HOUSTON (Dow Jones)--The world will eventually transition its way out of fossil fuels, but forcing the change too quickly could hamper investment in the oil sector" and create a "nightmare scenario of diminishing energy supplies," Saudi Oil Minister Ali al-Naimi said late Tuesday.
While the push for alternatives is important, we must also be mindful that efforts to rapidly promote alternatives could have a "chilling effect on investment in the oil sector," Naimi said in a speech at the Cambridge Energy Research Associates conference in Houston.
The cost of replacing the current "highly efficient and economical" energy infrastructure with alternatives in the short term would be "prohibitive," he said. "A prudent approach demands that we recognize that the massive scale of the global energy system makes rapid change costly and impractical."
The remarks come at a time when a new U.S. administration is embarking on an ambitious path to steer the country's energy policy away from fossil fuels. President Barack Obama's government, intent on fighting global warming, wants to enact a national renewable electricity mandate and a carbon-cap-and-trade system this year, and plans to create massive incentives to alternative energy research.
Traditional energy producers, after years of windfall profits, are already in a corner as oil prices have come down significantly from last year, when they had reached nearly $150 a barrel. Oil prices closed at $37.55 a barrel Tuesday.
Naimi called this sharp drop an "exaggerated price weakness," helped by the same market speculators who once made oil soar to unprecedented heights and have now "flipped" their sentiment. He said financial markets were guilty of "group think," forgetting that the oil business is cyclical.
Oil prices, Naimi said, should be "low enough" to facilitate the growth of poor countries, and "high enough to provide sufficient return to producers that ensures adequate and timely investment."
But without greater stability in energy markets, "the task of achieving global economic recovery will be significantly more difficult," he said. If today's low prices continue, "they will sow the seeds for future price spikes and volatility," he said.
Saudi Arabia has been instrumental in curbing the Organization of Petroleum Exporting Countries' output in the face of falling demand for crude. Naimi said that the country's spare production capacity will be 4.5 million barrels a day by mid-2009 after it brings its 1.2-million-barrel Khurais project online.
"Maintaining our spare capacity requires considerable investment, but over the years the value of that cushion has been proven in the face of unforeseen supply disruptions, and it has helped to counter market volatility," he said.
Saudi Arabia will also continue to expand its refining capacity, both in the kingdom and in "key markets around the world," Naimi said. "We are continuing to invest now to help ensure an uninterrupted supply of energy when the global economy recovers."