.

The volatile price behaviour was discussed at length at the Jeddah meeting, which was called specifically for that purpose. There was widespread agreement that a combination of factors has been behind this behaviour.

OPEC’s Member Countries stressed that speculation has been playing a significant role in the volatility and rising prices. This is evident in the fact that more than 70 percent of oil futures contracts on the NYMEX are currently held by speculators. This represents a dramatic rise.

It is becoming increasingly clear that some form of regulation is needed to moderate this. Industrialised countries have made some headway in this regard, which can be viewed in a number of recent measures. OPEC welcomes these. Better regulation should eventually affect the price behaviour of not just oil, but also other commodities, which have suffered in a similar way from excessive speculation.

Let me state clearly that market has no shortage of physical crude, with comfortable stock levels. Today, supply is higher than demand. OPEC output currently stands at 32.2 million barrels a day, well above the forecast average level of demand for its oil for the whole of 2008, of 31.8 million barrels a day.

OPEC has played a big part in stabilizing the oil market, by increasing output when needed and by aiming to ensure that there is always a comfortable cushion of spare capacity. Indeed, OPEC supply has risen by 7.4 million barrels a day since 2002, compared with just 3.2 million barrels a day from non-OPEC.

Let us be clear about this. If more crude is needed, we will supply it. But what is the point of supplying more volume, if it is not needed? Does anyone behave like this in any other economic sector? The problem is not volume. It is price.

My second issue concerns resources. The world has plenty of oil. Ultimately recoverable reserves of conventional oil worldwide have doubled since the early 1980s and continue to rise. Technology has resulted in new discoveries, increased recovery rates and improved efficiency.

In addition, there is vast potential for the expansion of non-conventional sources of oil, such as tar sands, oil shale, heavy oil, gas-to-liquids, coal-to-liquids and biofuels.

The IEA has also looked closely into this issue and has reached the same conclusions. We know that oil is a finite resource, but there is clearly enough of it to meet global needs for generations to come. The world has plenty of energy resources, but bringing them to the market obviously involves significant challenges. This brings me onto my third issue — investment.

The outlook for the coming years is sound. Despite rising costs, there are more than 120 upstream development projects underway in OPEC countries, with over US $160 billion in cumulative investment to 2012, to add net capacity of around five million barrels a day.

With this, spare capacity is set to grow.

Downstream too, our Member Countries are also investing heavily in refinery capacity and delivery infrastructure. This will help address the refinery bottlenecks in some consuming countries, which have been adding to the general oil price volatility.

Our commitment to bring secure, stable supplies of oil to the market is as strong for the future as it is for today. Our Member Countries are ready, willing and able to meet this commitment for the foreseeable future.

However, as was widely accepted in Jeddah, producers must be assured that demand will actually be there, when they invest heavily in expanding production capacity. A climate of uncertainty is detrimental to sound investment strategies. The upfront costs for investment are enormous in the oil sector, and it should not be forgotten that most of the world’s leading producers are developing countries.

Therefore, every effort must be made by consumers to maximise transparency and predictability, especially in regard to policy-making.

And finally, there is the issue of technology, which applies right across the supply chain and can bring enormous gains in efficiency and output, as well as addressing environmental concerns.

Notable here is the technology for carbon capture and storage, whose potential for combating climate change is receiving greater international recognition, as again was clear in Jeddah. But the technology needs further development and finance, as the process advances to mainstream commercial viability. Industrialised countries are best equipped to take the lead in this.

However, technology alone is not enough! We also need to focus on the human resource. More effort must be made to attract highly skilled personnel to the industry, to support its future development.

We believe that cooperation should be enhanced among international, national and service companies from all producing and consuming countries. The challenges facing the oil sector are many and varied in today’s interdependent world. A committed, coordinated approach from all parties is needed to address them, and the World Petroleum Council will clearly continue to have a major role in supporting this.

Thank you.