Perhaps, now more than ever before, the world needs the guiding principles at the heart of the Atlantic Council: international cooperation; innovative thinking; fact-based policy making; the generation of bold ideas and the multitude of benefits that come from reaffirming historical alliances.
Let me stress that OPEC shares these values. Our encouragement of international cooperation and support of the multilateral system are ‘front and centre’ of everything our Organization stands for and the actions we take.
Given our common values and shared interests, I welcome the opportunity to share perspectives with you today and encourage exploring all other possibilities for further strengthening relations between our two organizations.
Next month, OPEC celebrates a very special and historically significant occasion. We will commemorate the 60-year anniversary of the First Arab Petroleum Congress, which took place in Cairo, Egypt. On the margins of this event, two kindred spirits, Venezuela’s Juan Pablo Pérez Alfonzo and Saudi Arabia’s Abdullah al-Tariki who had originally met as students in the US, sat down with representatives from Iran, Kuwait and Iraq, at the Maadi Yacht Club in Cairo.
There the ‘Gentlemen’s Agreement’ of Maadi was forged, which encouraged the signatories’ governments to establish a formal consultation commission as a means of countering the arbitrary decisions of oil companies and sought to secure better concession terms for oil producing countries.
It was what I might term a first ‘crossroads moment’ for our Organization.
The unstoppable momentum generated in Cairo would eventually culminate in the foundation of OPEC in Baghdad on 14 September 1960 by the five founding fathers of our Organization: Abdullah al-Tariki; Perez Alfonzo; Fuad Rouhani of Iran; Dr. Tala’at al-Shaibani of Iraq; and Ahmed Sayed Omar of Kuwait.
It was perhaps no coincidence that a US citizen, the legendary energy reporter, Wanda Jablonski, also played an important role in bringing these five founders together, helping bring about the initial consultations in Cairo.
I think this, alongside the fact that Alfonso and al-Tariki first met in the US, is symbolic of the crucial, interactive role that OPEC and the oil industry in the US would have over the subsequent six decades. I also believe it represents how our fortunes are closely intertwined.
OPEC has a vested interest in sustained US economic growth and prosperity. We are friends of the US. Equally, I feel that the US stands to benefit when OPEC prospers. OPEC’s Statute and mission is to help achieve a sustainable stability in the oil market; and this is not stability for stability’s sake: this is because we are cognizant of the diverse range of economic and social benefits that came from sustainable oil market stability.
When we succeed in our mission, this benefits both US producers and consumers.
One of the clearest examples of the interconnected nature of our fortunes was during the last global energy market downturn, what some call the ‘Great Bust’ of 2014-2016. This downturn was as devastating for OPEC Member Countries as it was for US producers, especially tight oil producers.
I would like to commend the author Bethany McClean, who vividly described the impact of the bust on the US industry in her book, ‘Saudi America’.
The consequences of the downturn were various: the rig count in the US fell from 1,920 rigs in late-2014 to a low of 480 in early-2016. This is a huge drop of around 75%! By mid-2016, US oil production had declined by a staggering 1 mb/d. Two hundred companies would declare bankruptcy in this country as a result of the bust, with huge corresponding negative multiplier effects on the economy.
With shale companies looking to reduce expenditure, fracking equipment was idled and as IHS Markit research has shown, close to 60% of the fracking equipment in the US was inactive during 2016.
OPEC Member Countries were not insulated. Revenues fell significantly and national and corporate budgets had to be readjusted. Foregone oil revenues were in the region of $1 trillion!
At the global level the figures were also stark. Investments were choked-off, with exploration and production spending falling by an enormous 27% in both 2015 and 2016, and only recovered by 8% in both 2017 and 2018. Additionally, nearly one trillion dollars in investments were frozen or discontinued.
Moreover, according to the consulting firm Graves & Co, the global oil and gas industry shed almost half a million jobs.
Of course, these factors rippled through the global economy. Millions of pensions were put at risk, especially in the US, as pension funds had invested in high yield debt, such as energy firms, and private equity firms that were heavily invested in shale companies.
Given all these factors, it is small wonder that the British economic historian Adam Tooze has concluded:
“In 2015-16 the world dodged a third instalment of the global crisis.”
It is far from hyperbole, then, when I say emphatically that our industry was resuscitated from its ‘death bed’ by the collective efforts of OPEC and its non-OPEC partners through the ‘Declaration of Cooperation’ process.
As a result of our voluntary production adjustments, a long absent element of stability was reintroduced to the market. The ‘Declaration of Cooperation’ became an integral and responsible feature of the energy market.
In the interests of ensuring our noble efforts were conveyed transparently to the market, participating countries also developed effective monitoring mechanisms: the Joint Ministerial Monitoring Committee, supported by its Joint Technical Committee and my team at the OPEC Secretariat. This was the first time this occurred in the history of oil.
On the back of the stability generated by the ‘Declaration of Cooperation’, the US oil industry has been revived. From the depths of despondency and despair, we now have an industry that is thriving again. Last year, with production booming, the US became the largest oil producer in the world. At the end of last year it was at 11.85 mb/d, and now sits at over 12 mb/d.
If you asked producers in the US shale basins whether they have benefitted from the actions taken through the ‘Declaration of Cooperation’, I am sure the answer would be a resounding ‘yes’.
I should also like to add here that without the US shale revolution in the first part of this decade the world would have witnessed major energy chaos.
It underscores the importance of the US and OPEC to the global oil industry and the fact that we both have a strategic stake in global supply and demand levels.
The past two years or so of the ‘Declaration of Cooperation’ and the recovery of the oil industry also came at the same time the global economy picked up too. This was apparent in the conclusions of the IMF in a publication entitled ‘The Global Economic Recovery 10 years after the Financial Meltdown’:
“After faltering at time over the past 10 years, the global economic recovery experienced a long awaited synchronized growth upswing in 2017-18.”
Looking ahead, the world will need more oil from both OPEC and the US.
According to OPEC’s flagship publication, the World Oil Outlook, long term oil demand is expected to rise to 111.7 mb/d in 2040. There is no expectation for peak oil demand over the forecast period to 2040. The IEA, the EIA and OPEC share this consensus.
To put this into an investment perspective, the required global oil sector investment to 2040 is estimated at $11 trillion.
What all this emphasizes is that while the short-term focus remains on maintaining market balance and stability, it is also vital that we do not lose sight of the medium- and longer term outlook. All timeframes are inter-linked; what happens in the short-term will have knock-on impacts for the industry’s prospects.
Such timeframes and numbers highlight the fact that oil will continue to play a critical role in the energy transition.
A clear exemplification of this is the petrochemical industry. Our Outlook, in line with other forecasting agencies, sees global population expanding to 9.2 billion by 2040. To support such growth and feed these additional mouths, there needs to be a high yield per acreage in the agricultural sector – this can only be achieved through nitrogenous fertilizers and other agricultural products that are produced through hydrocarbons.
As Charlie Munger, the famous entrepreneur, thinker and collaborator with Warren Buffet, has concluded:
“hydrocarbons as chemical feed stock are probably irreplaceable.”
Meeting this future demand challenge must of course be done in a sustainable manner, especially given one of the major issues of our time: climate change. At the most recent UN Climate Change Conference COP24 in Katowice, Poland, OPEC reiterated that it remains fully engaged and supportive of the ‘Paris Agreement’.
In some quarters, however, there is an evolving narrative that the oil industry is on the cusp of a demise.
This is far from the truth. We need to challenge this misconception, particularly given the climate disclosure drive from the financial community, which is affecting the vital investments into our industry.
It is perhaps a ‘crossroads moment’ for the oil industry.
We need to reinvigorate the industry; highlight the great benefits that oil has brought to billions, and the future positive impact it can have on billions of others.
We need to highlight, as eloquently put by Fatih Birol, Executive Director of the IEA, at the World Economic Forum in Davos in January, that carbon emissions from crude oil production by all IOC’s constitute only 4% of emissions worldwide, and compared with other energy types, this proportion is relatively low.
Moreover, as often noted by Bob Dudley, BP’s CEO, we need to emphasize this is not a race to renewables alone; it is a race to lower greenhouse gas emissions.
For this reason, OPEC emphasizes the importance of what sometimes is known as the ‘fifth fuel’ ̶ energy efficiency or as Dan Yergin called it in one of his masterpieces, ‘The Quest’, ‘energy ingenuity’, namely, applying greater intelligence to consumption, and being more clever about how energy is used.
Of course, the great enabler of improvements in energy efficiency is technological innovation.
We need to stress that the scale of the climate challenge means that no single energy source is a panacea; nor can the contribution of an entire industry or group of countries be overlooked.
The oil industry possesses know-how and experience for reducing our environmental footprint: working practices and fuel efficiency standards have improved exponentially over the decades.
Of course, more needs to be done. Nevertheless, the industry’s capacity for technological innovation must be harnessed within this process.
OPEC, the US oil industry, and the entire global oil industry, are part of the solutions to a sustainable energy future.
At the end of last year, when analysts and commentators were looking to the year 2019, one word kept being repeated: uncertainty. Uncertainty related to heightened trade negotiations; the easing of monetary tightening by several central banks; geopolitical developments; the impact of sanctions; the continuing prevalence of populism – the list goes on.
Yet in this world of uncertainty, I can assure that one thing is steadfast, unchanging and completely unwavering. And that is the resolve of the ‘Declaration of Cooperation’ partners to maintain a balanced oil market and achieve a sustainable stability, in the interests of both producers and consumers.
Moreover, following the proven success of the ‘Declaration of Cooperation’, participating countries are organizing in 2019 a permanent intergovernmental platform for dialogue, under the Charter of Cooperation between Oil Producing Countries, a forum that will ensure constant conversation between countries about salient energy issues.
We will persevere because it is the right thing to do. As one of the greatest sons of this country, John F Kennedy, said: we undertake our actions,
“not because they are easy, but because they are hard; because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone.”
And as I have stressed throughout my remarks today, it is in the interests of both the US and OPEC to see a vibrant and flourishing oil industry in the decades ahead.
Barkindo, who is OPEC’s Secretary General, delivered the speech at the Atlantic Council Luncheon in Washington DC, USA, recently