Supply, Demand, and Energy

by Gen. James L. Jones (USMC Ret.)

At the end of June, Karen Harbert and I travelled to Jeddah, Saudi Arabia for an energy summit to discuss the international energy market.  The summit was called by Saudi Arabia's King Abdullah and brought together energy ministers and heads of state from 38 major oil producing and consuming countries, CEOs, and executives of leading oil companies and international energy organizations.  The Institute for 21st Century Energy was invited by the Saudi government to be an active participant and was the only organization of our kind in attendance.

The meetings served to put in stark contrast the entrenched views of producing and consuming nations on the causes of the rapid run up in oil prices.  Producing nations, led by Saudi Arabia, attributed the high prices to increased and "unmanageable" speculation, whereas consuming nations and most of industry ascribed the cause principally to the market fundamentals of supply and demand.  Both sides agreed, however, that this trend was causing economic hardships, particularly in the developing world. 

Three areas emerged for recommendations, and the difference between producers and consumers could not have been clearer.

Increased investment:  Producing countries called for more investment in downstream operations, principally in refining and mainly not in their countries.  Not surprisingly, consuming nations called for investment upstream to bring on more supply to the market.

Fiscal Reform:  Producing nations argued that consuming nations should reduce or remove taxes on oil and gasoline if there is a desire to lower prices.  Other nations argued that subsidies on gasoline should be removed so the real price of energy would be recognized by the consumer and therefore moderate demand. 

Energy Market:  Producing countries called for more managed oversight and regulation of energy markets and trading.  They also called for consuming countries to guarantee future demand to justify continued investment in expanding production.  Consuming countries called for more open markets and trade, sanctity of contracts, and predictable investment climates. 

Probably the most disturbing trend we sensed by both producing and consuming nations was increased discussion about needing to "manage the market."  It was clear that some nations are truly in economic panic and are prepared to abandon market principles.  The meeting ended with an agreement to hold another such summit in October, hosted by the United Kingdom, and to have the secretariats of the International Energy Agency and OPEC work in the interim on further analysis of the root causes of high oil prices.

All in all the deliberations we witnessed served to underscore the critical need for a new, bold energy strategy for the United States.  We came away more convinced than ever that we must rely on our own resources (both natural and human) to address our energy challenges.  In this time of energy uncertainty, the United States can and must provide global leadership.