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Saudi Arabia’s Changing Oil Equation

October 1, 2013

For decades since the 1960s, Saudi Arabia has been able to manage the price of oil.

It has had the ability, for the most part, to cut production to maintain higher prices, or increase production to maintain lower prices.

It has the ability to produce 12 million barrels per day (mbd) of oil, and claims to be able to increase this to 15 mbd.

Two events have now overtaken Saudi Arabia.

The first has been the revolution in U.S. oil production, as the result of fracking.

The second has been the dramatic increase in oil consumption within Saudi Arabia.

America’s oil revolution has limited Saudi Arabia’s ability to turn the oil spigot on or off.

More importantly, internal events in Saudi Arabia have put its ability to export oil at risk.

Saudi Arabia’s use of oil has doubled since 2000, with 2.9 mbd of oil being consumed within the Kingdom in 2012, roughly 25% of its production.

Population growth, growth in chemical plants to produce chemicals for export, and growth in the number of desalinization plants have resulted in increased use of oil for power generation and increased use of natural gas in petro-chemical plants. Population growthhas also resulted in increased use of gasoline and diesel fuel.

The kingdom’s use of oil to generate electricity increases to 1 mbd during the summer months.

King Fahd has warned that internal consumption could grow to 8 mbd by 2030.

With these changing conditions, the Kingdom has undertaken actions to improve energy efficiency and to shift to alternative forms of power generation.

Saudi Arabia plans to more than double its power generation capability from 55 GW to 120 GW by 2020, placing more strains on its ability to export oil. It has linked its grid to that of other nearby countries, such as the UAE and Bahrain, to mitigate the effects of sudden changes in load or generation.

Saudi Arabia’s economic calculus has changed.

Its most valuable assets are oil and natural gas: Oil for export, natural gas for use in chemical plants.

In the case of oil, it can sell it for around $100 per barrel. If it can use alternatives for generating electricity, it can reduce the amount of oil used for power generation, and sell it instead.

Installing concentrating solar power (CSP) plants that produce expensive electricity, is better than using its valuable supply of oil or natural gas for generating electricity.

Concentrating solar power tower from EIA

Concentrating solar power tower from EIA


That calculus is different than in the United States where we have low-cost natural gas and coal that can generate inexpensive electricity.

The UAE is developing a nuclear power plant for the same reason.

Saudi Arabia is also spending more money on developing new oil and natural gas fields, including the possibility of shale gas. It’s becoming a leader in technology rather than merely a consumer.

It’s important for the world economy for Saudi Arabia to be successful in developing alternatives to replace its use of oil.

Removing an additional 5 mbd of oil, a possibility outlined by King Fahd, in conjunction with increased consumption in Asia, India and elsewhere in the world, could cause the price of oil to increase dramatically.


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7 Comments leave one →
  1. VACornell permalink
    October 1, 2013 2:19 pm

    Donn….thanks for an excellent article on Saudi Arabia…! I grew up out there… In 1951, after my MSChE from USC, I went out there… And lowered the price of Arab Light from $2.12 per barrel.. To $1.89… And held it there for three decades… Everyone had to meet our competition, as we could control production… We had a lot of oil…(as you point out).. The World had an unpresidented period of prosperity…x30 years.. Just because of my USC education…

    Sent from my iPad Vern Cornell


  2. October 1, 2013 3:39 pm

    Thanks for your comment. Your personal knowledge about Saudi Arabia makes your comment especially important.
    I think it’s vital for people to understand what’s going on in the world with respect to energy issues. Saudi Arabia is a key country, and what’s happening there affects us.

  3. October 1, 2013 9:23 pm

    Reblogged this on Pankaj Oswal and commented:
    This writer makes a strong case about the shifting control by Saudi Arabia over the price of oil due mainly to the country’s dominance as a producer as well as tempered use of the commodity.

    It seems now that increased demand for use in Kingdom, coupled with rival producers, particularly in the US, and alternative products, has caused quite a stir.

    Worth some consideration.

    • October 2, 2013 10:02 am

      Thanks for your comments, and for reblogging the article.
      As Vern, see above, knows, I was active in Saudi Arabia and that area of the Mideast. I have seen the area when the Kingdom was poor and after it became rich. Now we see the situation changing again, though we cannot know the eventual outcome.

  4. jmdesp permalink
    October 14, 2013 5:37 am

    It’s useful to point out that at the moment the US tight oil production has lead to prices that are much higher than what SA used to be able to maintain. Yes it’s good for the US to progress toward energetic independence, but the complexity of the extraction results in a price that is much less favorable for the economy than cheap oil used to be.

    Saudi Arabia is also planning 18 GWe of nuclear, as well as additionally some reactors specifically for desalination, and this would actually provide as much energy per year as their solar program. It has like UAE confidence it will find vendors that are able to deliver on time and budget, as is the case for the 28 nuclear plant currently under construction in China.

    • October 14, 2013 9:25 am

      Thanks for your comment. Here’s my view:
      Fracking isn’t the cause of higher prices for oil, it is the beneficiary.
      Higher prices on the world market have allowed higher cost extraction techniques to become economic.
      Aside from the role of OPEC, prices are the result of supply and demand. In the final analysis, the new techniques that produce more supply, as demand for oil grows, will help restrain price increases from exceeding the rate of inflation.


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