IHS CERAWeek: Saudi oil minister is confident global oil market will rebound, but short term is here to stay

The Saudi oil minister’s view of the industry being cyclical, and the price being lower for longer has people wondering how the industry will bounce back and rebalance.

The second day of IHS CERAWeek kicked off with a Welcome and Ministerial Address given by His Excellency Ali Al-Naimi, Minister of Petroleum & Mineral Resources of Saudi Arabia.

He started off telling jokes, lightening the somewhat stuffy mood, by claiming that Daniel Yergin, chair of IHS CERAWeek, only invites him to speak when there is a crisis. Many laughs were garnered by the audience once again when Al-Naimi stated that he’d even survived peak oil, and had a t-shirt lying around somewhere that said so.

Al-Naimi’s experiences have taught him that the oil business is inevitably cyclical. “Demand rises and falls. Supply rises and falls. Prices rise and fall,” he said.

His Excellency joined Aramco as an office boy in 1947. During his seven decades in the oil industry, he’s seen oil under $2 bbl and at $147, with much volatility in between. Having been through booms and busts, he is confident that the global oil market will rebound.

When asked my Yergin when he predicts the crisis will end, he responded, “If I knew that, you and I would go to Las Vegas. But it will end,” again, getting quite a chuckle from the audience.

A week ago Russia, Saudi Arabia, Qatar and Venezuela proposed an oil freeze that would cap production at January’s levels.

Yergin asked Al-Naimi to explain an oil freeze, and Al-Naimi was quick to say that it’s the beginning of the process, “We want to get all the major producers to agree not to add barrels during this high inventory we have now. It’s not like cutting production. That is not going to happen.”

Al-Naimi hopes to let demand rise, let some inefficiencies in supplies decline and eventually the market will bounce back. “We’ve had one meeting, four countries agreed. In March there will be another meeting.”

Would countries from across the Gulf be participating in the freeze? He’s unsure, but felt that “Most of the countries will freeze.”

The Minister was firm when he acknowledged that shale oil has its place in the industry’s future, but said that Saudi Arabia has no plans to produce the crude today because it has an abundance of conventional reserves.

“We are looking for shale oil and shale gas. We will produce it one of these days. I am a geologist by trade. I know that shales do have oil in them. It’s just hard to get them out,” Al-Naimi said. “We are finding it in Saudi, but we have much more economic ways to produce right now. We are doing our homework for the future.”

The minister thinks solar will be the answer in the future. “We have a solar center, and I recently gave the director of the center a challenge.” That challenge? Currently Saudi is exporting 7 million bbls of oil every day – the minister would like to convert solar into BTUs and generate enough solar as an equivalent to 7 million bbls of oil. “So we can export power and not oil. Solar is definitely going to be the answer to energy’s future.”

The past year or so is often compared to 1986. The minister feels strongly that this time it’s different. “This is not 1986. This is definitely different - 1986 was a reaction to cutting, mainly by Saudi Arabia. In 1981 we were producing close to 10 million barrels a day, in 1985 less than 3 million,” he remembered. “In 1981 the price of oil was over $40, in 1985 it was less than $9.”

Before November 2014, the price of oil was simply too high, so every barrel was being produced. The minister said we need to go back to marginal costs and let the marginal costs drive the demand.

The role of OPEC remains and tries to do the best it can to balance oil’s supply and demand. That is the primary role of OPEC - the business of defending price came much later.

“We are still willing to defend, but we are going to do it differently,” Al-Naimi said. “We have not cut a single program. Saudi Aramco continues to spend money. We are spending money to cover decline and stay at the max capacity which is 12.5 million bbls a day. We need that extra capacity to cover catastrophes.”

Saudi Arabia’s future is bright, with the minister’s solar challenge, future shale plays and demand growth, the minister is on top of it all. “We have investments, we are building facilities. Nothing will change.” The country is set to move forward with aplomb.

The minister’s view of the industry being cyclical, and the price being lower for longer has people wondering how the industry will bounce back and rebalance.

“Inefficient producers will have to get out. We can coexist at $20 oil. It’s not there, and we don’t want it. But we could do it.”

Short term impacts the market, long term impacts supply and demand. His Excellency Ali Al-Naimi finished his talk with a simple, “The short term is here to stay.” Wise words, indeed.

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