US, Saudi energy officials see need for cooperation

May 8, 2006
Oil-producing and consuming countries must cooperate to effectively and economically meet the world’s growing oil demand, top energy officials from Saudi Arabia and the US agreed at a Center for Strategic and International Studies forum.

Oil-producing and consuming countries must cooperate to effectively and economically meet the world’s growing oil demand, top energy officials from Saudi Arabia and the US agreed at a Center for Strategic and International Studies forum. But the officials differed on the extent to which alternative fuels should be expected to help.

“It benefits the world to begin research on alternative fuels, at least on those that go hand-in-hand with hydrocarbons,” said Ali Ibrahim al-Naimi, Saudi Arabia’s petroleum and minerals minister.

But he warned against mandating alternatives. “Oil remains the most cost-efficient source of transportation fuel. Forcing consumers to switch away from it will cost them more money,” he said.

Noting that US President George W. Bush has set a goal for domestic ethanol production to reach 5 million b/d by 2025, US Energy Sec. Samuel W. Bodman said that would represent only 20% of projected US petroleum consumption for transportation at that time. “The president’s call to develop new alternatives will take pressure off of traditional energy supplies,” he said. “It is in the mutual interest of all nations to diversify their energy portfolios and include more alternatives.”

Both officials emphasized increasing cooperation between producing and consuming countries and said no one benefits for long from dramatically higher prices. Naimi declared, “We must act decisively. The current path will continue a boom-and-bust cycle that discourages economic growth.”

Promoting security

The goal should be to promote energy security for both producers and consumers, he said.

“Producers undermine their own security when consumers can’t afford their products. Long-term energy security must be a win-win situation. That means prices must be higher than many consumers like and lower than some producers desire,” he said.

Bodman said that in times of tight markets and high prices, communication is essential. The public needs to understand that both Saudi Arabia and the US are working to reduce prices and increase supplies.

“The tight market reveals the need to expand the world’s oil infrastructure more than ever. Fearing disruptions, some market participants try to assure they’ll meet demand by building inventories. That creates more pressure on prices,” he said.

Asked what the maximum tolerable oil price would be for the US, Bodman was not willing to speculate. “We have a very strong economy in this country. For many individuals and families, however, prices are beyond what we’ve seen historically,” he said. “They can’t afford today’s prices, let alone prices that might be created in the future. We simply have to work together to take pressure off the markets.”

Naimi said Saudi Arabia spends $20 billion/year to maintain production and expand output. “Oil markets are international. Whether you’re first, second, or fourth as a country’s foreign supplier is irrelevant. What matters is to supply the international market,” he said.

He said the world faces four essential oil challenges: (1) improving market data, (2) removing delivery constraints, (3) making the energy infrastructure more secure, and (4) making supply systems more flexible with adequate spare capacity.

“There is no question that there’s concern about what’s going to happen in Iraq with its capacity to produce more oil from its reserves. The same is true of Iran. People are aware that supplies are meeting demand today. The fear is about tomorrow,” Naimi said.

Failure to invest

Bodman noted that Cambridge Energy Research Associates Chairman Daniel Yergin estimates that lack of investment in Nigeria, Venezuela, and Russia as well as the Middle East has reduced oil production worldwide by 2 million b/d.

“That may be conservative. There may be a limit to supply. There is a perception of concern about what’s going to happen in the future,” he added.

When former US Energy Sec. James Schlesinger, who moderated the forum, asked the officials for their views of concerns that the world is approaching an oil production peak, Naimi replied, “I believe there are at least 14 trillion bbl of reserves left, 7 trillion of which are conventional. With advancing technology, we’ll produce more of it.”

Bodman said: “Eventually, we’ll run out of it. We had peak oil production in the US in 1970, and it’s been declining ever since. I am comfortable that the nations which supply our country are working hard to keep oil coming to the marketplace.”

Schlesinger said M. King Hubbert’s theory about peak oil and depletion, while technically sound, failed to consider developing technology, availability of tar sands, and other near-substitutes, and the impact of higher prices on increased production.

Nevertheless, he said, the idea that the world’s crude oil supplies are finite should not be disregarded.