Saudi Arabia has warned that oil prices could again surge above the record high level in 2008 within three years unless other producers join the Kingdom and pump sufficient investment into capacity expansions.

The government-owned Saudi Aramco, the world’s largest oil exporter, said the collapse of crude prices in the second half of 2008 was only a temporary phenomenon and demand would pick up again in the near future.

“We must recognise that depressed oil prices are not only detrimental to the economies of petroleum producing nations but also to the interests of consuming countries. That may seem counterintuitive, but consider that sustained and timely investments in petroleum projects and infrastructure are essential for maintaining future supplies at adequate levels,” said Mohammed Madi, Chief Representative in Beijing of Aramco’s Saudi Petroleum.

“Current oil prices do little to encourage the necessary massive investments, and without them we may experience supply shortages once demand picks up in the future. Unfortunately, our industry may already be sowing the seeds for future problems. If others do not begin to invest similarly in new capacity expansion projects, we could see within two to three years another price spike similar to, or worse than, what we witnessed in 2008,” he said.

Addressing an oil conference in China this week, Madi said the industry as a whole has been affected by the weak global economy and its downward pressure on energy demand. He noted that last year marked the first time in a quarter-century that global demand for crude oil declined.

He cited recent estimates by the International Energy Agency (IEA) that global crude demand would decline by about 2.6 million barrels per day in 2009.

Madi described it as a significant decrease, roughly equivalent to the total production of Venezuela, Kuwait or Nigeria.

Faltering demand has also translated into rising inventories and sharply lower crude prices, he said, adding that despite the recent improvement in prices, they are still below half of their record level in late July 2008. He said these developments have impacted all parts of the hydrocarbon industry, and given that petroleum is a “fungible commodity” traded on global markets, companies and corporations all around the world have been impacted.

“In other words, whether we look at suppliers or consumers, upstream producers, midstream refiners, downstream marketers and manufacturers, or service providers and engineering and construction companies, we are now operating in a very different environment,” said Madi.

“And while volatility is nothing new in our business, the sheer scale and scope of the changes we have seen over the past 12 to 18 months could be classified as unprecedented, at least in the recent history of the petroleum industry… and it is precisely because these market developments have been so abrupt and so widespread that we run a real risk of mistaking short-term phenomena related to the current cycle as indicators of sustained, long-term trends in the oil sector.

Madi cited IEA forecasts that total world primary energy demand will increase by nearly 45 per cent between now and 2030.

“The IEA also predicts that oil demand will expand markedly over the same period, from roughly 83-84 million bpd at present to 104 million bpd by 2030, an increase of about 20 million bpd, nearly 1.5 times Saudi Arabia’s current maximum sustainable crude oil production capacity,” he said.

“There is no mystery about the drivers of long-term crude oil demand growth, of course. First, we must consider demographic growth – primarily in developing economies – which will mean a substantial increase in the total number of energy consumers in the decades to come. Secondly, there are the rising living standards in many nations around the world, including China, which the IEA estimates will account for more than 40 per cent of all new global demand for oil over the next two decades.

“As the benefits of economic and social development are extended to billions of more people around the planet, they and their children will be leading healthier, safer, more mobile, and more affluent and prosperous lives. In other words, as these individuals and families buy larger homes filled with more appliances, enjoy more varied diets, purchase more cars and other vehicles, and travel further and more frequently for both business and pleasure, they will be pursuing more energy-intensive lifestyles.”

Madi warned that given the long lead times and considerable financial investments needed to bring new crude oil production capacity online, as well as to build the processing, transportation, shipping, refining and marketing infrastructure required to get those new supplies to consumers, under investment now has the potential to trigger not only high prices in the medium term, but also tight capacities at various points along the petroleum value chain for many years beyond that, depending on the strength and speed of the global economic recovery.

“But if it engages in wise, timely investments and stays focused on long-term needs rather than short-term noise, the industry can avoid such a scenario and instead create the conditions necessary for greater stability, reliability and predictability all the way from the reservoir and the wellhead to the refinery and the retail forecourt,” he said.

“And because at Saudi Aramco we recognise that petroleum is essential to our economies and our societies, because we believe so much is riding on our efforts, and because we remain committed to fulfilling our responsibilities to our stakeholders both in the Kingdom and around the world, we are continuing to invest both upstream and downstream, domestically and internationally, and for today and tomorrow,” he added.

(Zawya & Emirates Business 24/7)