Center for Strategic and International Studies
December 8, 1999
Ladies and Gentlemen:
I would like to thank the Center for Strategic and International Studies, and in particular Chairman Sum Nunn and Secretary James Schlesinger, for inviting me to this prestigious conference. And I commend the Center and the Financial Times for organizing this forum.
As we stand on the threshold of a new millennium, now only days away, a thoughtful review of the state of the world's energy could hardly be more timely.
Indeed, these are times that call for clear vision. What the next century holds, in terms of social, political and economic stability, will be influenced one way or another by energy policies. I would like to offer my views on the role of oil in that future, keeping in mind that the oil industry, like so many others, has been going through a major transformation.
We hear a lot of debate about transformation. In the geopolitical sense, events of the past few years have been as profound as any in this remarkable century. The end to the Cold War, for example, shattered old systems and brought incredible changes throughout the world. In addition, technological innovations have swept the globe, opening unlimited opportunities for business and communication, and they have made the world almost borderless.
The world oil industry has experienced significant change in the past decades. Part of this change is the result of external, global forces I just mentioned, while much of it has taken place within. Internally, the industry has found ways to cut the cost of finding and producing oil. Thanks to new technologies like three-dimensional seismic, horizontal drilling and computer-aided modeling, the cost of producing a single barrel of oil is now a fraction of what it used to be.
Likewise, the industry has applied new methods to extend oilfield life, confront the toughest challenges and be more efficient along the entire chain - upstream and downstream.
The oil market underwent a process of transformation. Increasing competition and liberalization of oil production helped in making the market more transparent. The entry of financial houses and the use of futures, options and swaps have added to the factors influencing oil prices.
Yet, there is a paradox in all of this. Remarkably, in most studies analyzing energy trends, little note is made of the oil decline, in terms of its share of international gross domestic product, global trade, and relative wealth of the industry.
Over the last 20 years, we have seen startling changes in the relationship between energy and economic growth. The energy-to-GDP ratio - a traditional measure of the average amount of energy needed to produce a unit of output - has dropped dramatically. This is due both to greater efficiencies in energy usage and to a shift in the product mix - away from energy intensive sectors to services and information technology, particularly in the industrialized countries.
Now, let me elaborate. The share of oil in the industrialized countries' energy consumption declined from 55 percent in 1980 to 40 percent today, and oil's share in world merchandise trade declined from 17 percent to 7 percent in the same period. Today, the industrialized countries need 50 percent oil than they used twenty years ago to produce the equivalent unit of GDP. These changes have had an impact on the proportionate position of the oil industry in global business. For example, in 1980 there were 13 oil companies on the list of the 20 largest U.S. companies. By 1998, that number came down to only three.
But, although oil's share in the industrialized countries has declined, its use in the developing countries has been on the rise. Of the 20 million barrels per day increase in world oil consumption in the past two decades, 17 million barrels per day of that demand came from the developing countries. This trend is projected to continue into the future.
Let us now turn to the politics of oil. We all remember the 1970s, when ideological conflicts abounded, politics played a big role in shaping the world oil industry. During that era, Malthusians made dire predictions: the limits to economic growth were imminent; vastly depleted natural resources would leave nothing for the future; the generation of the seventies had positioned itself into a corner. There were gloomy forecasts for the well being of Earth and its inhabitants, and the world seemed to be split between East-West and North-South conflicts.
But the doomsayers were wrong. Global natural resources, for example, are managed far more effectively today than ever before. Witness oil - the industry is finding and producing at rates not thought possible 30 years ago. And no one can say the sky has fallen on economic expansion.
On the institutional level, the Organization of Petroleum Exporting Countries made its share of headlines, as did the International Energy Agency. The two organizations were seen as opposing entities, working at odds, though both recognized the strategic importance of oil to world commerce. This perception of an adversarial relationship between producers and consumers, along with the bias toward big-government solutions to economic and social problems, led many countries to nationalize their petroleum industries. Oil was seen as strategic and vital for the national interest.
Looking back, I don't think any of us were totally wrong in our views, or completely right. We were just working according to circumstances at the time. However, the world has changed indeed and greatly so. Clinging to old beliefs distorts the realities of today.
For example, in 1970 global oil production was less than 50 million barrels a day; today it is 75 million barrels a day. The world's known oil resources base changed dramatically. In 1970, the reserve-to-production ration was 33 years, meaning we would theoretically run out of oil in 2003. Today, the world's reserve-to-production ratio is well over 46 years, and likely to increase.
The Earth today has more proven oil reserves than eve. The world had 549 billion barrels of proven reserves in 1970, but in 1999, even after the consumption of more than 500 billion barrels, it still has more than one trillion barrels of proven reserves - a far cry from gloomy forecasts made less than 25 years ago. But then and now, the Arabian Gulf still has the same two thirds of world oil reserves.
The changes in world politics, economics and energy have also transformed relations between oil producers and consumers. The atmosphere of confrontation of the '70s has given way to the awareness of the need for a cooperative approach towards evolving oil market relations.
Consumers and producers are recognizing the value of cooperation. Next year we will host the Seventh International Energy Forum in our capital city, Riyadh, under the theme 'Partnership in Energy' with officials from over 50 leading oil producing and consuming countries attending.
Even though the politics of oil have become less divisive, some outdated attitudes unfortunately persist in some quarters. One remnant is excessive product taxation. In some OECD countries, for example, the composite oil product price is between $110 to $120 per barrel. Only $20 to $30 of that goes toward actual production, transportation, refining and marketing costs. The rest, something like $90 to $100, goes to governments as consumption taxes.
The rational for such high tax burdens on oil products has shifted from time to time. It used to be security of supply, or conservation based on perceived resource scarcity. Today it's global warming and environmental protection.
Oil should be viewed according to present realities. Those who propagate the issue of supply insecurity, the dangers of import dependence, and the perceived instability of the Arabian Gulf are ignoring realities. Let us look at the facts.
The security-of-supply issue is global in nature. A price increase or decrease, a shortage or over-supply, will affect all countries in the free market system. For example, oil price changes are felt by consumers in an oil-exporting country, such as the United Kingdom, in a similar way they are felt by those in an oil-importing country like Japan.
Today, the world political, economic and energy relations are more favorable than ever. So are the conditions in the oil market. The expanded oil reserves, the excess production capacity, and the transparent market should all ease the concern over supply security. Today, there is unused production capacity of 6 million barrels per day, almost half of it in Saudi Arabia. This capacity, which represents 8 percent of global demand, provides insurance against unexpected supply interruption or demand surge. This is a far cry from 1980 when there was no excess capacity in the system.
As to the alleged instability of the Arabian Gulf and its relation to the security of supply, one should not ignore geology and economics. The Arabian Gulf has the largest world reserves and readily available supply. During the different supply disruptions in the past two decades, such as the Iranian revolution, the Iran-Iraq War, and the Iraqi invasion of Kuwait, the only alternative to the disrupted oil supplies came from the region itself, and mostly from Saudi Arabia. Our willingness to maintain significant spare capacity has prevented potentially disruptive shortfalls from occurring.
Now let us turn to the future, about which I remain firmly optimistic. The nations of the Arabian Gulf have a great deal to offer. The six members of the Gulf Cooperation Council are moving rapidly to create a common market, and improve relations with Iran, making the region more stable and attractive for foreign investment.
In Saudi Arabia, we recognize the challenges of globalization and have made major progress towards joining the World Trade Organization. We have strengthened the GCC framework by agreeing recently to a Customs Union towards a Gulf common market. We are also negotiating with some Arab League members for a Greater Arab Free Trade area. We have established a Supreme Economic Council, headed by Crown Prince Abdullah Ibn Abdul Aziz, to deal with major economic issues affecting the Kingdom. We are also privatizing formerly state-owned activities like telephone services to encourage wider participation by our citizens and international investors. We are liberalizing our stock and real estate markets. We are also improving our investment and mining codes to attract foreign investment in all sectors including power generation, mining, petrochemicals and downstream oil and gas.
Ladies and gentlemen, these are the driving forces today in Saudi Arabia. We believe with conviction that Saudi Arabia holds a major role in maintaining a stable and reliable supply of hydrocarbon resources for the world to use. Regardless of crisis, disruption or sudden surge in demand, the kingdom stands ready to respond. In this regard, we are prepared, along with other major exporters, to assure supply in the event of any Y2K disruption.
I want to emphasize here that the U.S. and Saudi Arabia, the world's largest consumer and producer, respectively, have had a special relationship for many years. Saudi Arabia, as the largest supplier of petroleum to the U.S., has worked hard to fulfill its role in this partnership. The Kingdom has shown itself, time and again, to be a reliable supplier of petroleum to world markets as well as a force for price stability. Saudi Arabia will continue to fulfill this role as the world's largest supplier of petroleum in the next century.
Ladies and Gentlemen, Saudi Arabia is confident that petroleum, which fueled progress in the twentieth century, will continue to be a major contributor to economic growth and human progress in the next century, and reaffirms its role as a central and reliable supplier in this coming era.