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Energy and Economic Issues: Official views from Washington and Riyadh

Speakers: Ali Al-Naimi, Minister of Petroleum and Mineral Resources, Kingdom of Saudi Arabia, Alan P. Larson, nder Secretary, Economic, Business, and Agricultural Affairs, U.S. Department of State, Jeff Bingaman, member, U.S. Senate (D-NM); Chairman, Committee on Energy and Natural Resources, U.S. Senate, and Spencer Abraham, Secretary of Energy
Moderator: Alfred C. DeCrane Jr.
April 22, 2002
Council on Foreign Relations

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U.S.-Saudi Energy and Economic Relations in Global Perspective

TRANSCRIPT OF MORNING SESSION

MINISTER ALI AL-NAIMI

MIN. AL-NAIMI: Ladies and gentlemen, good morning. I am very happy, privileged, and honored to be with you today. It's really a great pleasure.

I would like first to express my appreciation to the Council on Foreign Relations and PIRA Foundation for organizing this timely conference. And I would like also to thank the U.S.-Saudi Business Council for their sponsorship.

This is an important conference in terms of timing and topics of discussion, which deal with the U.S.-Saudi petroleum and general economic relations from a global perspective.

Now the ties between the United States and Saudi Arabia go back more than 80 years, before oil was ever discovered in the kingdom. Its roots can be traced back to the period just after World War I, when a new international order was evolving out of the ruins of war. New nations were being born and a new world power, the United States, was in ascendancy.

One of these new nations was Saudi Arabia, which was emerging as a power in its own right in the Middle East. Saudi Arabia's leader, King Abdulaziz, saw in the U.S. a natural ally. Its president, Woodrow Wilson, had called for self-determination for nations at a time when much of the world continued to live under the yoke of European colonization.

With their emergence onto the world stage, both the U.S. and Saudi Arabia began to look outward to establish economic and political ties that would grow with time.

The United States, with no colonial ambitions, and Saudi Arabia, with no formal linkage to the dominant European colonial system, were natural partners.

This partnership was sealed when King Abdulaziz chose an American company to help it develop its oil reserves over the objections of others. And I'm very happy to see Mr. Reilly (sp) sitting in front of me, who represents that company. In the years prior to World War II, oil was the focal point for relations between the U.S. and Saudi Arabia. A concession was granted to the Standard Oil Company of California on May 29th, 1973, and full diplomatic relations were established in November of 1933.

With the advent of World War II, we changed the world once again, and with it, the nature of U.S.-Saudi cooperation. The landmark meeting between King Abdulaziz and President Roosevelt in 1945 marked the opening of a new chapter in U.S.-Saudi relations. Even though Saudi Arabia was not exporting significant oil and its reserves base was still very small, President Roosevelt understood the geopolitical importance of the kingdom. Both leaders came away from that meeting with the realization the vital interests of their two nations were intertwined.

While the breadth and depth of the relationship grew with the challenges of the postwar period, oil always remained at the center of the relationship. At the time President Roosevelt and King Abdulaziz met, the United States had the largest oil reserves worldwide and was the biggest producer and exporter, as well. Few anticipated then the important role the kingdom of Saudi Arabia would eventually assume in supplying the oil needs of the U.S. and the world. The United States became Saudi Arabia's principal trading partner, exporting to the kingdom billions of dollars of goods and services each year while importing from the kingdom a significant portion of the state's crude- oil requirements.

Now while the relationship developed between Saudi Arabia and the United States during the second half of the 20th Century had its roots in shared dependence, it grew into something much more; it became a partnership.

American oil companies and Saudis worked together to find and develop the kingdom's great oil reserves, creating a world-class oil company, Saudi Aramco, in the process.

This partnership created opportunities for thousands of Saudi Arabians to live, study and work in the United States and for thousands of Americans to live and work in the kingdom. A measure of this partnership was evident in the transfer of ownership of the former Arabian American Oil Company's assets from the American partners to the Saudi government. It was completed in timely and orderly fashion, without the rancor that's characterized the nationalization of private companies for using oil assets in other producing countries during the 1960s and '70s.

Another measure of this partnership is Saudi Aramco's tie to the U.S. oil industry. In 1989 it entered into a joint venture with Texaco Inc., later Joined by Shell Oil Company, to form a downstream company that refines about 800,000 barrels per day of crude oil at four refineries. This joint venture, now a partnership, involving Saudi Aramco and Shell and known as Motiva, distributes products to thousands of gasoline stations and other retail outlets in 26 states.

Saudi Arabia's role is important as a provider of significant quantities of oil imports used to fuel the U.S. economy and as a major participant in supplying refined products to U.S. customers through Motiva's joint venture. But the significance of Saudi Arabia to the U.S. economy goes beyond import levels and number of gas stations. As the world dominant oil producer and exporter, Saudi Arabia has been committed to ensuring the stability of the international oil market and the reliability of supplies to the consumers.

Saudi Arabia has also consistently championed the cause of price moderation. In times of crisis, Saudi Arabia has stepped forward to ensure that adequate supplies of oil were available in world markets. This happened in 1979, during the Iranian revolution, when Iranian exports were halted. Again, in 1990, the kingdom increased production to replace oil exports from—to replace oil exports from Iraq and Kuwait, which were lost due to the Iraqi invasion.

And Saudi Arabia was able to provide this protection for the world economies because it has maintained, at considerable expense, large quantities of spare production capacity. I might add that few countries or companies are willing to or perhaps able to bear the cost of such insurance.

Today Saudi Arabia has more than 3-1/2 million barrels per day of excess production capacity. This alone is more than the total output of many other major oil producers and close to half of daily U.S. production. No other country is even close to having this much standby capacity.

Saudi Arabia's policy of maintaining spare production capacity is based on a belief in the desirability and benefits of stable oil prices. Experience shows that energy markets are volatile by nature and that maintaining price stability requires constantly sound management of the supply side of oil. This has been the case since day one of the U.S. oil industry, an industry that experienced more than its share of boom-and-bust cycles. Oil price stability is necessary to encourage a continuous flow of investments into a high- risk business where cost can vary greatly from region to region.

While Saudi Arabia continues to carry the lion's share of managing supply for price stability, the cooperation of other major producers is greatly needed, especially in times of falling demand, as we have seen during the last eight months. Saudi Arabia's objective is to avoid the wrenching swings in prices which harm consumers and producers alike. Our efforts aim to maintain a balance between demand and supply that serves the best interests of all—producer, consumer, and industry.

The careful management of supply and inventory to achieve a stable market condition is obviously important to those who provide and to those who consume. The case is more than clear for the U.S. when we review what happened in recent years. As we painfully recall, the oil market collapsed in 1998. Investments in oil exploration dropped 60 percent, and actual production decreased by half a million barrels a day.

Now had prices continued to languish for two or three more years, the U.S. might be producing only half of what it does today, and its dependence on imported oil might be as high as 70 percent, instead of 50 percent today.

Now stable oil prices and shared prosperity require more than just cooperation among producers on the supply side of the equation; they require the existence of understanding and confidence between both producer and consumers. Today, as producers and consumers, we are reaching towards a far better understanding of codependence.

As you may know, ladies and gentlemen, Saudi Arabia is also working hard establish in Riyadh the secretariat of the International Energy Forum. All the necessary steps to achieve this have been made. About 60 countries and international energy organizations have expressed their support for the project. A diverse group of experts met in Riyadh recently to review the plan to establish the secretariat before it goes for approval to the ministerial meeting of oil producers and consumers in Osaka, Japan, next September. The secretariat will no doubt help establish a solid relationship and common goals among oil producers and consumers, as well as the oil industry at large.

Equally, we have strong and intensive commercial relationships with more than 80 companies all around the world. These ties include joint ventures, crude oil and product sales agreements, construction deals, service contracts, information and expertise exchange, training, and so on.

Within this context, I would like to add something about our relationship with consumers and the major international oil markets. We consider them our most valued assets. As such, we work hard to satisfy their needs, whether in times of want or in times of plenty. More than that, we take a long-term view when it comes to our customers. Sometimes there might be an opportunity for some gain, particularly if a price or supply advantage develops in this or that region.

But Saudi Arabia is not about making the instant profit. Rather, we are more interested in satisfying our customers and building lasting relationships with them. That's our primary goal, and that's why we want to have a consistently strong position in the U.S., European, and Asian markets. We will not jeopardize this stand in favor of opportunistic moves.

Now those who would propagate the myth that Saudi Arabia's importance to the U.S.—or any other trade partner, for that matter—rests solely on its ability to supply oil overlook several other aspects of the kingdom. Saudi Arabia plays a global role in a number of key ways. For one, Saudi Arabia is the cradle of Islam, the site of its two holiest cities, and the focal point of faith for the world's 1.2 billion Muslims.

Occupying most of the Arabian Peninsula, Saudi Arabia is one of the largest countries in the world, almost one-fourth the size of the U.S. and about half the size of Europe. The Arabian Peninsula has for thousands of years been an important culture and trading center. Its geographic location has held a great strategic value for east-west trade and the military. Today, the Saudi market for goods and services is the largest in the Middle East.

But Saudi Arabia is far more than all of this. The kingdom has followed a constructive policy since its establishment more than 70 years ago. It's a policy based on cooperation, respect, justice and understanding.

And now, ladies and gentlemen, let me turn for a minute to a subject about which we in the kingdom are quite excited: the restructuring of Saudi Arabia's economy. Today Saudi Arabia is undertaking an ambitious plan to restructure its economy—a massive effort that will not only bring strong economic growth in the coming years but will also create excellent investment opportunities, including those from the United States. In the energy sector, we have four major initiatives:

One, the gas initiative, where eight multinational oil companies will invest over 25 billion over the next five years in gas exploration and production, as well as power generation, desalination and chemical facilities. And I can assure you that the article in the Wall Street Journal today is inaccurate in its statements. There are no political setbacks in the initiative.

Two, the Ministry of Petroleum and Mineral Resources is working with private Saudi investors to create a holding company that will provide support industries and services to the petroleum and energy sector in Saudi Arabia and beyond. This new holding company will provide the umbrella under which subsidiaries will be created to provide opportunities for international companies to invest in joint venture with Saudi companies.

Three, we are expanding supplies of natural gas for use in the production of petrochemicals. Saudi government hopes to attract private capital for expansion of the petrochemical industry with low feedstock prices. Now to realize this goal, we are building the necessary infrastructure to move gas from the eastern province fields, where it's produced, to industrial sites elsewhere in the kingdom.

For example, within a year, the Yanbu industrial area, in the western part of Saudi Arabia, will be supplied with natural gas from the eastern province. With this new supply of natural gas, methane, which is currently used as fuel, will be made available as feedstock for further growth of the petrochemical industries in Yanbu.

Four, we are working to link Saudi Arabia's mineral resources with our hyrdocarbon resources. For example, one of the most ambitious plans involves building the 1,100-mile railroad into the northern part of the kingdom, to Riyadh in the central part of the country, which will be connected with existing tracks to the Damamm, on the Arabian Gulf.

The northern line will permit Saudi Arabia to exploit phosphate deposits, and they are world-class deposits which are one of the world's largest. The railroad will be used to transport phosphates to the Arabian Gulf with plans utilizing the kingdom's natural gas resources will produce fertilizer. This project will help us realize the goal of becoming a major producer and exporter of fertilizer.

Now these are only a few of the projects the kingdom is undertaking as part of its economic restructuring program. They hold a great promise for the future of Saudi Arabia and for creating excellent opportunities for U.S. and other international companies to invest in the kingdom. Our nation is still young my most standards. And its people are vibrant and eager to develop their potential. This is something we share with Americans, along with a sense of adventure in pursuing economic cooperation.

I believe there are exciting times ahead for us all. We, indeed, have a long history together, the United States and Saudi Arabia. We have built upon a sense of cooperation that enabled our country to establish a world-leading energy-supply capability that today, in some way, benefits everyone in this room. We share common values in advancing peace, productivity and prosperity. I believe that these are values worth keeping and that every effort should be made to strengthen what's right between our respective regions of the world. As business people and as citizens, we have all the resources we need to meet that challenge.

Thank you very much. (Applause.)

END


SENATOR JEFF BINGAMAN

SEN. BINGAMAN: Thank you very much for including me today in your conference. I'll do like the other speakers and commend the Council on Foreign Relations, the other sponsors for the timeliness of this conference. Obviously, they're—we are in a time of increased, heightened political conflict around the world, and it's important, I think, at this point to try to separate, to the extent we can, the issues that are critical to the world's economic recovery from some of these other political conflicts. U.S. and Saudi Arabia have a very natural interest, long-standing interest, in stable energy markets, and that is certainly a precondition or prerequisite if the world economy is to recover, as we all hope it does.

We have seen some dramatic extremes in world oil markets over the last five years. These extremes have wreaked havoc on the economies of producing and exporting countries, as well as on importing countries. Unfortunately, as the world economy has become more integrated, it seems as though oil markets have become more subject to—well, are more volatile, subject to ever greater volatility. Perhaps it's the 24-hour news cycle that we are all on, in watching CNN and other sources of news. Perhaps it's global trading and commodity markets. But it's clear that a single action by one player somewhere in the world can cause the entire market system to respond before anyone knows the real facts that prompted the action in the first place.

For the United States, volatility in oil prices, especially a reduction in oil prices, have now become a major factor, not only affecting oil, but also affecting the supply and price of natural gas. This correlation was suppressed for many years as the United States worked off a large bubble of excess natural gas deliverability. The downturn in world oil prices in '98 and '99 suppressed the drilling for oil and for natural gas in the U.S., and led later to natural gas prices three and four times the previous levels that they were at. With natural gas as a major fuel for power generation and a much larger fuel as we move forward in the U.S. economy, that downturn in world oil prices can be expected to cause ripples in—throughout our entire energy system, as it ripples through natural gas and then electricity as well.

My home state of New Mexico is affected by many of these cycles in the same way that oil-producing countries are affected. The depressed oil markets in the late 1990s took a dramatic toll on many communities in New Mexico as companies consolidated and cut their cost. The state experienced a record number of bankruptcies in the service industry and suffered revenue losses from royalties and income taxes. And when prices finally recovered, the industry was not able to ramp back up to previous levels, due to shortages of skilled labor and shortages of equipment that had been permanently lost in the downturn. Minister Al-Naimi correctly pointed out that had those low prices continued for a longer period, the impact would have been even more severe.

I mentioned the domestic side because I think that discussions of the world oil market often overlook the fact that the U.S. is still a major oil consumer, but also is still a major oil producer. The stability of the world economy is as important to the U.S. as it is to Saudi Arabia on many levels that we do not often discuss.

Obviously, all of us here who have spoken and, I'm sure, all in this room are in agreement that stable oil prices are in everyone's interest, but clearly the answer is not government-mandated or -regulated prices. One factor that can

help substantially in maintaining stable prices is greater transparency into what the real supply-and-demand situation is. I think the importance of this greater transparency cannot be overestimated.

This is—it's obviously easier said than done as—when you start talking about improving transparency of the real market fundamentals. Timely data and information exchange has to involve a great many players—the producers, the governments, the private sector, the traders, consumers—and it is a very major challenge.

U.S., which has fairly sophisticated information systems, through the Energy Information Administration and the various commodity exchanges and the industry surveys, is constantly looking for ways to improve transparent access to market fundamentals. Yet during the last major price downturn we've been discussing here this morning, there were stories and rumors of millions of barrels of missing oil. Producers in the U.S. were concerned that those so-called missing barrels could flood the market at some point and further depress prices. And what became increasingly clear, however, was that the lack of reliable and timely information on world oil supply and demand and stocks was the culprit. When it takes six months to know what is actually happening in a market that experiences minute-by-minute price changes, there's clearly a problem for everybody involved except the speculators.

At the time of those depressed oil prices, the—our committee in the Senate, the Senate Energy Committee, encouraged the administration to initiate a serious effort at improving information reliability and transparency. I understand that progress is being made on this transparency issue through some of these ongoing discussions that Minister Al-Naimi was referring to and Secretary Abraham, as well, as part of the producer-consumer dialogue. The commitment of the U.S. and Saudi Arabia in that process is absolutely crucial.

Continued volatility to the degree that we've experienced it in recent years will only cause further instability and the revenues of exporting countries and private-sector investments and in the economic growth of developing countries, as well. There may be other steps that, in addition to increased transparency, that we can also take to encourage more stable energy prices, I think it's certainly worthwhile to explore any promising ideas in this area in this regard. And I believe this producer-consumer dialogues is a great forum in which to do that.

To make real progress, though, we will need cooperation—continued cooperation. We will need realism. Investments that Saudi Arabia has made in excess capacity are absolutely crucial to market stability. At the same time, the international private sector needs clear longer-term markets signals and short-term-cash-flow stability in order to maintain capability and to ensure ongoing investments in capacity. That applies to the downstream part of the oil sector, as well.

Too often in Congress, we have portrayed—we have been part of the problem, rather than part of the solution. Energy debates have been marked by attempts to score partisan points in larger—some larger political battle, and I'm—I understand that it can be unsettling for the world outside to hear and read about some of our internal debates.

I hope the constancy of the actual policies that are being pursued are recognized and serve to smooth over some of that political rhetoric.

Fundamentally, we all recognize that energy is critical to the world market, to the world economy; that Saudi Arabia is playing a critical role in maintaining stable energy markets; and if the world economy is to prosper, then stable energy markets are an essential prerequisite. Both the U.S. and Saudi Arabia have a major responsibility to the world community to help bring this about.

Thank you again for inviting me. (Applause.)

END


SECRETARY OF ENERGY SPENCER ABRAHAM

SEC. ABRAHAM: Al, thank you very much. I commend you and all the groups who put together today's conference for doing so—the Council on Foreign Relations, the Petroleum Industry Research Foundation, as well as the U.S.-Saudi Business Council. I'm happy to be here.

I commented to Senator Jeff Bingaman, my former colleague and good friend, how much actually we all owe him for my presence today. And to the extent that my presence is of benefit in the first place is that with the energy bill being back on the floor of the Senate for now about our third or fourth week, my plans to be on travel had to be changed. So I have to say that I'm happy to be here, but I'm also particularly happy to be with Senator Bingaman who, notwithstanding the fact we might have some disagreements with respect to this legislation, has done a great job of pushing forward to bring about, ultimately, I hope, the completion of energy legislation. So, Jeff, thanks a lot for your help and support.

I'm also, of course, very happy to be here to both pay my respects and to spend a little bit of time today with my friend, Minister Naimi. We've come to know each other very well and worked together on a number of matters over the last year. In the course of our meetings and conversations, I have quickly come to value his counsel, as well as the strong working relationship which we've developed in a very short period of time. And I've been particularly impressed by his hard work and his efforts to diversify Saudi Arabia's energy infrastructure. Some of the points that he made today I was encouraged to hear about, and the progress that Saudi Arabia has been making in this area.

This conference obviously recognizes, and I think Minister Naimi's comments put in great perspective the close and long-standing working relationship between the United States and Saudi Arabia. That relationship, one of friendship between our nations, has been a bulwark of stability in the Middle East and it is one that has benefitted both nations as well as the rest of the world. We've been partners on many fronts, and as he pointed out, for many decades.

We laid the foundation for our special relationship back in the 1930s when major American companies first began to collaborate with Saudi Arabia on energy issues. We built on that foundation over the years, through World War II, the Cold War and beyond, and that relationship has obviously endured.

Of course, during that time, the role of the Saudi energy minister became increasingly important, and back in the 1970s there became an American counterpart. And so visits between Minister Naimi predecessors and my predecessors at the Department of Energy, of course, became somewhat commonplace.

But I think it was the Gulf War, perhaps more than anything else, that most dramatically demonstrated the importance of our mutual interests. We came to Saudi Arabia's aid when it was threatened with invasion, and Saudi Arabia in turn turned on its tremendous spare production capacity to offset the loss of oil from Iraq and Kuwait, which ensured that adequate supplies and a calming of the oil markets could occur.

Then, of course, came the events of September 11th and its aftermath. I think that Minister Naimi's reassuring statement made the day after those attacks is worth quoting again. He said at that time, "The government of the Kingdom of Saudi Arabia will cooperate with fellow OPEC producers to cover any oil supply shortage following the attacks on the United States."

"The Saudi Arabian government," he went on to say, "gives special importance to the stability of the oil market and to providing constant supplies under all circumstances, in cooperation with OPEC, to cover any shortage that might occur in the market for any reason."

The world, I know, greatly appreciated these commitments, just as we all appreciated Minister Naimi's remarks earlier this month, when he said in response to Iraq's call for an oil embargo against the United States, quote, "Saudi Arabia rejects the use of oil as a political weapon and is committed to stable and fair prices on the oil market."

So I want to take this opportunity, my friend, to thank you and the government of Saudi Arabia for the commitments and reassurances that have come at times of such uncertainty. It is both a heartening gesture of solidarity and a positive signal to the world that oil cannot be wielded and should not be wielded and will not be wielded as a weapon in international disputes. This administration's policy has been to strengthen our own energy security and the shared prosperity of the global economy. The Saudi Arabian government understands the vital importance, as the minister said in his comments, of a reliable and steady supply, and its efforts to minimize any disruptions will benefit not just our two nations, but nations all over the globe.

Having surveyed the past and discussed recent events, I also want to talk a little bit about the future. One thing that's become clear to me, from our conversations over the last year and from the work we've done at our department, is the need for even more dialogue between producer countries and consumer countries. Last year the Saudi government suggested that we improve our producer-consumer discussions. We considered the idea and in fact included it by reference in our national energy plan, which specifically directs us to work to improve dialogue between energy-producing and -consuming nations.

In February of this year—just a few weeks ago, in fact—in a meeting with Minister Naimi, I indicated our support for his proposal to create an informal voluntary secretariat for what is now called the International Energy Forum to further advance and formalize these producer-consumer dialogues. We believe this makes sense, as one part of a broad set of continuing dialogues, and we look forward to working with the IEF to advance our understanding of our respective interests and roles in the world energy market.

Just as we need more dialogue among producers and consumers, we also need more opportunities to develop energy supply. Indeed, the centerpiece of this administration's energy plan is to increase and diversify our international energy relationships. So even as move to further strengthen our relations with Saudi Arabia and other longtime energy partners, we've also been moving ahead on new fronts, as we continue to promote the need for more competitive energy markets. Next month, for example—in fact, in just a few short days—the United States will host the first meeting of G-8 energy ministers in many years. I'll be co-chairing the meeting, and we will be taking that opportunity to share ideas and develop opportunities for increased international cooperation and energy development.

We've also launched with Canada and Mexico the North American Energy Working Group during the past year, which is reviewing ways to further integrate the North American energy market and make it more effective. And we're putting our Western hemisphere Energy Initiative to work with our partners from the rest of the Americas. We, along with those hemispheric partners, aim to create more opportunities for new investment, as well as the development of new energy sources here in the Western hemisphere.

And finally, last fall I had the chance to travel to Russia to be part of the—opening the Caspian Pipeline Consortium. And while I was there, I had the chance to meet with both my counterparts in Russia as well as others in Kazakhstan and other states of the Central Asian region and the Caucuses, all of whom are intent on developing and expanding their vast energy resources. All of those initiatives, discussions and cooperative efforts are aimed at helping to address the projected increase in energy demand in a global market where oil consumption will increase by approximately 45 million barrels of oil a day over the next 20 years.

So opening new sources of supply is critical if we're to meet this increasing worldwide demand. But it's important to note that the development of new sources of supply does not in any way diminish the importance of our existing sources of supply. And as such, new sources, wherever they might be, will not or in any significant sense be seen as an alternative to working closely with all of our partners that we have today and certainly will not affect the close relationship we've built up with Saudi Arabia over so many years to such great mutual benefit.

And so, in carrying out the work ahead, we know that we have no better friends

than Minister Naimi and his government, and for that reason alone, I'm glad to be here to be part of this event. I think it's an excellent opportunity for us to both gain a better understanding of the broadness of the relationships that exist and the opportunities for the future.

I wish you well in your deliberations. Thank you very much. (Applause.)

END


UNDER SECRETARY ALAN P. LARSON

MR. LARSON: Thank you very much, Al, and good morning. It's always complicated to talk about energy policy but it's particularly challenging to do so this morning with the minister of Energy of Saudi Arabia, the U.S. Secretary of Energy and Senator Bingaman. I really welcome the opportunity, though, to be here.

To begin, I'd like to just say a few brief words about the immediate political context. I think we're all aware of the fact that events in the Middle East are taking an enormous toll in human lives lost and families shattered, economic activity frozen. That's why President Bush recently offered a powerful statement of our determination to fight terrorism, to end the violence, and to move towards peace, and why he put forward a vision that entails Israeli and Palestinian states living side by side in peace and security.

We also recognize that Crown Prince Abdullah has put forward a very important peace initiative that represents a courageous vision and is a concrete example of the type of partnership that President Bush values. We're working with Saudi Arabia to realize this vision.

On the subject of energy policy, I really can't think of a more appropriate time for a discussion of the sort that we're having here this morning. We believe that it's very important that there be a secure world energy market. That's why almost a year ago the administration put forward its National Energy Policy Report, which is a comprehensive and balanced look at the energy issues that are facing the United States and the world, along with recommendations for dealing with those initiatives.

This morning I'd like to say just a few words about areas that we are stressing, in particular with a focus on areas where we have shared interests with our friends in Saudi Arabia.

First and foremost, we share an interest in having a stable and reliable international oil market. The National Energy Policy highlights a number of the policies that Saudi Arabia and the United States have taken to improve that stability and reliability. Saudi Arabia, as Minister Naimi mentioned, is not only the world's largest oil exporter, but it also has been a linchpin of supply reliability. It has the largest oil reserves, and its oil policy reflects its economic interest, including maintaining the viability of oil as the world's leading fuel well into the future. The policy of Saudi Arabia of investing in spare oil production capacity and of diversifying its export routes to both coasts has been a very important factor in making clear that Saudi Arabia is a reliable oil supplier and can—and this policy can be likened to really an insurance policy for the world economy.

Similarly, the United States is a very central player in international energy markets. First of all, the United States itself is a leading energy producer. We produced 72 of the 98 quadrillion Btus of energy that we consumed in 1999. We're the world's second- largest producer of natural gas and the third-largest producer of oil. We're virtually self-sufficient in energy resources, except oil, where we import just about 50 percent of our needs.

About half of our imported oil comes from just four countries. Saudi Arabia is always one of those four, and Canada, Venezuela, and Mexico are the other three.

We recognize that energy security begins at home, and that's why we're pursuing the agenda that Secretary Abraham's referred to just a moment ago in his remarks. The national energy policy recognizes that the first step towards a sound and balanced international energy policy is to use our own capabilities at home to produce and process and transport energy resources in an efficient and an environmentally sustainable way.

As the world's largest importer, the United States has borne the cost of significant investments in strategic oil stocks, and the national energy policy report underlines our policy view that these need to be used in the cases of actual physical shortfalls in oil supplies. We've also made the decision to fill the Strategic Petroleum Reserve to its 700 million barrel-a-day—700 million- barrel capacity. And in fact the fill rate currently is close to 150,000 barrels per day.

We work with our friends in the International Energy Agency to also maintain security stocks, so that consuming governments can do their part to provide stability and reliability to the marketplace in the case of a major supply disruption.

Both producers and consumers realize that the use of oil as a political weapon is unacceptable and that the lessons from the past are clear that it does not work, it will not work in the future.

U.S. energy security cannot be achieved in isolation from the world. We enhance our own global security by working with other countries. And we do believe, as the secretary said, that we can deepen our dialogue with major oil producers on information related to the oil market, and that's why we value the initiative of Crown Prince Abdullah to call for deepened producer-consumer understanding.

We also believe that it's important to make investments in the energy sector.

Both producers and consumers benefit from ensuring that supplies and infrastructure are sufficient and flexible to meet growing needs.

Many people would be surprised to learn that a European company is the largest energy producer in the United States and that a Russian firm has required (sic) one of our recognized name brands, Getty, as well as its retailer network. And Saudi Arabia and Venezuela and other major producers hold significant refinery and distribution ventures here.

We believe that this openness to foreign investment has been part of what has made the United States one of the most competitive economies in the world and that it has provided capital and jobs for our people and has contributed to our energy security. We welcome Crown Prince Abdullah's natural-gas initiative, which itself is an important step in reinforcing and deepening ties between producers and consumers and also is a very important move towards opening up the Saudi economy to more foreign investment. We are fully supportive of this initiative, and we look forward to early conclusion of these ongoing negotiations.

The last point I wanted to just touch on is the WTO, because given our close relations with Saudi Arabia and given the important role that it plays in the global economy, we are very eager to see Saudi Arabia take its place in the world community of trading nations by joining the World Trade Organization. The types of policy measures in Saudi Arabia make—that contribute to WTO accession are very, very important in strengthening the resilience of economies. We think that they lead to strong trade and investment regimes. We're very happy to work closely with Saudi Arabia as it pursues its bid to join the WTO.

In conclusion, our long-standing and productive energy relationship with Saudi Arabia is a very good example of the type of cooperation between producers and consumers that's rooted in common interests and is deepened by market forces. We remain very committed to this partnership. Together, the world's two leading energy economies can take the steps that are necessary to advance stability and reliability in the oil market and to support the growth of the world economy, as well as the success of our own national economies.

Thank you. (Applause.)

END


CHAIRMAN ALFRED DECRAINE —Q & A SESSION

ALFRED DECRANE (U.S. chairman, U.S.-Saudi Business Council): Secretary Abraham has a schedule conflict, which is going to require that he leave the meeting at the present time. We have his remarks, and are confident also, Secretary Larson, that some of the activities that were referred to by the Energy secretary in his comments, you'll be able to fill in some of the blanks on that

also.

I would like to ask the panel members to deal with an issue here, as you gather your thoughts that you would like to address to the members of the panel. We have had discussion of transparency, information, various vehicles for providing information, the work which is going on in the Kingdom of Saudi Arabia to establish a center for information, data concerning supply and demand, price ranges and the like.

On the side of continuing supply, the investment around the world in the areas that were described as opening by Secretary Abraham and also by others, Saudi Arabia's own investment. Could there be comments from members of the panel concerning efforts underway to provide a degree of transparency or expansion of the legal systems and political systems under which private investment is brought into and encouraged to back up government investment in energy sources and energy supplies.

You referred, Your Excellency, to the programs which are underway to expand and to open the economy in Saudi Arabia. I wondered whether efforts on the part of the consuming countries to encourage investment guidelines, and openness of investment, and legal systems which protect or define the rights of investors, what efforts encouraging world energy supply are being undertaken in that area?

Secretary, this is part of your responsibility, I believe, at least from the State Department point of view. Could I ask you to comment first?

MR. LARSON: Sure. We have felt, really for the last three decades, that diversification of energy production and supply from around the world was something that was good for both producers and consumers, because it would produce a better balance in the energy supply mix.

We have welcomed the fact that in recent years there has been, I think, heightened interest in many producer countries in having the sort of investment climate that would be more open to private investment. And we have tried to take steps here in the United States to make sure that we were operating an energy policy that was conducive to private investment, certainly private investment from American companies, but as I indicated in my remarks, also private investment from companies whose capital and headquarters are outside the United States.

So this is a trend that we have been pursuing primarily through bilateral discussions with individual producing countries, because it is really an art of persuasion that there's a shared interest in having an investment climate that makes it possible for there to be more production, but also a private investment in that production.

So again, I think that this is something where the trend line has been very positive over the last decade in particular.

MR. DECRANE: Your Excellency, may I anticipate that part of this will be discussed at our luncheon speech by the minister of the national economy? But do you have anything to comment on?

MIN. AL-NAIMI: Yeah. Let me say that also producers suffer from lack of transparency, from lack of accurate information, both on supply, on demand, on level of inventory. All of these are actually guessed at most of the time. And there is progress being made at the energy forums, the consumer-producer dialogue. And one of the tasks, hopefully, of this secretariat is to help in that direction, in making information available and transparent.

On the area of investment, from a—of course, Saudi Arabia is an open economy, and we welcome international investment, and the laws—I'm sure you will be hearing from His Excellency Abd Al-Assaf this afternoon on a number of initiatives there.

But one thing I would like to make clear. The reason we seek stability in the international market, the reason we seek reasonable prices, is to see to it that the industry is able to invest in many areas. And it's a selfish reason, from our perspective.

We want the use—continued use of hydrocarbon to be propagated over time. And if investments are not made, naturally, supplies will be shortchanged, and people begin to look at different and alternative sources of energy, which we feel, as possessors of the greatest hydrocarbon reserves in the world, somewhat disastrous for us. And so there is a reason for encouraging investments worldwide in the pursuit of finding and producing and exporting hydrocarbons.

MR. DECRANE: Senator, you'd commented on a similar issue—knowing something about the price and it being fair to both sides to encourage investment as well as use.

SEN. BINGAMAN: Well, I think—I would just say that we've encountered so many problems here in the United States in recent months in just getting transparency into corporate reporting generally that we're not in a very good position to advise the world on how to solve this problem. But I think we need to underscore our commitment to greater transparency in all sorts of information-gathering and corporate reporting, even though we haven't been a good example.

MR. DECRANE: May I clarify—do we have walking microphones here that are available for—can I turn to the floor, then, to open the discussion for your part, so that you're not here solely as attendees and ask if there are questions from the floor at this point? I used to say, when I came to one of these sessions, that the most difficult thing is the first question, so I'd like to go immediately to the second question—(laughter)—and I see it in the back. And if we could get a microphone to our guest—

Q This is for Mr. Naimi. Iraqi oil exports have been suspended since April the 8th; that's 1.7 million barrels per day off the market.

Is Saudi Arabia going to step in and replace those exports? If so, when? Or so you think there's enough oil on the market at the moment and a replacement is not needed?

MR. DECRANE: Did you get the whole —

MIN. AL-NAIMI: Yeah, I think so. I didn't get the last part, but let me address this issue. I think I have addressed it more than once. And I don't really want to deal specifically with the issue of Iraqi cut in production.

We have made many statements and we have actually said that Saudi Arabia, and also, in addition, the OPEC countries, will make up any shortage in supply due to any reason, whether it is political, military, natural catastrophe, what have you. The question is when do we make the move without destabilizing the market.

We recognize how sensitive the market is and we are watching very carefully the inventory level and supply side. And from our perspective today, I think the inventory level is fairly good. That does not mean a month or two months from now it's going to be good, and we will probably have to take action to increase the supply side. But we need to be careful from taking steps which by themselves create destability in the market. It's not something—you know, one thing we need to know is if these volumes have actually been taken off the market, and we're not going to know that until 40 days from the effective date of reducing or cutting production.

So I will repeat again, that yes, Saudi Arabia is committed, and so is, really, the rest of OPEC. And because of the good relationship we have with non-OPEC major producing countries, I believe we have a working formula for maintaining reasonable supplies.

MR. DECRANE: We have a question here in the front row, to my right.

Q To the U.S. government officials; currently U.S. bans Libyan imports of oil to the United States and Iranian imports of oil to the United States. And now the Senate has just added the Murkowski amendment to the Senate energy bill, and it looks like we could have a very decent chance that we'll be banning Iraqi exports into the United States. Are we limiting our alternatives, is the question, too much?

MR. DECRANE: Senator, would you like to start with that?

SEN. BINGAMAN: Well, I can give you my reaction. I did not support the Murkowski amendment. I think it's difficult to explain how we support the oil-for-food program that the United Nations has put in place, that contemplates exports from Iraq, and at the same time we would support—under this amendment, we would support the prohibition on imports into this country from Iraq. So I don't think it's good policy.

I hope very much that if we are able to get to conference with the House of Representatives on the energy bill that we can see cooler heads prevail and that that provision that not be part of any final bill that might go to the president. That would be my hope. And I don't know what the prospects are. I think the administration position on this is going to prove crucial. There was really—I think part of the reason that amendment was adopted this last Thursday is that we did not have any information from the administration as to their position on the issue. And I think if they will clarify that position, I think we would have a reasonably good chance of seeing that provision deleted from a final bill.

MR. DECRANE: Secretary Larson, could you comment some on that issue?

And we're going to need a microphone on this side of the room; we had a question.

MR. LARSON: Yeah, certainly. I am confident, Senator Bingaman, that we will be there with a position on the Murkowski amendment, and thank you for highlighting the importance of that.

I just wanted to speak about the—really the first half of that question. I think that we would like nothing better than for the circumstances that have led to the ban on imports from Libya and Iran to be changed so that there would be reason to change that. But that hasn't happened yet.

I do think that the fact that we get a fair amount of our oil from this hemisphere, and the fact that we get a substantial part of our imported oil from Saudi Arabia, and the fact there is quite a bit of fungibility and flexibility in the international oil market means that we have not been unduly hampered by these bans on imports from Libya and Iran.

But I do believe that the more that we can do to diversify production in reliable places, the better off we are going to be.

MR. DECRANE: Thank you.

There was a—we have a question here in the second row.

Q Would the members of the panel comment on the impact of developments in Central Asia on the question of price stability and, secondly, non-OPEC members? And I have Russia in mind, in particular.

(Off-mike conferral among panelists.)

MR. DECRANE: (Chuckling.) That falls to you, Mr. Minister.

MIN. AL-NAIMI: Well, let me say that as far as Central Asia, if you're talking about production from the Caspian, we recognize that it is going to be important, maybe not today, but maybe five years from now. We are probably looking at 2 million-plus from that area. And when we look at the total increase in demand in the future, that's really minuscule. Nevertheless, it's an important area, and like other non-OPEC producers, we will definitely work with them and seek their cooperation.

We have succeeded in working with countries like Mexico, Norway, Oman, Angola, and Russia. And of course there is always casting of doubt on intentions or commitments of non-OPEC producers. But remember, the market is more influenced by what is said than what's done.

And that's very important for the stability of the market.

Now some of the volumes that come from here or there, when you look at the total volume of 75-plus million, and somebody is putting another hundred or 200,000—is really nothing. But it's important what is said, as far as commitment is concerned. And that is really what we first of all seek. We hope that the commitment is adhered to, but in the violation of the commitment within the range of a few hundred-thousand barrels per day in a total consumption of over 75 million barrels per day—that's not really very significant. I must say that OPEC has been very successful in getting cooperation from non-OPEC producers because of the recognition that this international oil market must be stabilized for the benefit of all.

MR. DECRANE: There was a question here to my left, in the back.

Q I'd like to ask Minister Al-Naimi what—since we've been talking about stability in the market and reliability, what does he feel has been the impact of the abrupt return of Mr. Chavez in Venezuela?

MIN. AL-NAIMI: (Pause; Minister Al-Naimi sighs; laughter.)

MR. DECRANE: Request noted. (Laughter.)

The answer, it seems to me, is it's part of the transparency. It's been reported that oil prices went up one day, and they went down the next day. I guess that kind of answers the question.

(To Minister Al-Naimi.) Do you have anything you—(chuckles)—you wish to add?

MIN. AL-NAIMI: All I can say is, the hope is the return of Chavez to—back to the presidency I hope is the wish of the people of Venezuela. But as far as the oil market's concerned, he is a supporter of OPEC, and of course, Saudi Arabia is a supporter of OPEC. But what we support in OPEC is moderation and stability of the oil market.

And so in that respect, we pull together to moderate the price to make supplies reliable and, hopefully, avoid—really what we want to avoid are shortage of supply that generates wide swings in prices and threatens investment, steady investment in a very important source of energy.

MR. DECRANE: There was a question here in the front.

Q On Friday, Foreign—please excuse my voice here—Foreign Minister Saud al-Faisal said in Moscow that while Saudi Arabia would not consider using the oil weapon, that they will use it to promote Arab interests in the region. I was hoping that you could further explain what that means, exactly.

MIN. AL-NAIMI: I'm not sure that he said it will be used to promote the interests. What was clear from the statement of His Royal Highness the foreign minister is that oil is not tanks, nor are they missiles or F-16s or anything like that, and really it's an economic source of prosperity for the producing countries. And I don't think any reasonable individual is going to cut his nose to spite his face. So I think that was very clear. I believe what he meant is we will continue to supply the world with its needs and that the revenue of those supplies will be used for the prosperity of the area. That's what I believe he means.

MR. DECRANE: A question in the back here, if we could get the microphone. Thank you.

Q This is again a question for Mr. Naimi. Mr. Minister, in your comments you stressed the enduring U.S.-Saudi relationship and also commented on the role of the Saudi gas initiative in the kingdom's restructuring. Could you give us a brief summary of the status of that initiative, in which a number of American companies are involved?

MIN. AL-NAIMI: Let me first say that I am restrained on discussing details of the gas initiative because of a confidentiality agreement we have between the parties.

Nevertheless, let me say this. It boils down to, eventually, what is the price of a gallon of water, or what is the price of a megawatt hour or a—to the consumer, and what subsidy, if any, will the government pay? In a nutshell, that's where the differences are. Anything else that is being said, such as the recent events or the September 11 events or the events in—between the Israelis and the Palestinians, really have very little influence on the negotiations that are under way.

MR. DECRANE: A question in the very far—

Q (Off mike)—

MR. DECRANE: You clearly need a microphone. (Laughter among panelists.)

Q Some—I'd just ask sort of a long-term—everybody's sort of obsessed with the short term. I'd like to ask the minister to address the long-term picture for OPEC. There are several countries in OPEC—Iran, Algeria, and others—that have—are working to bring on new oil fields and expand capacity. And there is the wild card, long-term, of Iraq's return to the market, through a different sanctions regime or other changes. I'd like to get the minister's opinion on what he thinks that will mean for OPEC in the long term and also what it'll mean for Saudi Arabia's own plans to invest in its own capacity.

MIN. AL-NAIMI: If you believe in projections between now and 2020—I think Secretary Abraham threw a number today, something like 40—additional 45 million barrels. My numbers are less than that. But if the numbers are anywhere between an additional 30 to 40 million, we are going to need all the resources of these countries and more. And so, from the long-term perspective, OPEC today is supplying somewhere in the mid-30s, and it's projected by 2020 they'll probably be supplying 50-plus percent of the crude oil requirements.

And so, as I have said earlier, we welcome investments—continued investments in increasing the capacity of countries to produce more oil and perpetuate it in the international market. So it's really not a threat to OPEC.

MR. DECRANE: Is there a desire on the part of OPEC to include these new producing countries in the formal ranks of OPEC?

MIN. AL-NAIMI: Actually, because of the success of cooperation that we have had, it's not necessary, as long as we have succeeded as major producers in understanding the reason we seek stability of the world market, and the reason we seek a reasonable price, so that consumers, producers, and hopefully the industry, primarily, can invest. We know what happened in 1998; we saw how investment shrunk. And we really don't want to see that.

MR. DECRANE: All right. There were a group of hands here. One on the aisle.

Thank you.

Q Mr. Minister, earlier that you indicate the Kingdom—(inaudible)—3.5 million barrels per day of excess capacity. I'm wondering how much of that will be able to be produced within a week, and for the remainder, how long it takes—is needed to be produced?

Secondly, for the Kingdom, what will be the needed oil price at this moment to balance the budget?

MIN. AL-NAIMI: The—?

MR. DECRANE: The second part was, what would the price be to balance the budget?

MIN. AL-NAIMI: I'm not going to comment on the second one since His Excellency, the minister of Finance and National Economy, is here! (Laughter.) I'm not going to guess the number there.

But I think—I think I heard the first question is on capacity, how to bring capacity. We have said we require 90 days to bring the 10.5 million barrels per day capacity on stream—that is to bring the last barrel. I believe it's very easy to get up quickly from where we are today to something like 9 million in less than two weeks, but it's always the last barrel that we need to bring on, which takes up to 90 days. So I would say it would be a very quick response. We have done that in the past; we can do it today.

MR. DECRANE: I wonder if I could turn back to the panel for a moment. We've talked about the desirability of a certain stability—a stability, obviously, of supplies, so that there are not massive reductions or interruptions which can totally destabilize the world economy. On the other side, we've talked about a level of price that encourages that stability; that continued investment, the flow of investment, the willingness to have some standby capacity and recognize the costs associated with that.

There have been some articles in the paper talking about the recovery in the economy of the United States possibly being stalled as a result of increasing oil prices. Is there general agreement through the transparency or flows of information which exist as to ranges which seem to deal with both side of that equation? Encourage investment, provide for continued exploration, new development investment and levels that do that—and I know—I'm not looking for a dollar amount; I'm looking for a range—are we way off the mark as to where prices have been? Is it really a major concern economically that long-range, they could jump up to a level that would damage both the U.S. economy and other major economies? How do you feel about that? Senator, do you—

SEN. BINGAMAN: I'm the least qualified to speak on this subject. I think maybe Secretary Larson should give us the administration's view. I gather from my perspective—and this probably reflects more the view from a state that is a significant oil and gas producer—it appears to me that we can maintain good production levels for our own domestic production at a lower price than we have today, although clearly, anything that gets down much below $18 begins to be a problem for us. But that's sort of the view from New Mexico, as I see it. But I'm sure that both our other panel members have much more insight into that.

MR. LARSON: We don't, as the U.S. government, get into the business of deliberating on what the right price of oil should be or, you know, even have discussions with our partners, including Minister Naimi, about what the right price of oil should be.

I think, though, when one talks about stability, in my mind, there's really two factors that are very important. One is that there be confidence that the market and that the producers and consumers can respond quickly to physical disruptions. And we've talked a little bit about that this morning already. The Kingdom of Saudi Arabia has invested a lot in spare production capacity, which is a very important stabilizing force in the market. The United States has invested a lot in holding—buying and holding oil strategic reserves that can be deployed in the event of a physical disruption. And these are both things that I think work in a very positive direction.

A second aspect or dimension of stability is this issue of transparency in the market, and I think it does work in both directions. In other words, it is very difficult to know with accuracy what's going to happen in the global economy six months out. And I think having a good dialogue in the context of producer-consumer dialogues about what demand prospects are can be very helpful in encouraging the levels of production that make sure that that global growth potential is realized. The last thing that one would want to see happen and—I would think, even from the standpoint of oil- exporting countries, the last thing that one would want to see happen would be to have a supply situation that was so tight that it forced oil prices up to such levels that it actually slowed down a global recovery. That's not a good thing for consumers or producers. At the same time, Minister Al-Naimi was mentioning concern about not repeating 1998 again.

So it's in this way that good exchanges about inventory levels, good exchanges about production levels, and good exchanges about what anticipated oil demand is likely to be, based on an understanding of what economic growth prospects are—I think those are all things that, put together, do contribute to stability of prices, and I say that without reference to a particular price level.

MR. DECRANE: As Secretary Larson noted, you had referred to the '98 situation, where $18—their operations in New Mexico—the supply house is closer than it is in Kazakhstan, I guess. The—things seemed to slow dow

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