Saudi Arabia's reluctance to commit to boosting oil production capacity beyond 2009 is a response to the potentially huge impact on future demand of energy efficiency, alternative fuels and high prices.
Demand uncertainty is providing little incentive for oil producers to risk investing billions of dollars on long-term projects to boost capacity, as they worry it will lie idle.
"This is a major concern for producers," said David Kirsch, manager of market intelligence at Washington-based consultancy PFC Energy.
"If you assume certain conservation measures, alternative fuels and the introduction of some form of carbon limiting legislation, you could take as much as 6 million barrels per day (bpd) off global demand by 2015."
Under the greener world scenario, PFC projects demand growth could be limited to 4 million barrels per day between 2007 and 2015, taking global consumption to 89 million bpd from around 85 million bpd now, Kirsch said. Without environmental and conservation policies, demand could soar to as much as 95 million bpd, he said.
The International Energy Agency (IEA), adviser to 26 industrialized nations, has pegged the untrammeled demand scenario even higher, at 99 million bpd in 2015.
Faced with such disparate projections, Saudi Oil Minister Ali al-Naimi sent the strongest signal yet last week from the world's biggest oil exporter that it needs concrete signs of demand before committing to further supply boosts beyond its 12.5 million barrels per day target in 2009.
"Our feeling now, with the thrust and push for conservation, efficiency and the use of alternatives, is that we probably need not go beyond 12.5 million bpd," Naimi said after a gathering of Asian and Middle East energy ministers in Riyadh.
Naimi has called for better data on future demand, turning the tables on oil consumers that press producers for commitments to boost output capacity.
Saudi Arabia sits on a quarter of the world's oil reserves and is seen as one of the principal sources of future supply growth. The IEA has forecast the kingdom may need to boost output to as much as 18 million bpd by 2030.
Targeting that kind of capacity boost would be unwarranted in the current price environment and may anyway be unsustainable, said Sadad Husseini, a former top executive at Saudi Arabian oil firm Saudi Aramco.
"I think the oil minister's comments introduce a certain realism to all these projections that wasn't there before," he said. "It's not that demand will go down, it's that it will level off at these higher prices."
Soaring energy costs globally, as the industry strains to bring new capacity online, are making producers more cautious.
"Making such investments at a time when capital expenditure costs are at an all-time high entails a significant risk. The last thing we need is idle capacity," OPEC President and United Arab Emirates Oil Minister Mohammed al-Hamli said in Riyadh.
HIGH PRICES CURB DEMAND
High prices have slowed annual demand growth from the breakneck pace of 2004, when the world's thirst for oil grew more than 3 million bpd. Last year, annual growth was just over 750,000 bpd, according to the IEA.
As oil markets reeled from the 2004 growth, Saudi Arabia accelerated its plans to expand to the 2009 target to ensure it kept spare capacity of at least 1.5 million bpd to deal with any surprise global supply outages. Naimi said then that the kingdom could raise capacity further to 15 million bpd if needed.
Since then, as well as encouraging conservation and alternatives, high prices have allowed non-OPEC producers to begin drilling oilfields that were previously deemed too expensive, a process that continues to play out.
"We still haven't seen the full effect of the high price scenario on non-OPEC supply," said Husseini.
Saudi Arabia and other OPEC members late last year agreed to cut production by 1.7 million bpd to bolster prices. Even before then, the kingdom had reined in supply on slower demand for its oil.
According to a Reuters survey, Saudi Arabia was producing around 8.5 million bpd in April, down from around 9.45 million bpd in March 2006. With capacity of around 11.3 million bpd, it is already sitting on spare capacity of nearly 3 million bpd.
Should demand growth again begin to quicken, the kingdom could quickly install new capacity, the IEA said.
"We are not too concerned about our long-term numbers," said William Ramsay, the IEA's deputy executive director. "They can put in spare capacity very quickly if they want to."