Remarks as Prepared for Secretary Bodman
Thank you, Minister Naimi . . . and my sincere thanks to King Abdullah and the Saudi government for hosting this event.
Everyday -- and around the world -- we are seeing the significant negative effects that high energy prices have on our economies, our industries and, most profoundly, on our citizens. We face an extraordinary set of circumstances that demands responsible action from producing and consuming nations alike.
Market fundamentals show us that production has not kept pace with growing demand for oil, resulting in increasing - and increasingly volatile - prices.
Since 2003 global demand, fed by worldwide economic growth, has increased significantly.
World oil consumption growth has averaged 1.8 percent per year, with the largest share of that increase coming from non-OECD countries, especially China, India, and in the Middle East.
But for the past three years global oil production has remained constant at roughly 85 million barrels per day. OPEC production has remained largely flat while non-OPEC supply growth has been well below levels seen just four years ago.
As a result and even despite higher global production so far this year, inventories have been drawn down and current world surplus production capacity is well below historic levels - at fewer than 2 million barrels per day - and is highly concentrated in a few countries.
Our two main cushions against price volatility - spare capacity and inventories - have been severely strained. Not surprisingly, prices have responded dramatically.
If there are no additional supplies of oil, for every 1 percent increase in demand, we would expect a 20 percent increase in price to balance the market.
In my judgment, this reality of fundamentally tight market conditions is the major driver of the dramatic price increases we have seen over the past five years, and particularly in recent months.
Let me also say that I recognize the complexity of global markets and the interdependence of a number of contributing factors, which though not directly responsible for the upward trajectory of prices, are having an impact at the margins.
It is clear that financial markets have seen unprecedented movement of capital into commodities in recent years. This capital is following the oil market upward - not leading that movement.
The fact is, there is plenty - indeed, too much - uncertainty in the market, and those differences are represented by the differing views in this room. But I believe that most of us agree on one thing: prices are too high at present. And unless we act, the situation will remain unsustainable.
So we must come together with a clear intention to foster stable markets and reasonable prices, while restoring market confidence.
First, all nations must change the way we use energy . . . and I put my own country, the United States, at the top of the list. We have a lot of work to do. Increasing the energy efficiency of our economies is an absolute necessity.
Second, all nations - including producers, as Saudi Arabia has acknowledged - must move rapidly towards a more diverse, sustainable set of energy resources. This move depends on the aggressive development and deployment of cleaner and more sustainable energy sources and alternative fuels.
The U.S. government is funding programs - for both basic science and applied research and development - to achieve the type of transformational discoveries we need, and we are eager to work with the global community - especially in the developing world - to get these technologies deployed as quickly as possible.
At the same time, investments in new capacity in all liquid fuels - both from traditional hydrocarbon resources and advanced biofuels - are essential to assure long-term supply adequacy, and will have the added benefit of reassuring current market participants that supplies will be forthcoming.
While increases in near-term oil production are welcome and necessary, fundamentally the market needs to see investments in increasing long-term production capability and spare capacity. To some degree this is already happening - and I hope it continues.
To that end, this past week President Bush called upon the U.S. Congress to open access to currently restricted reserves in the Outer Continental Shelf, the Arctic National Wildlife Refuge in Alaska and our domestic oil shale resources.
Similarly, we must invest in more - and the right mix of - refining capacity around the world . . . and the President has called for expediting the permitting of refineries in the United States.
But in order for the necessary global investment to occur, the world absolutely requires open, transparent investment climates, and predictable legal and regulatory environments - in producing and consuming countries alike.
We must have reliable, accurate, and timely market data. Good data - on consumption, inventory levels, and current and future surplus capacity levels - fosters efficiently functioning markets and will assist in reducing uncertainty.
One way we can do this is through the Joint Oil Data Initiative (or JODI). It is incumbent on all member nations and organizations to fully participate and report all pertinent information - now and on a sustained basis going forward.
We also must curtail the artificial manipulation of prices in order to promote more realistic energy consumption. And this means reducing untargeted subsidies.
Now, let's be practical here. I'm not arguing for eliminating price subsidies tomorrow . . . nor do I expect that is feasible or particularly wise. But I do believe that countries that employ this mechanism have a responsibility to take steps to reduce its use in a reasonable and timely way. And I believe that could have a meaningful impact on prices.
The true measure of our collective leadership will be our ability to resist the convenient - and all too easy - distractions of finger-pointing and laying blame . . . and instead to take direct, meaningful actions that will materially improve this earth's energy security.
This is a global challenge requiring a global solution. I believe we all are up to that challenge . . . and our citizens expect no less from us.
Location: Saudi Arabia
Media contact(s): Andrew Beck, (202) 586-4940