| Editor's
Note:
The Saudi-US Relations Information Service is
pleased to provide its readers with participants' remarks from the April 27,
2004 conference hosted by the Center for
Strategic and International Studies and the U.S.-Saudi
Arabian Business Council. The conference addressed U.S.-Saudi relations and
global energy security with high-level speakers from the United States and
Saudi Arabia. The conference explored the link between affordable energy
and economic growth. It is important to bring
you the comments of leaders from Saudi Arabia and the United States on these
important issues.
The following are introductory remarks made by
Dr. Dan Yergin, Chairman, Cambridge Energy Research
Associates, and Guy
Caruso, Administrator, Energy Information
Administration.
Click
below to read previous transcripts from this conference:
U.S.-Saudi Relations and Global Energy
Security
Dr. Dan Yergin, Chairman,
Cambridge Energy Research Associates: On behalf of really everybody who's
participating in this session, we express our appreciation to CSIS and to the
U.S.-Saudi Arabian Business Council for bringing together this very timely
discussion. I think we would all say that the timeliness is very clear to
everyone in this room. We are indeed looking at a reality of a tight oil
market and in some ways, an extraordinary oil market that takes place against
the backdrop of a very strong economy. We
just had the meeting of the IMF [International
Monetary Fund] and the World
Bank here in Washington, where a very optimistic view of the global
economy, at least as of April 2004, the possibility that this will be the best
economic year in a generation. That is one of the things that has translated
into a very strong oil market, and that's one of the things that really sets
the context for the discussion we're going to have on this panel.
World oil demand growth this year
is probably going to be double the average of the years 1998 to 2003, which
gives a sense of the strength of the market, and as we know and Minister
Naimi referred to it, the demand estimates in response to a strong global
economy have continued to be raised over the last few months.
| At the same time, of course,
supply has been constrained. There have been a series of disruptions, all of
them managed over the last 17 months, and spare capacity is, well, rather
spare right now. This has given rise, as Minister Naimi described, to once
again this fear that the world is running out of oil. As he noted, we've gone
through cycles of these. One of my favorites is in the 1880s when one of the
founders of the standard oil trust began selling off his shares in Standard
Oil because the engineers told him there was no oil to be found outside
Pennsylvania. So, it's been going on a long time.
But, as the Minister I think
emphasized, the role that's often underestimated is of technology, and it's
not just an incantation to say technology, but it's part of the fabric of the
industry; and I think as a student of the industry, it strikes me that often
the public outside the industry doesn't understand what a technologically
driven industry this is. So, the strong market is one element to the context
of our discussion.
|
|
The second is this striking
geographic shift in supply and demand that's going on. Over the next decade,
most of the growth in world demand and supply will be outside of what is at
least currently the OECD [Organization
for Economic Cooperation and Development]. And as is evident, China and
Russia loom large. It's useful to quantify what that means.
Between 2000 and 2003, China
accounted for 35 percent of all the growth of oil demand in the world and
Russia for 75 percent of non-OPEC [Organization
of the Petroleum Exporting Countries] supply growth.
The third characteristic or part
of the context was the one
that Kyle [McSlarrow] referred to, which is that the U.S. really is on the threshold
of a new era in natural gas, and this has major implications. In a sense, the
U.S. is today in natural gas where it was 30 years ago in oil, about to go
from being a minor importer to being a major importer, and a decade from now,
the United States could literally overtake Japan as the world's number one
importer of LNG [liquefied natural
gas]. That will add to the dimensions of
energy security that we talk about, a host of new energy relations and give a
larger dimension to the conversations.
| Amid these
changes, of course, some things do remain fundamental and with
continuity, and one of them is Saudi Arabia's unique role, not only as a
supplier but also as responding to supply disruptions. It's very
striking in the last 17 months alone. Saudi Arabia has helped to offset
disruptions from Venezuela, Nigeria and Iraq. No other country could
have played the role that Saudi Arabia did and continues to do. |
The central producing facility in
Saudi Arabia's Shaybah field sends 500,000 bpd of Arabian Extra Light
crude oil to Abqaiq via a 640-kilometer pipeline. (Photo by
Unknown/Saudi Aramco/PADIA)
|
Now, there's a second dimension,
which I think draws out some of Kyle's remarks, which is and does provide part
of the context which is as we think about it a kind of changing meaning of oil
security and energy security. For 30 years, the focus has been on the smooth
flow of oil, dealing with or anticipating and preventing disruptions. But now,
in the last few years, the definition of energy security has been widened out
to really include infrastructure and the entire supply chain because we
recognize that the entire supply chain is a target as was demonstrated this
past Saturday. I think we need to think through the implications of that for
the private sector, for governments and for international cooperation. Some of
the elements of new emphasis are, of course, what's already been addressed,
which is enhancing physical security, deepening the notion of
diversification, a focus on flexibility and resilience, whether measured in
spare capacity, strategic stocks or the resilience, and flexibility of the
entire supply system.
Something else I think that's
very important, which you can't quantify but really is critical for how you
operate in this kind of era, which is the importance of communication and the
kind of dialogue that's represented in this conference and this discussion
today. So, I think that provides really, when we talk about energy security,
the context of what we're going to try and do in our panel this morning.
Abdallah Jum'ah is the President
of Aramco, the world's largest oil producing company, by far. He'll describe
the role that Saudi Arabia plays. Rex Tillerson, who's the President of
ExxonMobil, brings a global view and perspective to addressing these issues.
And, Guy Caruso, the head of the Energy
Information Administration (EIA), will look at the dynamics that will
drive the oil market in the years ahead.
And, in our discussion, we will
go now in reverse order. We'll begin with Guy, who since 2002 has been the
Administrator of the Energy Information Administration, which as most
everybody here knows provides independent data, forecasts and analysis on
energy policy. Guy has a 30-year career in energy policy. He held senior
positions in the Department of Energy, including Director of the Office of
Market Analysis, Senior positions at the International Agency and also was
Executive Director of the Strategic Energy Initiative Report of CSIS and also
directed the Energy Strategy Report at the United States Energy Administration
before taking on his present duties.
So, let me turn it over to Guy to
provide more context.
 The
Honorable Guy Caruso, Administrator, Energy Information Administration:
Thank you, Dan. It's a great pleasure to be here this morning. Mr. Minister,
distinguished guests, this is quite an honor to appear at this joint
conference with CSIS and the U.S.-Saudi Arabian Business Council. I'd like to
thank particularly Bob Ebel and Frank Verrastro and Lisa Highland for
organizing such a distinguished set of speakers and topics that are so
current.
As Dan's introduction said, I've
had a lot of association with organizations that seemed to have three letter
acronyms -- EIA, DOE [U.S.
Department of Energy], IEA [International
Energy Agency], but I did graduate. For four years, I was at CSIS, so I
moved up to a four-letter organization. [Laughter]
And, when I took the EIA job, I
didn't realize that every week when we put out our gasoline and oil and
natural gas numbers, I'd also get some four-letter comments. [Laughter]
So, as several speakers have
said, at EIA, Guy's the guy with the numbers. Of course, it depends on whether
they're the right numbers, and it depends on your point of view. I think Minister
Naimi indicated that within OPEC, there are even different points of view
as to where the market's going and that depends so much on the numbers. Each
month when we put out our monthly oil
outlook, the IEA does its own, and OPEC
does its own. But, clearly, when we talk about energy security and the oil
market, one needs to look at the history of this roller coaster ride of crude
oil prices we've observed in the 30-plus years that I've been trying to
analyze
the market.
External events have played such
an important role. Some of them have been political with respect to embargoes
and wars, and others have been more unexpected events that were not related to
policy or war. I mean you even had the '86 collapse in oil prices, which was
largely a result of Saudi Arabia's decision that it would no longer be the
swing producer and would institute buy-back pricing.
So, we've had a very rocky road
when it comes to oil price projections and outlooks, so this period we're
going through, although it's been one of rather steady increases in prices
over the last several years, is certainly no different than we've observed in
the last 30 years.
The reasons that we are looking
at a very tight market in the near term and our projection is prices for crude
are going to stay firm for at least the next two years. That's our latest
outlook. That crude prices of WTI [West Texas Intermediate], the benchmark
crude in the U.S., will be in that $30 to $35 range. They've been above $35
now for the last four months, and to put that into perspective in the OPEC
basket, the Minister mentioned this morning, it's roughly $4 less than the WTI
average. The OPEC basket runs around $31 or so.
The reasons are multi-fold. There
are a number of factors, and I think some of the speakers have alluded to
them, starting with rising world oil consumption. Dan mentioned the strong
economic growth we're witnessing not only in this country, but as the World
Bank meetings last week indicated, it's a global boom in economic growth.
China has been mentioned.
Clearly, that is a driving force in the world oil consumption growth, and we
see that continuing as I'll mention later on.
|
This refinery in Rabigh, Saudi Arabia has
some 41 storage tanks for crude oil. (Photo
by Unknown/Aramco/PADIA)
|
"..there
are about two million barrels a day of unused productive capacity in
Saudi Arabia, that's about all there is in the world of an
80-million-barrel-a-day economy of world market.." |
The other one is that although
there are about two million barrels
a day of unused productive capacity in Saudi Arabia, that's about all there is
in the world of an 80-million-barrel-a-day economy of world market. So, 80 out
of maybe 82 total capacity -- that's a bit like having 98 out of every 100
seats in every airline that flies every day occupied, and there's bound to be
things that go wrong in that type of a tight market situation.
What that has also led to is low
inventories. We have low inventories of crude in this country. They've been
low since the last part of 2002 with the Venezuelan unrest and really have not
recovered to what we believe to be normal range. This is true in OECD
countries as well.
Another factor certainly has been
OPEC's quota reductions and restraint on production. It's one of a number of
factors, but it clearly has had an effect of putting upward pressure on prices
and keeping inventories low.
Clearly, there's a political
uncertainty and a speculative uncertainty that's part of that $35 WTI that
we've seen averaged over the last several months.
There's uncertainty about what's
going to happen in Iraq. There's uncertainty about where Venezuela's going to
go. And, more recently, we've seen further unrest in Nigeria. All of these
things are adding to the, I would call it, asymmetrical risk on the upside of
crude oil prices.
Finally, of this long list of
factors is the downstream tightness, particularly in the United States
refinery sector,
which again both the Minister and Secretary
McSlarrow mentioned this morning. We don't see that changing. In fact, we
see that tightening as refiners try to meet new specs for low sulfur gasoline,
ultra low sulfur diesel and the banning MTBE in
New York, Connecticut and California as we approach the summer gasoline spec
season.
To illustrate the kind of demand
growth that I mentioned, this chart [not available] shows a point that Dan mentioned in his
opening remarks. We saw about a million-barrel-a-day average growth in the
'90s in world growth. That tempered somewhat with the slowdown in the
economies, not only in the United States but also globally in 2001 and 2002.
But, now it's picked up, and we see a very robust growth of about 1.6 million
barrels a day this year. It's about the same as we witnessed last year. We'll
be about a 1.8 million barrel a day growth in 2005, and as the Minister and
others have mentioned, every time we look at these demand numbers, we tend to
revise them upward. This is particularly true in China, where demand has been
growing at about 500,000 barrels a day per year, and we see that growth
continuing this year and next. That's a major factor in putting such a strain
on our global productive capacity.
Now, these high prices and the
demand growth have brought forth some increase in non-OPEC production. It's
been up over a million barrels a day last year, and we think it will probably
be 1.4 this year and next. But, that's not going to be enough because the
consumption growth and the need to rebuild inventories will exceed what
non-OPEC can add.
So, OPEC clearly remains in the
driver's seat with respect to this market. And, as this chart shows [not
available], the OPEC
decisions on quotas over the last five to six years have tried to adjust
production to meet demand, and in some instances, to meet uncertainties with
respect to supplies in Iraq related to the Oil for Food program during the
earlier part of this period, and again as the Minister mentioned, an attempt
to bring forth production during times of uncertainty with respect to
Venezuela and Iraq.
So, we certainly see these OPEC
decisions having had a very important influence on keeping prices where they
are, and I think one often hears, well, the speculators are driving this
market. Speculators are keenly attuned to what they hear, see and read about
what's going on among the OPEC countries, and clearly that's played an
important role in the speculator's decisions.
But, more importantly, the key
indicator has been inventories. This illustrates how low crude inventories or
total oil stock inventories have been in the OECD. They've been at the low end
of that five-year minimum-maximum range for a number of years now, and we see
them continuing to be at the lower end of that in 2004 and 2005. That should
continue to put upward pressure on prices which is why we think a $30 to $35
WTI world is what our forecast indicates.
In the U.S. we've also had low
crude stocks, partly because of the Venezuelan situation in late 2002
continuing into '03, but we've really never recovered, and we're staying at
the low end of that. The last number we released was 295 million barrels of
crude. We'll be releasing a new number tomorrow, but we don't anticipate
moving back into that normal range very soon, and therefore, we expect, again,
an inventory-driven upward pressure on price.
In the longer run, we have very
strong growth as Kyle mentioned this morning for petroleum, and it's largely
driven by the transportation sector. We've got a long-term projection of U.S.
demand for oil going from 20 million barrels a day to about 28 million barrels
a day in 2025, and of that eight-million-barrel-a-day growth, almost all of it
is in the transportation sector, and we don't see much of an improvement on
our domestic
production. In fact, it's flat to declining. So, that our net import position
will increase from about 55 percent this year, the chart shows it for 54
percent last year, going to about 70 percent import dependency by 2025.
So, the need for increased
imports and increased imports from the Persian Gulf area I will discuss a bit
later.
| But, on the
global scene, we see fairly steady growth in world energy consumption
through the next 20-25 years, but the real message on the global scene
is where that growth will be, and it's mostly in developing countries.
About 70 percent of the world energy growth will be in the developing
countries, led in particular by developing Asia. China and India are a
big part of that growth in world energy demand as by 2025 developing
countries, and OECD countries will be consuming almost the same amount
of energy. |
"About
70 percent of the world energy growth will be in the developing
countries, led in particular by developing Asia.." |
On the oil scene, the share of
oil will continue to maintain its market share of about 39 percent. Gas will
grow fast because of the desire to use more gas in electric power generation,
not only in this country but also in developing countries, so that we
certainly subscribe to the view that's already been mentioned here, that the
oil share will continue to hold its own over the next 20-25 years. Ultimately,
it may peak and decline, but our view is the resources, both conventional and
unconventional, are adequate to meet this kind of demand.
The demand for oil we see growing
from about 80 million barrels a day this year to about 120 million barrels a
day by 2025. Now, any time one looks that far out, as the Minister said, our
vision is perfect because no one can prove us wrong. It's next month we're
really worried about.
But, clearly, a
40-million-barrel-a-day growth in world oil demand and supply represents an
enormous challenge for both producers and consumers.
We expect, again, much of that
growth to be not only the transportation sector in this country but growing
needs for transportation in countries like China, India and a broader use of
oil in developing Asia. So, major growth not only in North America, but also
in developing Asia, will lead to this kind of picture on the demand side.
On the supply side, we see growth
both in OPEC and in non-OPEC countries to meet this 40-million-barrel-a-day
growth in supply. We've got about an 18-million-barrel-a-day growth in
productive capacity in non-OPEC countries and more than 25 million barrels a
day growth in OPEC countries, much of which will be in the Gulf country
region; and Saudi Arabia clearly will be the main contributor to that growth
whether the number in our particular international energy outlook this year,
we're saying Saudi capacity could grow to 22 million barrels a day by 2025. We
think the resources are there. The Minister certainly indicated he believes
they're there, not for that particular number, but to grow substantially from
their 10.5 million barrel a day capacity today.
But, we'll be watching things
like investment decisions and where the investments are made over the next
coming years. But, clearly, we expect a robust growth in both OPEC and
non-OPEC sources of crude over the next 25 years.
Let me conclude by saying we see
an oil market that remains very heavily utilized at, as I mentioned, with only
two million barrels a day of excess capacity; that's a tight world oil
capacity situation subject to volatility and surprise, and we need that two
million barrels a day of unused capacity to meet the kind of demand we see. In
the long run, robust growth led by a strong world economy, growth in both
non-OPEC and OPEC, and clearly the investment decisions in infrastructure,
which have been mentioned earlier, are critically important to reaching these
demand and supply numbers that we project in our current international energy
outlook.
Dan, members of the panel, thank
you very much, ladies and gentlemen, for your attention this morning.
[Applause]
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