Ladies and Gentlemen,
I would like to thank Mr. Claude Mandil, Chairman of IFP for inviting me to the second oil summit conference in this beautiful city. The developments in the world oil market in the past two years and the growing challenges facing the world economy, the energy markets, and the global environment warrant continued dialogue among all parties in governments and industry. The program and the distinguished speakers in this conference promise a fruitful dialogue on the underlying issues.
While my talk will focus on the long run dimensions of the theme of today’s Session on oil supply and demand, I would like to take note of some short run aspects of the relations of interest to us all. Oil market developments of the past two years have provided governments and industry with invaluable lessons. The oil price collapse in 1998 in the wake of the Asian economic crisis did not only prove the strong link between world oil demand and economic growth, but also affirm the necessity of a stable oil market where supply and demand are in equilibrium for the health of the world economy.
These very relations have been guiding our efforts in OPEC in concert with other producers when we successively reduced production in 1998 and increased it in 2000 to balance the market. The production decrease initiatives early this year fall within this market balancing endeavor in an ever-changing world economic environment. Our aim is to keep the market well supplied and prices at the desired average of $ 25 per barrel for the OPEC basket. We believe that the less favorable U.S. and world economic outlook for this year and the changing inventory behavior of the industry warrant caution and continued vigilance to keep the market stable for the sustained growth of our economies and the health of the industry.
Ladies and Gentlemen,
I would like now to share with you our perspectives on the relations that will shape the overall long-run world oil demand and supply landscapes, namely the interaction and interdependence between Energy, Economy and the Environment or the three E paradigm.
I need not elaborate further on the crucial role that energy plays in economic growth. During the last century, while world population tripled and world GDP increased twenty times, industrial output increased fifty times and energy consumption forty times. Energy production and consumption have shaped the industrial order and contributed to world prosperity.
The energy/economy relation is multifaceted with local and global dimensions. Being an important input in the production process makes energy essential for economic growth and prosperity. On the other hand, economic growth stimulates energy demand and initiates investments in all energy sub-sectors. Differences in energy endowments across countries or regions as well as the capital intensity of its production and infrastructure, gave energy its global dimension through cross-border trade and investments.
This linkage between energy and the economy have had different characteristics. First, the change in world energy mix towards oil since it is the cheaper, cleaner and more versatile energy source. Its share in world energy consumption increased from 10 percent at the beginning of the century to 40 percent towards its end. Meanwhile Coal’s share declined from 85 percent to 26 percent. Since then oil has become the elixir of industrial civilization. This had consequences on world trade and investment in oil which, even before the dawn of the globalization era, has linked the interests of the world consumers and producers as well as governments and multinational companies across boundaries.
The second feature of this link between energy and especially oil and the economy is the continuous change in oil consumption patterns across regions, sectors and products. Over the past two decades the source of world oil demand growth has shifted from the industrialized to the developing countries. And by sector oil use also shifted from the industrial and power sectors to the transportation sector. This affected oil product demand from the heavier towards the lighterend products. These shifts which are due to the favorable characteristics of oil as well as the change in the structure of world output towards services have ensured the prominence of oil in energy use and economic development.
Over the last twenty five years, of the 20 mbd world oil incremental demand, the developing countries accounted for 14 mbd. Consequently, their share in world oil demand increased from 12 percent in the seventies to 30 percent at the end of the century. As was the case with the industrialized countries for most of the past century, the developing countries oil demand has been growing in tandem with their economic growth. This trend in oil consumption is expected to continue. For as long as the majority of world population still live in poverty and nearly two billion people in the developing countries do not have access to commercial energy, demand for energy - especially oil- will increase to fuel development and help in eradicating poverty.
Even in the industrialized countries, when the relation between economic growth and oil demand weakened and the share of oil in power and industrial sectors declined due in part to outright government command and control measures, oil remained a valued commodity. Slow growth is not the same as no growth. The versatile nature of oil and its declining real price ensured its dominance in the transportation sector despite excessive taxation on motor fuels to arrest that growth.
There is every reason to believe that the elements of the energy/economy relationship would continue into this century. The IEA and OPEC forecast that the developing countries would account for 80 percent of the incremental 30-40 mbd world demand increase in the next two decades. The transportation sector is forecast to account for 62 percent of this incremental demand.
It is obvious then, that the continued strong link between economic growth and oil demand over the years could not have been achieved without free movement of international trade. The availability of oil supplies from producing countries throughout the last century and the role of OPEC in market stability were crucial factors in the smooth functioning of the economy/energy relation. The huge resource base of oil, and the willingness to invest in incremental production capacities, as well as the commitments of OPEC to a stable oil market, should ensure a continued role for oil and for OPEC throughout this century as well. Here again the IEA and OPEC forecast that around 85 percent of the incremental world production will be supplied by OPEC. The Arabian Gulf region is projected to supply 65 percent of that increment.
Yet, despite the fact that oil is still a relatively cheap source of energy and its contribution to world economic growth is vividly clear, there is still a state of “Petrophobia” prevailing in the industrialized countries. While advocating openness and freer trade within the process of globalization, those same countries continue to erect, directly or indirectly, barriers to the normal growth of petroleum demand and its trade. Excessive petroleum product taxation and undue regulation are exercised under the pretext of energy supply security, import dependency or environmental concerns. These measures are pursued vigorously despite the decline in energy and oil intensities in those countries in the past three decades and the relatively small share of energy in their GDP. Such discriminatory policies and measures undermine free trade and consequently world economic growth.
Ladies and Gentlemen,
The second element of the “Three E” paradigm is the relationship between the economy and the environment. It is well recognized that since the production and consumption processes take place within the biological and physical environment, the costs of the degradation of the environment must be internalized rather than transferred to others or to future generation. In the same vein, economic progress helps in mitigating the environmental effects resulting from the production and consumption processes. The concept of sustainable development embodies these complex relationships between development in its broadest socio-economic terms and environment in its qualitative and quantitative terms.
Sustainable development, broadly defined as meeting the needs of the present generation without compromising the ability of the next generation to attaining their own needs, has become a guiding principle to international development and environmental efforts. But also there is an awareness that for practical purposes sustainability should be perceived in approximate and relative terms.
First, while the state of the global environment is of concern to us all, there are different priorities as well as different views on the causes and approaches to global environmental problems. To the developing countries abject poverty is indeed the worst environmental problem. Favorable local and international conditions conducive to growth and development are necessary to combat poverty and improve the standards of living of three fourths of the world population living in the developing countries. Technology transfers and aid flows to those countries enhance their development efforts and contribute to the betterment of their environment. This is not only a global moral imperative but also essential for global environment stewardship.
Global environmental concerns such as climate change, to which I will talk about later, should be viewed from this perspective. The global community has acknowledged in the Framework Convention on Climate Change that while the global nature of the phenomenon calls for international cooperation, this should be done in accordance with the countries common but differentiated responsibilities and respective capabilities and their social and economic conditions. The industrialized countries who have contributed most of the emissions of greenhouse gases and have taken the responsibility under the Convention to deal with the problem, should recognize the developing countries priorities and development aspirations. Imposing undue emissions constraints on those countries retards the development of their economies and contradicts the thrust of the Convention.
Second, there are complementary as well as trade-off aspects to the economy/environment relation. It is conceivable that in the course of development some sort of environmental degradation might occur. On the other hand, the benefits to be realized from measures to reduce environmental degradation should be weighed against the costs in terms of foregone production and consumption. Policy-making should exploit the complementary aspects of the relation to the extent possible and apply cost-benefit criteria before rushing into costly, often politically motivated measures.
Ladies and Gentlemen,
The third element of the paradigm is the energy/environment relation. The production and consumption of energy, like other human activities impact local, regional and global environments. Examples of such are emissions of gases and particulates in the case of fossil fuels and radiation and waste in the case of nuclear energy. The environmental consequences in this respect vary. They could be of local, regional or global nature. They could extend over time and have intergenerational dimension. They could also have proven or perceived environmental damages.
Over the years, technology, human ingenuity and strides in energy efficiency mitigated energy related environmental consequences, especially those regarding local air pollution. In the case of petroleum, the introduction of catalytic converters, cleaner petroleum products, tankers and pipeline specifications and production abatement guidelines helped reduce air and water pollution. For example, over the past twenty five years, while vehicle miles traveled in the U.S. doubled, emissions from automotive exhausts were cut in half. The international petroleum industry was up to the challenge and invested billions of dollars to make the production process and the products environmentally friendly.
It is sad to note that despite such improvements in the quality of petroleum products, other policies and programs in the industrialized countries were initiated to lessen oil use especially in the power sector, in favor of the more polluting coal or the hazardous nuclear energy. In the past twenty five years, oil consumption in those countries registered a modest 8 percent increase while coal use increased by 25 percent and nuclear energy by ten times. Unfortunately, the ideology of oil supply security over-rode all proven adverse environmental consequences of coal and nuclear power.
This bias was reflected in the OECD government’s energy R&D budgets. Over the period 1986-1998 when oil prices were stable and moderate, the total reported R&D budgets exceeded $110 billion. Oil and gas research accounted for only 5 percent, renewables for 7 percent, conservation for 9 percent. The bulk of R&D funds went to coal with 10 percent, and nuclear energy around 70 percent. The irony is that such R&D expenditure patterns were made after the dangers of the nuclear power and the role of coal in global warming have been widely recognized.
This brings me to the issue of climate change and the role of fossil fuels in the emissions of CO2. While there are still number of scientific issues to be settled regarding the causes, timing and magnitude of climate change, the world community responded to this environmental issue through the Framework Convention on Climate Change, which along with the Koyoto protocol set the rules, commitments and other guidelines to deal with the issues and consequences of climate change and the policies to address them.
It should be noted that the Convention takes a comprehensive view of climate change and its effects with all greenhouse gases and all sectors and activities contributing to the phenomenon recognized and addressed. No specific policy alternative favored, leaving the door open for countries to enact policies and measures compatible with their socio-economic, environmental and political conditions. It asserts the need to enhance the scientific knowledge and technology transfer. It applies the “polluter-pays” principle on a global scale by assigning the Annex I countries the responsibility and the role to combat climate change and its adverse effects due to their contribution to CO2 concentration. At the same time, the Convention takes into account the specific needs and circumstances of the developing countries and especially those whose economies depend on the exports of fossil fuels.
We entered the Convention process keen to contribute to the preservation of the global environment without adversely impacting the development of our economies and those of the other developing countries. We believe that since the Convention is an international effort to tackle a global environmental concern, then the views of all parties should be duly addressed.
First, we see distorted energy prices in many annex I countries, whereby prices of fossil fuels at the production or consumption ends do not reflect their environmental impacts. For example, although oil and gas emit less CO2 than coal by 23 and 40 percent respectively, policymaking in the industrialized countries, before and after the enactment of the Convention discriminate against hydrocarbons--especially oil. In the last fifteen years, the tax on a composite barrel of oil in the OECD increased from $17 per barrel in 1986 to $38 in 1999, while in the European Union it increased from $30 to $65 per barrel. At the same time the most recent estimates of producer equivalent subsidies to coal ranged from $161 per ton in Japan to $109 per ton in Germany and $84 in Spain. Many studies show that restructuring taxes and subsidies in OECD to reflect the carbon contents of the fuels would reduce CO2 emissions by more than 10 percent, which is double the Koyoto commitments.
Second, we see more emphasis put on command and control measures to achieve the emission targets than market based approaches or improvements in energy technologies. Eliminating coal subsidies, restructuring taxes along carbon content, liberalizing the gas markets and applying cost-benefit criteria to different policy measures, would help more in reducing emissions within the market framework. Investment in efficient energy technologies and carbon sequestration technologies would have far reaching long term benefits to the energy markets and the environment than outright regulatory policies contemplated or enacted in some countries.
Third, we see a genuinely global environmental concern, which could benefit from the contributions of science, economics and other disciplines, being drawn to the realm of ideology and politics. Imposing the political environmental agenda of one country or another on a global undertaking is counter productive and derails the whole process. All parties to the Convention need to work towards depoliticizing the environmental concerns because what is at stake is the development and welfare of the current and the future generations.
Fourth, our economies are dependent on the production and export of oil and gas. Measures taken in the context of climate change that affect their prices and trade volumes would impact our economies. Many studies show that the implementation of the Kyoto protocol through more taxes would impact substantially the economies of the oil exporting developing countries. Recent independent studies estimate that the implementation of the protocols without the flexibility mechanism would reduce the revenues of the oil exporting countries by around $44 billion in 2010 of which Saudi Arabia alone would bear $19 billion.
It is the world community’s realization of this potential impact that the Convention in articles 4.8 and 4.9 and the Kyoto protocols in articles 2.3 and 3.14 acknowledged the importance of taking into consideration the adverse economic impacts of measures to mitigate climate change on our economies. We would like to work with the other parties towards implementing such articles within the balanced and comprehensive approach taken by the Convention and the Protocol.
Ladies and Gentlemen,
Realization of the interaction and interdependence between energy, the economy and the environment is important when dealing with local as well as global environmental problems. The crucial role that energy plays in achieving high rates of growth is accompanied by its effects on the environment. While economic progress and technological advances help in mitigating the adverse environmental impacts, governmental policies should not curtail economic growth and welfare or reduce world energy trade.
Saudi Arabia has long realized and acted upon the interdependence of the three Es. By assuring the world of secure and reliable oil supplies and working interactively with other producers towards market stability, it contributed to world economic growth and prosperity. Although our revenue from the barrel of exported oil is less than one third of what the industrialized governments take from the barrel consumed in the form of taxes, we continue to use the revenues to develop and diversify our economy and provide economic assistance to other developing countries. Over the past twenty-five years, Saudi Arabia provided more than $75 billion development assistance, averaging 3.4 percent of our GDP. This is compared to the 0.7 percent of the industrialized countries GDP targeted by the UN for assistance to the developing countries but was never achieved.
The concerns for our economic development and for the health of the global economy, which have guided our oil pricing and production policies have been guiding our approach to sustainable development. We believe that our contribution to the security of oil supply and the preservation of the environment should be appreciated by the consuming countries. In the era of globalization there is no justifiable reason for the continued preoccupation of policymaking with energy supply security and oil import dependency. When the world economies are integrated and interdependent, trade in energy resources should not be any different from trade in all other commodities.
Ladies and Gentlemen,
We have long advocated a holistic and balanced approach to the interrelation among energy, economy and the environment relations to attain sustainable development. The events in the oil market and in the climate change process in the past few years proved the imperative of this balanced approach to the underlying issues. Rather than blaming one another over oil market volatility or the Koyoto protocols impasse, all parties must continue the dialogue to find credible solutions to the common concerns.
It is from this perspective that His Royal Highness the Crown Prince of the Kingdom of Saudi Arabia proposed establishing a permanent Secretariat for the International Energy Forum to foster the dialogue between energy producers and consumers on issues of common concern including the economy, energy and environment interrelations. The positive responses which we have had to this initiative will guide our work with the other parties to bring about the proposed Secretariat in order to facilitate the dialogue and ensure its informality and continuity.