2001 Speech

Address in Tokyo to Second Seminar on Energy Security
Speech entitled 'East Asia, West Asia and the Wordl Oil Market', by Dr. Ibrahim Al-Muhanna at the Second Seminar on Energy Security in Asia, in Tokyo, Japan on March 6, 2001

I would like to express first my sincere thanks and appreciation to Japan’s Ministry of Foreign Affairs for inviting me to take part in this distinguished gathering. I am happy to be in Japan, a great country that has full respect and admiration from all over the world, especially from the Arab people.

Today, I will talk 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, ladies and gentlemen, it is nice to take a glance at one particular period of the past. This helps us to appreciate and understand the changes which we have gone through, and possible changes in the future.

I will go back more than 20 years ago. taking a normal year, say 1978. It was a year where 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 64 million barrels per day, or about ten million less than today. The Asian market was consuming 8 million barrels per day, or about half of its consumption today. At the time, the Arabian Gulf region was producing more than 21 million barrels daily, only two million less than it’s producing today.

Since that year and up till now, there have been a lot of changes. To name just 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 5 million barrels per day. We witnessed the advent of the oil futures market, plus a wave of mergers and acquisitions in the energy sector.

Everywhere, the liberalization of the energy business brought changes. As for oil prices, competition among producers for market share in the mid -‘90s was severe. Then, the oil market collapsed in 1998, only to recover again a year later. Now, the establishment of $25 a barrel as a target price for oil finally seems to be acceptable to the majority of key producers and consumers.

All of what I’ve just cited, ladies and gentlemen, are important events in the recent history of energy, and with important consequences.

Yet one thing which stands to be a most notable event – not just then but for the future -- is the growth of the Asian oil market. As I said, more than 20 years ago Asia required only about 8 million barrels per day of oil, or less than 10 percent of the world’s total consumption. Today, however, it consumes 20 million barrels per day, 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 to 4 percent yearly. Further, most forecasters see no major events likely to drastically affect this growth. There is no certainty, of course, but the opposite might be the case if growth exceeded 4 percent.

On the energy side, it is likely that growth in demand will continue. Again, no major disruptions in either supply or demand are expected, nor 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 keep 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 assuring a safe margin of spare capacity. Most oil producers and the industry agree that reasonable spare capacity should be a constant level of no less than 2.5 percent of demand. This would meet any sudden production shortages or an unusual rise in oil demand. Today the world has 3.5 to 4 million barrels per day of spare production capacity. This level might go up or down during the next few years. But there is risk in not having spare capacity, or letting it go down to a critical level such as 1 percent of demand or less. There is no question 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 4 to 6 million barrels per day 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 up to the expected level of demand and enough to meet any sudden shortages. I will talk more about this point shortly.

So, ladies and gentlemen, the world of petroleum during the next twenty years or so is seen as stable and secure. As with the case of any commodity, of course, there may some ups and downs as a result of extraordinary events. But oil has hedged its position through strong exploration and production technologies, spare capacity and such safeguards as strategic petroleum reserves.

At this point, I would like to talk about the future possibilities for the world oil market and the position of Asia, including the Arabian Gulf region and Southeast Asia.

As I said before, global demand for oil should increase by between 1 and 2 percent yearly 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 expected demand, perhaps even surpassing it.

Yet, there are three major changes which are expected to take place during the next few decades: one is full globalization of the oil business, another is regionalizing of oil movements, and the third is of most importance to you: the growth of Asia as the center of the oil market.

Let me further discuss each one. First, globalization of the oil market is already in the making. It could be said that it started by the beginning of the ‘80s 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.

We should keep in mind that while transparency on principle is a good thing, it can also have a negative side effect. The possible misuse – deliberate or otherwise -- through such methods as misinformation, misleading statements and so on, could cloud an otherwise clear market climate. However, globalization means that supply, demand, prices, investments and trading are all done at the international level. Therefore, there is no definite and lasting control by any single faction, or the likelihood of collusion. Globalization also leads to limiting the political influence within the oil market to boycotts or other measures with little impact.

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, where 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 as 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 if they wish to do so. What prevents them from doing so are normal business considerations that go back to efficiency and logistics. All key 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 ‘70s and before, oil used to be sold on a much more rigid scheme. Crude was supplied from this field to that refinery and according to a fixed price for a fixed amount. Little oil was actively sold on the open market, and refineries and oil fields were more closely dedicated. It was like a prearranged, fixed marriage and indeed a catholic one. Today, it is a marriage of convenience, and no one should feel insecure or unable to move from one source to another.

At this point, ladies and gentlemen, 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: America, Europe/Mediterranean, 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. And the European Mediterranean zone, which includes Russia and Iraqi oil flowing through Turkey, is currently producing around 22 million barrels per day but consuming less than that by 2 million barrels per day. This vast region, even with strong demand growth in Eastern Europe and the south Mediterranean, 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 27 million barrels per day. 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 22 million barrels per day. 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. This area’s growth in production will be enough to match its rise in consumption. Therefore, the region’s oil deficit of about 5 million barrel per day will likely have to be offset by imports from elsewhere.

The third important region is Asia. We should define Asia, however, in geographic and well as petroleum and economic terms. In the last couple of years there have been four overlapping definitions: Asia, South Asia, Southeast Asia, and the Asian-Pacific region. I believe Asia extends 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, 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, estimated at around 6 percent annually. This sustained growth will require fuel resources. Oil demand alone in Asia will go up by around 2 percent yearly, and an increase of no less than 500 thousand barrels daily is forecast.

Today, Southeast Asia is producing around 8 million barrels per day. If you add the production from western Asia – the Arabian Gulf Region -- then its total production is about 30 million barrels per day. That is more than 40 percent of the world’s total. On the other hand, oil consumption in Asia - both east and west – is about 23 million barrels per day. Therefore, Asia has a production surplus of about 7 million barrels per day – the largest available spare production capacity in the world.

With expected annual growth in its own demand between 500 and 750 thousand barrels, Asia is likely to be consuming more than 30 million barrels daily ten years from now. It will, therefore, catch up with the Americas and surpass them a couple of years later. What is 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, key Gulf producers will do their best to keep spare production capacity up to around 2 percent of the world demand, as I noted earlier.

Ladies and gentlemen, 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 cry 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 ‘70s and ‘80s. There remains fear from some in the West that supplies can be snatched away at will, and 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 U.S. was in the year 2000, when oil prices were also at a high level.

Instead of affixing blame or dwelling on cause-and-effect, we could better serve the energy scenario by promoting trust. Trust, not only at the Asian level but also at the global level, should carry the message of cooperation, understanding, and the pursuit of common goals. All these can yield common benefits. What are some of the ways that producing and consuming countries might come to better agreement on the issues? Conferences like these, plus investment seminars, information exchanges, educational forums and trade summits, among others. Except for sports in general and football in particular, we in Asia aren’t short of capability or resources.  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, ladies and gentlemen, 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 stable world with the benefits of oil energy available to all. It has used all of its resources – political, human and economic -- since its establishment more than 70 years ago to help create better lives and relationships for peoples around the world. I do not need to go through our achievements in this regard. We 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 260 billion barrels with a high possibility of discovering much more than that.

According to the most logical scenario, our oil likely will 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’s 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 product. We will, therefore, do our best to achieve a stable international market that keeps prices in check with the balance of supply with demand.

With regard to Asia, we consider ourselves 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 1980’s, for example, we were exporting to Asia about 1.5 million barrels per day. Today we are exporting more than 4 million barrels per day, or more than 65 percent of our total exports. For the future, we are willing to supply Asia 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 take place 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 2.5 million barrels per day. We also have a system capable of handling any new increase of capacity. For example, our oil export capacity from Gulf terminals alone can take as high as 14 million barrels per day.

Ladies and gentlemen, during the recent 7th International Energy Forum in our capital city, Riyadh, we hosted high-level delegates from some 60 oil producing and consuming countries, as well as international energy organizations. During his opening speech, HRH Crown Prince Abdullah bin Abdulaziz proposed the establishment of a Secretariat to better organize the relationship between oil producers, consumers and other interests. The establishment of the Secretariat, based in Riyadh, will create an important base for cooperation and understanding, and nurture interest among different parties 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 Abdullah’s proposal has received wide support at all levels. We are also excited that Japan will be hosting the 8th International Energy Forum, where we hope to see the proposed Secretariat already a reality, and are planning to help Japan have a great conference with great results.

In closing, ladies and gentlemen, I would like to say again what a pleasure it is to be in Japan. We value our relationship and we trust it will grow closer through further understanding and cooperation. As fellow members of this great continent, we are naturally optimistic. I believe we share a common desire for economic growth, a brighter future, mutual interests and peace. For its part, Saudi Arabia, as has been the case for more than 50 years, will be a reliable supplier of oil to Asia. We look forward, with your invitation, to a greater role in that effort with Japan. Domo arigato. (Thank you.)