Ladies and gentlemen, I would first like to thank His Excellency Olav Akselsen and Mr. Ivar Tangen for inviting me to address this conference. It is always a pleasure to visit Norway, a great country whose warm hospitality is especially comforting during a cold winter like this.
I want to take this opportunity to discuss with you the basic driving forces behind Saudi oil policy, the issue of oil prices and the future of our strategic oil commodity, and finally the importance of cooperation among the various oil participants for the benefit of all.
The first foundation of our oil policy derives from the stability of the nation. Politically, Saudi Arabia has remained remarkably stable since its establishment over 70 years ago. This has lent strength to the Gulf region and modeled success for much of the third world. The Kingdom has likewise sought to contribute solutions to regional and international problems. Saudi Arabia has given billions of dollars in grants and financial assistance toward the economic development of many countries around the world.
One might ask: What has this to do with our oil policy? Simply put, we in Saudi Arabia view petroleum wealth as an extension of our governing system. Oil is therefore seen as a tool to help achieve our economic and social prosperity, and to make meaningful contributions toward peace and economic development at the regional and global levels - especially to less fortunate societies.
The second aspect of our oil policy is our position in the world's oil map. We have about 25 percent of all proven conventional reserves, currently more than 260 billion barrels. If you add the reserves of our neighbors in the Gulf Cooperation Council, the total comes to around 500 billion barrels, or roughly half the world's known reserves. Future discoveries in promising zones, coupled with improved recovery rates from existing fields through the use of new technologies, might be as much as double that.
It is natural, therefore, that we work not only to expand the use of, but prolong the life of, oil, far into the future. I feel we are succeeding: yet we face problems from within the oil business and from outsiders. Within our business there are those who have doubts about the future of our commodity. Others may look only at short-term interests, where in the end they might not see the long-term issues. In so doing, they might unknowingly harm their own interests.
And from the outsiders, there are those whom we might call the anti-oil groups, who are using every tactic to discredit oil. Sometimes, they talk about the insecurity of supply or independence from foreign sources. Other times they are disguised under the guise of environmental protection, or restriction of globalization which they fear will be dominated by only a few multi-national enterprises.
The debate can often rise to highly emotional levels. We in Saudi Arabia and, I believe, the majority of all oil producers feel it is unwise to be guided by emotions. Rather, we consider it a duty to protect our long-term interests from any influence that might impair our ability to function as major oil suppliers to the world. Only by remaining focused on such a mission will stability prevail.
The third foundation of our oil policy is the relationship between oil income and industry on one hand, and gross domestic product and government revenues on the other. Currently, about 85 percent of Saudi Arabia's government budget is based on international oil sales. At the same time, about 35 percent of our GDP is generated from oil.
Consequently, the Saudi government is working diligently to reduce the level of dependency on oil. We have crossed significant milestones already, and are planning to do more in the near future. The Kingdom is currently undertaking major steps toward economic and financial reforms, which will eventually facilitate diversification of the economy and lessen our dependence on a single depleting natural resource.
We are therefore working for the stability of the oil market over short and long terms, the continuity of oil as the fuel of choice and supplying the market with whatever oil it needs. These objectives can be achieved through cooperation, understanding and the pursuit of a moderate but rewarding price.
At this point, ladies and gentlemen, I would like to talk about the price of oil. This issue definitely brings up two important questions: one is, what is the right price for oil? and two, how and who should decide this price? The right price, I believe, is what allows the industry to grow and continue investing. It is a price that compensates the oil producers for a depleting natural resource. It is also the price that does not hamper world economic growth - that is a tall order but definitely attainable.
To elaborate further, it is the price where the oil industry can make a fair return - not just in the profit sense - but enough to replace their depleted reserves, add new reserves, plus keep or increase production capacity. For the oil producers, it is a price which will contribute to the stability and prosperity of their economic, political and social systems. It is the price which will generate reasonable income not only to meet the needs of the country, but also to avoid a decline in their productive capacity and, preferably, to increase it.
We all know the importance of spare capacity in times of need. This is essential to achieve market stability. We also know that spare capacity costs a lot of money to maintain, and it's the governments of oil producers who bear this expense.
And what might we say is the right oil price for consumers? For them - the right price is what guarantees security without adversely affecting economic growth or contributing to inflation.
Ladies and gentlemen, having said all of that and after careful studies and analysis, we in Saudi Arabia and within OPEC arrived at the conclusion that the right price for oil is about 25 [U.S] dollars a barrel for the OPEC basket.
We realize, however, this cannot or should not be fixed for all times. In truth, the market decides what the price of oil will be at any given day and moment. The market decides the differential, or the spread between different types of curds, and according to a number of different factors.
For us, $25 a barrel is a desirable goal which we'd hope would be durable. To achieve this target, we created a band of $22 to $28 a barrel, either side of which would trigger an immediate need for correction. We believe there is general support - from the majority of participants in the oil markets, including OPEC and non-OPEC producers, the oil companies, the major consumers, and some interested energy organizations.
Understandably, there are those who doubt our ability to keep this $25 average price for more than one or two years. They think competition and conflict among oil producers will displace our current spirit of cooperation. Even if more oil sources are opened up and competing energy options proliferate, I think this view is more likely to be wrong than right.
Permit me now to talk about the immediate future of the oil market and what I perceive as the role played by the Gulf region. Assuming continued general economic growth during the next 20 years - which we all hope for and expect - then demand for oil should rise. Accordingly, the GCC countries will share in that increase to the tune of 500 thousand barrels per day annually.
The countries of the Gulf Cooperation Council have adopted a moderate energy policy for the benefit of all. They have met demand by supplying the oil needed. They have substantial production capacity. And it is worth remembering that when supplies were cut off during the first Gulf conflict in 1980, it was this region itself which replaced the oil lost to the global market.
It was also the region of the Gulf Cooperation Council which replaced the five million barrels of oil lost during the second Gulf conflict early in the past decade. We played a crucial role in immediately supplying high-growth regions of Asia over the same period. We were able to increase daily production by more than five million barrels over that time to meet demand from all of the world. All this has been accomplished because of our ability to replace reserves easily and because of available and ready production capacity.
Ladies and gentlemen, while the future may look bright, we do expect to face some challenges and uncertainties. The first challenge may well be the management of a temporary oversupply. Supply could indeed exceed demand over the near term as a result of higher investments in upstream activity. With more producers using more sophisticated means, fields once too expensive to produce may be more readily accessible.
This calls for more cooperative - not unilateral - efforts among oil producers to balance supply with demand. While there are many variables and certainly differences of opinion, the central issue remains this: we must assure sufficient supply to match demand without causing prices to swing widely. That is what we in OPEC in cooperation with others are trying to accomplish - a price band with very small amplitude of swings.
At the same time, we should establish a firmer common ground between the oil producing and consuming nations, working hard to establish a reasonable dialogue where everyone's interests are served. In this regard, we within the Gulf Cooperative Council see the need for a more formal mechanism to assure that any such dialogue yields results.
Crown Prince Abdullah called for such an initiative three months ago at the seventh producers/consumers forum in Riyadh. He proposed that a secretariat be established to help stimulate more direct cooperation and cerate a long-lasting, stable oil market. We are pleased that support for such a forum was immediately voiced.
The structure and role of such an office have yet to be finalized, but the primary thinking underscores a concept of trust. To clarify its role, I would first like to submit our concept in Saudi Arabia as to what the secretariat should not become. It should not be a place where decisions are made with binding commitments. It should not be a closed association made up of charter members who pay fixed dues or otherwise buy their way in.
Rather, it should be a free association holding no binding commitments, vesting no decision-making power, and unfettered by rigid rules. It should be made up of professional people respected in their fields, drawing income through contributions and possibly other sources. Most importantly, it should hold the interests of both producers and consumers as its highest priority.
As a practical matter, the secretariat would have three central mandates. First, it would help organize meetings between appropriate ministers of oil producing and consuming countries. These forums would continue as they have in recent times, held every other year in a different locale. The host country would receive help from the secretariat in organizing its meeting schedules and facilitating activities to the greatest extent possible.
Second, the secretariat would create a database and methodology to collect and disseminate the most accurate available information concerning the petroleum industry. It is hoped that this will reduce discrepancies and smooth the dialogue among our various stakeholders, helping to create efficient, accurately informed markets.
Third and finally, the secretariat would organize and sponsor other conferences that deal with timely subjects related to oil markets and the industry in general, where high level experts from around the world could participate.
To summarize, Saudi Arabia's oil policies are grounded in the prudent management of an abundant and valuable natural resource. We share with our GCC neighbors the desire to conduct business worldwide in a very competitive market economy. And we have been working hard to create a stable environment for a much-needed commodity - oil - while promoting a better understanding of the challenges and risks that its delivery entails.
Sharing is perhaps the best word to characterize these endeavors. Our goal is a stable market , a reasonable price for our commodity, and the realization of prosperity for ourselves and those we serve. We believe that is more than laudable.
Ladies and gentlemen, again it is a pleasure to be here in your lovely country and be part of this distinguished body.
Thank for the opportunity to contribute to this forum.