Editor’s Note: Kathleen Sullivan is an analyst at Ergo, a global intelligence and advisory firm. The article below is based on a report Ergo recently published, entitled The Waning Era of Saudi Oil Dominance. Follow Ergo on Twitter.
By Kathleen Sullivan – Special to CNN
Saudi Arabia has thus far managed to stave off the popular protests that have led to the ouster of four Arab heads of state, chiefly due to its strategic and well-timed disbursements of oil-revenue-funded social giveaways. While so far effective in preserving the status quo, this approach has tied the fate of the monarchy to that of its oil revenues - an increasingly risky linkage.
For decades, Saudi Arabia’s booming oil revenues have been a safe bet in a constantly shifting region. Proud and longtime holder of the world’s largest proven reserves, highest exports, and most spare capacity, Saudi Arabia maintained an unrivaled position of dominance in global oil markets. However, a deeper look at Saudi Arabia’s growing domestic pressures and its external challenges reveal signs of decay in the Kingdom’s global oil market dominance, and with it, weakening defenses against a popular uprising.
The challenges confronting Saudi Arabia are both internal and external. First, domestically, Saudi Arabia’s oil reserves have long been a subject of mystery and speculation. Can the Kingdom’s oil reserves support its current level of production for the next decade and beyond, or is the country approaching its peak? Either way, many sources familiar with Saudi Aramco and Saudi geology believe the Kingdom’s access to easily extractable oil has come to an end. Its fields are aging, and light crude has become scarcer. Many oil experts believe that Saudi Arabia’s future oil production gains will depend on advances in enhanced oil recovery technology to extend the life of existing fields. While advanced techniques may increase production, these techniques can add an additional cost of $20-$60 per barrel, slashing the Kingdom’s profit margin.
Second, Saudi Arabia must accommodate its increasing population, which at approximately 28 million has nearly doubled in the past 20 years and continues to grow at an annual rate of nearly 2.5%. The Saudi youth demographic is among the country’s fastest growing, and is feeling the pain of both underemployment and an acute housing crisis. Throw in the restrictive social environment imposed by the Saudi government and you have a volatile mix resembling the climate in other Arab countries before their uprisings. As regimes crumble all around them, the Saudi people know they have leverage; demands will likely become more numerous and require more expensive pay-outs.
Third, Saudi Arabia’s growing population has increased the demand for energy, infrastructure, and water desalination. Lacking a sophisticated natural gas industry, the Kingdom must use oil for its domestic electricity and infrastructure needs, thus placing pressure on oil exports. Export revenues are critical to the government’s ability to fund massive public giveaways, and the country’s increasing domestic demands have constrained the monarchy’s ability to effectively buy off its population.
Saudi Arabia’s external challenges are no less daunting. The Kingdom faces an evolving and expanding competitive landscape. Iraq’s growing oil production, which could reach 12 million barrels per day by 2017, could significantly cut into Saudi Arabia’s exports and revenues. Even if Iraq only reaches half of its targeted production by 2017, an extra 6 million barrels per day in the global oil markets could diminish the Kingdom’s power within OPEC and possibly make the United States - its bulwark against regional hostiles - a less loyal ally.
In addition, aggressive neighbors are posing an increasing threat to Saudi Arabia’s oil dominance. In October 2011, Saudi Arabia accused an unnamed foreign power, widely understood to be Iran, of instigating violent protests among the Shia community in its eastern province. Iran has also been blamed for plotting to assassinate the Saudi ambassador to the United States. Unlike many of its war-plagued neighbors, Saudi Arabia’s oil industry has enjoyed domestic stability and security. A sustained Iranian campaign to covertly destabilize Saudi Arabia by manipulating Shia populations could threaten the Kingdom’s oil infrastructure, its revenues, and its overall security.
As Saudi Arabia continues to direct resources to fending off an uprising, social reforms addressing its skyrocketing energy consumption, underemployment, and housing crisis have taken a back seat. The Kingdom must focus on the development of solutions to these critical challenges, and prioritize true social reform over transparent largesse. Unless it addresses the internal and external threats to its power, Saudi Arabia’s days as the world’s oil hegemon could be numbered.
The views expressed in this article are solely those of Kathleen Sullivan.