Saudi Arabia's Biggest Threat

Brian Hicks

Written By Brian Hicks

Posted December 18, 2013

It turns out the biggest threat to Saudi Arabian oil production may be Saudi Arabia itself.

Saudi Jadwa Investment Bank said that rising demand in the Kingdom will hamper export efforts. This will have both a long-term and short-term effect on international supply, which could open possible exporting opportunities for North America.

Saudi Arabian ProductionThe surplus of shale oil from North America could soon force Saudi Arabia to cut rates on its own light-quality crude. And demand for OPEC oil is expected to dwindle in the coming years as North America explores for shale and sand resources.

West African light crude has already suffered from lower demand because of domestic production in the U.S. and Canada.

Rising domestic demand couldn’t come at a worse time for the Kingdom, as the U.S. is approaching a record production rate of 9.6 million barrels per day by 2016. And with more NGLs flooding into the market from North America, Saudi Arabia’s stockpiles will be unable to compete.

An increase in liquefied petroleum products (LPGs) in the U.S. may also force Saudi Arabia to cut prices – something that will benefit refineries already struggling with lower demand from slow economies. Since Europe processes light oil resources, it stands to benefit even further from lower prices.

Within Saudi Arabia, oil prices are much lower, fueling more demand for at-home needs. We know that Saudi Arabia relies on its destitute population and economy in order to keep exports alive, but economic growth continues nevertheless.

Saudi Domestic Growth

By the end of 2013, oil demand in Saudi Arabia will reach 2.98 million bpd – an increase from 2.92 million in 2012. The scary part for the Saudis is that domestic consumption may surpass production within a 20-year time frame.

The Saudi economy is expected to remain stable from 2013 to 2018. GDP will grow 3.6 percent this year and 4.4 percent in 2014, according to data from the International Monetary Fund.

Saudi Arabia is not known as a country that cares about its citizens, since it relies on heavy exports to enrich the royal family. However, it must toe the line, satisfying the most basic of social needs to quell growing dissent. Unemployment is 12.1 percent, and officials have tried to alleviate this problem by cracking down on illegal foreign workers and fostering job creation in the country.

If anything, the royal family wants to cater to developing markets rather than create the same economic opportunity at home. The last thing the Saudis want to do is create a growing and robust middle class like in China or India.

WTI or Brent Investment?

OPEC will take a massive hit from North American production, but Asia is still a growing market that will fuel demand. With U.S. regulations very restrictive when it comes to exporting natural resources, OPEC will still remain at the top as China and India demand cheap oil.

The U.S. can make inroads into the European market for tight oil, but shale oil could have trouble competing with Saudi Arabia’s cheap and abundant crude.

But the Saudis could have massive problems if the Iranians begin ramping up production, which could force the OPEC leader to cap production. The Saudis have virtually no control over the Persians, and they are slowly losing control over Iraq as well, where leaders are also hoping to ramp up production to full capacity.

OPEC is going to take a hit on NGLs, LPGs, and tight oil, but it will remain on top with conventional oil. As of now, the U.S. may not be able to compete with thick crude from OPEC. WTI crude is higher in quality, but major markets in Asia prefer quantity over quality, and they want it cheap. Canada stands a higher chance of competing only because it does not have the same restrictions as the U.S. for exporting to non-FTA countries.

And a recent report from the EIA suggests U.S. tight oil production could begin to slow after 2020, supporting OPEC suspicions that U.S. production may not be as strong as suspected. OPEC members also believe that drilling technology will not keep up with production, and it will become too expensive to explore for oil.

But with the U.S. approaching record levels of production while reducing import demand, there is no sign of this happening anytime soon.

North Dakota and Texas have already reached record levels, and there are a variety of new shale oil and gas plays that show promise.

The U.S. is slowly becoming an oil superpower, and shale oil is the worthwhile investment for those looking to stick with at-home investments. With liquids production at record levels and natural gas prices creeping up at home, this will spur passion to engage in more projects.

No one is predicting Saudi Arabia’s downfall. But it will be interesting to see how the Kingdom intends to remain on top of the export market while balancing the needs of its people.


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