Saudi energy minister says oil glut has vanished
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“We are out of it,” Khalid Al-Falih said in his first newspaper interview since his rise to the most powerful job in the global energy industry last month. “The oversupply has disappeared. We just have to carry the overhang of inventory for a while until the system works it out.”
Two years and day after U.S. oil price peaked at $107 barrel, he sketched out the end of the world’s oil surplus and the beginning of a new chapter in the cyclical energy business in an exclusive interview with the Houston Chronicle.
Prices tumbled as low as $26 a barrel in February in the biggest oil-market crash since the 1980’s. Texas alone has lost 100,000 jobs since the slide in prices began in the summer of 2014. But countries like India and parts of Asia have a bigger appetite for oil now, Falih said, while crude production in the United States, Nigeria and other regions has fallen, closing the 1 million-barrel a day gap between supply and demand.
The first phase of a long-anticipated industry recovery is underway as refineries on the Gulf Coast and around the world work through storage tanks of crude oil. The United States has a near-record stockpile of more than 530 million barrels, which could take months to cut down.
“The question now is how fast you will work off the global inventory overhang,” said Falih, who serves as chairman of Saudi Aramco, the company that produces one out of eight barrels of oil the world consumes every day. “That will remain to put a cap on the rate at which oil prices recover. We just have to wait for the second half of the year and next year to see how that works out.”
Boom and busts
In the first half of the decade, shale drillers in Texas and North Dakota put fracking in the nation’s lexicon and led the United States to its biggest oil boom since the 1970s. But oil markets eventually became overstuffed as producers pumped more than 1 million barrels than the world needed each day.
For Saudi Arabia and other OPEC nations, the surge in U.S. oil production proved shale drillers could respond faster to high crude prices than all but the lowest-cost producers – “a game-changer,” Falih said, in the way the Organization of Petroleum Exporting Countries manages oil markets. Since November 2014, Saudi Arabia has refused calls by other OPEC nations to resume its role as the world’s swing producer and cut its oil production in a bid to stabilize falling crude prices.
“The tools that OPEC has used in the past – targeting specific prices – have not always worked in the long term,” Falih said. “They create market dislocations that ultimately hurt producers and consumers.”
The Kingdom, which can profit off of oil even at low prices, opted to let market forces weed out higher-cost producers. U.S. oil production, driven by higher-cost shale plays, has dropped by more than half a million barrels a day since early 2015 and nearly 80 drillers have gone bankrupt.”No matter what we do, ultimately markets win,” Falih said.
Saudi Arabia’s financial reserves have also declined as it collects less oil revenue, but it’s in better shape than many of its rivals. The government is planning a series of reforms and investments to expand other parts of its economy outside of oil production, including tourism, services, mining, petrochemicals, even renewable energy.
One goal of the plan, which Saudi officials call Saudi Vision 2030, is to bring its non-oil exports up from 16 percent to half of the exports it offers the world over the next decade. Deputy Crown Prince Mohammad bid Salman has said the Kingdom is striving to be able to live without oil by 2020 – a mere four years. The comment “impress on the urgency that this needs to happen quickly and it needs to happen now,” Falih said.
“But nobody has the intention of turning off the oil economy in Saudi Arabia,” Falih said. “We’re trying to build it up. But what we hope while we’re doing this is the non-oil economy will grow even faster.”
It’s a big play for the world’s biggest oil producing country and some observers of the closely guarded Kingdom have wondered if it reflects anxiety over the possibility the world’s oil and gas demand will eventually peak amid global efforts to limit rising temperatures by moving the world from combustion engines to electric vehicles – making the Kingdom’s number one export a relic of a bygone age.
Some industry players, including major oil companies like Statoil,believe it will take much more than the Paris climate accords signed last year to thwart the worst effects of climate change, including much tighter emissions rules for vehicles and massive growth of solar and wind power in electricity generation and a sharp reduction in coal production.
But Al-Falih said Saudi Aramco is still investing heavily in maintaining the Kingdom’s capacity of 12.5 million barrels a day because Saudi officials believe global economic growth will continue to support rising energy demand of about 1.5 million barrels a day annually.
Even as it pumps 10 million barrels of crude a day, he said, the world’s largest oil company is working to offset natural declines in its spare oil production capacity so it’s ready to meet demand if supplies drop somewhere else in the world.
That’s because Saudi Arabia, he said, isn’t too worried about big changes in the world’s energy mix. Unlike quickly evolving information technology, global energy systems take decades to build, and while the Kingdom plans to invest in renewable energy resources, it also recognizes “any transition is going to take decades.”
“We’re going to invest in making it happen. We’re not afraid of it, but we’re also realists and we know that oil will be a significant part of the energy mix for decades to come,” Falih said. “Even if the share of oil goes down from, say, 30 to 25 percent, 25 percent of a much bigger global demand means a much higher absolute number of barrels that will be in demand by 2030 or 2040.”
So while electric vehicles could one day make serious inroads in transportation, because of sheer demographic and economic growth in coming years, “we believe overall demand for petroleum in transportation and petrochemicals is going to rise for a long time before it starts falling in absolute numbers. Yes, we know it will fall in percentage terms – but very gradually.”
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