The Future of Saudi Oil
DEVELOPMENTS
The Middle Eastern economy has thrived on oil profits since the 20th century, with six Middle Eastern states making the list of the world’s top 15 oil exporters. As oil prices soared to $147 a barrel in July, Saudi Arabia stood by a June pronouncement to increase output above its average production rate for the remainder of 2008. The move by the House of Saud was the product of many forces—Saudi Arabia’s geopolitical interests, diplomatic pressure from developed countries with diminishing reserves, and security concerns regarding Iranian profits from inflated oil prices. The announcement was approved by Abdallah bin Abd al-Aziz Al Saud, who has served as King and Prime Minister since 2005.
As demand for oil rises, and proven supply plateaus, the method by which oil exporting countries in the Middle East (particularly Saudi Arabia) handle their dwindling supply will determine the viability of those countries’ political and economic systems. OPEC member states will have to decide how to bolster their GDP with income from other sources while oil supply dwindles. Governments that fail to solve this puzzle could find themselves out of power.
Saudia Arabia has launched several political and economic reforms. How it shifts away from being predominantly a petro-state will determine oil's future role in the Middle East. There are two possibilities. First, oil could become a dwindling resource that will be increasingly less important to economies of OPEC countries. Or, second, these countries may use the dwindling oil supply as a crutch, threatening stagnation and regional insecurity, as they continue to myopically rely on oil as the lucrative guarantor of economic security. Under the former scenario, countries will follow Saudi Arabia’s lead in finding outlets for private industry through industrial manufacturing, education, and other industries that will enable them to successfully transition from primarily petro-based economies to more diversified economies. In the latter possibility, the results could produce any number of vices, such as corruption, mismanagement, or unfulfilled promise of new resources.
BACKGROUND
Oil provides 40% of the world’s energy, and 96% of the world’s transportation energy, according to the Institute for the Analysis of Global Security. The Institute predicts oil consumption will increase by 60% between now and 2020, propelled by rising demand in China and India. Of the Middle Eastern nations that hold in aggregate 66% of global oil reserves, 20-25% of the world’s proven oil reserves are estimated to be in Saudi Arabia. If oil production continues at its current pace, the Institute estimates that by 2020, 83% of remaining proven oil reserves will be controlled by Middle Eastern nations. This not only raises questions about what new forms of diplomatic leverage these oil exporting states might exert over their client states, but also how this leverage might affect the Israeli-Palestinian conflict or the U.S. presence in Iraq or Afghanistan.
As the world’s largest producer and exporter of total petroleum liquids, Saudi Arabia is a key player in the Middle East’s energy future. Its state-owned oil company, Saudi Aramco, effectively runs the national hydrocarbon sector, subject to the supervision of the Saudi Ministry of Petroleum and Mineral Resources and the Supreme Council for Petroleum and Minerals, which comprises the Saudi royal family, industry experts, and government ministers.
Petroleum accounts for 45% of Saudi Arabia’s GDP. But it is the other 55% that has drawn much of Saudi Arabia’s attention recently. Acknowledging the need for diversification, the royal family developed the Saudi Arabian Basic Industries Corporation (SABIC), a major national producer of industrial materials. SABIC is estimated to produce 48 million tons of the goods by 2010. Sovereign wealth funds, foreign asset investment, and the creation of government-supervised credit institutions for foreign direct investors have also allowed Saudi to nurture its private sector GDP growth, which in 2002 was at 4%, compared with less than 1% growth in overall GDP.
The reforms in Saudi Arabia are not just limited to business. High unemployment rates among Saudi males have prompted political reforms. The first big step came in 2005, when the royal family organized and held the first elections for representatives in 178 municipal councils across 13 provinces.
But even these political reforms might not be enough to ensure Saudi Arabia’s continued resilience if oil runs out. A rising Shi’a Iran has sparked concern. The House of Saud may feel threatened by Iran’s nuclear ambitions, even though some analysts believe the Saudis have sought their own nuclear weapon for years.
ANALYSIS
Saudi Arabia's options for leveraging its proven oil reserves appear to fall into three categories. There is a nuclear option (figuratively speaking), a hoarding of reserves option, and a middle path that would leverage its resources to assure a blend of sustainable political and economic reforms while also deterring regional aggressors.
Saudi Arabia is unlikely to pursue a nuclear or disruptive option with its oil for two reasons. First, the reputational effects Saudi Arabia would suffer for reneging on its commitment not to use oil as a political weapon and second, the time and resources required to boost capacity to the level desired to achieve these objectives would be costly.
The hoarding option is also unlikely in the near future because Saudi reserves will last for 80 years at current production rates, far longer than the average non-Middle East producer’s (15 years). With such disparity, Saudi Arabia can afford to continue current levels of production and retain superlative profitability on its production in the long term, provided supply remains constant or continues to rise.
The most likely path for Saudi Arabia is the one it is currently pursuing – to be a leader in reconciling developed nations’ needs for oil with the interests of OPEC states. Positioned at this fulcrum, Saudi Arabia can continue to get the foreign direct investment it needs to ensure the success of its continued efforts to diversify its economy, and by so doing, ensures the success of its incremental political reforms, all while preserving the stability of its society and a security guarantee against possible Iranian hegemony. For the U.S., this means that Saudi Arabia will continue to be one of its best and closest partners in the Middle East for years to come.
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Foreign Policy Digest Editors