For almost 3 decades the Kingdom of Saudi Arabia has been the dominating the world oil markets. It literally holds the global spare production capacity.But according to analysts, this monopoly will soon be coming to an end.It’s biggest challenge will come from a trade off between supporting prices and maintaining the market share. Energy consultant Matthew Simmons who coined the term “Twilight in the Desert” warned that the Kingdom will struggle to maintain production as global demand peaked and output from its fields will go into a decline. The prophecy is almost coming true. Experts predict multiple challenges that could decapacitate export earnings by 2020.
Here are 6 reasons why Saudi’s Oil dominance will be waning:
It’s an open secret that one of the chief beneficiaries of the ongoing US-Iran nuclear stand-off is Saudi Arabia. Iran, the second biggest oil producer and Saudi’s main rival within OPEC has been sidelined by sanctions. The eventual normalisation that is bound to take place once the nuclear issues are resolved and sanctions ease, will give Iran more export opportunities. This is bound to affect KSA’s oil export prospects.
2. Domestic Strife
Despite the fact that King Abdulla has weathered the Arab Spring, allegedly using repressive crackdowns and massive social patronage; over the next five years, however, the kingdom will be confronted by multiple problems, including succession planning, unemployment woes, social spending requirements, and potential internal sectarian conflicts. This is most likely to affect its share of the global oil market and put export revenues under severe pressure.
3. Shale Gas/Oil
Shale gas/oil is the natural gas formed from being trapped within the shale formations. It has become a very important source of natural gas, and is emerging as a major rival to conventional producers. The massive increase in oil prices will put the Kingdom in competition from Shale, with the conventional exploration off the coasts of Africa and Latin America, Barent’s Sea and the Arctic.
4. Threat from other OPEC countries & New global oil fields
Saudi Arabia will also have to accommodate growing output from Iraq, the exports from Iran when the nuclear issue is resolved, and rising output from new oil fields in Latin America , Mexico, Alaska and Africa.
5. Growing Energy Demands
With the increasing population that has grown from 15 million in the 1990’s to 28 million in 2011, there is an increase in demand for energy needs, infrastructure and desalination. In the absence of natural gas industry, Saudi Arabia has turned to oil for its domestic electricity and infrastructure needs. Thus the kingdom has still not managed to slow its growing combustion of oil and gas for domestic electricity production, which threatens to shrink the amount available for export.
6. Lack of Diversification Initiatives
There has been no progress in diversifying the economy away from reliance on oil export revenues. The petroleum sector accounts for 45%of budget revenues, 55% of GDP and 90% of export earnings. Despite the government’s effort to encourage private sector growth to lessen its dependence on oil, a lot more needs to be done. It was only in 2005 that it entered the WTO, to attract foreign investment and diversify the economy. Since then Saudi Arabia has improved its regulatory regime, opened up sectors such as telecommunications and banking to foreign investors, and is encouraging tourism within the region. But the paradox of the situation is that though the Kingdom wants to expand its economic base, the capital investment for that still has to come from the oil.
There is a 7th reason for a possible decline in Saudi’s oil dominance. International Energy Agency in its latest report titled World Energy Outlook said that the US could become the largest producer of oil by 2017. If and when that happens, the US’ reliance on Saudi oil will drop, which will have repercussions, including decline in Saudi’s global oil dominance and world politics.
Below is an infographic by British Petroleum – on BP’s statistical review of World Energy summarizing world’s import export activity.