The first ministerial meeting between oil producers and consumers took place in the summer of 1991, seventeen years ago. Since then, the global petroleum and energy markets have confronted five major challenges.
The first major challenge, which I call the development of a globalized oil market, started in the eighties and took on defined shape in the nineties. The globalization of the oil market means that prices are decided freely within an open market, petroleum is directed to where the demand is, and buyers and sellers are fully integrated at the global level.
With the help of this globalized market, producers and consumers have been able to deal successfully with many problems with minimum impact on energy markets and wider economies. Crises such as the production cuts from Nigeria and Venezuela in early 2003, the halt of Iraqi oil exports in March 2003, the reduction of oil production from the Gulf of Mexico and damage to oil refineries in 2005 as a result of Hurricanes Katrina and Rita, and the loss of Alaskan production the following year were all met successfully within the context of this global market system. In other words, I believe this is a challenge we as producers and consumers have successfully met.
The second major challenge we are facing today is the recent flood of money into the oil futures markets from various directions, including hedge funds, institutional and individual investors, traders, and speculators. As an indicator of the scale of this development, I would note that paper markets have grown 45 times faster than physical markets over the last four years. Of course, there is a lot of debate about the impact of this new money and these new players in the oil market. Many experts believe that the influx of investments into the future oil market—which is also related to other financial developments such fluctuations in the value of major currencies, the sub-prime mortgage crisis, and interest rate movements—are behind the increase of oil prices during the last eight months.
The third challenge is reducing harmful emissions from fossil fuels while at the same time making sure these sources of energy are available to contribute to higher economic growth and human prosperity, especially within developing countries. In this regard, I believe that we should avoid political or individual economic self interest and focus instead on scientific and technological solutions such as carbon capture and storage, as well as efficiency in energy uses, cleaner burning fuel formulations, and more efficient engine designs.
The fourth challenge is dealing with the artificial fear about the availability of oil supplies, resources and production capacity. Frankly, I believe that this fear has neither a scientific nor an economic basis. Nevertheless, it is creating a perception of scarcity and is therefore helping to push oil prices higher and higher. Take for example the issue of petroleum resources: all respected petroleum engineers, geologists and upstream professional organizations believe that the world has enough petroleum resources to easily meet demand for at least the next 30 years. Yet, a handful of non-specialists are able to scare the world with theories about peaking oil reserves.
The second area related to fear and scarcity is the issue of production capacity. For example, we in Saudi Arabia have a current production capacity of 11.3 MB/D and 12.5 MB/D by year end 2009. Yet some people who have never actually visited Saudi Arabia and who have a limited scientific knowledge about production capacity and the oil industry in general (let alone the specifics of the
Kingdom’s oil industry) lower their estimates of Saudi production capacity to the range of 10 to 10.3 MB/D. Regardless of their motivation in low-balling their numbers, they create a fear of availability of oil in case of supply shortage which bolster oil prices.
The fifth challenge we face is the increasing level of engagement between food markets and production and energy markets and uses. For the last one hundred and fifty years, petroleum has been used to produce more and more and cheaper and cheaper food; at the moment, however, some food crops are being increasingly used as sources of energy for cars, planes and other transportation vehicles.
Let us leave aside the wisdom of such policies and practices, and for the moment simply note that the energy and food markets are increasingly interlocked, not only at a national level but also at the international level. This is a major issue for all of us, and it requires a logical, scientific and economic approach if we are to optimize both energy use and food production.
In sum, the last four challenges indicate that we as producers and consumers still have collaborative work to do if we are to resolve the concerns and problems which affect the wellbeing of our citizens. One method, among others, to deal with these challenges is to strengthen the existing framework we have for multilateral co-operation and collaboration which includes both the International Energy Forum and its Secretariat.