Foreign Correspondence

[Amaunet]

Saudi Arabia's balancing act

Jordan Times - 01/04/2004


By Rima Merriman


IS SAUDI Arabia sitting pretty in the battle for "energy dominance?" Well, there is good news and bad news and many myths in between. It's hard to trust forecasters, especially in times of crisis and uncertainty. Witness the prediction of most mainstream forecasters after OPEC's 1973 embargo that oil would cost over $100 a barrel by 2000. Such forecasters included those at the US Department of Energy. As everyone knows, oil prices are volatile. But since 1970, prices have ranged between a low of $9 a barrel and a high of $40 — a far cry from the prediction. Last December, the US Energy Information Administration, which predicts trends up to 2025, projected that the years of erosion of OPEC's market share could be coming to a close.
Now the negative hype about Saudi oil is back in the news. "Forecast of rising oil demand challenges tired Saudi fields" read a recent New York Times headline.

"But the country's oil fields now are in decline, prompting industry and government officials to raise serious questions about whether the kingdom will be able to satisfy the world's thirst for oil in coming years." Another way of looking at this is from the Saudi point of view: it looks like it is going to be easier for Saudi Arabia to maintain the price of oil at the level necessary for its own development. Saudi economists estimate that the country needs to keep oil prices at around $25 a barrel.

For the first time since the 1980s, Saudi Arabia is projected to show a budget surplus. Just some months ago, based on a conservative price estimate of $17.50 per barrel, the country was staring at a budget deficit of $10 billion. Now it looks like Saudi Arabia will show an estimated surplus of $13.6 billion. Its real GDP growth in 2004 is estimated at 3.5 per cent, much higher than the average growth rate of 0.2 per cent over the last decade. The country will be able to continue to subsidise food and fuel at home and cope better with high unemployment rates, a bloated state sector and fast population growth. So has Saudi Arabia finally found the tools to point the market in its favour?

The good news for Saudi Arabia includes the following factors: The spectacular basics haven't changed. Oil currently accounts for 40 per cent of global energy consumption and is not anticipated to fall much below this share in the next 20 years. The country is still sitting on top of more than a quarter of the world's total oil reserves and produces about 10 per cent of world oil output. Its spare stores are still unparalleled, giving it the ability and power to buffer the world's economy against oil shocks and to be a dominant price-setter in the global oil market. It can expand its capacity to 12 million barrels per day (bpd).

The unfolding scenarios about the self-serving objectives of the US and its manipulations of Iraqi oil may look bad for Saudi Arabia, but they are not as bad as some analysts make them out to be. Iraq's proven oil reserves are estimated at 112 billion barrels, certainly enough to meet current US import needs for a hundred years. Some believe that reserves could be as much as 310 billion barrels, as compared to Saudi Arabia's 262 billion. However, Iraq is still unlikely to become a swing producer. Few analysts believe that its output will rise even up to 6 million bpd in a decade; Saudi levels are over 8 million bpd. According to Iraqi oil minister, Ibrahim Al Uloum, a serious capital investment "in the range of $50 billion" is needed for Iraq to get there. Iraqi exports are not expected to regain pre-war levels, around 2.8m bpd, before the second quarter of 2004.

Russia? Russia is currently producing 7m bpd. The projected rise in its production is up to 9-10m bpd (Russia will deplete its current reserves by 2040). Many of the country's ports are frozen for part of the year, which means swift deployment in the event of a crisis is problematic. But most importantly, because Russia's oil is in private hands now and because spare oil is considered a waste of shareholders' money, Russia will never be able to maintain a buffer in spare oil.

The recent news that Robert McKee, senior oil adviser for the Coalition Provisional Authority, is moving in the direction of keeping Iraq oil state-owned and not pursuing privatisation is "just pragmatism", as he is reported to have said. Part of the pragmatism that no one is mentioning (much of what one comes across is about the virtues of privatisation) is that state-owned oil can be leveraged more easily than private-owned oil even in a US satellite state.

More good news for Saudi Arabia: All current projections made by the United States Department of Energy point to increasing dependence on imported oil by the US. Long before President Carter viewed the US energy crisis as the "moral equivalent of war" and all the way up to the actual recent war in Iraq, the US has been trying to decrease its dependence on foreign oil. The US Energy Security Act of 2000 calls for a reduction of all outside sources of energy to 50 per cent by the year 2010 through increasing domestic energy supplies and other measures.

But finding new sources of supply is an enormous challenge. The International Energy Agency (IEA), that coordinates the strategic policies of consuming countries, figures that the oil industry needs to invest as much as $2.2 trillion over the next 30 years in replacing declining production and in exploration. Mature oil resources in Alaska and the North Sea, for example, are declining. Given this, OPEC's market share can only increase, especially since production costs in Saudi Arabia are less than $1.5 per barrel (compared to double that in Russia, for example). This fact deters development of alternative energy sources and reduces investment in exploration by other countries. All major production increases from 2010 to 2020 are projected to come from the Gulf.

At any rate, the notion promulgated by US politicians and now firmly lodged in the popular imagination that lower dependence on Middle East oil will protect the US from the negative effects of a potential oil shock is not even true. When there is a supply disruption, even if the US is not dependent on the supplier that caused the disruption, it will suffer high energy prices like everyone else. That's because oil is a global commodity. So if the US were to import less crude oil from Saudi Arabia and more, say, from the Caspian basin, offshore West Africa or the deep water Gulf of Mexico, or from Iraq, some Saudi exports would go elsewhere. Currently, the United States is Saudi Arabia's largest oil export market, followed by OECD Europe.

Oil now accounts for almost 30 per cent of Chinese energy consumption. China imports 60 per cent of its oil from the Gulf. This figure apparently could rise to 90 per cent in the next two decades. Demand from Western Europe and South and East Asia is determined by availability and price.

On the negative side for Saudi Arabia are the following factors: the country must continue to balance its internal financial requirements with the need to stabilise and moderate oil prices while increasing its market share, and that's a tight-rope act in the best of circumstances. In spite of attempts at diversification, the Saudi economy remains heavily dependent on oil. It costs the Saudi budget an estimated $2.7 billion in lost revenue for every one dollar drop in oil price. Every year, more than 100,000 Saudis enter the workforce, yet the non-oil private sector is only creating enough jobs to absorb about one in three job-seekers.

The determination of IEA members to increase strategic petroleum reserves will reduce Saudi swing power in the market except in the event of a prolonged disruption. IEA members are obliged by law to release strategic stocks at a combined rate of something like 5 million bpd for about four months or less than 3m b/d for half a year (Saudi spare output, which can be sustained for years, is 2.5 million bpd to 3 million bpd).

Other measures also affect Saudi Arabia's ability to manoeuvre. When oil prices are high, Saudi Arabia gets accused of taking part in "international price-fixing conspiracy" by cutting back output. For example, in March 2000, the United States House of Representatives passed a bill urging that aid and military sales to OPEC countries be cut off. Also in July 2000, the US Senate antitrust subcommittee approved a bill enabling antitrust regulators to sue OPEC for fixing prices and setting production levels for crude oil.

And lastly, these days, an important factor in the volatility in international oil markets is terrorist activity in Saudi Arabia and other oil producing countries. For example, the price of crude oil jumped 10 per cent (to $28.9 per barrel) in the aftermath of the May 2003 bombing in Riyadh. Saudi Arabia must maintain stability in the kingdom — no mean feat.

The writer lives and works in the United States. She contributed this article to The Jordan Times.


http://www.menafn.com/qn_news_story_s.asp?StoryId=46146