My presentation today will be about the possible future direction of the world oil market, and the role of Asia, East and West, in this market.
I will also discuss the petroleum relationship between the Gulf region and the rest of Asia. Finally, I will talk about Saudi oil policy with regard to the world oil market in general and the Asian market in particular.
Before talking about the future, it would be beneficial to take a glance at one particular period of the past. This should help us to appreciate and understand the changes which we have gone through, and possible projections about the future.
I will go back more than 20 years ago, taking a normal year, say 1978. It was a year when the oil market was stable and well balanced, and prices were acceptable to producers, consumers and the industry.
During that year, the world was consuming about 64mn b/d, or about 10mn b/d less than today. The Asian market was consuming about 9mn b/d, or less than half of its current consumption. At the time, the Arabian Gulf region was producing more than 21mn b/d, only 2mn b/d less than it is producing today.
Since that year, and up until now, there have been a lot of changes. To name just a few: The Iranian Revolution and the Iraq-Iran war; the sky-rocketing price of oil in 1979 and 1980, and its sudden collapse six years later; There was also the Iraqi invasion of Kuwait, which caused an international supply shortfall of more than 5mn b/d.
We witnessed the advent of the oil futures market, plus a wave of mergers and acquisitions in the energy sector. Everywhere, liberalization of the energy business brought changes. As for oil prices, competition among producers for market share in the mid-1990s was severe.
Then the oil market collapsed in 1998, only to recover again a year later. Now, the establishment of $25/B as a target price for oil finally seems to be acceptable to the majority of key producers and consumers.
All the developments that I have just cited are important events in the recent history of energy, and have had important consequences.
Yet one development that stands alone – not just then but also for the future – is the growth of the Asian oil market. As I said, more than 20 years ago Asia required only about 9mn b/d of oil, or less than 10 percent of the world’s total consumption.
Today, however, it consumes 20mn b/d, or 25 percent of the world’s total. This is good news, not just for the oil industry, but for the people of Asia.
It signals strong regional economic growth and prosperity at many levels. Southeast Asia itself is no longer trailing other industrialized regions; it is taking steps to catch up with them.
During the next 20 years, it is expected that global economic growth will continue at a strong level – between 3 percent to 4 percent annually. Further, most forecasters see no major events that would drastically affect this growth.
On the energy side, it is likely that growth in demand will continue. Again, no major disruption in either supply or demand is expected, nor is any revolutionary breakthrough in technology which could dramatically alter the energy mix.
New regulations, especially in the environmental area, might be introduced, but they should not materially impact economic and business trends. Therefore, growth in energy demand is expected to be sustained.
On the supply side, global oil reserves are definitely in no danger of declining. If anything, the most likely case is an increase in reserves as a result of new exploration technologies and improved recovery methods.
Stable and reasonable prices, which we are trying to establish right now and maintain for the coming years, will certainly help the industry find new oil resources.
The second important element of the supply side is production capacity. The world’s production capacity will increase as demand for oil likewise increases. At the same time, and equally important, is to assure a safe margin of spare capacity.
Today, most people within the oil industry agree that reasonable spare capacity should be at a constant level of no less than 2.5 percent of total demand.
This would meet any sudden production shortages or an unusual rise in oil demand. Today, the world has 3.5 to 4mn b/d of spare production capacity.
This level might go up or down during the next few years. But there is a risk of letting it go down to a critical level such as 1 percent of demand or less.
There is no question but that the interests of a stable market and reasonably priced oil are vitally served by spare production capacity. We have seen what happens when it isn’t.
The world lost an estimated 4mn to 6mn b/d of production capacity when oil prices collapsed in 1998. But bringing it back up again is costly.
We should all remember that increasing and maintaining excess production capacity is expensive. While oil producers and industries are willing to pay millions of dollars for the benefits of their commodity and the world’s economy, oil consumers should understand this sacrifice.
For our part, Saudi Arabia is committed to keeping reasonable spare capacity. I will talk more about this point shortly.
So, the world of petroleum during the next 20 years or so is seen as stable and secure. As with the case of any commodity, of course, there may be some ups and downs as a result of extraordinary events.
At this point, I would like to talk about the future possibilities for the world oil market and the position of Asia within this market.
As I said before, global demand for oil should increase by between 1 percent and 2 percent annually over the next couple of decades. This is a result of a number of factors, such as population growth, higher living standards, urbanization and the desire to use efficient fuels.
At the same time, oil supply is expected to increase in accordance with anticipated demand, perhaps even surpassing it.
Yet, there are three major changes which are projected during the next few decades: one is full globalization of oil business, another is regionalization of oil movements, and the third, which is of most importance to you: the growth of Asia as the center of the oil market. Let me discuss each one further.
First, globalization of the oil market is already under way. It could be said that it had started by the beginning of the 1980s with the establishment of the futures market. Globalization means that oil is being traded in the open market around the world.
That makes possible the ability to trade oil at any time and anywhere. It means you can hedge globally the oil you buy or sell and therefore protect yourself from unexpected losses. It also means more transparency, since transactions are open, and interests are wide.
Globalization means that supply, demand, prices, investments and trading are all calculated and performed at the international level. As a result, no single faction has definitive and lasting control, nor is there likelihood of collusion.
Globalization also limits the impact of political influence – through the imposition of boycotts or other measures – within the oil market.
One of the most important issues of globalization is security of supply. Today, that has little if any meaning. The oil market is now fully open, and you can buy oil from wherever you want.
What makes one refinery choose this or that type of oil is based largely on purely business considerations. Certainly price, deliverability and the quality grade of oil configured to that refinery are paramount.
But the options to source are many. For example, any or all oil companies in Japan can purchase their entire oil supply from North America and the North Sea is they wish to do so.
What prevents them are normal commercial considerations that go back to efficiency and logistics. All commodities are traded this way.
Perhaps the best way to illustrate the relationship between globalization and so-called security of supply is to revisit the market of 20 or more years ago.
During the 1970s and before, oil used to be sold on a much more rigid scheme. Crude was supplied from this field to that refinery, according to a fixed price for a fixed amount. Little oil was actively sold on the open market, and refineries and oilfields were more closely dedicated.
It was like a pre-arranged, fixed marriage and, indeed, a catholic one. Today, it is a marriage of convenience. Today, therefore, international oil companies do not refine all or only the oil they produce.
At this point I would like to talk about the second aspect of the future of the oil market – that is, the regional movement of oil. As I said before, the oil market, like all other markets, will be guided by what is convenient and normal business practice.
In this regard, the world oil map gives us a good clue as to where the action is heading. In terms of demand, production and reserves, there are three global regions holding the key to oil dynamics: Europe/Mediterranean, America and Asia.
Certainly other areas will play important roles too: western Africa and perhaps the Caspian region are also likely to help balance the supply side among the three regions.
First, the European/Mediterranean zone, which also includes Russia and Iraqi oil flowing through Turkey, is currently producing around 20mn b/d and consuming a similar amount of oil. This vast region, even with some demand growth, is likely to continue to be self-sufficient for many years to come.
The second region is the Americas, North and South. This is the largest consuming area in the world, at 29mn b/d. In terms of consumption it will continue to be number one for many years to come. Oil production from these two continents is currently around 21mn b/d.
That volume is likely to increase in the years to come, especially from countries like Canada in the north, and Venezuela and Brazil in the south. However, this area’s production growth will be enough to match its rising consumption.
The third important region is Asia. To start with, it should be noted that in economic terms our continent has been given a variety of overlapping, definitions, such as Far East, Near East, South Asia, Southeast Asia, and the Asian-Pacific region.
However, economic terms should reflect geography. Asia is just Asia, from the Red Sea in the west, to the Sea of Japan in the east. Asia is a vast area with a huge population.
It is rich in culture and natural resources, with young, highly educated and highly motivated people. No wonder that Asia has enjoyed for so many years the highest economic growth rate in the world.
This is expected to continue for some years to come. This sustained growth will require fuel resources. Oil demand in Asia will go up by more than 2 percent annually, a yearly increase of no less than 500,000 b/d.
Today, Southeast and East Asia are producing around 8mn b/d. If you add production from Western Asia (the Arabian Gulf Region), which we should, then its total production is about 25mn b/d, about 40 percent of the world’s total.
On the other hand, oil consumption in Asia – both east and west – is about 23mn b/d. Therefore, Asia has a production surplus and the largest available spare production capacity in the world.
With expected annual growth in its own demand of between 500,000 and 750,000 b/d, Asia is likely to be consuming about 30mn b/d 10 years from now. It will, therefore, catch up with the Americas and surpass them a couple of years thereafter.
Equally important is that production capacity within Asia, mainly from the Gulf Region, will increase by a similar amount, keeping pace with demand.
At the same time, as I noted earlier, key oil producers, including the Gulf countries, will do their best to keep spare production capacity up to no less than 2 percent of world demand.
Taking into account these three most likely developments in the future of the international oil market – globalization, regionalism and the position of Asia within the world market – the outcry about supply security and diversification of sources has little meaning.
These themes are recurring and we still hear them from voices that hark back to the 1970s and 1980s. There remains a fear among some in the West that supplies might be snatched away at will, and that diversity of sources is the only alternative.
Such rhetoric is still high on some agendas, but we in Asia have no reason to adopt these old and irrelevant themes.
Other lonely voices today try to blame higher oil prices for economic slowdowns here or there. These voices, however, forget that when the Asian economy went into recession in 1998, oil prices were at their lowest level in recent history.
They also forget that the highest level of economic growth in the US was in the year 2000, when oil prices were also at a high level.
Instead of apportioning blame or dwelling on arguments about cause-and-effect, we could better serve the energy scenario by promoting trust – not only at the Asian level, but also at the global level.
We should all carry the message of cooperation, understanding, and the pursuit of common goals. All these can yield common benefits. What are some of the ways in which producing and consuming countries might reach a consensus on these issues? Conferences like these, plus investment seminars, information exchanges, educational forums and trade summits, among others.
We in Asia aren’t doing what we should. We need to work hard to increase cooperation at all levels. And we should work together to reflect our current position and our future roles.
At this point, I would like to talk about Saudi Arabia’s oil policy internationally, and more specifically with regard to Asia. Globally, our oil policy is based on three simple facts.
First, Saudi Arabia believes in a politically stable and economically growing world for the benefit of all.
It has used all of its resources – political, human and economic – since its establishment more than 70 years ago – for this goal. We therefore, do look at our oil wealth as a tool to help develop a better world.
Second, we currently hold more than 25 percent of the world’s oil reserves – some 260bn barrels with a high possibility of discovering much more than that.
According to the most logical scenario, our oil is likely to last for the whole of this 21st century. It is of course in our interest to keep oil as a fuel of choice, and to make sure that it is available to all of the people all of the time.
Thirdly, Saudi Arabia is highly dependent on oil income. It is the cornerstone for both government income and gross domestic production.
We will, therefore, do our best to achieve a stable international market that keeps prices in check with the balance of supply and demand.
With regard to Asia, we are part of this great continent. We have been active on broad fronts to promote goodwill and prosperity for those who may best benefit.
Our contributions toward peace, stability, cooperation and economic growth are well established. Perhaps our strongest show of willingness is our commitment to supply Asia with its oil needs. Saudi oil exports to Asia have been growing steadily over the years.
In the late 1980s, for example, we are exporting to Asia about 1.5mn b/d. Today we are exporting more than 4mn b/d, or more than 65 percent of our total exports.
In the future, we are willing to supply Asia with whatever oil it needs. We, in Saudi Arabia, as well as in cooperation with other producers, will not allow a true shortage of supply to occur in Asia.
That is why we maintain spare capacity, even with its attendant high costs. Saudi Arabia alone currently has excess production capacity of about 2.5mn b/d. We also have a system capable of handling any new increase in capacity. For example, our oil export capacity from Gulf terminals alone can rise as high as 14mn b/d.
Recently we hosted the 7th International Energy Forum in our capital city, Riyadh, with high-level participation from some 60 oil producing and consuming countries, as well as international energy organizations.
During his opening speech, HRH Crown Prince 'Abd Allah ibn 'Abd al-'Aziz proposed the establishment of a Secretariat to better organize the relationship between oil producers, consumers and other interests.
The establishment of the Secretariat will create an important base for cooperation, understanding and transparency within the world of energy.
This, in the end, will help to create a lasting and stable oil market for the economic benefit of all.
We in Saudi Arabia are pleased that HRH Crown Prince 'Abd Allah’s proposal has received wide support at all levels. We are also excited that Japan will be hosting the 8th International Energy Forum, by which time we hope to see the proposed Secretariat already a reality, and we are willing to work with Japan to have a great conference with great results.
By Dr Ibrahim al-Muhanna The following is the text of the speech delivered by Dr Ibrahim al-Muhanna, Advisor, Saudi Ministry of Petroleum and Mineral Resources, at the 2nd Seminar on Energy Security in Asia, sponsored and organized by the Japanese Ministry of Foreign Affairs, Tokyo, 6 March..
© 2001 Mena Report (www.menareport.com)