Saudi Arabia has been the most important oil producer in the world since the early 1970s and it is likely to be so for many decades. It has the largest reserves. It is the largest oil exporter, to all corners of the world, and it has maintained a major and meaningful spare production capacity during the last three decades and will continue to do so in the future.
As global demand has increased during the past 40 years, Saudi Arabia has increased its production. It has met supply shortages due to wars, domestic conflicts, technical problems and natural disasters. It has a clear and transparent oil policy. It has a close working relationship with major oil producers and consumers, and the industry at large.
Above all, Saudi Arabia cares about the stability of the oil market. It seeks a balanced oil market, in terms of supply and demand. It also seeks a reasonable oil price which takes into account the interests of oil producers, consumers, the energy industry and the global economy.
Over the past fifty years, we have seen new oil production, new oil importers, and we have seen larger than expected increases in supply or demand and big fluctuations in the oil price. Throughout, Saudi Arabia’s policy has remained steady. Saudi Arabia has handled the demands placed upon it. It will continue to do so in the future.
What will be the implications of shale oil on global oil markets? The oil market today is vast: more than 90mn b/d of oil are consumed each day, around 32bn barrels per year. Consumption is set to increase due to increasing economic growth, rising levels of prosperity, and improving standards of living, especially in emerging and developing countries. It is also providing new economic opportunities for people around the world. So Saudi Arabia welcomes the shale oil boom. Why?
First, these new developments are important because global demand is growing. Global economic growth is rising, populations are rising, the middle classes are increasing in size – around 50 million people are added to the middle class each year. All this means the long-term demand for energy will increase and new supplies needed.
Second, shale oil is giving consumers and the world at large a sense of security in terms of energy supplies. It is diversifying energy supplies in terms of the locations and type. It is the new energy sources being found in the world.
Third, under a decade ago, we were told that the world was running out of oil. The supply peak oil theory was fueling price increases, leading to prices hitting $147/B in 2008. Today, the peak oil theory is little accepted anywhere.
Fourth, all new developments add depth to the market which helps stabilize oil prices. Take the uprising in Libya in 2011, which cut Libyan production and led to a sharp rise in price. Over the last 12 months, when there has again been a crisis in the country, and falling supplies, there has been no repeat of the price increases. There is no doubt that the oil market has more depth today than three years ago, thanks to shale oil production and thanks to Saudi Arabia.
Fifth, and lastly, the cost of shale oil developments and production are creating a floor for oil prices. Today, the floor is estimated to be between $60/B and $80/B. Having this floor is good for stability of the market and long-term investment plans. This ensures that oil will keep flowing for many years to come.
US MIDEAST POLICY: SHALE IMPACT
What are the implications of shale oil development on US international policy, especially the Middle East? I do not believe increased US shale oil production will change US international policy in the Middle East for three reasons: America’s status as a superpower, the oil market at large, and Israel.
The US position as superpower requires involvement in all regions of the world. Unlike other regions, the Middle East is currently in a process of change and formation. As such, the US and leading international powers seek a role in leading or shaping that formation, especially with the Arab Spring and changing role of regional powers such as Egypt, Turkey, Iran and Saudi Arabia.
Second, let me turn to oil. Oil is and will remain the world’s most vital energy source for many decades to come. As such, international powers such as the US will keep close links to the producers of this important commodity regardless of how much they need it. The fact is that most of the world’s proven oil reserves are in the Middle East. And despite its increasing production of shale oil, the US will continue to be a major oil importer. As such, it will continue to be affected by global supply and demand issues and the rise and fall in the price of oil. So America – and other major economic powers – will retain a vital interest in the Middle East, regardless of the amount of oil they import from the region. So this means, America will not step back from the region.
Third, the US is a staunch supporter of Israel. The Israeli lobby in Washington and around the US is strong and America’s presence in the Middle East is critical for Israel. As such, America will continue to have a strong interest in developments within the region which affect Israel, directly or indirectly. Israel has great interest in all developments in the region, and as a consequence, so does Washington.
To conclude: Shale oil is needed and it is welcome. It brings with it many advantages to the global economy and energy market. The growth of US shale oil and gas is unlikely to change its policy and involvement in the Middle East at all. US relations with different parts of the world, especially the Middle East, are not one dimensional.
Saudi Arabia has seen over the decades, major changes in the oil market: over supply, supply shortages, increasing demand, high and low prices. It is likely to see many more in the future, including shale oil. Yet it has maintained a rational, confident and stable oil policy during the last 50 years and it will continue to do so into the future.