When global oil producers and consumers met yesterday in Riyadh to discuss the international oil market, the two key issues of greater market transparency and increased production took center stage. King Abdullah in his opening speech to the three-day Seventh International Energy Forum, hosted this time by the Kingdom, addressed both issues frankly.
Saudi Arabia believed in a fair and reasonable price for oil, he said, and would seek to meet demand by expanding its own production capacity. However, he warned that consumer countries also had to play their part by lowering taxes on refined products. He also hit out at oil market speculation which has added a superfluous dimension to the relationship between demand and price.
The theme of this latest forum — “An Energy Partnership for the New Century” — conceals the new complexities that face the oil and gas markets. High Asian demand, principally from the booming Chinese economy coupled with supply shortages saw a barrel of oil hit $70 in August. However, as industry analysts admit, despite sophisticated data monitoring, it is hard to pin down the exact supply-and demand-relationship. This is because speculators seeing magnificent opportunities for profit have piled into the market, buying up oil on the expectation that they can exacerbate existing short supply problems and sell their oil at handsome profits when the real customers become sufficiently alarmed to accept markedly higher prices.
At a time of crisis, the world could do without the drastic effect of speculative intervention, often using complex forward contracts, which can be linked by clever investment bankers to a wide range of other securities, none of which has the remotest connection with the basics of the oil and gas business. Then there is the conundrum of governments trying to use high oil taxes to cut consumption in line with their environmental commitments.
The Kyoto Protocol was always going to have an economic impact. However is it sensible for national treasuries to be pocketing the relative increase in tax take on higher oil prices and using the chaotic market situation as a haphazard way of meeting Kyoto obligations? It would be far better if they took some control of the market by defining a tip point between economic/environmental benefit and damage and then adjusting their taxes to maintain a safe balance. Yet this, as King Abdullah pointed out, is not happening.
Increased production, as demanded by consumers, will not of itself restore stability. The Kingdom is currently investing billions of dollars to increase its capacity by 1.5 million barrels a day to 12.5 million bpd within four years. Further investment will raise output to 15 million bpd. But consumer governments need to be playing their part as well. They have fiscal and financial market regulatory powers which can and must be used to complement the benefits of increased output. If, however, they do nothing, the impact of additional supply will be zero and the risks for the health of the global economy will have become even greater.
