Saudi government officials like talking to the media about oil. They invariably come across as upbeat, confident that the OPEC deal will achieve its goal of shrinking the global oversupply, and equally confident that U.S. shale will not seriously eat away at their oil revenues, however fast it grows.
The general message seems to be: We can handle everything. Behind the scenes, however, things look differently, Time reports, citing former and current U.S. government officials with experience in the Kingdom.
Following an interview with Crown Prince Mohammed, in which he anticipated a bright future for crude oil thanks to new strong demand, Time talked to several U.S. officials who shared their concern about how realistic this view of the industry actually is.
In fact, these officials believe Saudi Arabia is still overdependent on crude oil, and this could spell trouble for the barely contained powder keg that is the Middle East-a ripple in crude oil would likely set the region all ablaze. What's more, they say, Saudi Arabia is still unable to make ends meet, even at the current higher oil prices. If prices fall and its deficit deepens further, the Kingdom would be hard pressed for an urgent change in its heavily subsidized economic model. There is even a danger of the economy crashing, one U.S. official said, and should this happen, chaos will ensue. Related: Escalating Trade War Ups Pressure On Oil Prices
It is possible that Saudi officials are downplaying some very real threats to all the ambitious economic reform plans initiated by Mohammed bin Salman. However, it seems difficult to gauge the importance of these threats when Saudi sources are often at opposing ends of the opinion spectrum. Some, U.S. officials say, are adamant that everything around the reforms is proceeding smoothly. Others are equally adamant that the Kingdom is running on fumes that will soon evaporate.
In any case, there is some concern about what the future holds for Saudi Arabia and that was summed up perfectly by the Council of Foreign Relations' energy security and climate change program director, Amy Jaffe. "If they're talking about it," she told Time, "they're worried about it."
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
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Comments
How fast things change. In just the span of a few years oil has become a common resource w prices desperately held up as reserves & production grows by an alliance between the two largest producers OPEC/Russia & their willingness to idle more & more production as the USA speeds toward becoming the worlds largest producer.
It’s not just that oil is no longer a scarce resource. The world can recover more & more of it at lower & lower cost. It’s that we are also beginning to hit critical mass w renewables. We are fast approaching the day when wind & especially solar & other renewables will be cheaper than the current price of oil & gas, & we never know when a sudden break through in solar or fusion will completely change the picture. We don’t know when but a child born today will live in a world where carbon fuels will be a quaint dirty form of energy looked upon the way we look at horsepower or the steam engine. It could even be a 30/40 year old will see that future.
The new crown prince of Saudi Arabia seems to realize that. The question will be whether there is enough gas left in oil & gas for him to mitigate the pain of taking Saudi Arabia into the future at break neck speed or whether the speed of these changes will catch it long before it can be ready.
In early February 2016, the Saudi's said that they can still produce a profit with oil at $10/bbl, a price no other producer can still afford to keep the pumps on.
WTI is currently more than 6 times that price, and now there is talk of possible economic collapse, despite approx. $100 billion recently recovered from "corruption" on behalf of numerous Saudi princes and billionaires (which accounts for roughly the same amount of money that the Kingdom was hoping to achieve this year through the 5% sale of Aramco IPO, which still has no specific details).
So, it appears as though the crown prince's (MbS) 'Vision 2030' just might be a bit of a pipe dream? But don't worry if you are an oil bull...because with today's rig count data from Baker Hughes (which showed an increase of 11 U.S. oil rigs), even though this bearish news will most likely lower prices on Monday, I'm sure the very moment WTI is approaching $60/bbl (I estimate early on Tuesday) that there will be such incredible jawboning from Saudi's oil minister Khalid al-Falih that the price of WTI will be back to $65+ before this time next week.
In this respect, they are not different from the United States talking about the prospects of the petrodollar vis-à-vis the petro-yuan and the future of its shale oil industry or China talking about its energy security.
Oil’s future and by extension Saudi oil is assured far beyond the 21st century. On the 8th of December 2016, the United States Association for Energy Economics (USAEE) published a research paper of mine titled:” A Post-Oil Era Is a Myth” (Working Paper Series No: 16-290) in which I argued forcefully and convincingly that oil will continue to reign supreme throughout the 21st century and probably far beyond. This is despite the hype about the advent of electric vehicles (EVs).
The media claims virtually on daily basis that it is just a matter of time before EVs start to materially reduce global oil demand. They also claim that EVs are yet another reason why the decline of oil production and consumption is inevitable. Except it isn’t true.
Even a wider EVs penetration of the market projected by some experts at 50 million EVs by 2024 and by BP at 320 EVs by 2040 will only reduce the global demand of oil by 0.83 billion barrels (bb) or 3.3% by 2024 and by 3.15 bb or 7.6% by 2040 according to my research.
For Saudi Arabia and other Gulf Cooperation Council (GCC) countries - Saudi Arabia, UAE, Kuwait, Qatar, Oman and Bahrain – there would be no post-oil era ever.
Contrary to widely accepted wisdom, oil will remain an integral part of the Middle East economies throughout the 21st century and far beyond. Even if cheap alternatives to oil in transport, water desalination and electricity generation were to become readily available in the future, oil will not be left underground because the Arab Gulf oil producers will use it to power thousands of water desalination plants to generate enough water not only for drinking but also for irrigation to make the desert bloom again. They will also use it to dominate the global petrochemical industries and any industries in which oil is a feedstock.
My conclusion is that there is no cause for worry for Saudi Arabia about oil. There will never be a post-oil era through the 21st century and probably far beyond.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London