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11/07/2008

OPEC...and musing about the financial crisis

OPEC Secretary General, HE Abdalla Salem El-Badri, at the 3rd International Energy Week, Moscow, Russia, Oct. 24, 2008. 

Whilst we are here today to look at a time horizon of 2030, I feel it is important to share with you some thoughts about what is currently front page news all over the world: the global financial crisis. 

The turmoil that has hit major financial markets and shaken many investment institutions over the past month has sent shock waves through the world economy. No one is immune from the current situation, including of course the oil sector. 

There are a number of questions we need to ask. For example, how might future economic growth and energy demand be affected? How might the shortage of liquidity affect everything from routine day-to-day operations to the devising and implementation of long-term investment strategies? How might the future international financial environment differ from the past? And how might it impact the emerging market and developing countries and the achievement of the United Nations’ Millennium Development Goals? 

The close links between the financial sector and the oil sector are already evident when looking at the volatility and level of oil prices over the past year or so. Prices have witnessed significant movements, firstly upwards and then downwards. Since the mid-summer highs, crude prices have fallen by more than 50 percent. And there has been a rise of US$16 in just one day of trading, and a fall of $15 a barrel over three days. Volatility continues to characterize the market. 

Yet I would like to stress that throughout this turbulent period, supply and demand fundamentals have been sound, thanks to the pro-active measures taken by our Member Countries. The market has remained well-supplied with crude, and stocks have been at comfortable levels. Supply has been, and continues to be, more than sufficient to meet demand. It leads me to a question: what do we make of these developments? 

While prices were rising, we were stating that this was due to the influence of non-fundamental factors, notably the heightened levels of speculation, the falling value of the US dollar, geopolitical developments, downstream bottlenecks and misguided perception of market tightness promoted by investment bank reports. 

Now that there have been significant changes to some of these factors, such as the recent strengthening of the dollar, the easing of geopolitical tensions and the expectations of a global economic slowdown, with its impact on oil demand, we have been witnessing big falls in the oil price. Speculators, for example, have liquidated their long positions on NYMEX, and this, in itself, has helped drive prices down. [For example, open interest in WTI (West Texas Intermediate) futures has dropped from 1.5 to 1 million contracts since mid-summer.] 

This all supports what we have been saying over the past year about the enormous pressure that speculation and non-fundamental factors have been having on oil price volatility. Let me stress here: there is too much at stake across the world for such high levels of speculation and volatility to have such a major and damaging impact in the market. This has certainly been borne out in the recent financial sector developments. 

It all points to the need to reduce the market role of excessive speculations, and the necessity for some form of regulation. This is something OPEC has called for. Industrialized countries have made some headway in this regard, which can be viewed in a number of recent measures. Whilst OPEC welcomes these, the progress of this needs to be monitored carefully. 

We should also remember that low prices will, without any doubt, result in the cancellation of many upstream and downstream projects, and this will lead to future long-term supply problems. 

Now, I would like to turn to the longer term and touch on three key areas: technology, the human resource and what links everything, market stability. The importance of these is evident from looking at the past, it is clear from looking at how things stand today, and each one will be essential to the industry’s future. 

Allow me to start with technology. Given that today’s theme looks out over 20 years, I think it is relevant to take a few moments to look back at the past two decades, and see how technology has changed the global oil industry landscape? 

What is evident is that when you look back 20 years, there were some tasks that seemed impossible. Yet, as I am sure you can all appreciate, many of these tasks are today taken for granted. Technology has transformed our industry and empowered it to be more effective and efficient. There has been the information technology revolution, moves to explore and develop deeper offshore, better sub-surface imaging and directional drilling. 

This has helped expand production, improved recovery rates and at the same time facilitated a continuing increase in the estimates of global ultimately recoverable reserves. In fact, USGS estimates of ultimately recoverable reserves have practically doubled since the early 1980s and continue to rise. It is interesting to note that cumulative production during this period has been less than one-third of the increase. On top of this, there is also a vast resource base of non-conventional oil to explore and develop. 

The issue is not whether the resources are there. We know they are. The world has enough oil resources to meet demand and satisfy consumers for decades to come. Availability is not a concern. The question is one of deliverability. 

So given this, and the expectation that fossil fuels will continue to satisfy the overwhelming share of the world’s commercial energy needs for the foreseeable future, the challenge going forward is clear. It is making sure that the emphasis is placed on how to develop, produce, transport, refine and deliver oil to end-users in an efficient, timely, sustainable, economic, reliable and environmentally-sound manner. 

Technology can help us to promote the early development and deployment of cleaner technologies. In this regard, Carbon Capture & Storage (CCS) is a proven technology that can be cost effective, and it has the potential to contribute significantly to emissions reductions. 

Another issue is the human factor. This is critical in developing, adopting and deploying technology. Yet today, there are questions being raised over the future adequacy of the human resource skills base. There are a number of reasons. 

Our industry continues to expand leading to the need for more skilled labor, but at the same time we face more competition for talent from the expanding service and knowledge economies. And it should not be forgotten that a significant percentage of the current workforce is expected to retire in the next ten years. 

There is a need to broaden the ways and means to find, hire, train and keep talented people and transfer knowledge to the next generation. They will be the ones that drive our industry in the decades ahead. 

This brings me to market stability. The importance of this is readily apparent today. And it will be the platform on which we continue to develop and expand our industry. It is something OPEC has been committed to since the Organization was founded in 1960. 

What I should like to underline here is both the supply and demand perspectives, and the fact energy security is a full circle. Security of demand is as important to producers, as security of supply is to consumers. 

Some people say that oil producers are not investing enough to be able to cater for future demand from consuming countries. While I cannot speak for other producing countries, the opposite is indeed the case for OPEC countries. For example, in the upstream sector, investments of more than $160 billion are expected to increase crude production capacity by around 5mb/d by 2012 from current levels. With this, spare capacity is set to grow. And downstream, investment levels over the same period exceed $60 billion. 

Looking to the future, it is clear there is much at stake. Scenarios developed by the OPEC Secretariat that by 2020, the additional amount of oil required from OPEC ranges between 32mb/d and almost 41mb/d. In monetary terms, the range for Member Countries upstream investments is as high as $320 billion. This represents a huge uncertainty for Member Countries upstream investment requirements. 

In addition, risks over possible future demand patterns are skewed towards the downside, due to a range of drivers. For example, the current financial situation, recent energy and environmental policy initiatives and higher tax rates that tend to push towards a reduction in demand. 

It is clear that this could lead to situations of over-investment, or under-investment. On the one hand, for producers there is a real prospect of wasting precious resources on capacity that may not be needed. And on the other, without the confidence that additional demand for oil will emerge and the market signals that long-run prices are supportive, the incentive to invest can be reduced. This may lead to a situation where consumer’s needs are not met. Neither is it conducive to a healthy and balanced market. 

I should like to stress, however, that despite the current financial stress and its inherent uncertainties, and the increasingly tight access to credit for businesses in all industries, OPEC remains committed to ensure the market is adequately supplied at all times. 

Source: opec.org
 
--- 

And on a totally different topic, I just want to include a passage on today’s financial crisis from John Cassidy in the November 2008 edition of Conde Nast Portfolio magazine. 

“Most important of all, the U.S. economy retains an enviable capacity to re-create itself. In one way, the unfolding of the credit crunch reads like a left-wing conspiracy theory: Rich Wall Street bankers concoct an explosive brew of exotic mortgage securities that bubbles over and blows up the financial system, or large parts of it. Amid the carnage, the government – the executive committee of the capitalist class, as Marx called it – offers to bail out the bankers at the taxpayers’ expense. But from another perspective, that of Austrian economist Joseph Schumpeter, the subprime catastrophe can be seen as the inevitable by-product of a crucial and ultimately beneficial innovation: the securitization of illiquid assets such as mortgages, credit-card debt, and auto loans. Whenever something exciting and new comes along, Schumpeter pointed out, entrepreneurs and investors gear up to take advantage of it, which can easily lead to the emergence of ‘reckless’ finance. It happened with the building of the railroads of the mid-19th century, the development of radio and television in the 1920s, and the commercialization of the internet in the 1990s. 

“As a longtime critic of financial deregulation and the Greenspan-Bernanke policy of stoking asset-price booms, I don’t totally buy into the Schumpeterian story, but neither do I buy the argument that American capitalism is collapsing under the weight of its internal contradictions. A period of living within its means, behaving less arrogantly toward other countries, and relying for its prosperity on creativity and honest toil rather than speculative bubbles would be good for the U.S. It might well make it more popular; it could certainly make it stronger.” 

---
 
Wall Street History will return Nov. 21.
 
Brian Trumbore



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-11/07/2008-      
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Wall Street History

11/07/2008

OPEC...and musing about the financial crisis

OPEC Secretary General, HE Abdalla Salem El-Badri, at the 3rd International Energy Week, Moscow, Russia, Oct. 24, 2008. 

Whilst we are here today to look at a time horizon of 2030, I feel it is important to share with you some thoughts about what is currently front page news all over the world: the global financial crisis. 

The turmoil that has hit major financial markets and shaken many investment institutions over the past month has sent shock waves through the world economy. No one is immune from the current situation, including of course the oil sector. 

There are a number of questions we need to ask. For example, how might future economic growth and energy demand be affected? How might the shortage of liquidity affect everything from routine day-to-day operations to the devising and implementation of long-term investment strategies? How might the future international financial environment differ from the past? And how might it impact the emerging market and developing countries and the achievement of the United Nations’ Millennium Development Goals? 

The close links between the financial sector and the oil sector are already evident when looking at the volatility and level of oil prices over the past year or so. Prices have witnessed significant movements, firstly upwards and then downwards. Since the mid-summer highs, crude prices have fallen by more than 50 percent. And there has been a rise of US$16 in just one day of trading, and a fall of $15 a barrel over three days. Volatility continues to characterize the market. 

Yet I would like to stress that throughout this turbulent period, supply and demand fundamentals have been sound, thanks to the pro-active measures taken by our Member Countries. The market has remained well-supplied with crude, and stocks have been at comfortable levels. Supply has been, and continues to be, more than sufficient to meet demand. It leads me to a question: what do we make of these developments? 

While prices were rising, we were stating that this was due to the influence of non-fundamental factors, notably the heightened levels of speculation, the falling value of the US dollar, geopolitical developments, downstream bottlenecks and misguided perception of market tightness promoted by investment bank reports. 

Now that there have been significant changes to some of these factors, such as the recent strengthening of the dollar, the easing of geopolitical tensions and the expectations of a global economic slowdown, with its impact on oil demand, we have been witnessing big falls in the oil price. Speculators, for example, have liquidated their long positions on NYMEX, and this, in itself, has helped drive prices down. [For example, open interest in WTI (West Texas Intermediate) futures has dropped from 1.5 to 1 million contracts since mid-summer.] 

This all supports what we have been saying over the past year about the enormous pressure that speculation and non-fundamental factors have been having on oil price volatility. Let me stress here: there is too much at stake across the world for such high levels of speculation and volatility to have such a major and damaging impact in the market. This has certainly been borne out in the recent financial sector developments. 

It all points to the need to reduce the market role of excessive speculations, and the necessity for some form of regulation. This is something OPEC has called for. Industrialized countries have made some headway in this regard, which can be viewed in a number of recent measures. Whilst OPEC welcomes these, the progress of this needs to be monitored carefully. 

We should also remember that low prices will, without any doubt, result in the cancellation of many upstream and downstream projects, and this will lead to future long-term supply problems. 

Now, I would like to turn to the longer term and touch on three key areas: technology, the human resource and what links everything, market stability. The importance of these is evident from looking at the past, it is clear from looking at how things stand today, and each one will be essential to the industry’s future. 

Allow me to start with technology. Given that today’s theme looks out over 20 years, I think it is relevant to take a few moments to look back at the past two decades, and see how technology has changed the global oil industry landscape? 

What is evident is that when you look back 20 years, there were some tasks that seemed impossible. Yet, as I am sure you can all appreciate, many of these tasks are today taken for granted. Technology has transformed our industry and empowered it to be more effective and efficient. There has been the information technology revolution, moves to explore and develop deeper offshore, better sub-surface imaging and directional drilling. 

This has helped expand production, improved recovery rates and at the same time facilitated a continuing increase in the estimates of global ultimately recoverable reserves. In fact, USGS estimates of ultimately recoverable reserves have practically doubled since the early 1980s and continue to rise. It is interesting to note that cumulative production during this period has been less than one-third of the increase. On top of this, there is also a vast resource base of non-conventional oil to explore and develop. 

The issue is not whether the resources are there. We know they are. The world has enough oil resources to meet demand and satisfy consumers for decades to come. Availability is not a concern. The question is one of deliverability. 

So given this, and the expectation that fossil fuels will continue to satisfy the overwhelming share of the world’s commercial energy needs for the foreseeable future, the challenge going forward is clear. It is making sure that the emphasis is placed on how to develop, produce, transport, refine and deliver oil to end-users in an efficient, timely, sustainable, economic, reliable and environmentally-sound manner. 

Technology can help us to promote the early development and deployment of cleaner technologies. In this regard, Carbon Capture & Storage (CCS) is a proven technology that can be cost effective, and it has the potential to contribute significantly to emissions reductions. 

Another issue is the human factor. This is critical in developing, adopting and deploying technology. Yet today, there are questions being raised over the future adequacy of the human resource skills base. There are a number of reasons. 

Our industry continues to expand leading to the need for more skilled labor, but at the same time we face more competition for talent from the expanding service and knowledge economies. And it should not be forgotten that a significant percentage of the current workforce is expected to retire in the next ten years. 

There is a need to broaden the ways and means to find, hire, train and keep talented people and transfer knowledge to the next generation. They will be the ones that drive our industry in the decades ahead. 

This brings me to market stability. The importance of this is readily apparent today. And it will be the platform on which we continue to develop and expand our industry. It is something OPEC has been committed to since the Organization was founded in 1960. 

What I should like to underline here is both the supply and demand perspectives, and the fact energy security is a full circle. Security of demand is as important to producers, as security of supply is to consumers. 

Some people say that oil producers are not investing enough to be able to cater for future demand from consuming countries. While I cannot speak for other producing countries, the opposite is indeed the case for OPEC countries. For example, in the upstream sector, investments of more than $160 billion are expected to increase crude production capacity by around 5mb/d by 2012 from current levels. With this, spare capacity is set to grow. And downstream, investment levels over the same period exceed $60 billion. 

Looking to the future, it is clear there is much at stake. Scenarios developed by the OPEC Secretariat that by 2020, the additional amount of oil required from OPEC ranges between 32mb/d and almost 41mb/d. In monetary terms, the range for Member Countries upstream investments is as high as $320 billion. This represents a huge uncertainty for Member Countries upstream investment requirements. 

In addition, risks over possible future demand patterns are skewed towards the downside, due to a range of drivers. For example, the current financial situation, recent energy and environmental policy initiatives and higher tax rates that tend to push towards a reduction in demand. 

It is clear that this could lead to situations of over-investment, or under-investment. On the one hand, for producers there is a real prospect of wasting precious resources on capacity that may not be needed. And on the other, without the confidence that additional demand for oil will emerge and the market signals that long-run prices are supportive, the incentive to invest can be reduced. This may lead to a situation where consumer’s needs are not met. Neither is it conducive to a healthy and balanced market. 

I should like to stress, however, that despite the current financial stress and its inherent uncertainties, and the increasingly tight access to credit for businesses in all industries, OPEC remains committed to ensure the market is adequately supplied at all times. 

Source: opec.org
 
--- 

And on a totally different topic, I just want to include a passage on today’s financial crisis from John Cassidy in the November 2008 edition of Conde Nast Portfolio magazine. 

“Most important of all, the U.S. economy retains an enviable capacity to re-create itself. In one way, the unfolding of the credit crunch reads like a left-wing conspiracy theory: Rich Wall Street bankers concoct an explosive brew of exotic mortgage securities that bubbles over and blows up the financial system, or large parts of it. Amid the carnage, the government – the executive committee of the capitalist class, as Marx called it – offers to bail out the bankers at the taxpayers’ expense. But from another perspective, that of Austrian economist Joseph Schumpeter, the subprime catastrophe can be seen as the inevitable by-product of a crucial and ultimately beneficial innovation: the securitization of illiquid assets such as mortgages, credit-card debt, and auto loans. Whenever something exciting and new comes along, Schumpeter pointed out, entrepreneurs and investors gear up to take advantage of it, which can easily lead to the emergence of ‘reckless’ finance. It happened with the building of the railroads of the mid-19th century, the development of radio and television in the 1920s, and the commercialization of the internet in the 1990s. 

“As a longtime critic of financial deregulation and the Greenspan-Bernanke policy of stoking asset-price booms, I don’t totally buy into the Schumpeterian story, but neither do I buy the argument that American capitalism is collapsing under the weight of its internal contradictions. A period of living within its means, behaving less arrogantly toward other countries, and relying for its prosperity on creativity and honest toil rather than speculative bubbles would be good for the U.S. It might well make it more popular; it could certainly make it stronger.” 

---
 
Wall Street History will return Nov. 21.
 
Brian Trumbore