Minister Petroleum Ali I. Al-Naimi address at CERAWeek
February 10, 2009
Good evening ladies and gentlemen.
It is my great pleasure to join you here tonight in Houston. I would like to thank CERA and my good friend Dan Yergin for inviting me to address this important industry gathering at such a pivotal moment for the world economy and energy markets.
Ladies and gentlemen, 2008 was a year of unprecedented turmoil and volatility, the likes of which have not been seen since the Great Depression of the 1930s. A year ago, we were riding the crest of a wave of rising commodity prices, asset values and wealth creation that appeared unstoppable. Today, as we ponder the horrific consequences and the terrible swiftness and scope of the collapse, we know now that what we saw then was not unstoppable, but rather unsustainable.
These dramatic swings of fortune were clearly reflected in the price of oil. While there may be no consensus on what is a fair price for a barrel of oil, I think that we all can agree that the volatility of oil prices over the past year was detrimental to the interests of producers, consumers and the industry alike. We share a common interest in energy market stability because it is critical to our economic success.
Achieving energy stability is a difficult task in what are inherently volatile markets. Creating the conditions for stable energy markets requires not only collective efforts to understand the various factors which led to our current predicament, but positive steps to counteract future sources of instability.
My comments tonight will focus on the task of achieving energy market stability in these uncertain times – including the demands for a greater government role in markets, the changing dynamics of energy markets and the newly emerging sources of uncertainty and price volatility, the need for a sound energy strategy, and finally, Saudi Arabia’s role in helping to stabilize energy markets in these uncertain times.
The upheavals of the past year have shaken the foundations of the global economy. The unprecedented price volatility in conjunction with the complexity, breadth and the pace of the collapse of the financial system – crashed over us like an economic tsunami, ripping us from our intellectual and experiential moorings, leaving many confused and uncertain about the way forward.
Globalization and the liberalization of markets had at their foundation a belief that less government intervention in markets was better. However, in the current economic turmoil many now feel “betrayed” by markets, and instead, look to governments for solutions. Whereas the recent past was all about high risk and high returns, the present focus is on stability and survival.
The current economic crisis is likely to represent a major turning point in the way governments view their role in the global economy and as stabilizing forces in world markets. As governments look for solutions they must be mindful not only of the destruction and dislocation but of the unprecedented wealth creation and poverty reduction that was achieved through market liberalization. The task facing governments is a daunting one -- to achieve stability while at the same time preserving the dynamic potential of the old system to bring a better way of life to billions of people. The solutions will challenge the best minds among us. How this process works itself out will have major implications for our economic and energy futures.
Ladies and Gentlemen,
Oil market stability has long been a central pillar of Saudi Arabia’s own oil policy. By maintaining spare production capacity and investing for the long-term, we believe our policies have made a positive contribution toward stable markets. But we also recognize that market dynamics are rapidly changing and that there are new challenges that must be confronted if our efforts to achieve stable energy markets are to be successful.
I believe oil market stability is enhanced when the following four conditions exist. First, oil prices should be low enough to facilitate economic growth, particularly in low income developing countries. Second, they should be high enough to provide sufficient return to producers that ensures adequate and timely investment. Third, prices should also be at a level high enough to provide an incentive for consumers to use oil efficiently. And finally, prices must be sufficient to encourage production from marginal fields, non-conventional sources and renewables.
The danger of price volatility lies in its ability to obscure the market signals required to ensure adequate investment to meet future energy demand. Without greater stability in energy markets, the task of achieving global economic recovery will be significantly more difficult.
Ladies and Gentlemen,
It has become painfully clear that our understanding of market forces remains imprecise at best. A year ago, few anticipated our current predicament. During the recent period of rapid global economic expansion, we often heard talk of “paradigm shifts” and declarations about the “end of economic or business cycles.” Some even talked about a “decoupling” of the global economy.
Others insisted that oil prices were on an upward path that somehow would never end. Prominent analysts predicted oil prices would easily reach $200 a barrel or more in the near future.
The fact is “group-think” dominated financial markets, with few analysts challenging the widespread notion that markets could only go up in the “new globalized economy.” What many either forgot, ignored, or wished away was the fact that markets are cyclical and recessions are inevitable, facts from which we can neither hide nor divorce ourselves. Events have clearly demonstrated that interdependence brings shared benefits during the good times and shared pain during periods of upheaval.
I believe we have much to learn from recent developments. We are all aware of the traditional sources of volatility – geopolitics, weather, natural disasters. However, I believe that the extreme volatility we witnessed last year can not be explained by these traditional sources alone. There were new factors at work – I call these ‘the newly emerging challenges” which I believe will be significant contributors to the ongoing volatility in energy markets as we go forward.
The three “newly emerging challenges” that deserve our special attention are the products of globalized capital markets, the emergence of energy as an asset class, and climate change.
First, globalization has internationalized capital markets, creating an environment where a vast pool of capital flows freely around the world in search of the best returns. As a result, national borders have become increasingly irrelevant in this new age of mobile international capital. Trillions of dollars are now instantaneously transferred in and out of markets world-wide every day, with just the click of a mouse.
As the speed of market forces has increased in this digital age, so has the complexity of the financial transactions. The implications for government efforts to stabilize markets are profound. While the IT revolution has made real time information more readily available, the sheer number, size and velocity of transactions have had the effect of making markets less transparent. We are now realizing that governments were “behind the curve” in dealing with the forces that had been unleashed. The increasingly diffuse nature of the global economy, combined with its amplified velocity, makes it exceedingly difficult for any one actor, or even a group of actors, to influence markets and foster stability.
The second factor impacting energy markets is the spectacular increase in the financial community’s interest in oil and energy as an asset class. As the popularity of oil grew, so too did the sophistication of investor’s strategies. Some bought and sold oil as a bet on the direction of oil prices. Others looked to profit from changes in the oil’s price relative to other commodities. Oil even became a popular tool for hedging the value of the dollar.
There is no doubt in my mind that increased speculative interest in oil contributed to the extreme price volatility of the past few years. The extraordinarily high prices we saw last summer were not as much a measure of market fundamentals as it was a reflection of the strength of the prevailing bullish market psychology of investors. Now that market sentiment has flipped, I expect continued volatility with exaggerated price weakness. From a fundamental viewpoint, prices will be just as unsustainable at these low levels as they were at the stratospherically high levels experienced last year.
The high level of volatility that now characterizes oil markets represents a significant impediment to ensuring adequate and timely investment flows into the energy sector. It is a condition that is detrimental to decision-making and investment planning by producers and consumers alike. If today’s low prices continue long enough, they will sow the seeds for future price spikes and volatility.
While the economic crisis will be an important driver of change, I am convinced the third challenge -- climate change – will have an even more profound impact on redefining the role of governments and government intervention in energy markets.
The well-being of the environment deserves our full attention and a dedication by our industry to be leaders in energy efficiency and in the search to provide consumers with a wider range of affordable cleaner energy choices.
It is increasingly apparent that the problems we face, like climate change, are so complex and broad-based, as to defy individual action. Perhaps more than any other issue we face, addressing climate change, in an economically sound manner, demands that we work cooperatively to find solutions. It is clear that the policies of one country to reduce emissions will have little impact if its actions are not taken in concert with the rest of the world. Likewise, energy stability must be addressed globally, with broad cooperation.
Ladies and Gentlemen,
As we look to address the challenge of climate change and create the conditions for sustainable economic growth, we must pursue an energy policy framework that is both robust and flexible. We can only do this by separating what is theoretically possible from what is realistic, and by examining the real economic costs and benefits of various policy approaches.
Over time, the world will likely transition away from the current fossil fuel-based energy economy. However, we don’t yet know which fuels or technologies will emerge on the path ahead. Nor, can we accurately predict how long this transition will take. Recognizing the inherent uncertainty in the process of transition to new forms of energy, we must pursue an “inclusive” energy strategy, one that recognizes the risks and uncertainties, emphasizes cost-effective solutions and does not presuppose where we will find the solutions to the challenges we face.
I strongly believe that a core feature of any energy strategy must be policies to promote increased energy efficiency and conservation. Using our existing energy resources more wisely is a critical step toward greater stability and sustainability. Policies to promote conservation and efficiency are robust across any energy future price scenario and will be the cheapest form of “new energy supply” in many cases.
A successful strategy will also include efforts to increase the contribution of alternative fuels. However, a note of caution is warranted. Scale is critical in our massive global energy system. The existing oil delivery system is highly efficient and economical, and the cost of rapidly replacing it with alternatives would be prohibitive. A prudent approach demands that we recognize that the massive scale of the global energy system makes rapid change costly and impractical.
Research into new energy sources is critical for our twin goals of meeting our energy demand and protecting the environment. So too is research into technologies that help us use current energy sources more efficiently and cleanly. Both are equally vital for the long-term prosperity of mankind and the health of our environment.
While the push for alternatives is important, we must also be mindful that efforts to rapidly promote alternatives could have a “chilling effect” on investment in the oil sector. Growing demand uncertainty increases producers’ perceptions of investment risk. A nightmare scenario would be created if alternative energy supplies fail to meet overly optimistic expectations, while traditional energy suppliers scale back investment due to expectations of declining demand for their products. The prospects of supply constraints would grow along with the potential for higher energy prices and lower economic growth.
Meeting the needs of a growing global population and the aspirations of billions of people in developing countries for greater prosperity, will require an “all of the above” energy strategy. All BTUs are welcome and needed -- whether they come from renewable energy, nuclear power or fossil fuels.
Ladies and Gentlemen,
Saudi Arabia realizes that we have an important role to play in promoting stability in world oil markets. The most powerful tool we have for achieving a balanced market is our maintenance of spare production capacity. We work very hard to make sure that the global oil market is well supplied and well balanced, and to that end it is our ongoing policy to maintain at least 1.5 to 2 million barrels per day of spare capacity to be used when there is an unexpected need. Given current oil market conditions, our spare capacity will be 4.5 million barrels a day by mid-year when we bring the Khurais mega-project of 1.2 million barrels per day on stream, which is significantly higher than our stated policy. Maintaining our spare capacity requires considerable investment, but over the years the value of that cushion has been proven in the face of unforeseen supply disruptions, and it has helped to counter market volatility.
We will also continue to expand refining capacity in Saudi Arabia and in key markets around the world. We are continuing to invest now to help ensure an uninterrupted supply of energy when the global economy recovers.
Our commitment to energy stability extends beyond our ongoing upstream and downstream investments. We believe it is also essential to invest in knowledge and in our human capital. We therefore are growing the Kingdom’s capacity to conduct research and development on technologies that will help ensure a cleaner, more sustainable energy future. We are building new scientific institutions to advance our knowledge of energy and the environment and training the scientists and technicians of tomorrow. These institutions include the King Abdullah University for Science and Technology, known as KAUST, which will open September 5th of this year, and the King Abdullah Petroleum Studies and Research Center.
We are also addressing environmental concerns by cooperating with other countries, including the U.S., to develop and use carbon capture and storage technology. We are also making strides in petroleum desulfurization and working to develop cleaner fuel formulations to meet the needs of the efficient internal combustion engines of the future.
And, we are even investing substantial research funds to achieve our goal of one day becoming the world’s largest exporter of clean energy in the form of electricity produced from our most abundant resource – sunlight.
Ladies and gentlemen, let me conclude my remarks by saying that we all have much to learn from the recent turmoil in global markets. We must learn from past mistakes and proceed carefully, ever mindful of the importance of stable energy markets to the world’s economic well-being.
As governments ponder how to respond to our current environmental and economic challenges they must be mindful that a re-emergence of protectionism through over-regulation and the erection of barriers to trade would be devastating for the global economy. The poorer countries of the world, whose hopes for a better way of life were raised by the impressive poverty reduction achieved under globalization, are particularly vulnerable.
Achieving a greater measure of stability also demands that we recognize the dynamic changes occurring in energy markets and that the “newly emerging challenges” – globalization, oil’s role as an investment vehicle and climate change – are contributors to uncertainty and price volatility.
Going forward we must pursue an “inclusive” energy strategy, reflecting the risks, uncertainties and the criticality of scale in our energy supply system. It must emphasize cost-effective solutions and should not presuppose where we will find the solutions. In our efforts to provide these solutions we must be careful not to forget the critical role that fossil fuels will continue to play and that a successful energy strategy demands we use these fuels more efficiently and reduce their impact on the environment.
Saudi Arabia is committed to fostering long-term energy market stability. The task will not be easy, given the complexity of the global economy, the changing dynamics of energy markets and the need to address climate change issues. Working together, we can develop a pragmatic and flexible strategy that provides a level playing field for all fuels and technologies. With realistic and cost-effective policies, we can realize – as both producers and consumers – our common goal of stable, sustainable and reasonably priced energy for a cleaner environment and a more prosperous future.
For over half a century, Saudi Arabia and the United States have shared a commitment to work together in areas of mutual interest. I believe that our long-term relationship in energy has paid great dividends for the health of the global economy, the stability of oil markets and for our respective societies. Working together we can build on these successes to provide the foundation for a strong, sustainable economic recovery and a bright future.
Thank you for your kind attention this evening.