Saudi Arabias oil policy the challenges ahead

Dr. Naser Al-Tamimi

Published: Updated:
Saudi Arabia’s oil policy is facing internal and external challenges which could have a huge impact on its statute as a leader in the global oil market. Firstly, the kingdom is facing a significant shift in oil demand from the west (America and Europe) to east (Asia). Secondly, Saudi Arabia’s dominant role in the world oil supply could be altered by (a) large new unconventional oil reserves in North America. (b) Saudi Arabia’s place in the world oil market is threatened by unrestrained domestic fuel consumption. And, (c) increased Iraqi production with significant spare capacity could challenge Saudi Arabia’s dominance in OPEC, which we have seen small part of it in the last meeting of OPEC.

Indeed, oil demand is shifting from the developed world to the developing world, and Asia is expected to account for much of the growing demand during the next two decades. The growing importance of Asia represents a fundamental shift in the geopolitics of oil. Saudi officials are increasingly seeing prospects on the Great Wall; China will soon become the biggest purchaser of Saudi oil. As a result, the challenge for Saudi Arabia is how to balance the rapidly developing economic and political ties with the emerging Asian countries such as China and India, at the same time maintain its share in the markets of the United States and Europe in order to ensure the continuing policy of markets diversity. In that regard, we can see pragmatic steps in this direction; companies such as Saudi Aramco and SABIC are making significant investments in Asia, especially in China. On the other hands it is also worth noting here that Saudi Aramco and Royal Dutch Shell operate three refineries and 8900 gasoline stations in the United States, mostly in the East and Southeast, which ensure a U.S. market share for Saudi crude - irrespective of U.S. production.

The global energy landscape also is shifting as increased oil output from the U.S. and Iraq and soaring demand from emerging economies is driving change in markets. Within a decade, the U.S. will import almost zero crude from the Middle East as its need for overseas oil evaporates. The U.S. will emerge as a net oil exporter, accelerating a switch in the direction of international oil trade, with almost 90% of Middle Eastern oil exports being drawn to Asia by 2035. While Iraq will be experience the largest growth in production over the next two decades. According the International Energy Agency (IEA); Saudi Arabia will continue to be the largest oil producer in the region; but the Kingdom is expected to contribute the fifth-largest increase in oil production worldwide between 2011 and 2035, raising production by around 10 percent from11.1 mb/d in 2011 to nearly 12.3 mb/d by 2035. Iraq’s oil production potential is immense, but exploiting it depends on consolidating the progress made in peace and stability in the country and the need for infrastructure investments. The IEA’s Central Scenario, projects, Iraq’s oil production more than doubles to 6.1 mb/d by 2020 and reaches 8.3 mb/d in 2035.

Above all, one of the biggest challenges facing Saudi Arabia is how to curb the growth of its energy consumption. This requires long-term structural changes such as reforming energy prices, introducing efficiency measures, and improving energy productivity, especially in the industrial sector and power generation. Some economists say that if Saudi Arabia’s current energy-consumption growth rate of 7% a year continues unabated, the kingdom within 20 years will burn the equivalent of around two-thirds its total current crude production capacity of 12.5 million barrels a day. Strikingly, a recent report published by Citigroup Inc warned that Saudi Arabia, the world’s biggest crude exporter, risks becoming an oil importer in the next 20 years. Oil and its derivatives are used for about half of the kingdom’s electricity production, which at peak rates is growing at about 8 percent a year. Within this context, Saudi Arabia’s place in the world oil market is threatened by unrestrained domestic fuel consumption. Saudi Arabia’s ability to stabilize the international oil market by turning export volumes up or down would be damaged, with spare capacity used up to maintain export volumes.

How Saudi Arabia will respond?

Firstly, Saudi Arabia has identified energy efficiency as a key national priority and sees renewable energy sources as supplementing existing sources. The issue of energy efficiency is, indeed, crucial. Khalid Al Falih, head of Saudi Aramco, expects domestic energy to rise from to about 8.3 mb/d in 2028, or an increase of almost 250 per cent. But improved energy efficiency and stop the fuel subsides could reduce that increase by half or more. The issue of fuel subsides, although it is politically sensitive to tackle, however Saudi Arabia must deal with it soon than later. Citigroup warn that the world’s biggest crude exporter – could become a net oil importer in the next 20 years. A quarter of the country’s fuel production is used domestically, more per capita than industrialised nations, because the cost is subsidised. According to IEA’s estimates of energy subsidies (Oil, Gas, Electricity) in Saudi Arabia is between 40 and 45 billion dollars in 2011. It is encouraging that there is a growing push within the Kingdom to develop and apply clean energy technologies and to reduce dependence on oil consumption; But Saudi Arabia needs to unite efforts in the framework of the decision-making and move more quickly in this area.

Secondly, Saudi Arabia needs to diversify its energy mix. The switch to gas is one of several measures the kingdom is taking to reduce oil demand. According to Al Falih, Aramco is planning to increase the conventional and unconventional gas supplies by almost 250 percent over the coming couple of decades. Saudi Arabia also announced recently it will adopt a wide-ranging solar strategy, outlining plans to invest $ 109bn over the next 20 years in order to take advantage of its excellent solar resources. According to many experts this path may be safer and less expensive. However this policy needs Saudi Arabia to accelerate the application of smart grids and the introduction of explicit regulations to govern the grids in the planning and execution stages. Furthermore, to manage electricity loads; the development of power storage systems; and defining standards and specifications for the integration of solar power plants with existing electricity transport systems. Additionally, Saudi Arabia seriously considers the introduction of nuclear and renewable energy as an option to counter the challenge as well as to diversify the industrial structure for the nation’s sustainable development. However, Citi group report notes that “nuclear projects however present execution risk given; the lack of available nuclear power experts, no history of successful execution in desert conditions and capital costs are high in any event (…) All-in-all we believe these issues are likely to result in delays to Saudi Arabia’s target nuclear power launch of 2019.”

Thirdly, Preserving Saudi Arabia’s spare oil production capacity is crucial to maintaining the Kingdom’s political and economical influence. According to Saudi Petroleum Minister Ali al-Naimi, it is that spare capacity which “has been tapped to compensate for production disruptions and declining supply from other major suppliers, and is a cornerstone of the kingdom’s energy policy.” Furthermore, Saudi ARAMCO is pushing to become the world’s largest vertically integrated energy company. ARAMCO’s ‘2020 Strategic Intent’, a programme which, in the next 20 years, aims to ‘to establish an integrated value chain approach in the company crude oil mix, further develop the Kingdom’s unconventional gas resources, and become a leading global chemicals and refining company. Saudi Arabia is also participating in oil processing and storage projects in Asia. These actions are to improve access to markets and protect Saudi Arabia’s future oil shares in the region. ARAMCO plans to build refineries in Asia as part of a spending program to double refining capacity in 2015and in a bid to become the supplier of choice for the booming economies of Asia. These all are positive steps, but required the Saudi decision-maker to increase transparency and increase public awareness in order to support these strategic shifts.

Last but not least, Saudi Arabia still needs to diversify its economy; Riyadh sees its strategic and energy future as revolving around becoming a global economic and energy power, an indispensable economic power‖, based on being a dominant global supplier not only of oil but also of other energy-based commodities, at least in chemicals and fertilisers. Saudi Arabia currently accounts for 7 percent of global supply of basic and intermediary products, and is committed to producing 10 percent of the world’s petrochemicals output by 2015. Another goal is to increase Saudi Arabia’s share of the global plastics petrochemical industry from 1-2 percent today to 15 percent in 2020. Saudi would like to become the newest plastics hub. However, Saudi Arabia should continue to strongly encourage non-oil-related sectors such as small and medium industries, tourism and the development of a competitive financial sector. Saudi Arabia is the largest economy in the region and has enormous potentials can turn the country into financial and tourist center in the region.

To conclude, it must be said that with the increase in the population, urbanization and the growing numbers of young entrants to the labour market in Saudi Arabia, the Kingdom should educate its people about the next stage … that the reliance on oil policy cannot be guaranteed forever, and in practice could not be sustained.

(Dr. Naser AL-Tamimi is a UK-based Middle East analyst with particular research interest in energy politics and political economy of Saudi Arabia, the Gulf and Middle East- Asia relations)
Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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