07/08/2010

Oil and Future Generations

By Professor Bichara Khader
CERMAC, Catholic University of Louvain

 

The issue of “Pétrole et Gaz Arabes” published on July 16th 2010 unveiled a surprising piece of information. On his latest visit to Washington on July 1st 2010, King Abdallah made a statement to Saudi students, declaring: “…During a meeting of the Council of Ministers, I told them (the ministers)that God will grant them a long life…that I had ordered a stop of all oil explorations…Reserves should remain untouched for our sons and grandsons and our heirs , if God wishes it”.

It is not the first time that the King of Saudi Arabia speaks in favour of a reduction, even a suspension, of oil explorations. Back in 2008, he had claimed: “Leave all new discoveries in the earth…our children will need then”.

How can one explain this sudden concern for the fate of future generations while, for decades, the oil giant of the Arabic Peninsula did not refrain itself from flooding the market with its oil, playing, at times, the role of “swing producer”?

It is, for sure, not solely the concern of a father for the future of his children. The bulk of the answer can be found in the evolution of the oil market. In fact, a declaration made by the Saudi oil minister emphasizes this suggestion: “demand projections are decreasing, those of alternative energies is on the rise. We must mark a pause”.

With its reserves estimated at 260 billion barrels, its daily production at 12 million barrels and its vaults full of sovereign wealth funds, Saudi Arabia, whose total population oscillates around 30 million – less than Morocco – is the only country in a position to grant itself a break: all other oil-producing Arab states have a gun pointed at their heads: they combine enormous needs with relatively low energy production. Hence, they must work hard and carry out new explorations without respite, as is the case of Algeria.

This frenetic race seems to be marked by a fear of being caught unawares: in other words, to see its resources dry out, or outclassed by other energies, before building a post-oil economy. Is it necessary to recall that hydrocarbons represent more than 90% of Algerian exports, having generated no less than $400 billion of accrued value between 2000 and 2009?

In light of the country’s needs, every barrel, every cubic meter of gas count. Taking a break is out of the question: oil irrigates of a rentier economy and a glutton state. Furthermore, Algeria seeks to develop the exploitation of its resources or, at least the exploitation necessary to “obtain a better understanding of the potential of its mining sector”. Since 2000, the Algerian Sonatrach and its foreign partners made no less than 123 discoveries of hydrocarbons. In fact, ambitions of internationalization of Sonatrach through new reserves in other countries are no secret.

This may seem of little significance from the outside. But it is a simple reality: Saudi Arabia, which produces 6 times more hydrocarbons than Algeria, is home to the most important reserves in the world, sleeps on a comfortable financial cushion and, with already existing infrastructure, can allow itself a little break. On the contrary, despite important investments in its infrastructures, especially of its international pipeline connections, Algeria is now faced with huge necessary improvements to be made in terms of housing, transport infrastructure, waste disposal, educational equipment and the development of its employment sector. In these conditions, Algeria cannot grant itself a break in the exploitation of new deposits.

These two distinctive orientations between an oil-producing and a gas-producing Arab state are the reflection of two different approaches:  firstly, that of Saudi Arabia, for which the equilibrium price of oil is set at $75 per barrel. This price was reached on Friday, July 9th 2010: it was at this level that prices of light crudes were being established in New York and London at the closing of business of the stock exchange. As a result, this market does not increase demand and does not, therefore, entail further oil exports. As global economic perspectives remain bleak, or at least uncertain, it is unnecessary to seek new discoveries.

The Algerian reasoning differs greatly: it seeks to transform Algeria into an incontrovertible energy actor at the risk of developing energetic bulimia, both in Algeria and abroad. This involves greater investments in exploration works, more production contracts, more transcontinental gas connections (MEDGAZ between Algeria and Spain) (GALSI between Algeria and Italy) and the Trans-Sahara Gas Pipeline (TSGP) between Nigeria and Algeria via Niger (operational in 2015). Sonatrach’s investments reached $11.8 billion in 2009 through increased capacities in transport and refineries, an absolute record.

In view of this energy frenzy, Algeria does not neglect the solar solution, in which colossal projects are being discussed. Will it manage to make its population benefit fully from these projects and prepare a nice future for its next generations? I dearly hope so, but the results of past experiences leave me dubious. Will it succeed in breaking away from a rentier economy and, therefore, a rentier state? This is most likely … but in how long? In one or two generations: I cannot say, as the future sheds greater light on the past than does the present on the future. Will it one day become the Saudi Arabia of the Maghreb? This is a possibility, but it will not have the Holy Sites of Islam.