Ladies and gentlemen, I would like first to express my appreciation to Mr. J. Curtis Mack, President of the Los Angeles World Affairs Council, for inviting me to speak in front of so distinguished an audience and in this highly respected institution.
It is a great pleasure to be in California, a state with many outstanding aspects, including its unique position on the world energy map. Today, as the world’s seventh largest economy, California consumes a significant part of the global energy output. It is also a great state in terms of energy production and energy resources, such as oil, gas, nuclear power and renewables.
But I think the Golden State’s importance goes beyond all of this. It has a key role in shaping the future of our world through the highly advanced technologies developed and produced here. The oil industry is aware of California’s unique role as an energy trendsetter. With its large population, economic prosperity, and unique environmental features, the state’s citizens have been at the forefront in challenging the oil industry to develop efficient methods – both of production and use.
I am pleased to have this opportunity to talk about some of today’s current issues within the oil market as well as the expected future of the oil market. Normally, I am not keen to do so. Predictions of the future often seem to turn out more wrong than right. Still, we look ahead in order to choose the best possible road and to prepare ourselves for unexpected detours along the way.
However, in talking about the future of the oil market, there are two facts I don’t need to predict. One is that there is a plentiful supply of oil to go around. The other is, we are in a truly international market where producers and consumers are far more closely connected than they may realize. The security of oil supply is not really the issue; better understanding of market dynamics is.
Let me explain further. Many of you recall the early 1970s, when some learned studies certified that global oil reserves stood at about 500 billion barrels. They also warned that we would start running out of oil by the start of the 21st century. Well, the new millennium has arrived, and that prediction is a bit off.
Over the past quarter-century, in fact, the world has consumed more than 600 billion barrels of oil, and our best estimate of recoverable oil today is about twice what it was less than 20 years ago. A figure commonly cited these days is about one trillion barrels of oil in the ground.
Consider this too: a recent study by the U.S. Geological Survey, one of the most authoritative sources on the subject, estimates that recoverable global oil reserves are more than two trillion barrels outside the U.S. Adding in U.S. Department of Energy estimates for the U.S., one arrives at a figure of about 2.3 trillion barrels of oil; an amount sufficient to satisfy all the world’s needs for no fewer than 80 years, based on current rates of consumption.
While the Arabian Gulf region will continue to hold the bulk of global oil reserves, other areas such as offshore West Africa, the eastern coast of South America and possibly the Caspian area will add a lot of new reserves. Further studies have indicated that the United States has possibly more than two to three times its current estimated oil reserves. That alone would enable the U.S. to produce enough oil to meet its needs for more than 30 years, based on current consumption levels and patterns of supply.
The United States was the first oil-producing country in the world and has consistently ranked among the top three producers for the past 100 years. It has provided a great number of the technological advances enjoyed by the oil industry at large.
Oil has made a great contribution to U.S. economic growth and prosperity. It has also opened new frontiers at home and abroad. The U.S. still enjoys the great benefit of oil, at reasonable cost.
Nevertheless, the fear of shortages and runaway prices persists, often striking an emotional chord. In the case of petroleum, it has often led some to begin promoting the issues of security and supply, and to criticize high dependence on non-domestic sources. If we applied this concept generally, no country in the world would import any major commodity from outside their borders.
Let’s look at it more rationally, though. Today, the price of oil is set by an open market, with many players. They include oil producers, oil companies, traders, fund investors and others. Moreover, the price of oil, like many commodities, rises and falls according to seasonal demand, production and consumption rates, political events, and often, less-than-accurate information on the state of the market.
Within this context, the goal of Saudi Arabia is clear: stability of the oil market for the benefit of consumers and producers alike. After all, and like other products, the importance of oil is mainly determined not by those who supply it, but by those who demand it.
Yet for both buyers and sellers, sometimes the price goes too low; other times it goes too high, proof that no one, including OPEC, has full control of prices. Sometimes the market is over-supplied, while other times it is under-supplied.
While oil producers cannot control the market, they can exercise some influence, especially in the short run. However, when it comes to longer term, oil-consuming governments have a bigger role. They do exert influence through taxation, funding research to promote lower oil consumption and develop alternative fuels, and through subsidies to certain sources of energy, like solar, wind, and nuclear power.
Perhaps the best example of the capability of oil consumers to influence oil markets is in the electricity sector. In the early 1970s, about 30 percent of the world’s electric power generating plants burned oil products as fuel. That was gradually reduced over ensuing years, primarily through government mandates. Today oil accounts for less than 10 percent. Its use in power plants is expected to decline further in the future.
Some people might perceive that oil producers and consumers are working against each other. However, there are more reasons to be connected than divided.
No doubt that cooperation and understanding can benefit us all. We, consumers and producers, should work to strengthen the economic ties that connect us – for the benefit of our societies and the health of the world’s interdependent economy. It is a highly recognized fact that we in Saudi Arabia, and to a large extent other major oil producers as well, have done our part by making available a steady supply of oil to avert serious disruptions.
When oil prices collapsed in 1998 and ’99, real damage to our vital industry was imminent. Oil industries in this country and elsewhere saddled with low-yield, high-cost fields felt the impact keenly. We in Saudi Arabia joined with other concerned producers, both inside and outside OPEC, to bring back market stability. A few months after the system regained equilibrium, the price of oil started to rise, as expected.
However, by the first week of March 2000, the oil price was over 34 US dollars for WTI. The consuming countries, both developed and developing, expressed their concern about this high oil price and its possible negative impact on their economies and citizens. But let me tell you that we in Saudi Arabia were also concerned about the high prices and their possible negative impact on consuming countries and the world economy at large.
Therefore, before the end of March, the producers both in OPEC and outside increased production by more than two million barrels. Furthermore, OPEC has adopted a mechanism to stabilize the oil market in order not to let it get out of hand as happened in 1998 or this last February and March. So we expect a sufficient stability within the oil market for couple of years to come.
Ladies and Gentlemen:
As I mentioned before and especially in this era of globalization, the interests of producers and consumers are inseparable. Our mutual future depends on the continued growth and health of all the world’s economies.
In addition, experience indicates that price volatility is in no one’s interest except that of the speculator. Fortunately, periods of volatility are usually short-lived. We therefore should not over-react or under-react when such events occur. We should also avoid political manipulation of the oil business as a means of tempering market cycles. The market system is still capable of self-correcting.
Oil is a depleting natural resource involving substantial risks and heavy investment. As such, its producers should take special care in managing the supplies of this vital commodity for the interest of the world economy and for the benefit of future generations. Moreover, unlike some other products and commodities, oil exploration is a high-risk business, and requires large capital for long term investments.
As producers in California and elsewhere know, the cost of producing a barrel of oil can range from as little as a dollar to as much as $15. Until viable, efficient alternatives are in place, oil remains an absolutely essential resource for both developed and emerging nations of the world. For those reasons, the industry as a whole needs close coordination and careful management. Saudi Arabia, and those in other key producing states, take their stewardship seriously.
Part of good stewardship is to have reasonable production capacity and to use it when the need arises. This has been the case on some occasions such as during the Iraqi invasion of Kuwait in 1990, spectacular growth in demand in 1992 to 96, and when the oil price spiked in the first quarter of this year. Today, the world has a little more than 3 mbd of excess production capacity with about 70% from Saudi Arabia. This spare production capacity can at least meet the expected demand within two to three years. It also can replace any unexpected cut of supply. Moreover, and even though there is a great cost with keeping unused production capacity, Saudi Arabia will in the year to come do its best to meet the expected growth in demand and keep at the same time a reasonable level of spare production capacity.
At this point, Ladies and Gentlemen, we can have a better look at the long-term future. Looking far ahead, it is likely that the oil industry will be shaped by four critical factors: population growth, economic growth, government regulations and technology. Let me touch on each.
First, there is population growth. The world’s population continues to grow and more energy will be needed to house, clothe and feed the expanding numbers of people inhabiting the globe. Population is expected to increase most in the less developed economies. In these areas, oil is currently used primarily for cooking, heating, and lighting. However, by dint of sheer size, and because these societies will increasingly desire the comforts of modern, efficient transportation systems, heating and cooling technologies, and the convenience of petrochemical products, it is expected that their call for petroleum will rise dramatically.
The second factor is economic growth. I feel very optimistic, as do the majority of business and government leaders. Globalization and the shift to market-based economies will be a catalyst for robust economic expansion in the years to come. It promises to be a broad-based expansion, not one that is limited to a relatively few highly industrialized economies.
In fact, the greatest growth – in percentage terms – is projected to come from within the developing countries, including some of the poorest societies that have the farthest way to go in terms of living standards.
Rising incomes will afford developing countries the means to acquire material goods that increase the quality of life. As mentioned earlier, improving standards of living will almost certainly raise the per capita use of energy.
While it is true that the world has become more efficient in its use of energy over the last 25 years – requiring less energy to produce a unit of GDP – the relationship between economic growth and energy growth remains positive. We expect a global economic growth rate of at least 3.0 percent in the coming decades. This, along with an expanding global population, will boost annual oil demand by at least 1.5 percent. California might be a good example of this trend. It will need 29 percent more energy by 2011 than it used in 1990, even with increasing energy efficiency.
However, there are offsets to this predicted 1.5 percent annual growth. The most important one is government policies – the third factor shaping the future of oil. Evidence shows that oil is one of the most regulated basic consumer commodities. This regulation takes many forms, most importantly, excessive taxation of oil products and large subsidies for other types of fuels at the same time. The reasons for these regulations are varied, but often have to do with what is frequently described as security of supply, or scarcity of reserves.
Whether or not government regulation has reached its zenith is a topic for debate. While some legislatures are still seeking more control, others are meeting consumer resistance, often due to the high costs associated with added regulatory burdens. Those areas with the most energy regulation, such as some European countries, are at an economic disadvantage compared to those with fewer restrictions. It could be said that part of the spectacular economic growth in the U.S. is due to less regulation and lower taxation of such important commodities as oil.
So, a simple conclusion is that regulatory constraints on economic activity in this time and age are counter-productive. They limit potential economic growth and the welfare of the world’s population. The world marketplace will simply not tolerate over-regulation.
This leads me to the last and perhaps most important factor: technology.
For the future oil market, technology has an interesting dual aspect. On the one hand, it serves as the catalyst for increasing oil reserves through new, low-cost exploration and production methods. On the other, technology can lead to lower use of oil and the rapid development of alternative energy.
The key unlocking the vast global reserves discovered in recent years is technological innovation. This key has allowed the oil industry to confound gloomy reserve predictions of 20 years ago. Technology now allows the industry not only to discover new fields, but to greatly enhance recovery in established producing areas.
As stated earlier, technology’s second aspect - alternative energy - could reduce growth in petroleum demand. Research into alternative energy technology goes on worldwide. Some of the global research focuses on the sources of energy, while others concentrate on end uses, such as vehicles. In addition, researchers continue to enhance the energy efficiency of appliances, transportation, and buildings. Yet, a third type of research takes different directions. It concentrates in the enhancement of oil uses by making it more friendly and more competitive with other sources of energies.
Realistically, however, while these commendable new energy technologies are being researched with vigor, they are not, as yet, capable of replacing petroleum, nor is it likely that they will in the foreseeable future. Therefore, instead of wasting money and time in replacing oil as a major source of energy, researches on energy technologies should concentrate on the enhancement of oil uses for diminishing poverty, improving living standards and protecting the environment at all levels.
In conclusion, ladies and gentlemen, let me re-state that our world has plenty of oil to last for a long time to come. There is no need to create an anxiety about such issues on the scarcity or security of oil supply.
While the price of oil might fluctuate from time to time, these are blips on the broad scale of time. Again, we should remember as well that demand goes in cycles, with changing seasons, population shifts and emerging energy trends all part of the equation.
In the new millennium and beyond, there will be more people, rising economic standards and greater demand for energy. At the same time, there will be responsible stewardship of resources, greater efficiency of use and innovative technology.
Oil may be a finite resource, but it brought bright light during the last century to our world, and we should keep it doing so for our coming generations in this century.