OPEC perspective on oil price volatility

This Commentary is taken from the July-August 2008 edition of the OPEC Bulletin which can be downloaded free of charge in PDF format from the OPEC website.

With half the summer gone, the oil price debate rages on.

Large international gatherings, such as the 11th International Energy Forum (IEF) in Rome, the 19th World Petroleum Congress in Madrid and, in between, the special meeting in Jeddah, called at short notice by Saudi Arabia, have dissected all the issues at hand. Yet, all the while, the price volatility persists, with the market ‘bulls’ continuing to dominate proceedings, basking in the limelight of a market rife with speculation.

The release of two separate publications on the oil outlook in early July — by OPEC and the International Energy Agency (IEA) — has added to the debate, especially with regard to the medium term.

Indeed, hardly a day goes by without some headline in the media announcing a significant new price movement, or revealing another so-called insight on price volatility.

This has all served to demonstrate once again the importance of oil to the day-to-day lives of most people on the planet — but, critically, not all people, notably those in the least-developed countries with, to date, little or no access to it — and the acceptance by all but the most diehard sceptics that this will remain the case for decades to come.

The diversity of views within industry, government and other specialist circles in the world about the reasons for the volatile price behaviour comes as no surprise. It reflects the nature of the global body politic and its interaction with the complexities and dynamics of the international oil industry — and all of this set in the context of oil’s ubiquitous role in the global economy.

At the same time, however, the similarities in views outnumber the differences. There is a broad consensus that world energy demand will continue to rise for decades to come, fossil fuels will remain dominant, oil resources are plentiful, environmental issues in a carbon-constrained world will be paramount and renewables will expand gradually from a very low base.

Furthermore, the Jeddah Energy Meeting’s concluding statement — issued jointly by Saudi Arabia, the IEA, the IEF and OPEC — recognized the importance of focusing on seven specific areas in addressing the price volatility: spare capacity, the financial markets, data transparency, IEA/OPEC/IEF collaboration, development assistance, technology transfer and energy efficiency.

In spite of all this, we cannot help feeling that the debate is beginning to lose its way and that it is in danger of becoming engulfed in familiar rhetoric from some influential consumers, with an unhelpful polarization of views creeping in.

Every study we have undertaken in this recent difficult period has made it clear that the market is well-supplied with crude, that fundamentals are sound and that other factors, notably speculation, dollar movements, geopolitical developments and downstream bottlenecks, are driving the volatility.

Why do some parties, therefore, persist in saying that the price volatility is really down to a misalignment of fundamentals? This flies in the face of reason, ignores the evidence and does not make sense to us.

As OPEC Conference President, Dr Chakib Khelil, told reporters recently: “How can one explain that the oil price fell by $15/barrel in the space of two days, if, as they say, there is a lack of supply? The fact is, supply has not changed during these two days … which means that the cause of the rise in crude prices is nothing to do with supply problems.”

Furthermore, some consumers express concern about the medium-term outlook and claim that this sentiment is contributing to the volatility. However, when we provide assurances about the oil-supply situation over the next five or so years, highlighting in detail the investment that is actually being undertaken by our Member Countries, ‘expert opinion’ from some consumer circles publicly questions this, fuelling the volatility! How can they claim to know more about what is happening within our sovereign territories than we do?

Massive strides have been made in dialogue and cooperation over the past two decades in a global industry that is more integrated than ever and at a time of growing interdependence in the world at large.

We all know that, because of its important role in the global economy, oil remains a highly politicized commodity. However, this should not detract the industry at large and all the associated interests from taking a balanced, reasoned and constructive approach to handling a debate on an issue which lies at the heart of sound, sustained growth in the world economy and where the benefits should be shared by all countries, in accordance with the Millennium Development Goals.

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