Could Saudi Arabia’s Oil Exports Dry Up?
Editor’s Note: Elliott Gue is leaving this publication, to pursue another venture. We wish him all the best. Elliott has served at Investing Daily with great distinction for more than 13 years, and we’re rightfully proud of his superb track record. We’re passing the baton to a new investment expert with decades of hands-on experience in the energy patch. Along with the continued support of the Investing Daily research team, this new energy strategist will uphold our legacy of excellent service; look for an announcement from us soon.
In the meantime, here’s a guest column by Geoffrey Styles, a new contributing member of our investment team who specializes in the energy sector. Geoffrey is managing director of GSW Strategy Group LLC, an energy and environmental strategy consulting firm.
His industry experience includes 22 years at Texaco, culminating in a senior position on Texaco’s leadership team for strategy development, focused on the global refining, marketing, transportation and alternative energy businesses.
Geoffrey’s “Energy Outlook” blog has been quoted frequently by The Wall Street Journal and other media and was named one of the “Top 50 Eco Blogs” by The Times of London.
Change is a constant—in life, publishing and investing. From this transition, you will enjoy an enhanced publication and greater investment rewards.
— John Persinos, editorial director, Investing Daily
A recent analysis from Citigroup has raised the alarming possibility that Saudi Arabia might become a net oil importer by 2030. This conclusion relies on the extrapolation of economic growth and demographic trends that are driving up domestic Saudi demand for petroleum products and electricity, much of which is generated from oil. Needless to say, the consequences for energy investors are profound.
If these trends continue unabated, the country’s capacity to export crude oil would be used up within twenty years. Even if growth moderated in the interim, this could still have a significant effect on global oil markets and change the context for the ongoing debate about the potential benefits of North American energy independence.
The report in question (“Saudi Petrochemicals – The End of the Magic Porridge Pot?”, Citi Research Equities, September 2012) is focused on the Kingdom’s petrochemical industry, a large consumer of Saudi oil and gas output. Part of the report’s credibility stems from the fact that many oil-producing countries have gone through a similar cycle of internal market development and eventual export decline.
For that matter, the US was once a major oil exporter, before economic growth early in the last century surpassed the productivity of US oil fields. The repetition of this trend among oil exporting countries is a basic argument for the idea of Peak Oil.
The situation poses a real challenge, both for the Saudis and for us. Although there are several fairly obvious ways by which exports could be preserved, they aren’t all feasible within the current political climate in Saudi Arabia or many other producing countries.
According to the report, per-capita energy consumption in the Kingdom is higher than in the US; it’s also high relative to gross domestic product (GDP). As a result, there should be plenty of ways to improve energy efficiency. However, it’s hard to make efficiency a priority when subsidies keep retail energy inexpensive.
The Citigroup report apparently suggests reducing these subsidies, but that might lead to popular unrest similar to what we’ve seen in other countries that have cut subsidies. That leaves mainly investment-based options for introducing other energy sources, to save the oil for exports.
The Saudis have already targeted some of these, such as nuclear and solar power. Including additional natural gas development, they have the means and the motivation to buck the tide of rising internal oil consumption, as well as the cash to fund the infrastructure investment involved.
It’s up the Saudis to strike whatever balance between exports and consumption they choose, but their decision has important implications for us, too. We must decide to what extent our own energy policy should depend on Saudi Arabia succeeding in its efforts to preserve oil exports by fuel substitution and efficiency.
We should also consider how it would affect oil prices and the functioning of the global oil market if internal Saudi consumption removed just another 2-3 million barrels per day of exports from the market. Would Saudi Arabia be able to continue to act as a moderating force within OPEC? Recalling that a narrowing between demand and available supply of about the same magnitude was a key factor in the oil-price run-up of 2006-2008, that question could cause us serious concern.
Elusive Independence
For nearly forty years a succession of US presidents has touted the goal of energy independence, even though most experts regarded it as unrealistic. And when we speak of energy independence, we are usually referring to oil, because that’s the only form of energy we import to any significant degree, other than the natural gas we receive from Canada.
Yet suddenly that goal doesn’t seem nearly as remote, thanks to the combination of resurgent domestic oil production and vehicle improvements that are dramatically boosting fuel economy. Another, earlier report from Citigroup outlined potential future North American energy independence based mainly on those elements. It’s not guaranteed, but it doesn’t look like a fantasy, either.
However, just when energy independence has begun to seem more feasible, confusion about its potential benefits is leading some to downplay or dismiss it. Contrary to some claims, it wouldn’t cut us off from the global oil market; that’s the last thing we should want. Instead, it would give the US a much more flexible and influential role within that market, while allowing us to continue taking advantage of the benefits of global trade in crude oil and petroleum products.
Global oil prices would inevitably be lower than otherwise due to the substantial changes in US supply and demand necessary to shrink our oil imports to near zero. Oil market volatility would also likely fall, even if OPEC cut its output to compensate, because of the resulting increase in spare production capacity.
While US energy independence might not end the risk of future oil price spikes, their ramifications would be very different, because the US economy would not be transferring tens or hundreds of billions of dollars offshore to pay for imported oil. Most of the extra oil revenue from future price spikes would consequently stay right here, and state and federal governments would capture a large slice of it through taxes and royalties. That’s a very different scenario than what happened in 2008 and continues today.
Citigroup has proposed a fascinating “what if” concerning the world’s largest oil exporter. The implications are sobering, even if the trends on which it is based might conform to economist Herb Stein’s observation that “If something cannot go on forever, it will stop.”
The question of Saudi Arabia’s future oil exports is also highly relevant to the energy debate now underway between the US presidential candidates. We shouldn’t assume that Saudi Arabia’s oil exports won’t dry up by 2030, just as we shouldn’t assume that we can’t eliminate the need for oil imports from outside North America, just because that seemed true in the past.
The upshot for investors is that, barring another financial crisis or global recession, oil prices are likely to remain in a relatively high trading range above USD80 per barrel for the foreseeable future.
Time will tell whether the latest drilling technology will make sufficient domestic and Canadian oil accessible to achieve the goal of North American energy independence. But if we do reach it within a decade or so, it won’t be the result of the growing but still tiny contribution of renewable energy or the conversion of the US vehicle fleet to electricity. Those roads to energy independence look much longer.
In the meantime, here’s a guest column by Geoffrey Styles, a new contributing member of our investment team who specializes in the energy sector. Geoffrey is managing director of GSW Strategy Group LLC, an energy and environmental strategy consulting firm.
His industry experience includes 22 years at Texaco, culminating in a senior position on Texaco’s leadership team for strategy development, focused on the global refining, marketing, transportation and alternative energy businesses.
Geoffrey’s “Energy Outlook” blog has been quoted frequently by The Wall Street Journal and other media and was named one of the “Top 50 Eco Blogs” by The Times of London.
Change is a constant—in life, publishing and investing. From this transition, you will enjoy an enhanced publication and greater investment rewards.
— John Persinos, editorial director, Investing Daily
A recent analysis from Citigroup has raised the alarming possibility that Saudi Arabia might become a net oil importer by 2030. This conclusion relies on the extrapolation of economic growth and demographic trends that are driving up domestic Saudi demand for petroleum products and electricity, much of which is generated from oil. Needless to say, the consequences for energy investors are profound.
If these trends continue unabated, the country’s capacity to export crude oil would be used up within twenty years. Even if growth moderated in the interim, this could still have a significant effect on global oil markets and change the context for the ongoing debate about the potential benefits of North American energy independence.
The report in question (“Saudi Petrochemicals – The End of the Magic Porridge Pot?”, Citi Research Equities, September 2012) is focused on the Kingdom’s petrochemical industry, a large consumer of Saudi oil and gas output. Part of the report’s credibility stems from the fact that many oil-producing countries have gone through a similar cycle of internal market development and eventual export decline.
For that matter, the US was once a major oil exporter, before economic growth early in the last century surpassed the productivity of US oil fields. The repetition of this trend among oil exporting countries is a basic argument for the idea of Peak Oil.
The situation poses a real challenge, both for the Saudis and for us. Although there are several fairly obvious ways by which exports could be preserved, they aren’t all feasible within the current political climate in Saudi Arabia or many other producing countries.
According to the report, per-capita energy consumption in the Kingdom is higher than in the US; it’s also high relative to gross domestic product (GDP). As a result, there should be plenty of ways to improve energy efficiency. However, it’s hard to make efficiency a priority when subsidies keep retail energy inexpensive.
The Citigroup report apparently suggests reducing these subsidies, but that might lead to popular unrest similar to what we’ve seen in other countries that have cut subsidies. That leaves mainly investment-based options for introducing other energy sources, to save the oil for exports.
The Saudis have already targeted some of these, such as nuclear and solar power. Including additional natural gas development, they have the means and the motivation to buck the tide of rising internal oil consumption, as well as the cash to fund the infrastructure investment involved.
It’s up the Saudis to strike whatever balance between exports and consumption they choose, but their decision has important implications for us, too. We must decide to what extent our own energy policy should depend on Saudi Arabia succeeding in its efforts to preserve oil exports by fuel substitution and efficiency.
We should also consider how it would affect oil prices and the functioning of the global oil market if internal Saudi consumption removed just another 2-3 million barrels per day of exports from the market. Would Saudi Arabia be able to continue to act as a moderating force within OPEC? Recalling that a narrowing between demand and available supply of about the same magnitude was a key factor in the oil-price run-up of 2006-2008, that question could cause us serious concern.
Elusive Independence
For nearly forty years a succession of US presidents has touted the goal of energy independence, even though most experts regarded it as unrealistic. And when we speak of energy independence, we are usually referring to oil, because that’s the only form of energy we import to any significant degree, other than the natural gas we receive from Canada.
Yet suddenly that goal doesn’t seem nearly as remote, thanks to the combination of resurgent domestic oil production and vehicle improvements that are dramatically boosting fuel economy. Another, earlier report from Citigroup outlined potential future North American energy independence based mainly on those elements. It’s not guaranteed, but it doesn’t look like a fantasy, either.
However, just when energy independence has begun to seem more feasible, confusion about its potential benefits is leading some to downplay or dismiss it. Contrary to some claims, it wouldn’t cut us off from the global oil market; that’s the last thing we should want. Instead, it would give the US a much more flexible and influential role within that market, while allowing us to continue taking advantage of the benefits of global trade in crude oil and petroleum products.
Global oil prices would inevitably be lower than otherwise due to the substantial changes in US supply and demand necessary to shrink our oil imports to near zero. Oil market volatility would also likely fall, even if OPEC cut its output to compensate, because of the resulting increase in spare production capacity.
While US energy independence might not end the risk of future oil price spikes, their ramifications would be very different, because the US economy would not be transferring tens or hundreds of billions of dollars offshore to pay for imported oil. Most of the extra oil revenue from future price spikes would consequently stay right here, and state and federal governments would capture a large slice of it through taxes and royalties. That’s a very different scenario than what happened in 2008 and continues today.
Citigroup has proposed a fascinating “what if” concerning the world’s largest oil exporter. The implications are sobering, even if the trends on which it is based might conform to economist Herb Stein’s observation that “If something cannot go on forever, it will stop.”
The question of Saudi Arabia’s future oil exports is also highly relevant to the energy debate now underway between the US presidential candidates. We shouldn’t assume that Saudi Arabia’s oil exports won’t dry up by 2030, just as we shouldn’t assume that we can’t eliminate the need for oil imports from outside North America, just because that seemed true in the past.
The upshot for investors is that, barring another financial crisis or global recession, oil prices are likely to remain in a relatively high trading range above USD80 per barrel for the foreseeable future.
Time will tell whether the latest drilling technology will make sufficient domestic and Canadian oil accessible to achieve the goal of North American energy independence. But if we do reach it within a decade or so, it won’t be the result of the growing but still tiny contribution of renewable energy or the conversion of the US vehicle fleet to electricity. Those roads to energy independence look much longer.