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Saudi Arabia’s Energy Minister Warns of Oil Shortage

Wall St Journal, 19 October 2016
Saudi Arabia’s energy minister said Wednesday that the world’s oil industry would soon emerge from a crippling two-year slump but warned of an impending shortage of petroleum that could send crude prices up sharply.

In his speech here at the Oil and Money conference, Khalid al-Falih, the top oil official in the country that exports more crude than any other, outlined the rapidly changing landscape in the energy industry since the Organization of the Petroleum Exporting Countries agreed last month to modestly cut its output. A rebalancing of supply and demand is under way that will lift prices, he said.

“We are now at the end of a considerable downturn,” Mr. Falih told an audience that included top executives from oil firms such as Exxon Mobil Corp. , Royal Dutch Shell PLC and Total SA .

Mr. Falih also lent his influential voice to a theory rapidly gaining currency among oil-industry analysts and executives: Low oil prices for two years caused energy companies and countries to pull back so sharply from spending that their output will soon fall.

Mr. Falih said the oil industry was starved of financing during a downturn over the past two years in which crude prices fell to less than $28 a barrel this year from heights of $114 a barrel in 2014. According to Wood Mackenzie, the Scottish energy consultancy, the oil industry has slashed $1 trillion in capital spending in the past two years.

“Many analysts are warning of supply shortfalls. I am in that camp.” Mr. Falih said. “There will be a period of shortage of supply.”

Separately, Statoil ASA Chief Executive Eldar Saetre and Total SA Chief Executive Patrick Pouyanne admonished industry leaders here about the dangers of underinvestment and future oil-supply problems.

There is considerable disagreement within the oil industry about a supply shortage that could cause prices to spike.

Just after Mr. Falih’s speech, Exxon Chief Executive Rex W. Tillerson took the stage and threw cold water on the idea. He said large volumes of oil in storage and resurgent shale output in the U.S. could send more oil into the system quickly as demand and prices rise.

“It’s difficult for me to see a big price blowout,” Mr. Tillerson said.

Mr. Falih’s warning carries particular weight because Saudi Arabia has long maintained a cushion between what it is capable of producing — about 12.2 million barrels a day—and what it actually produces — about 10.6 million barrels a day at last count in September. The difference is called Saudi Arabia’s spare capacity, and many in the oil industry assume the Saudis would make it available in the event of a supply shortage.

Mr. Falih has said in the past that Saudi Arabia would step in to help during a supply shortage, but doubts remain about its ability to step in because the kingdom has pumped at record levels this year.

In his five months as Saudi energy minister, Mr. Falih has overseen a significant change in the kingdom’s oil policy, turning it away from strategies aimed at surviving an era of ultralow prices. Mr. Falih has instead pointed the kingdom back in the direction of its traditional role of stabilizing prices by regulating the output of OPEC, the 14-nation cartel that controls over a third of world crude production.

OPEC agreed to trim its output by 1% to 2% but left many of the details of the cut to its next meeting on Nov. 30. Many oil-industry analysts have been skeptical that OPEC will follow through, but Mr. Falih said the accord will help lift prices and spur more oil investments.

OPEC Secretary-General Mohammad Sanusi Barkindo said this week in London that the cartel’s move was meant in part to get ahead of the fast-changing trends in oil supply and demand. OPEC wants to set conditions that will draw down the billions of barrels of oil that have been stored at low prices, Mr. Barkindo said, an overhang that weighs down on prices.