No Imminent Crisis in Global Oil Supplies

No Imminent Crisis in Global Oil Supplies

  • 23 November 2009

In this exclusive interview conducted on the sidelines of ECSSR 15th Annual Energy Conference (November 16-18), Dr. Mohammed Al-Sahlawi, Professor of Energy Economics at the King Fahd University of Petroleum and Minerals (KFUPM), Saudi Arabia, highlights several issues related to energy security. He talks about oil supply crunch, threat to energy security, interdependence between oil producers and consumers, pricing and its link to the US dollar. Dr Al-Sahlawi also discussed the future of renewable energy and its repercussions on the Gulf region. Excerpts from the interview:

Q1: Some recent reports have indicated the likelihood of a crunch in global oil supplies. Do you agree with these reports and what will be its economic impact?

A: Security of oil supplies is an important subject and will depend on the investment made for excavation of oil and development of fields in traditional production areas such as Gulf and others. I believe one of the main reasons behind last year’s oil price rise was many producing countries’ failure to satisfy market needs. Luckily, Saudi Arabia used part of its financial surplus from high oil prices to enhance production in its existing oil fields. We should, however, not ignore that the security of supplies is linked to ensuring demand for oil. We expect large rise in demand, especially from China, India and countries of the Far East. But the balance between demand and supply will not happen in the current instable state of the economy. There must be a stable and reasonable oil price because fluctuating prices cause negative impact on supplies. As far as reports on oil crunch is concerned I can confirm that fuel supplies are not faced with any imminent crisis. On the other hand, rise in oil prices will enable producers to invest in the industries that follow the oil sector.

Q2: How has changing energy policies in major oil consuming counties affected the Gulf region?

A: This is also linked to the security of demand. Energy policies in major oil consuming countries have been focused on legislations like the tax system and on the environment and climate change issues that negatively impacts energy demand and supplies. While formulating their energy policies the oil consuming countries, especially those in Europe and North America, must carefully balance rising demand with revenues from its taxation system in a manner that is not unfair to the producing countries. Officials in these countries say they have formulated these policies and legislations to decrease dependence on imported oil and to encourage use of renewable energy. However I reckon such statements are for local consumption and are a kind of political maneuvering. The truth is these countries cannot do without oil. As much as 70 percent of energy consumption in Europe comes from fossil fuel. Their fuel resources are limited and consequently they depend largely on the Gulf oil.

Q3: How can interdependence be the key to energy security when producing and consuming countries pursue independent policies?

A: Interdependence is the key to energy security be it on the level of each country or on regional and international levels. It has been proved beyond doubt that energy security can only be achieved through cooperation between producers and consumers in areas of investment, pricing, technology transfer or open trade between oil industries. I believe if there was a clear understanding of interdependence the big surge in oil prices last year would not have happened. The lack of understanding of interdependence, especially between producers and consumers, was behind those competitive or conflicting policies in the international energy markets.

Q4: Is there an agreement on a specific price preference among the GCC countries?

A: The mechanism of supply and demand is the one that defines oil price. It is true that there are other factors that affect one way or the other. They are dollar exchange rate, inflation levels, interest rates, political climate and speculation. However, the oil price remains under the control of market forces. As far as the price preferences in the Gulf is concerned, they want a reasonable price. I think a price between $60 and $80 is reasonable and realistic and represents a balance between supply and demand.

Q5: Can you shed light on how oil revenues are being managed in the Gulf countries?

A: We must not ignore that mistakes have been made in the past in financial planning and investment, especially with regard to investments outside the region. But there is a positive aspect to it as well. A part of those revenues has also been used to widen the production base, diversify revenue sources, expanding refineries, petrochemicals and other auxiliary industries, and to build human capital. In my opinion, we must invest on human capital, especially in building experienced and qualified personnel in the oil sector, and in expanding the production base. I also want to emphasize that building a national workforce in the oil sector must be on top of the agendas of the political and economic planners in the Gulf. They must also facilitate technology transfer from consuming countries and link it with oil supply security. They should seek to indigenize technology and encourage nationals to contribute in its various fields.

Q6: What has been the impact of declining American dollar on energy pricing? Should the Gulf countries disengage oil trade with the dollar?

A: The subject of oil pricing in dollar has been one of the most controversial in recent times. Some analysts wonder why Gulf countries continue to price oil in American dollar despite huge losses resulting from its decline in recent years. In real terms, when the dollar value decreases the actual value of the oil revenues decreases and this reflects on the political and economical stability of oil producing countries thereby effecting investments for expanding capacities. Historically, OPEC countries have continued to price oil in dollars despite the dollar fluctuating from time to time. But pricing oil in another currency, like the Euro for example, is not the solution because they can fluctuate as well and this will not solve the problem of lower purchasing power of the producing countries especially when those currencies go down compared to the dollar. Proposing a basket of currencies to price oil could have many obstacles. The first is how to manage it. The second is that this basket could also be unstable because the trade balance and commercial exchange rates between oil producing and oil consuming countries are changing continuously. Also international oil trade requires a lot of liquidity which is not available in any other currency except the dollar and the United States is the largest consumer of oil in the world and the largest trade partner of the Gulf countries. Because of all this, the dollar will not be replaced by another currency for oil pricing in the near future.

Q7: How do you evaluate the role of renewable energy in global energy security? How do you view the UAE experience in this regard?

A: In my opinion, renewable energy is the future. However, the interest in it should not be at the expense of the traditional fossil fuel. Renewable energy has its positive and negative aspects in addition to being very costly. It represents around 10 percent of the international energy mixture. I believe the UAE has adopted a far-sighted approach in this field and this will contribute to its energy security. The country’s long-term vision must be commended because in a distant future, when traditional energy gets depleted, knowledge and use of renewable energy will be very useful.