Could Saudi Arabia lose its oil exporter status by 2038?

Jan 6, 2012 – 10:30 AM ET

Ali Jarekji/Reuters

Ali Jarekji/Reuters

Saudi King Abdullah bin Abdul Aziz al-Saud.

If Saudi Arabia’s current domestic energy consumption patterns continue, the country could lose its status as the top oil exporter in the world over time and turn into a crude importer by 2038.

The stark warning came last month from UK-based consultancy Chatham House which argues that the combination of an annual 7% rise in domestic consumption and flat oil production levels was ‘unsustainable.’

“The country currently consumes over one-quarter of its total oil production – some 2.8 million barrels a day. This means that on a ‘business as usual’ trajectory it would become a net oil importer in 2038,” said Chatham House in a report.

For a country that sits on one-fifth of proven oil reserves, this may not be the most likely outcome but the possibility does signal the urgency of the need for change in the country’s energy consumption policies.

Of course, the trajectory could change swiftly with greater efforts to conserve energy and ramping of new oil production, but recent comments from the country’s national oil company Saudi Aramco suggest the Kingdom is not expanding its existing capacity of 12 million barrels per day any time soon. (Also Read: Saudis worry over North American shale oil surge.)

“On a ‘business as usual’ projection, this would jeopardize the country’s ability to export to global markets. Given its dependence on oil export revenues, the inability to expand exports would have a dramatic effect on the economy and the government’s ability to spend on domestic welfare and services,” says Chatham.

CHANGING DEMOGRAPHICS The Kingdom’s demographics are changing fast and making more demands on the country’s finances and resources. It has a rapidly growing population of 27 million, with a third of the population under the age of 14 and high unemployment (officially 10.5–11% of the Saudi labour force, unofficially anything between 20% and 30%).

To nip similar social unrest in the bud faced by its Middle East neighbours, King Abdullah Bin Abdulaziz Al-Saud unveiled a US$130-billion stimulus package last year, which included salary hikes in the public sector, easier access to home loans, and 60,000 jobs in the Interior Ministry. This splurge has raised the country’s breakeven budget oil price to US$83-$88 — almost double to what it was three years ago.

While the country has well over US$500-billion in foreign assets reserves to cushion any financial blow, much of the US$130-billion stimulus is recurring expense, chipping away at the country’s earnings. That figure will only rise as legions of young Saudis enter the market looking for jobs over the next few decades.

IMPACT ON INTERNATIONAL MARKETS Chatham estimates show that current consumption trends in Saudi Arabia could deprive the world market of up to two million barrels per day by 2020 compared with the IEA’s supply scenario. Saudi Aramco has warned that Saudi Arabia’s crude export capacity would fall by about three mbd to under seven mbd by 2028 unless the domestic energy demand growth is checked.

Saudi Arabia’s ability to stabilize the international oil market by turning export volumes up or down would be damaged, with spare capacity used up to maintain export volumes, says Chatham.

As this spare capacity is eroded, and if other oil reserve holders such as Iran and Iraq fail to invest adequately in upstream capacity, an oil supply crunch leading to major price spikes on the world market is likely.

“While this may help oil producers balance budgets in the short term, in the longer term a dip in the oil price would be likely, followed by decline as new production comes on-stream and responsive national policies move even emerging markets away from oil. This would be even more damaging for the Saudi economy than our simulation suggests.”

To change that course, Chatham says the Saudi government should look to develop alternative energies and reduce subsidies on transport fuel — which, at 12-16 US cents per litre is one of the lowest in the world.


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