Al-Naimi provides hard facts about oil supply-and-demand and prices

Jun 25, 2008 02:00 AM

by Stephen L. Brundage

Saudi Arabia's Minister of Petroleum and Mineral Resources set the record straight at the Jiddah Energy Meeting and provided delegates with hard facts about supply-and-demand issues and the underlying causes of current oil prices.
"A year ago prices were in the range of $ 65 a barrel; now, they are almost double that," Ali I. Al-Naimi told participants. "What has happened during this relatively short period of time? Between the second quarter of 2007 and the second quarter of 2008, global demand rose by an estimated 800,000 to 1.2 mm bpd, but at the same time global oil supplies rose between 1.4 and 1.6 mm bpd -- substantially more than the increase in demand. Accordingly, days of forward cover increased from roughly 52 to 54 days during the last 12 months, and inventory levels are currently well within their normal range."

He said there were a variety of factors converging to create the situation.
"The world has enough petroleum resources, both conventional andnonconventional, to meet oil demand for many decades to come, even before we factor in future technological advances which will enable us to produce our resource base even more effectively," the minister said. "Of course, given the changes in driving habits, purchases of more fuel efficient vehicles, CAFE standards and ethanol mandates we're seeing in the United States, as well as the systemic decline in Japan's petroleum consumption and the long-term price elasticity of demand, there are also downward pressures on demand which must be considered, notwithstanding demand growth in developing nations such as China and India."

He also said the solutions were a little clearer than many pundits have expressed.
"What is required over the long-term, ladies and gentlemen, is not more oil in the ground, but rather the assets to bring it to the surface, to process it and to supply it to markets around the world. The Kingdom, for its part, is providing those assets through its vast integrated investment program all along the value chain," Al-Naimi said. "Our industry is experiencing stretched refining capacity worldwide, and a number of infrastructure bottlenecks around the globe are creating difficulties. Just as importantly, a shortage of complex conversion capacity to process heavy sour crudes, coupled with increasingly stringent and varied refined product specifications are also causing pain for consumers at the pump. This lack of conversion capacity, which is due to underinvestment in such facilities over the last decade, is constraining the ability of refiners to process heavy sour crudes whose supply is more ample."

He told participants that supply wasn't the issue.
"While there is little or no correlation over the past two years between global crude oil inventories and crude oil prices, there has been a strong correlation between the increasing volume of crude oil futures trade on the NYMEX and rising prices. According to many observers and analysts, inadequate oversight, regulation and reporting of speculative investments in commodities have further exacerbated this situation," Al-Naimi said. "Therefore, we welcome steps like the recent agreement between the US Commodity Futures Trading Commission and the Intercontinental Exchange regarding the extension of regulatory oversight to ICE Futures Europe."

The minister assured the world that Saudi Arabia -- and Saudi Aramco -- was ready to do whatever it could to calm the current situation.
"Given our current spare capacity, today I would like to state that for the remainder of this year Saudi Arabia is prepared and willing to produce additional barrels of crude oil above and beyond the 9.7 mm bpd, which we plan to produce during the month of July, if demand for such quantities materializes and our customers tell us they are needed," he said, detailing the current round of megaprojects and the massive hydrocarbon increments they will bring to the marketplace.

He also told delegates of additional increments that would be brought online if conditionsdictate and noted several joint ventures around the world to increase refining capacity, which is one of the bottlenecks contributing to supply concerns.
"These are massive investments, which over the next five years will total some $ 129 bn between the upstream and downstream segments of the industry. As the old phrase says, we're putting our money where our mouth is and we view our responsibilities and commitments as energy suppliers as a solemn trust," Al-Naimi said, noting that the Kingdom could not solve the world's problems by itself.

"Saudi Arabia is making these investments in the belief and with the expectation that other countries, corporations and institutions will also do their part to meet the multifaceted challenges posed by the current market situation, and will intensify their efforts just as we continue to strengthen our investments, capacities and operations," Al-Naimi said.
"In light of my earlier discussion, we strongly believe that actions by consuming nations in several important areas could play a pivotal role in complementing our efforts to collectively and effectively address the prevailing market situation."

He urged all the stakeholders to make a difference for the well-being of the world.
"This is not the time to cast blame, point fingers or play a waiting game," Al-Naimi said. "Rather, this is the time to stand up, step up and be part of the solution. The challenges before us require commitment, cooperation, and a lot of courage. The issues at stake are too big and too complex for any one entity to resolve, for any one sector of our industry to tackle alone, and not even for the oil industry as a whole to take on single-handedly. Instead, we must commit to working together and to aligning the efforts of all stakeholders to achieve our common objectives. By so doing, we have an opportunity to resolve the current market difficulties and, thus, to promote sustained growth for the global economy, greater prosperity for our nations and a brighter future for all of our peoples. Let us not allow that opportunity to slip from our grasp."

Source / Saudi Aramco
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