The secretary general of OPEC has said that volatility in oil prices is generating uncertainty within the industry and could result in major future imbalances in supply and demand in the future.
Speaking at the 7th Doha Natural Gas Conference & Exhibition, HE Abdalla Salem El-Badri also laid the blame for the current global economic crisis firmly at the door of developed nations and believes that there is still some way to go before an upturn occurs.
“As everyone knows by now, this crisis has its roots in the advanced economies. But in this interconnected world, it has spread to all countries, including the poorest ones — those who are least responsible for the crisis,” he said.
“The priority should be restoring confidence — in banking and financial institutions, in businesses and markets, and among consumers. This is the key to making markets work again and to reviving the global economy.” he added.
In regards to 2008’s market volatility, where prices for a barrel of oil ranged from a high of US$147 to a low of $30, El-Badri stated that such fluctuations were the fault of the world’s commodities markets, not oil producers.
“As OPEC has long argued, this kind of wild volatility is not caused by market fundamentals since the market was well supplied,” El-Badri said.
“It is the result of the increasing use of oil and other commodities as an asset class. The speculative funds flowing into — and out of — the commodity futures markets exposed the physical oil market to financial market volatility.”
El-Badri also said that the slump in both the demand and price of oil was troubling, not only because of the profit implications for OPEC’s 12 member states, but also the potential consequences for future investment in the industry.
“The current low price environment certainly represents a significant loss in revenues for both IOCs and NOCs. But it is also leading to underinvestment in exploration and production projects — in both crude and natural gas,” he said.
“In a low price environment, projects with high marginal costs and long lead times are hit very hard. The reasonable returns needed to make vital investments in capital-intensive projects in this and other industries remain elusive,” he added.
El-Badri went on to underline OPEC’s commitment to attaining market stability.
“Underinvestment now may result in market imbalances in the future,” he said. “And no matter how hard OPEC member countries try to contribute to market stability, it cannot be attained without price stability.”
“Extreme prices destroy demand patterns, make investment decisions difficult and undermine sustainable economic growth.”
“So OPEC stands firm — ready to pursue its commitment to contribute to market stability,” he added.
El-Badri’s concerns were backed up by Frank Mollerop, vice president of the oil and gas division at business intelligence software company the SAS Institute. Mollerop believes it is vital to keep investing in future production and that the current oil price does not allow for that.
“Today we have a perceived low oil price, but the industry needs to keep investing in its supply chain,” he told Oil and Gas Middle East. “The biggest challenge is not a lack of hydrocarbons, but the threat of a real supply crunch.”
“If the industry stops investing in building production capacity, then in just a few years we’ll have a serious supply problem.”
