An Arab Perspective on Security of Demand

Oil Scene

By Syed Rashid Husain

Oil business is both volatile and slippery, one has to concede, as oil prices get an unusual beating. Prices have gone down by an unprecedented almost 25 percent since July. Markets fundamentals appear to be finally in firm control — for the first time in many months — underlining the fact that security needs to be two ways. If the consumers clamor for security of supplies, suppliers have an equal right to insist on demand security as vital — to keep pace with the global crude requirements. To keep the markets well supplied, balanced and stable, security is of paramount importance — both ways, one has to concede.

Oil Minister Ali Al-Naimi first brought to fore the issue of demand security. While addressing a meeting of energy ministers and senior officials in Riyadh, at a conference held under the auspices of the International Energy Forum, conceding the importance of supply security to the consumers, Naimi raised the question of demand security too, as a vital component of the overall global energy balance. Now other major energy suppliers are also highlighting their concerns. Russia overtook Saudi Arabia as the largest global crude producer over the last few months. It is now expressing worries about the impact of the ongoing debate all around about cutting down the global dependence on fossil fuel.

While taking questions form an international group of Russia-watchers, over an elaborate lunch at his official residence near Moscow, earlier the month, Russian President Putin said Moscow wanted long-term contracts. Just as suppliers had to pledge continuity for the long term, “so that customers should also not be able to turn around and say ‘we don’t need it now’. Security works both ways. We need assurances, too,” Putin argued.

Oil is a costly business. Things need to be planned in advance. The gestation period for any energy related project is long. Hence signals that discourage investors from making rights investments at the right place and at the right time, could have detrimental and disastrous consequences. Hence when major oil producers that attempt to curb energy use may have an economic impact that could damage the world’s energy future, they are absolutely on target.

While the world does need continued improvement in energy efficiency, some government policies, which artificially curtail demand and create demand uncertainties, irrespective of the emerging signals from the market, would have economic ramifications that could jeopardize the global energy future.

There is an almost consensus within the industry that, despite all that is being said, fossil fuel would continue to be the most preferred energy option for many more decades to come. Virtually all the studies and reports concur in saying that the dependence on crude, and hence this volatile region, would continue to grow in absolute terms in the decades to come.

The Energy Information Administration, the statistical arm of the US Department of Energy projects the global crude consumption to soar by 37 percent — from the current 86 million bpd to almost 118 million bpd by 2030. And the EIA concedes that the OPEC will provide a large chunk of the additional oil supplies that will be needed to meet the global demand in 2030. According to the International Energy Agency, the OECD energy watchdog, the global energy consumption could go up by over 50 percent between now and 2030. The IEA however, insists that though the world has enough resources to meet the surge in demand, investment of a whooping $17 trillion will be needed to bring these resources to consumers.

According to the IEA, the Middle East and the North African region would still be the major energy provider to the world in 2030. From current approximately 29 million bpd, the supplies from the region would go up to 50.5 million bpd, as more than 60 percent of the proven oil reserves are in this region, IEA chief economist Dr. Fatih Birol argues. According to Birol, provided other constants remain same, an estimated $1.5 trillion — $56 billion per year — is required to be invested until 2030 in the sector in this region alone.

Saudi Arabia, the king pin would need to invest some $174 billion in the sector by 2030 and 80 percent of it would have to be in the upstream sector, as the call on Saudi crude is projected to go up to 18 million barrels a day from the current output of around 9.5 million bpd. Saudi Arabia has already announced plans to invest $70 billion in its oil and gas infrastructure over the next five years. The plan envisages to raise output to 12.5 million barrels a day by 2009. Other countries of the region also intend to invest around $24 billion in their oil and gas infrastructure.

Russia also is planning to exploit its energy riches to maximum. Putin rightly says, “We have huge energy potential that is still underestimated.” Reports from Moscow say, Russia is planning to invest some $70 billion in its aging energy infrastructure. But for all this investment to materialize and even attract new resources in the still untapped regions and areas, so as to meet the growing global energy needs in the short to medium term, proper investment climate is required. And in the presence of all sort of negative remarks, and clouds hanging over the actual demand over the next decades, the type of investments required in the sector may not be forthcoming.

This could be simply disastrous for the overall health of the global economy. Wolf mongering would not be of any help. Calls of ‘wolf coming, wolf coming’ are grave threat to energy security and need to be avoided — at all cost.

Syed Rashid Husain is a prolific journalist and is a contributor to Arab News for this article