Minister Al-Naimi explains oil price volatility

February 1, 2011

Oil price volatility is not merely a result of supply and demand, but is also triggered by commodities trading and fluctuations in the price of the dollar, Minister of Petroleum and Mineral Resources Ali Al-Naimi said during a speech yesterday at the Plenary Session of the Second Global Commodities Forum of the United Nations Conference on Trade and Development. Therefore, a wide array of actors – across the globe and across industries – must cooperate to promote energy market stability.

Noting that oil prices shifted drastically during a single decade (from a low of $11 per barrel in 1998 to a high of $147 per barrel in 2008), Al-Naimi explained that these wild swings occurred after oil became “well established as an attractive asset class for a growing and diverse set of investors.” As a result, in today’s world “investor money moves in and out of oil futures markets based on a variety of factors which may have very little to do with basic oil market supply and demand fundamentals.” Furthermore, the weakening of the dollar has encouraged investors to hedge their money in commodities futures, including oil.

Al-Naimi said demand for oil has risen drastically in the past few years, driven both by commodities investors and rapidly developing economies in Asia and elsewhere. Meanwhile, the resource base is maturing, making the product more expensive to produce. Nonetheless, Al-Naimi insisted that neither the world, nor the Kingdom, is running out of oil. “Saudi Arabia, as the world’s leading supplier of oil with 264 billion barrels of proven oil reserves, could continue to supply crude oil at current production levels for another 80 years, even if we never found another barrel,” he stated. “However, we are continually finding those new barrels through new discoveries and improved recoveries, so that our reserves have not decreased.”

The question is not whether there will be enough oil in the coming decades, Al-Naimi explained, but whether that oil will be valued at a price that is both affordable to consumers and worth the effort for producers to extract. “Oil producers and consumers share a common interest in promoting stable markets and ensuring affordable and fair prices,” he said. “Petroleum is a long-term, capital-intensive industry, with exploration, discovery and development taking long lead times of many years to bring to production.” A price range of $70-$80 per barrel is appropriate to encourage investment in new production, he concluded, while not harming the economies of consumers.

Al-Naimi warned against trying to turn away from oil, just as energy demand is rising so rapidly. “Meeting future energy needs will require contributions from across the spectrum of sources – including renewables, nuclear, natural gas, coal, and of course, oil,” he said. “The world does not have the luxury of discarding any particular energy source, marginalizing or penalizing its competitiveness through policy, public opinion, regulatory measures, or distribution of subsidies and incentives to unfair advantage. The effect of such an approach would be detrimental to global economic growth and to efforts to raise living standards for the billions of people still living in poverty.”

As to whether oil prices will continue rising indefinitely, Al-Naimi acknowledged that the wide array of contributing factors make that question impossible to answer. However, he asserted that the most important factor will be “our ability to develop and deploy new technologies with the goal of adequately expanding supplies.” He explained, “Innovation is revolutionizing oil, making it more accessible and more sustainable at every stage. Technology is allowing those ample resources to become reserves at progressively lower costs. The clear lesson is that the resource base is there, and that technology will determine how much we can convert into reserves and supplies, and at what cost.”

In conclusion, Al-Naimi stressed that cooperation between producers and consumers is key. He noted that the Kingdom has invited more than 80 ministers from around the world to Saudi Arabia next month to sign a new charter for the International Energy Forum, a step he predicted would “take the producer-consumer relationship to yet a higher level.”