Saudi Aramco Sr. Vice President discusses energy market volatility, energy security

'While oil market volatility is nothing new,' Al-Khayyal said, 'over the last few years it has made headlines around the world, largely as a result of the rise in crude oil prices, the rapid global growth in demand for oil, and the speculative debate triggered by the appearance of a dozen books promoting the mistaken and misguided notion of peak oil.'

In reality, he noted, high prices recently have been the result of tight capacities along the petroleum supply chain, growing demand, tightening product specifications, underinvestment in infrastructure, and other factors.

In recent months, however, crude prices have dropped by roughly one quarter, even though 'global crude oil production is not up by a fourth,' Al-Khayyal said. 'There has been no sudden, overnight expansion of worldwide refining capacity; nor has demand slumped by 25 percent.' In other words, he said, the recent price change is not fundamentals-based, and we must look beyond the basics to find the causes; only then can effective strategies toward energy security be formulated.

One major factor affecting the oil industry is the investment, regulatory and political environments in which it operates. Not only does this context determine the feasibility of investment by the industry to expand energy supplies, but also can impact end-users significantly. The analyses and policies of government regulators, legislators and international bodies 'sometimes owe more to political considerations than economic principles,' Al-Khayyal said, 'creating uneven playing fields for competing energy sources and badly distorting energy markets.'

Over the long term, he contended, 'this situation harms not only the oil industry and its shareholders, but also consumers and end-users who are hurt by constrained supplies of energy, lagging infrastructure investments, and eventually market volatility.'

Al-Khayyal also noted that another element of the oil industry's political context is the stated desire by some oil-importers to achieve energy independence. 'I believe this is a simplistic view which not only fails to recognize the realities of energy markets and the fungibility of oil and gas as commodities,' Al-Khayyal said, 'but also ignores basic economic fundamentals, the mutual benefits that come with cross-border trade, and the highly integrated nature of today's global economy.'

'Rather,' he said, 'energy interdependence' is the basis for continued prosperity. He pointed to the disastrous example of North Korea to illustrate how economic isolationism fails, contrasting it with the Republic of Korea's enthusiastic engagement in the global economy, coupled with the skills and talents of its people and businesses, leading to tremendous prosperity.

'If we accept the fact that interdependence is ultimately preferable to isolation when it comes to developing our economies and sustaining the prosperity of our societies, then how are we to enhance energy security?' Al-Khayyal asked. Of primary importance, he said, is to recognize that free markets are a key enabler of energy security, as they provide accurate demand signals and thereby encourage timely investment in facilities, as well as drive efficiency and technology development.

Another element of energy security is to recognize the limits of supply diversification. Currently, about 88 percent of global energy comes from fossil fuels, and while alternative fuels certainly are needed to help meet demand, Al-Khayyal noted they face a wide range of technical and economic hurdles.

When it comes to diversification of petroleum suppliers, Al-Khayyal said that with almost two-thirds of the world's proven crude oil reserves located in the Middle East, the potential for such diversification is necessarily limited. 'Subsurface geology is not something subject to relocation,' he said. 'Thus the premise of petroleum supply diversification begins to break down when it is seen as synonymous with a reduced dependence on Middle East oil.' Acknowledging this reality, Al-Khayyal said, leads to the conclusion that energy security is better served by a peaceful, stable Middle East.

According to Al-Khayyal, the third factor that contributes to energy security is for oil producers and consumers to maintain strong, mutually beneficial relationships. He cited the strong ties between Saudi Aramco and Korean businesses as an example of this type of relationship. 'In fact, our first direct entry into East Asia was right here in Korea,' Al-Khayyal said, 'where in 1991, we became a partner in the SsangYong Oil Refining Company, now S-Oil.'

Other examples of the strong relationship include the purchase by Saudi Aramco's shipping subsidiary, Vela International Marine Ltd., of many of its tankers from Korean shipyards, as well as the substantial roles of Korean engineering, construction and supply companies in Saudi Aramco's enormous oil and gas projects.

All of these ties, Al-Khayyal pointed out, contribute to the energy security of Korea, just as similar relationships do in other regions that depend on a reliable supply of oil imports. 'Wherever Saudi Aramco does business, we see ourselves not merely as an investor, but rather as a strategic economic partner with that country and its people,' Al-Khayyal said.