$80 per barrel is an appropriate price for oil: because it encourages additional supply without damaging consumers. Ladies and gentlemen, after a period of turmoil and economic downturn, recovery is well underway in most parts of the world, with growth particularly strong in the developing economies of Asia, including the Middle East. As the center of economic growth continues its Eastern shift, we will see energy demand growth focused on Asia, as its developing nations grow in population; as new middle classes emerge through new prosperity; and as less developed nations seek to lift themselves out of poverty. As a result of these and other economic and social trends, oil demand has increased and returned to pre-crisis levels in these high-growth areas. Excess inventories which built up during the downturn are now largely being worked off, and markets are returning to more normal storage levels. Some worry that the recent rise in oil prices could signal a return to the conditions of 2008, when prices approached $150 per barrel. These “market bulls” believe that oil demand growth in fast-growing developing economies will quickly burn through global spare capacity. At the same time, they are pessimistic about investment in both non-OPEC and OPEC supplies, believing that additions to capacity will lag, and thus fail to keep markets in balance going forward. There are those who are also concerned that a significant rise in oil prices could send the global economy back into recession. While there is reason to be vigilant about price, the current situation is different from 2008. In the short term, I am confident that oil markets are relatively balanced and that recent price rises have less to do with supply-demand fundamentals than with gyrations in the value of the dollar and in traders seeking to test new price levels. There is adequate spare capacity in the system. Inventories in all key markets are ample, and there is significant spare capacity in Saudi Arabia. The Kingdom realizes that we have an important role to play in promoting stability in world oil markets. Our most powerful tool for achieving a balanced market is our maintenance of spare production capacity. We work very hard to make sure that the global oil market is well supplied and well balanced. To that end, it is our ongoing policy to maintain at least 1.5 to 2 million barrels per day of spare capacity to be used whenever and wherever there is a need. Today it stands at about 4 million barrels per day. Maintaining this spare capacity requires considerable investment, but over the years the value of that cushion has been proven in the face of unforeseen supply disruptions, and it has helped to counter market volatility. It is worth noting that Iraqi production appears on pace to grow quickly over the next couple of years, as key fields benefit from new investment. These incremental supplies should also help ensure balanced markets. In addition, refining bottlenecks that existed several years ago have mostly been resolved through the addition of new capacity in key markets. In fact, the global refining capacity additions by Saudi Arabia alone are expected to approach 2 million barrels per day over the next five years or so. However, current prices are a reflection of more than just existing fundamentals. Market expectations play a significant role in price formation. And it is clear that markets and higher oil prices are being driven by doubts and uncertainties. These include the future of non-OPEC conventional supplies, whether OPEC will make investments to significantly expand production capacity, and whether non-conventional sources, such as oil sands, can meet growing demand without passing on their higher costs to the consumer. --More
