The recent oil market volatility and high prices have been a major cause for concern among OPEC’s Member Countries, and our Organization has been doing everything it can to restore order and stability to this leading energy sector.

However, at the same time, OPEC is aware of the need to attend to the challenges that await the industry in the future, notably to ensure that sufficient production capacity is available at all times to meet the forecast rising levels of oil demand in the first quarter of the 21st century.

Let us, therefore, look at the present market situation, before moving on to longer-term projections.

Prices for OPEC’s Reference Basket of seven crudes – which was introduced as a pricing yardstick in January 1987 – rose above US $45 a barrel for the first time in October. To put this in context, it compares with an average level of just over $25/b that prevailed for several years at the beginning of the 21st century – from the inception of OPEC’s innovative price band in 2000 through 2003. That average was close to the centre of the $22 to 28/b price band, showing how effective this market-stabilisation device was, as a result of the realistic nature of its upper and lower limits, which were, in turn, considered fair and reasonable by producers and consumers alike. Thus it won wide acceptance in the oil community.

We see a combination of factors as contributing to the destabilisation of the market this year – even though, throughout, the market has remained well supplied with crude and fundamentals have been sound: higher-than-expected oil demand growth, especially in China and the USA; refining and distribution industry bottlenecks in some major consuming regions, coupled with more stringent product specifications and compounded by the recent hurricanes in the Americas; and the present geopolitical tensions and concern about the adequacy of spare capacity to meet possible supply disruptions. Combined, these factors have led to fears about a possible future supply shortage of crude oil, which, in turn, have resulted in increased speculation in the futures markets, with substantial upward pressure on prices.

To help restore order and stability, OPEC has raised its production ceiling three times, by a total of 3.5 million barrels a day for OPEC-10 (OPEC, excluding Iraq), to 27.0 mb/d. We did this, even though our assessments had indicated that there was sufficient crude in the market and that Member Countries were already producing well above previous ceilings. Our latest studies show that, for the third quarter, the market was over-supplied by nearly 2 mb/d and that this trend was being continued into the fourth quarter, although to a lesser extent, due to demand seasonality and other factors. However, in reaching our production agreements, it was believed that, as well as the actual physical fact of agreeing to these big increases in supply, such actions, in themselves, would also send a powerful psychological signal that OPEC was ready to act in order to help stabilise prices.

The easing price trend of recent weeks, of almost $10/b, can be attributed in great part to OPEC’s continued efforts to restore market order and stability.

A further Extraordinary Meeting of the Conference is scheduled for 10 December in Cairo, to review market developments and, if necessary, adjust the production ceiling accordingly. The decisions we take will, understandably, be influenced by the outlook for 2005.

Initial forecasts from recognised sources for 2005 assume a moderate slowdown in global economic growth. We project an annual growth rate of 4.1 per cent for 2005, compared with the 4.9 per cent currently forecast for this year. Growth will be much faster in developing countries than in the OECD – 5.0 per cent compared with 2.8 per cent – while, separately, China is projected to experience 7.6 percent growth in 2005, and Russia 6.0 percent.

Let us look at the impact this will have on oil demand in 2005 – especially at a time when there may be attempts to fill strategic petroleum reserves in China, India and, possibly, the USA. Demand growth forecasts for next year fall within a wide range of 1.4 to 2.4 mb/d, with an average of around 1.8 mb/d. OPEC itself projects 1.6 mb/d. Asia is expected to account for a significant proportion of this growth.

Looking at supply, forecasts for increases in 2005 non-OPEC supply also cover a wide range, between 0.7 mb/d and 1.6 mb/d, with a mean of about 1.0 mb/d. OPEC’s projections see an increase of 1.2 mb/d. According to various sources, the difference between world oil demand and non-OPEC supply is expected to increase for the third consecutive year. The preliminary market balance forecasts – demand minus non-OPEC supply – are also spread across a wide range, from 27.4 mb/d to 29.4 mb/d, with an average of around 28.1 mb/d. OPEC expects this number, which is, effectively, the call on OPEC oil, to be at the low end of the range.

With regard to the ability to meet rising demand in the short-to-medium term, OPEC has spare production capacity of around 1.5 to 2.0 mb/d, which would allow for an immediate additional increase in production. Moreover, in response to the expected demand growth in the near future, Member Countries have plans in place to increase spare capacity further in 2005, to over 2.5 mb/d.

We believe there is widespread recognition within the oil community of OPEC’s concern about the present high level of volatility and of the fact that the Organization is doing all it can to take the appropriate remedial measures. Moreover, it is acknowledged that, in normal circumstances, these measures would be likely to have their desired effect within a reasonable period of time. We saw this, for example, with the successful application of the price band in the opening years of this century.

But these are abnormal times and, as I pointed out earlier, factors over which OPEC has no control have been driving up prices this year by substantial amounts. Solutions need to be found in these other areas, before order and stability can be restored to the market. Let us hope this happens soon.

It is important, moreover, is to ensure that the market can meet world oil demand to the full, at all times, and that it does this in a climate of order and stability, with reasonable prices, steady revenues and fair returns for investors. At the same time, there should be a clear vision of the future oil requirement, with a satisfactory balance being found between meeting today’s needs and catering for those of future generations.

Let us now look at the future, using the reference case from OPEC’s World Energy Model.

Our projections show global oil demand rising by 38 million barrels a day to 115 mb/d by 2025 – an annual average growth rate of 1.7 per cent. Oil’s share of the world energy mix will dip slightly during this period, from 40 to 37 percent.

OECD countries will continue to account for the largest share of world oil demand. However, almost three-quarters of the increase in demand of 38 mb/d over the period 2002 to 2025 will come from developing countries, whose consumption will almost double. Asian countries will remain the key source of oil demand increase in the developing world, with China and India central to this growth. At the global level, the transportation sector will account for about 60 percent of the rise in demand in 2000 to 2025.

Turning to supply, overall non-OPEC output is expected to continue to increase, reaching a plateau of 55 to 57 mb/d in the post-2010 period. This represents an increase of 7 to 9 mb/d from 2002, although the eventual scale of this future expansion is subject to considerable uncertainty. The key sources for the increase in non-OPEC supply will be Latin America, Africa, Russia and the Caspian.

OPEC will increasingly be called upon to supply the incremental barrel. OPEC has both the capability and the will to do this.

Around four-fifths of the world’s proven crude oil reserves are located in OPEC’s Member Countries. Moreover, these reserves are more accessible and cheaper to exploit than those in non-OPEC areas. In 2025, OPEC is projected to meet more than half the world’s oil demand, at 51 per cent, with 58 mb/d.

One of the most basic issues facing OPEC – and, let us not forget, other oil producers too – is to ensure that sufficient production capacity will be available at all times to help meet the forecast heavy rise in oil demand.

Investment is needed: to meet the forecast absolute increase in demand; to replace exhausted reserves; and to ensure that oil producers always have sufficient spare capacity available to cope with sudden, unexpected shortages in supply. Also, the oil must be cleaner, safer and more efficient than ever before.

Furthermore, producers need assurances of stable, predictable markets, just as much as consumers require certainty and consistency with supplies – security of demand is as important as security of supply.

The required investment will be large, although it will not necessarily be different in magnitude to that observed in the past. Also, the cost of investment in OPEC oil is much lower than in non-OPEC oil.

However, the magnitude of the required capital injection is far from clear, even in the short and medium terms. This is partly due to the wide range of feasible demand growth scenarios, but it is also reinforced by contrasting views on the potential evolution of non-OPEC production. Uncertainties over future economic growth, government policies and the rate of development and diffusion of newer technologies are among the main factors that lie behind this. To illustrate this, if we reduce our global economic growth projections by just one per cent, this will lower the investment requirement for 2010 from a reference case $95 bn to $70 bn – which is a big difference.

To appreciate the significance of all this, one must consider investment lead times that are measured in years rather than months, as well as the importance of “getting it right” – that is, over-investment may result in excessive, costly, idle capacity and under-investment may lead to a shortage of crude and higher prices. In both cases, the losses, especially for producing countries, and the possible, broader associated damage, such as to the world economy, can be huge. Because of the long lead times, it may take years to correct a situation of heavy over- or under-investment.

Clearly, any sound investment strategy must be built upon a solid base. This underlines the need for market order and stability today, with reasonable prices.

Responsibility for the welfare of the oil industry lies with all the principal players: OPEC and non-OPEC producers, consumers and the intermediary bodies, such as the large oil companies and the international financial institutions. There must be reasonable burden-sharing within the industry. This underlines the importance of cooperation. All parties stand to benefit from cooperation, on all time-horizons.

Big advances have been made in this area over the past two decades and the concept of cooperation is now well-established – although such is the complexity of this industry and the underlying forces and pressures that propel it, that there remains plenty of scope for improvement. Nevertheless, a clear realisation has emerged that the industry is better-off if there is an underlying consensus on the means of handling, at least, the major issues that concern all parties.

If the right conditions are in place, then the market will be better able to accommodate destabilising factors, as and when they arise, and one of the main beneficiaries of this will be future price levels, which will then be more stable and at levels that are acceptable to producers and consumers alike.

This is especially important as we settle into the framework of an increasingly globalised industry, where technology is enabling us to make remarkable advances in every field of activity and where the orderly, equitable provision of cleaner, safer energy services is seen as an integral part of sustainable development, the eradication of poverty and the general enhancement of mankind.