Excellencies, Ladies and Gentlemen:
It is wonderful to be back in Switzerland again, a country whose natural beauty and manicured landscape is only surpassed by the hospitality and friendliness of its citizens.
I am really honored and privileged to participate in this prestigious gathering and with so many distinguished delegates. Today, I will briefly address the vital subject of importance to us all – the world’s petroleum supply. We have heard a great deal of concern about this issue, and witnessed a number of events that raise questions. In spite of these concerns, however I believe there is an encouraging trend afoot. That trend is based on two indicators - closer cooperation between petroleum providers and consumers and the growing realization that the world needs a more stable market less fettered by regulation.
By way of illustrating, let’s look back to 1998. That was the year of a price crash for oil. More than bottoming out at about $10 a barrel, oil gyrated up and down for a period – enough to make the world’s economy nervous. Considering the importance of oil in global energy supply, there is little wonder why! A key commodity was out of balance and searching for equilibrium.
What makes its recovery to a more stable price of around $25 a barrel today is worth our attention.
Most major producers and oil exporters are now cooperating and sharing responsibilities for a stable oil market. They recognize that a glut or a shortage in the oil market is detrimental to the industry itself and the world’s economic health. In addition, their cooperation seeks to foster greater transparency. This leads to freer exchange of information and fairer ways of doing business. Fortunately it is not OPEC alone that is responsible for the stability of the oil market.
Today, other important non-OPEC oil producers such as Norway, Mexico, Russia, Oman and Angola are working to share the responsibility with OPEC to steady the oil market at a fair price of around $25 dollars for the OPEC basket.
Ladies and Gentlemen:
A well-supplied oil market and a fair price which is not detrimental to world economic growth are common goals we all seek. Equally important, there is frank and serious dialogue between producers and consumers for a lasting stable oil market.
The precedent for this new awareness actually began with the Iraqi invasion of Kuwait in August 1990. Exports were cut – off from both Iraq and Kuwait during that conflict resulting in a loss of about 5 million barrels of oil a day from the market. A disruption of that size – if prolonged – clearly could have had serious implications for the world economy.
But the oil industry is resilient, and its ability to respond to such crises should be noted. It was Saudi Arabia specifically and other OPEC nations generally that stepped in to make up the shortfall. There was a lot of doubt about the timely success of such endeavors. Nevertheless, within 30 days extra production was flowing, and in under three months’ time, before peak winter demand, Saudi Arabia had successfully increased its own production from 5 million barrels a day to 8.5 million barrels. That represents more than 70 percent of lost oil exports. Therefore, the spike of oil prices did not last more than a couple of weeks and no shortage was felt in any consuming country.
Equally important, the relationship among producers and consumers started to shift toward dialogue and cooperation. OPEC, the International Energy Agency, France, Norway, Saudi Arabia and others called for a joint meeting to open a new dialogue. The first landmark conference was held in Paris in mid- 1991. More than 40 countries participated.
It was a good start, but more momentum was needed. By the 7th International Energy Forum in the fall of 2000 in Riyadh, signs of new initiatives were offered. His Royal Highness Crown Prince Abdullah called for a permanent Secretariat to sustain this producer/consumer dialogue. The necessary steps have been taken to formalize the initiative and significant support has been received for it.
We believe this Secretariat is a positive move toward achieving world petroleum stability and security. The Secretariat will structure the informal yet substantive dialogue between energy producers and consumers at different levels and on wide range of issues affecting the world energy market and the world economy. What we seek is to build confidence, exchange information and develop understandings of underlying energy-related issues affecting the world community without the formality of binding resolutions.
Having said that Ladies and Gentlemen, I would now like to touch on two necessary and interrelated parameters for such stability to occur. First is a fair and equitable price. Second, is spare production capacity. The world lost an estimated 4 to 5 million barrels per day from the market because of the 1998 price crash. It was simply not feasible to support the cost of production with prices as low as $10 per barrel. Consequently, oil investments declined by about 30 percent.
Producers deliberated on what should constitute a reasonable price to sustain investments in production capacity maintain national economic development and meet the world’s growing oil demand. A range of $22 – $28 for the OPEC basket was thought to be a fair price. At this level, production could be maintained and consuming countries will be assured of secured supplies.
Ladies and Gentlemen:
Because of the current close cooperation among all major producers the oil market has witnessed reasonable stability around a price of $25 for the OPEC basket in the past 6 months.
Proactive measures were undertaken by OPEC and others to adjust production to match anticipated demands and minimize wide fluctuation in price. Two production cuts were necessary this year to stabilize the market but seasonal adjustments may well call for production increases later on. What is important is that the oil industry maintains its ability to respond while avoiding price volatility. However, it should be remembered that the oil price is not influenced by the supply side only. There are many factors which determine the directions and levels of price. They include, for example, the products market, the funds behavior, rumors, expert analysis, and major political economic and natural events.
I would mention in passing that regulations still weigh heavily on the ultimate price of oil products. Depending on consuming country’s internal policies, oil products still bear a disproportionate burden of taxes. As much as 80 percent of the retail price paid by consumers my be in taxes. This might be earmarked for highway funds, alternative sources of energy and environmental initiatives. But for the consumer, that is still a stiff levy on a vital product.
If long on taxation, oil has ironically been short on research. In the period from 1986 to 1998, when oil prices were moderate, the total energy R&D budget for the OECD was more than $100 billion. However, oil and gas research only accounted for 5 percent of that. The bulk of funds went to coal and nuclear energy projects, which alone accounted for some 70 percent.
In closing, ladies and gentlemen, I would like to underline the fact that oil is one of the most important sources of energy with a major contribution to sustainable global economic growth and human prosperity for developing and developed societies. Saudi Arabia has fostered dialogue among producers and consumers and continues to do so to attain a stable oil market and continued world economic growth. Sudden curtailment of supply for any reason is disruptive and conducive to instability and insecurity in the market.
We in Saudi Arabia will continue to seek better understanding among all the major players in the oil market for attaining security of supply and demand, and a fair price for a very strategic product.