In a recent article for Foreign Affairs magazine, Saudi economy expert and investment banker Dr. John Sfakianakis writes that while it may be easy to think that the shale boom in the United States is threatening to the world’s largest oil producer in Saudi Arabia, there are several reasons that more production from the United States may actually be beneficial to the Kingdom.
In the must-read article, Sfakianakis, who is a weekly contributor to the SUSTG.org blog, notes that an increase in supply from the United States could help mitigate major price swings in oil, which create huge risks for the Saudi economy:
“Unpredictable oil prices and a collapse in revenues in the 1980s and 1990s made Saudi Arabia particularly wary of uncertainty. Over the next few years, the increase in energy production in far-flung locations and diverse sources, including from shale, will help mitigate those swings. Eventually, increased supply will also help create stable new price floor for oil, which is now estimated to cost around $80 per barrel.”
A shale oil site in North Dakota, United States.
Photo courtesy of Marsh Energy
Although production is increasing in the United States and the U.S. is a major global consumer of energy, it is unlikely that the U.S. will reach energy independence for decades, if ever – and consumption in the Asian economies is projected to soar. And with the United States consuming the energy it produces, that leaves Saudi Arabia in a good position as a holder of spare capacity in future times of crisis. As Sfakianakis puts it:
“Markets that have traditionally relied on Saudi Arabia will continue to do so; and no other country is likely to be able to ramp up production capacity enough to amass such a large reserve, especially since more than a few of them have outsized domestic demand that they will struggle to meet.”
John Sfakianakis
However, regional increases in production from the recently war-torn Iraqi and Libyan economies is a worry for Riyadh – as is the soaring amount of domestic consumption of oil in Saudi Arabia’s energy-hungry and growing economy. “If consumption continues apace, Saudi Arabia could eat all of its extra oil capacity and, consequently, lose its role as oil-market bulwark.”
The full analysis by John Sfakianakis is available on the website of Foreign Affairs magazine, and it is a frank assessment of Saudi Arabia’s energy role in a changing global landscape.
