The world needs a stable oil market

Tord André Lien

The following statement was made by Tord André Lien in December last year, when he was Norway’s Minister of Petroleum and Energy.

The global use of oil is increasing. Soon oil demand will surpass the 100 million barrel per day. landmark.  At the same time, existing fields are depleting. Thus, there is a need for new production capacity every year to meet the growing demand over time.

In the last couple of years, oil companies have reduced investment budgets substantially. This has affected investment in new projects and thereby future production capacity. The International Energy Agency and others are now concerned that low investments will lead to a shortage of oil and higher prices in some time. This was one of the key points made by IEA director  Fatih Birol when he visited Oslo this week.

I share his view. Because oil is so important to the economy, both on a global as well as  a national level, stability in this market is of particular importance. Increased stability means less uncertainty for companies. Thereby they require a lower price over time to invest to meet demand.

As most commodity markets, the oil market is cyclical. Prices can periodically move far above and below the price level needed to balance the market. Too low prices can lead to too low supply some time ahead. Too high prices can bring about too much supply. The reason is that demand and supply are quite insensitive to price variations in the short term.

Today, the oil market is much more open and transparent than before. This is positive. At the same time, in special circumstances, it can be a good thing if market actors take action to even out extreme fluctuations in the crude prices.

I believe that the OPEC decision to reduce their oil production is beneficial for the world. Somewhat lower oil production in the months ahead will contribute to balancing t the oil market at a sustainable level at an earlier time. This will enable the oil companies to start new investments and projects, and avoid oil shortages and high prices in the years to come. This will benefit everyone – both oil producing and oil importing countries.

Norway is not a member of OPEC, but we have an open and constructive dialogue with other oil producing countries. We are no longer a large oil producer and exporter on a global scale, and have a declining trend in our oil production. The Norwegian oil production has been halved in the last fifteen years. The oil price we have seen this year creates great challenges for many companies in the industry, but it is not a threat to the resource management on the Norwegian Continental Shelf. Our established producing fields on the shelf are robust against periods of lower prices. Beyond our normal production developments from our fields, we have no plans of reducing production on our own initiative, as has been done some times before.

Even if we produce less oil than before, we are still an important contributor in the oil market. We have stable framework conditions, and an efficient production with relatively low emissions. This is why the IEA’s Executive Director this week said that “the world (will) need every drop of Norwegian oil”.

This is why the Government implements an active, predictable, stable and market based petroleum policy. The policy forms the basis for the highest possible profitable activity level and value creation from our resources. This is our most important contribution to a stable oil market, which benefits the world. The OPEC decision to reduce their production in the particular situation the oil market is in now, pulls in the same direction.