Stability and survival.
In a world of volatility and new challenges, those two words capture today’s message for the industry, a perspective delivered recently in Houston by Ali Ibrahim al-Naimi, Saudi Arabia’s minister of petroleum and mineral resources and former OPEC president.
Al-Naimi made the comments – and others – during a talk at the Cambridge Energy Research Associates’ annual CERA Week event, a gathering that attracted a prestigious assemblage of heavy hitters from around the world.
Al-Naimi drew a packed house for his dinner presentation that focused on the need to achieve energy market stability during today’s uncertain environment.
“A year ago, we were riding the crest of a wave of rising commodity prices, asset values and wealth creation that appeared unstoppable,” al-Naimi said. “Today, as we ponder the horrific consequences and the terrible swiftness and scope of the collapse, we know now that what we saw then was not unstoppable but rather unsustainable.
“These dramatic swings of fortune were clearly reflected in the price of oil,” he said, “and I think we can all agree that the volatility of oil prices over the past year was detrimental to the interests of producers, consumers and the like.
“We (all) share a common interest in energy market stability because it is critical to our economic success,” al-Naimi emphasized.
“Whereas the recent past was all about high risk and high returns, the present focus is on stability and survival.”
Market stability is enhanced via four conditions, he noted:
- Oil prices sufficiently low to facilitate economic growth, especially in low income developing countries.
- Prices high enough to provide a level of return to producers to ensure adequate and timely investment.
- Prices at a sufficiently high level to provide incentive for consumers to use oil in an efficient manner.
- Prices at levels that encourage production from marginal fields, non-conventional sources and renewables.
Geopolitics, weather and natural disasters are known triggers for oil price volatility. Yet “newly emerging challenges” also contributed to last year’s wild price swings.
Three of these challenges, he said, deserve special attention:
- First, globalization has served to internationalize capital markets, rendering national borders irrelevant as huge sums of money move unimpeded worldwide seeking the best returns. Each day, trillions of dollars are moved into and out of markets globally with just a mouse click.
Complexity of the financial transactions has increased along with the speed, making it extremely difficult for any one player – or even a group of players – to influence the markets and promote stability.
- Another emerging challenge contributing to volatility is the striking increase in the financial community’s interest in oil and energy as an asset class. Investors’ strategies have become highly sophisticated – oil even became a popular mechanism to hedge the value of the dollar.
Al-Naimi stated that the extraordinarily high prices during last summer were in large part a reflection of the strength of the prevailing bullish market psychology of investors. He anticipates continued volatility with the exaggerated weakness in price, declaring prices will be just as unsustainable at the current low levels as they were at the unprecedented high levels experienced last year.
This could be the harbinger of a significant problem down the road, as ongoing volatility will impede adequate and timely investment in the energy sector.
“It is a condition that is detrimental to decision making and investment planning by producers and consumers alike,” al-Naimi said. “If today’s low prices continue long enough, they will sow the seeds for future price spikes and volatility.”
- Al-Naimi said climate change will have a profound impact on redefining the role of governments and government intervention in energy markets.
“Perhaps more than any other issue we face, addressing climate change in an economically sound manner demands that we work cooperatively to find solutions,” he said. “It is clear that the policies of one country to reduce emissions will have little impact if its actions are not taken in concert with the rest of the world.
“Likewise, energy stability must be addressed globally and with broad cooperation,” al-Naimi noted.
He acknowledged the world will likely transition away from the current fuel-based energy economy, emphasizing that no one yet knows which fuels or technologies will emerge. Nor is it possible to predict how long the transition will require.
A successful energy strategy will include efforts to increase the contribution of alternative fuels, but caution is imperative given that scale is critical in the massive global energy system.
“The existing oil delivery system is highly efficient and economical, and the cost of rapidly replacing it with alternatives would be prohibitive,” al-Naimi said. “A prudent approach demands that we recognize that the massive scale of the global energy system makes rapid change costly and impractical.”
Walking on Sunshine
While acknowledging the need to push forward with development of alternatives, al-Naimi emphasized it’s important to be mindful that efforts to rapidly promote alternatives could have a chilling effect on oil sector investment.
“Growing demand uncertainty increases producers’ perceptions of investment,” he said. “A nightmare scenario would be created if alternative energy supplies fail to meet overly optimistic expectations, while traditional energy suppliers scale back investment due to expectations of declining demand for their products.
“The prospects of supply constraints would grow along with the potential for higher energy prices and lower economic growth,” al-Naimi noted.
Regarding the need to develop alternatives, it may come as a surprise to many folks that Saudi Arabia already is at work on this initiative.
Think sun, for instance.
The Kingdom is not only awash with petroleum resources, it has copious quantities of sunshine that it intends to harness productively.
“We are investing substantial research funds to achieve our goal of one day becoming the world’s largest exporter of clean energy in the form of electricity produced from our most abundant resource,” al-Naimi said, “sunlight.”