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Saudi Arabia's Essential Oil
JOHN SFAKIANAKIS is Chief Investment Strategist at MASIC.See more by this author
Last year, it was nearly impossible to miss headlines proclaiming the United States’ coming energy windfall. According to the U.S. International Energy Agency’s latest forecast, thanks to booming output from shale gas formations, the United States will be nearly energy self-sufficient by 2015, surpassing both Russia and Saudi Arabia in energy production. All this might seem like bad news for Saudi Arabia, which could see its regional and economic influence wane and its decades-long economic boom come to an end.
But the shale oil bonanza in the United States is actually a good thing for Riyadh. Over the last few decades, oil markets have experienced sharp price fluctuations, particularly with growing demand for oil in the emerging Asian economies. Oil is Saudi Arabia’s main source of revenue, so any price swings create big risks for the kingdom. 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.
At the same time, Saudi Arabia has little reason to worry about its position as the world’s supplier of last resort. Historically, Saudi Arabia has maintained more than half of the world’s spare capacity, even if markets did not put it to use all the time. In the future, too, its more than two million barrels of oil reserves will prove crucial whenever a supply crisis erupts. 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.