Saudi Arabia readies $100-bn oil warchest

MUMBAI: Saudi Arabia will invest $100bn in the energy sector to meet rising global demand, according to Muhammad Al-Jasser, vice-governor, Saudi Arabian Monetary Agency.

Speaking at the Ficci-IBA seminar on ‘Global Banking: Paradigm Shift’, Mr Al-Jasser said to meet the growing crude demand the country plans to expand its production capacity to 12.5m barrel per day by ’09. It always had a sizeable redundant capacity of 11.3m barrel a day and would use it to meet a demand surge. Saudi Arabia had 25% of the world’s proven crude reserves and accounts for 17% of the global exports.

Analysing the trend in the recent surge in global crude oil prices, Mr Al-Jasser said though crude prices had gone up sharply in nominal terms, in real terms (adjusted for inflation) the rise had not been much. Comparing the recent surge in crude prices to the oil price shock of the 70s, Mr Al-Jasser said while the current surge is more of a demand-driven phenomenon sparing the banking system, the price rise in the 70s was more due to supply side shock. And the latter did precipitate a global recession which undermined the stability of the banking system.

Normally, oil price hikes precede global recession, but this time around the prices have surged despite strong global economic growth. This is being attributed to the quality of growth and the general feeling that the impact on inflation had been limited, the vice-governor said. While inflation is a monetary phenomenon, oil prices are more of an outcome of market conditions like the demand and supply equations for oil. And it’s the market which has been calling the shots in the oil swings.

He said the pass-through of higher oil prices to the banking system is also a function of monetary policy and the policy should not accommodate any second round impact of oil price shocks, he said.