Saudi whining. how cool

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Oct 16, 2009 7:58 pm

Saudi Minister Urges Caution on Renewable Energy


Bloomberg News

“We frankly court disaster if these supplemental resources on which such high hopes for energy security and sustainability are pinned do not fulfill the high expectations,” said Ali Al-Naimi, the Saudi oil minister, at a conference last week.

Fears about energy security, and last year’s oil price spike, have sparked a serious push for renewable energy in the United States, the world’s largest oil consumer.

The trend is apparently making the world’s largest oil producer, Saudi Arabia, nervous.

Speaking at a major energy conference earlier this month, Ali Al-Naimi, the Saudi oil minister, offered an impassioned defense of oil, which he called “an enabler of progress and prosperity.” He cautioned that the current economic crisis — and the uncertainties over future oil consumption — could force producers to trim their supplies, and hence could cause a new price shock.

Mr. Naimi also offered his strongest public criticism against the drive for alternative fuels — which he referred to as “supplemental” energy — and the inconsistent policies of consuming countries. Although he never once mentioned either the United States or President Obama by name, these were clearly his targets.

But as I listened to the speech carefully again this week, it also struck me as one of the most important discourses on the economics of petroleum made by a senior oil official in recent times.

A video of the session is available here — though it takes a while to get through other speakers. (The relevant parts start around the ninth minute and last about 20 minutes.)

Mr. Al-Naimi, without doubt the most influential spokesman for the petroleum industry, began his address by praising the virtues of oil, the mainstay of the Saudi economy for 60 years.

“Oil is expected to retain its leading position as the world’s largest single source of energy,” Mr Al-Naimi said.

Like a growing chorus of producers and analysts warning of looming price increases, Mr. Al-Naimi said that oil prices could spike again since producers are curbing their investments as oil demand falls.

“In such an uncertain demand environment, long-range petroleum industry initiatives suffer,” he said. “Inconsistencies and unknowns are not conducive to future investments, when long-term, capital-intensive industries require a good financial return and stable prices, as well as clarity of future demand.”

But his speech took an uncharacteristically blunt turn after that. He essentially said that policies to develop alternative fuels, such as ethanol, could make matters worse by creating huge uncertainties about future energy demand:

While volatile energy prices have heightened interest in the development of other sources of energy called by some alternatives, but in my opinion, they should be called supplemental. These sources cannot contribute meaningfully to the world’s energy mix until they have attained levels of affordability, accessibility, acceptance and sustainability.

We frankly court disaster if these supplemental resources on which such high hopes for energy security and sustainability are pinned do not fulfill the high expectations. While all viable energies will ultimately have a role in meeting world demand, many of these sources are either in their infancy or face too many unresolved sustainability issues to serve as more than supplemental resources for some time. Just as the oil industry needs a long-term horizon, so do many alternatives.

Then came the kicker:

“In years to come,” Mr. Al-Naimi said, “if traditional energy supplies should prove inadequate because capital expenditure was curtailed due to unsustainable prices, unreliable indications of future demand, or hopes for a substitute for oil cannot deliver, such a supply crunch would be catastrophic.”

It’s not the first time that a Saudi official has expressed exasperation at American energy policies. The Saudis believe they have acted responsibly in recent years, spending $70 billion on the Kingdom’s largest capacity-expansion program, and increasing production whenever the market needed more oil.

But producers also need certainty about future consumption in order to invest in long-term projects. Saudi Arabia has 260 billion barrels of proven reserves, enough to keep pumping oil for the next 89 years at today’s rate of production.

The greatest fear for producers, especially one with such long reserve life, is if the world moves away from oil well before Saudi Arabia runs out of the stuff. As a former Saudi minister once famously said – the stone age did not end because the world ran out of stones.

So, what do you think: Is Mr. Naimi worried about the future of Saudi Arabia’s future oil wealth, or is he issuing a genuine warning about how difficult it is to switch away from oil?