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Energy Crises Feared if Oil Prices Gyrate

By William Drozdiak Washington Post Foreign Service Tuesday , November 21, 2000 ; Page A01

RIYADH, Saudi Arabia, Nov. 20 –– Soaring demand for oil in the developing world and limited growth of petroleum supplies are likely to trigger severe global energy crises in coming years unless consuming countries and producers can stabilize the world oil market, both sides have agreed here.

Breaking the boom-and-bust cycle in world energy prices is vital to encouraging the massive investment that will be required to meet future energy needs, officials from both sides said at a weekend global energy conference attended by representatives from 50 consumer and producer nations.

China alone expects to have as many as 170 million more cars on its roads two decades from now. By conservative estimates, the proliferation of cars throughout the developing world will boost global oil consumption to 115 million barrels a day by 2020 from 76 million barrels today.

World energy demand is expected to double by 2030 and quadruple by the end of the century.

Meanwhile, the recent wild swings in international oil prices--which have climbed to around $35 a barrel today from $10 just two years ago--have left major oil companies reluctant to make the large-scale investments needed to meet future energy needs.

"We could argue for a long time about which is worse, high prices or low, but in many ways it is the volatility of the swings from the highs to the lows and back again that is most dangerous to the market and the world economy," U.S. Energy Secretary Bill Richardson said in an interview. "World energy needs are growing too fast to tolerate the uncertainty this volatility brings."

The amount of capital required to meet future demand could be staggering: The World Bank predicts that the growing energy needs of China and India alone will absorb $1.5 trillion in investment over the next 20 years. The U.S. government forecasts that energy sectors in the developing world will require up to $25 trillion of investment over the next half-century.

Although oil companies have gained an enormous windfall from the recent surge in oil prices, executives say their companies are reluctant to sink large sums of money into drilling wells because of the risks that a sudden downturn in prices could jeopardize their returns.

"The memories of the 1998 price crash are still pretty fresh in everyone's minds," Shell Oil Co. chief executive Steven Miller said. He predicted the major oil companies will act in a "very prudent manner" when it comes to gambling on further drilling investments in the Middle East. But their apprehensions, in turn, may produce future shortages that will perpetuate the unstable energy markets that often cause economic trouble.

"We do not yet anticipate a global supply crunch, but getting these extra oil resources from Middle East countries onto the world market will require a lot of new investment to build up capacity," said Robert Priddle, executive director of the International Energy Agency. "This is an issue that we consider even more important than the resource base itself."

With the alternative of nuclear power still taboo in many Western countries, the United States and Europe will not be able to reduce their dependence on oil as their primary energy source, according to a study by the International Energy Agency, which monitors global oil supplies for two dozen Western countries.

And lessons of the 1973 oil embargo notwithstanding, the United States and Europe can expect to become more reliant than ever on oil from the politically turbulent Middle East, because it remains the cheapest place in the world to extract the product. Crude exports from Iran, Iraq, Saudi Arabia and other Persian Gulf states are expected to grow from 17 million barrels a day to more than 41 million barrels a day by 2020.

Despite agreement in Riyadh that oil consumers and producers share an interest in stable prices, the dramatic shift in their fortunes over the past two years has created a gap in understanding that is proving difficult to bridge.

Many oil producers came close to an economic breakdown as a result of the price collapse two years ago, when the Asian financial crisis drastically depressed demand in some of the world's fastest-growing economies. The Asian crisis occurred just as oil producers had agreed to raise production. The imbalance caused prices to plummet to less than $10 a barrel, leaving some oil-producing countries with suddenly shrunken incomes and bloated budget deficits.

The economic upheaval contributed to political instability in countries such as Nigeria, Iran and Algeria. Even in Saudi Arabia, the world's largest oil exporter, there were rumblings of political unrest as the government struggled to cover its debts by borrowing heavily from abroad.

Now that the sudden tripling in their oil incomes has boosted their economies, producers complain they are being unfairly accused today of gouging consumers.

"Where were the calls for dialogue and cooperation from consumers when we were suffering a couple of years ago?" asked Saudi Oil Minister Ali Nuiami. "After we struggled so hard to get a consensus on how to raise the price of oil from what were ruinous levels for us, do you expect we can just gamble away our own economic salvation?"

The producers also believe it is hypocritical for the West to plead for the sanctity of the free market when some European countries impose taxes that amount to almost 80 percent of the gasoline price at the pump. That means for every five barrels of crude oil sold to Italy, for example, the Italian government pockets the income from four barrels.

"Despite the fact that oil exporters get less than 20 percent of the price of a refined barrel, we get the blame and responsibility for the high cost of petroleum products," said Kuwait's oil minister, Saud Nasir Sabah. "Now they want us to bear the burden and cost of environmental problems, even though coal, which is subsidized in some consuming countries, is much more polluting than oil."

Producers also worry about the the potential impact on demand of efforts to reduce global warming. In treaty negotiations taking place in The Hague, more than 150 countries are seeking agreement on how to curtail pollutants, mainly from oil and other fossil fuels, that are contributing to an increase in the Earth's temperature. Because oil is being targeted as a key villain, Saudi Arabia and other producers are demanding compensation because, they argue, any cuts in fuel consumption will inflict lasting damage to their economies.

The claim by many oil producers that they are economically vulnerable does not win much sympathy from consumer nations. The harshest criticism comes from developing nations such as Thailand, the Philippines and South Africa. Within the past year, those countries have struggled with soaring inflation and unemployment because their treasuries have been drained by high oil bills.

"The daily needs and well-being of many people throughout Asia and Africa are being affected by the vagaries of oil prices," said Phunzile Mlambo-Ngcuka, South Africa's minister for energy and minerals. "The situation has become so serious these days that it is literally a matter of life and death in many of our countries."

Seeking to call a truce in the blame game, the United States and Saudi Arabia have acknowledged a high degree of mutual dependence and agreed to use their clout as the world's biggest energy user and the biggest oil exporter to build a new partnership between consumer and producer countries.

To general surprise, Saudi Arabia proposed to create a new global organization, based in Riyadh, that would coordinate views of consumers and producers and launch a new era of cooperation in which both groups would work as partners to try to stabilize the oil market.

"At the present stage of human evolution, such cooperation has become a necessity and not just an option," said Saudi Crown Prince Abdullah, who manages the day-to-day affairs of the kingdom since his brother, King Fahd, was incapacitated by a stroke.

The United States said it will consider the idea, but Energy Secretary Richardson made clear to his Saudi hosts, the first priority of the U.S. government remains a substantial drop in oil prices to prevent the global economy from tipping into a serious recession. The best hope to avoid that danger, he said, is for the Saudis to keep raising output. But after four successive increases since March, they are concerned about the prospect of another price collapse next year.

"People criticized me when I kept going around with a tin cup asking for help in bringing down oil prices, but I think my message is getting through," Richardson said. "We all agree that $10 is too low and $30 is too high, and we think a price between $20 and $25 would be ideal. But we still have to convince the Saudis that the only way to get there is for them to put more oil on the market."

© 2000 The Washington Post

http://www.washingtonpost.com/ac2/wp-dyn/A46488-2000Nov20?language=printer

-- Martin Thompson (mthom1927@aol.com), November 21, 2000