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Page added on December 18, 2013

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Local Demand, Not Shale, Poses Risk for Saudi Oil

Consumption

For Saudi Arabia, as well as the other oil-rich Persian Gulf countries, the challenge of recent years has been how far and fast it can increase oil production to offset any possible fall in market output.

But now shale oil, responsible for an unexpected surge in production in North America, is starting to pose a very different challenge for the kingdom. As forecasters expect increases in supply to outpace demand next year, Saudi Arabia and other members of the Organization of Petroleum Exporting Countries may face output cuts to balance the market and help keep prices stable.

The shale oil bonanza has already turned the oil market on its head, driven oil from West and North African OPEC members out of the U.S. and dented demand for OPEC oil. It has also hit the price Saudi Arabia can charge U.S. consumers for oil.

But Riyadh-based Jadwa Investment Bank reckons shale could be the least of the kingdom’s troubles and its production won’t increase as most other observers predict.

“The key factor that will impact Saudi Arabia’s long-term position in the world’s energy industry is the high, and growing, internal demand,” Jadwa said in a recent note to clients. “We believe that high internal demand, spurred by low internal energy prices, will not only distort internal economic decisions, but will also, in the long-term, crowd out and reduce the income from Saudi Arabia’s oil exports.”

Indeed, if Saudi Arabia’s current energy-consumption growth rate of 7% a year continues unabated, within 20 years the kingdom will burn more than eight million barrels a day domestically, or around two-thirds of its current production capacity of 12.5 million barrels a day, some economists say.

Last year alone, the kingdom consumed around 3 million barrels a day of oil, according to the U.S. Energy Information Administration, almost double its 2000 level and putting it on track to use more than 5 million barrels a day if a 7% annual growth rate were to continue. Even the chief executive of the state oil giant Saudi Aramco, Khalid al-Falih, acknowledged in 2011 that, if left unchecked, domestic energy consumption would rise to 8.2 million barrels of oil a day by 2030.

So for the moment Saudi Arabia can continue to dismiss the changes in the U.S. as nothing more than a source of marginal additions to international oil supply and downplay the threat to their dominance of world crude markets.

For its petrochemicals industry, however, the situation is far less reassuring. As more feedstock becomes globally available at lower prices, the kingdom’s petrochemical producers, who pay at home a fraction of the feedstock cost on international markets, may see their comparative profitability fall, Jadwa said.

WSJ



5 Comments on "Local Demand, Not Shale, Poses Risk for Saudi Oil"

  1. Bob Inget on Wed, 18th Dec 2013 7:06 pm 

    To their credit the Saudis are, in addition to stocking up on the latest Western Great Satan weaponry, are the first to invest as much money as needed into solar and wind power, offsetting some domestic oil use. Obviously, if KSA is only able to export a million barrels per day, how will Royals feed their children?

    The environment for solar in KSA is near perfect with lots of space, sand and sun. If PV won’t work there it.. da da..

    Other side effects we hope Saudis avoid
    because of diminished oil exports;
    Roll Royce… out of business.
    Boeing, Lockheed, out of business
    Paintings on black velvet, no longer in demand.
    Gold plumbing fixtures, dead in water.

  2. J-Gav on Wed, 18th Dec 2013 7:48 pm 

    Nothing really new here apart from the cautionary statement in the final paragraph. It’s called the Export Land Model, first proposed by geologist Jeffrey Brown some years back. Just Google it.

  3. rockman on Wed, 18th Dec 2013 8:38 pm 

    J-Gav – I think they also miss an important aspect. The KSA internal consumption for oil may be increasing but it’s projected that more of that internal consumption will be refined and thus reduce their current demand for imported products. And a bbl of imported product cost more than they sell an export bbl for. Sometimes considerably more than some of their poorer quality crudes sell for. So that portion of internal consumption that reduces their imports actually increases their net income from this dynamic situation.

    Granted their oil export volume is significant more than their import volume, this is still oil removed from the market place and thus puts some upward pressure on oil prices. And then consider the refinery JV’s the KSA is doing with other countries, in particular China. Their Red Sea JV will take 600,000 bopd out of the market place. Some of those products will reduce the KSA import bill significantly since, being part owners of the refinery, they’ll be getting that share at actual cost with no profit margin added. And China, with its growing demand, will ship the rest of the products home. The net result, as long as China continues to grow, will be the removal of more oil from the market place.

    Eventually the KSA will still face the potential of not being able to export enough oil to generate enough income to service the country. But the situation might allow the KSA the time to ramp up their alternative energy sources. Even today a ridiculous amount of oil is burned to produce electricity. In a region that is exporting LNG half way around the world one would think that along with the alts the KSA would be moving more towards NG.

    And they also miss what I think is the most critical aspect to the KSA’s finite resource. Before the big surge in US oil production the KSA had a typical yearly income from their oil sales of around $60 billion. So while the US has increased production and reduced imports (of which a relatively small portion came from the KSA) the KSA revenue has soared to over $300 billion per year. I seriously doubt that 6 or 8 years ago the KSA had expected a 500% increase in oil revenue by this date. The KSA could cut their oil exports 50% and would still receive 50% more revenue that they were taking in that short time ago. And I’m fairly confident that if they did reduce global oil production by 4.5 million bopd prices would not collapse any time soon. And by doing so would also reduce their reserve depletion by 1.6 billion bbls of oil per year.

    I suspect that just an announcement that the KSA was voluntarily cutting exports by an even small volume the price of oil would stabilize. And perhaps even increase significantly. Perhaps significantly enough to cause enough global demand destruction to force the price back down. Thus there’s a tender balance for the KSA to maintain. But the key to remember is that they hold the power to set that balance. None of the oil consumers have shown any serious effort to voluntarily decrease oil consumption in the face of the price surge. In fact, the world is now consuming more oil than ever before in history. The rest of the OPEC countries have little capability to affect the dynamics to any significant degree IMHO.

    IMHO the KSA is in the strongest position they have ever been in. They are in complete control of their faith: limit production to keep price high but not sio high to create global demand destruction. And they have a very willing and capable partner in the game: China. As long as China can afford to acquire increasing amounts of crude at the current price it can offset the decrease in demand by those economies that are being pushed out of the market place.

  4. J-Gav on Wed, 18th Dec 2013 8:56 pm 

    Rock – “Eventually the KSA will still face the potential of not being able to generate enough income to service the country. But the situation might allow the KSA the time to ramp up their alternative energy sources.”

    I agree there’s little doubt that that’s exactly what they’re counting on. However, let us not forget that ‘renewables’ are,in fact, fossil fuel extenders – and that ‘extension’ is only likely to last a few decades. Then what?

  5. BillT on Wed, 18th Dec 2013 11:51 pm 

    Camels to camels in four generations…

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