The International Monetary Fund’s executive board has urged Saudi Arabia to maintain a longer-term perspective on global oil demand. While praising Riyadh for its leadership in stabilizing oil markets by continuing to expand capacity in the face of falling prices, the IMF directors “encouraged the authorities to continue basing their capacity expansion decisions on medium to long-term (and indeed not short-term) demand conditions.”
Indeed easier said than done in many respects, one can’t fail underlining here, especially in the given environment.
Crude business is a serious one. To flourish and prosper, it needs a very conducive environment for it requires huge investments in infrastructure. Billions and billions of dollars are involved and no one could be allowed to dump money on unfeasible and economically unjustified projects. Projects need to be economically feasible. Products need to have a market before one could expand output. It is indeed hard to justify any investment until and unless fair returns could be projected. This is pure business. However, with talks in influential quarters, of developing alternatives and reducing dependence on fossil fuel, that very environment seems missing. Yet, what a paradox indeed; major producers are being pushed, by the likes of IMF, to invest in projects that at best could be hard to be termed as feasible in many respects in today’s environment.
Yet the most unfortunate aspect is that those who matter don’t really seem to be interested, at least for the time being, in creating and generating an environment that could attract investments, huge investments, in the sector.
And that is exactly what Prince Turki Al-Faisal points out in his write up, “Don’t Be Crude,” in the recent issue of Foreign Policy magazine. Lamenting at the global scenario, he underlines that “energy independence” has become a byword on the American political scene and that the White House website lists, as a guiding principal, the need to “curb our dependence on fossil fuels and make America energy independent.” And then the former Saudi envoy in Washington rightly argues: “But this “energy independence” motto is political posturing at its worst — a concept that is unrealistic, misguided, and ultimately harmful to energy-producing and — consuming countries alike.”
Prince Turki then suggests that rather than proselytizing about energy independence, (the US) should instead focus on acknowledging energy interdependence. “Like it or not, the fates of the United States and Saudi Arabia are connected and will remain so for decades to come.”
Pointing to the Saudi oil policy, consistent for the last 30 years, endeavoring for stability in the global energy markets, Prince Turki points out: “Today, a barrel of oil generally costs around $70. To put this into context, we should recall that even during the spike of 1973, the price of oil in 2008 dollars was just slightly over $100.”
Then he goes on to summarize Saudi efforts in stabilizing this market: “Following the irrational and unsustainable price spike of the past few years, Saudi Arabia undertook investments to make sure the world would not be surprised by such a supply failure again. After investing almost $100 billion to reach 12.5 million barrels per day of sustained capacity, today we hold about 4.5 million barrels per day of spare capacity (or more than 90 percent of the global total), enough to replace the second- and third-largest OPEC producers overnight if the world needed more oil.”
Enumerating the reason(s) behind the huge spikes the crude markets have faced over the last 12 to 13 months, Prince Turki underlines the sad — though extremely important — fact that four major oil-producing countries have in the meantime failed to live up to production expectations. “In 1998, Iran, Iraq, Nigeria, and Venezuela were producing 12.7 million barrels per day. Everyone — including major companies such as BP and our own planners at Saudi Aramco — expected them to be producing 18.4 million barrels per day in 2008. Instead, due to civil strife, failed investments, or in the case of Iraq, a US invasion, they were producing only 10.2 million barrels per day. That drove the price part of the way up. Then speculators, in the form of hedge funds, did the rest. Another factor in rising oil prices is the shortage in the world’s refining capacity. In the US, for example, not one new refinery has been built in more than 30 years. Add to this problem another: “boutique oil,” the different grades of gasoline required in different localities.”
There are indeed many causes behind last year’s oil price spike, but Saudi Arabia is not one of them. Yet the fact remains, this battle of ensuring continuity of supplies at a fair price cannot be won single-handedly. It needs support from all. However, in the wake of current political rhetoric, the environment is counterproductive to this entire process. We need to overcome that.
If the demand picture is not clear, no one could be pushed to invest in the sector. This could mean disaster for the mankind. And there is a limit for Riyadh too, in the direction. The global gas station too needs to invest in projects that are only economically feasible, one need to concede.
And as Prince Turki points out, “US politicians (and indeed others too) must muster the courage to scrap the fable of energy independence once and for all. If they continue to lead their people toward the mirage of independence and forsake the oasis of interdependence and cooperation, only disaster will result.”
Do the current leaders have the courage to get over the mirage of energy independence and speak out the truth? History is judging us!
