Saudi Energy Reform and International Oil Markets
These remarks were delivered on April 19, 2018 at the International Oil Summit in Paris by AGSIW Board Member Ibrahim Al-Muhanna.
It is good to be back in Paris and to return to this distinguished energy summit. I would like first to express my thanks and appreciation to Pierre Terzian and Said Nachet for inviting me to participate in this annual gathering.
Ladies and gentlemen, today I would like to talk briefly about three subjects: the reform of Saudi Arabia’s energy sector, the international oil market, and finally, my personal opinion about the oil market, including oil prices. I will start with the reform of the Saudi energy sector.
As you know, Saudi Arabia started three years ago to restructure the economy, including the energy sector. The goals are to reduce the Saudi economy’s heavy dependence on oil, diversify both national income and government revenues, and to have more efficient and transparent organizations, including privatizing different activities. In the energy sector, it includes many areas such as Aramco’s IPO and increasing the use of natural gas for utilities. Today I will look at four reform areas that affect the consumption pattern inside Saudi Arabia. These include the following:
First, the Saudi Energy Efficiency Center – this center started seven years ago and focuses on many aspects, including cars, efficiency, electronic appliances, air conditioning, building codes, and much more. Besides saving energy for households, the program will improve the quality of energy equipment and increase safety standards. It should conserve about 1.5 million BOE [barrels of oil equivalent] per day by the year 2030.
Second, restructuring domestic energy prices and eliminating, or reducing, subsides. For example, this year the price of gasoline has increased significantly and the price of electricity also has increased. Higher prices will reduce waste and poor consumption habits and diversify government income.
Third, using renewable and clean energy sources: mainly wind, solar, and nuclear. I am sure that you are familiar with the new solar energy projects signed last month, which in the long run, will meet about half of projected Saudi electricity consumption. This should make Saudi Arabia a major producer of solar energy in the world.
Fourth, the government is in discussion currently with some countries regarding the construction of nuclear energy facilities, which will make it an important part of our energy mix.
These four initiatives will have a clear impact on Saudi Arabia’s economy in general, and energy in particular. They are already starting to have an impact. For example, Saudi energy consumption growth has been going down from 5 – 6 percent during the last 20 years to about 3 percent this year and is projected to fall further in the coming years. While the slow economic growth has contributed to recent lower energy growth rates, changing energy prices and a focus on efficiency have also had an impact. We might even reverse the growth, especially when solar energy projects are fully operational. Saudi Arabia used to be one of the highest consumers of oil per capita and in terms of annual growth, but this will not be the case anymore.
This will translate into lower domestic oil use that will free up more oil for export. This is a slow process, but it is definitely good for Saudi Arabia and the international oil market in terms of having more oil from Saudi Arabia available to the market in the long term when needed.
At this point, ladies and gentlemen, I would like to talk about the international oil market, especially in the short and medium term.
No doubt that the Vienna alliance of the 24 oil-producing countries, which started at the beginning of 2017, has succeeded beyond expectations.
Compliance by participating OPEC and non-OPEC countries averaged more than 100 percent over the last 15 months. As a result, commercial oil stocks have been slowly decreasing. They are expected to continue declining during the coming months – even with a continuing increase of oil supply out of non-participating non-OPEC producers, and especially from shale oil.
As you know, oil prices have increased from about $50 per barrel in late 2016 to about $70 today. I believe they will stay firm in the future.
Compliance with the production cut overall is more than perfect. It has exceeded expectations.
The future is also more positive with global demand growth expected to be strong, at about 1.8 MBD [million barrels per day] this year and the same next year. It is driven by strong global economic growth of about 3.8 percent. Oil consumption during the second half of this year will be above 100 MBD for the first time ever. I remember when I joined the Ministry of Energy of Saudi Arabia 30 years ago it was about 50 MBD and Saudi oil production was about five MBD. Today it is about 10 MBD.
Supply will continue growing, from shale oil as well as other sources, but a gap between supply and demand will be about 300 MBD until the end of this year and possibly will continue next year, meaning more drawdown from commercial stocks.
Ladies and gentlemen, I would like to say few words about shale oil.
Last week I was reading about the oil market in the 1980s. They called the increase of oil production from the North Sea the new oil revolution.
It was an exaggeration then and I believe the shale oil revolution is an exaggeration now.
Some people in oil-producing countries as well as others, were frightened in 2013-16 by the “shale oil revolution.” They thought it would permanently change the energy landscape. Some even thought that they should stop shale oil growth though lower prices or other mechanisms.
But we now realize that while shale oil is unique, it is just one additional oil source and like many other new additions the world has seen developed during the last 100 years, it should be welcomed. It will add more depth and diversification to the oil market. Shale oil production is likely to keep growing at about one million barrels a day for the next three to five years but, after that, production growth will become flat or start declining, as we saw with production from the North Sea and other regions.
However, the basic equation of the oil market is demand that exceeds supply. Most of the major price jumps, both up and down, that we have seen during the last 50 years are demand driven. When oil producers adjust their production slightly and temporarily, they can deal with the problem successfully. It all depends on how fast they can adjust their production.
Ladies and gentlemen, my final point is that the coming years and decades are likely to be good for oil. I am an optimist and optimists are right more often than they are wrong.
We will have a balanced oil market with a continuing stock drawdown this year and next. The existing cooperation between oil producers will continue not only this year and next year, but beyond. Actually, the goal is to create a new template for cooperation for the producer alliance. It might be a modification of the format we have today but the basic goal is the same: exchange information and debate different ideas; keep a close eye on the oil market; work together at all levels, experts as well ministers; and meet regularly. They will adjust production if there is a need. The goal is to safeguard the market for the benefit of all. I believe Saudi Arabia and Russia will continue their close cooperation and consultations for many years to come. They will play an important role as the main catalysts and the anchor for the oil market.
Oil prices will continue fluctuating within a reasonable range, but they will not be out of control.
Ladies and gentlemen, before I came here, I was looking at 15 different oil price forecasts for the rest of this year. The lowest is $57 per barrel and the highest is $77.50. Nobody really knows.
Six months ago, I said in Washington that $60 will be the new floor for oil prices for the next six months. I was right. Today, I think the new floor will be $70 for the second half of this year, looking only at the fundamentals and the market perception.
This is my personal opinion and does not reflect in any way the official Saudi point of view.
Again, I am glad to be in Paris and to have the chance to speak before this distinguished and cordial gathering. Thank you very much.
Ibrahim Al-Muhanna is a board member at the Arab Gulf States Institute in Washington.