We admit that, like the United States and other countries, we were surprised by the way prices escalated in recent years. Many people blame demand from China and other emerging markets. But the sad fact is that four oil-producing countries failed to live up to production expectations. In 1998, Iran, Iraq, Nigeria, and Venezuela were producing 12.7 million barrels per day. Everyone -- including major companies such as BP and our own planners at Saudi Aramco -- expected them to be producing 18.4 million barrels per day in 2008. Instead, due to civil strife, failed investments, or in the case of Iraq, a U.S. invasion, they were producing only 10.2 million barrels per day. That drove the price part of the way up. Then speculators, in the form of hedge funds, did the rest.
Another factor in rising oil prices is the shortage in the world's refining capacity. In the United States, for example, not one new refinery has been built in more than 30 years. Add to this problem another: "boutique oil," the different grades of gasoline required in different localities. I encountered one of these anomalies when I visited Chicago three years ago. There is an oil refinery 50 miles from Chicago, but it does not supply the city with gasoline because the grade does not comply with Chicago's standards. Instead, Chicago has to import its gas from the East Coast. Prices at the pump would be much lower if there were direct supplies from the refinery to the city.
There are many causes behind last year's oil price spike, but Saudi Arabia is not one of them. Unlike large oil companies, which have been slow to respond to the supply crunch with more capital investments, the kingdom realized that such investments -- even if they seem counterintuitive in the short term -- are essential to avoiding catastrophic energy shocks. We have proposed a billion-dollar fund to promote research into making fossil fuels more environmentally friendly and have promoted the International Energy Forum to bring together producers, consumers, and the oil companies that extract, refine, and sell oil. Although it has yet to get the full support of consumers, the forum has held regular meetings to discuss relevant issues.
But Americans don't hear all this from their political leaders. In one of his very first speeches as U.S. president, for instance, Barack Obama declared that "America's dependence on oil is one of the most serious threats that our nation has faced." He said that it "bankrolls dictators, pays for nuclear proliferation, and funds both sides of our struggle against terrorism," and announced what he called "the first steps on our journey toward energy independence."
The allure of demagoguery is strong, but U.S. politicians must muster the courage to scrap the fable of energy independence once and for all. If they continue to lead their people toward the mirage of independence and forsake the oasis of interdependence and cooperation, only disaster will result.
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