For decades since the 1960s, Saudi Arabia has been able to manage the price of oil.
It has had the ability, for the most part, to cut production to maintain higher prices, or increase production to maintain lower prices.
It has the ability to produce 12 million barrels per day (mbd) of oil, and claims to be able to increase this to 15 mbd.
Two events have now overtaken Saudi Arabia.
The first has been the revolution in U.S. oil production, as the result of fracking.
The second has been the dramatic increase in oil consumption within Saudi Arabia.
America’s oil revolution has limited Saudi Arabia’s ability to turn the oil spigot on or off.
More importantly, internal events in Saudi Arabia have put its ability to export oil at risk.
Saudi Arabia’s use of oil has doubled since 2000, with 2.9 mbd of oil being consumed within the Kingdom in 2012, roughly 25% of its production.
Population growth, growth in chemical plants to produce chemicals for export, and growth in the number of desalinization plants have resulted in increased use of oil for power generation and increased use of natural gas in petro-chemical plants. Population growthhas also resulted in increased use of gasoline and diesel fuel.
The kingdom’s use of oil to generate electricity increases to 1 mbd during the summer months.
King Fahd has warned that internal consumption could grow to 8 mbd by 2030.
With these changing conditions, the Kingdom has undertaken actions to improve energy efficiency and to shift to alternative forms of power generation.
Saudi Arabia plans to more than double its power generation capability from 55 GW to 120 GW by 2020, placing more strains on its ability to export oil. It has linked its grid to that of other nearby countries, such as the UAE and Bahrain, to mitigate the effects of sudden changes in load or generation.
Saudi Arabia’s economic calculus has changed.
Its most valuable assets are oil and natural gas: Oil for export, natural gas for use in chemical plants.
In the case of oil, it can sell it for around $100 per barrel. If it can use alternatives for generating electricity, it can reduce the amount of oil used for power generation, and sell it instead.
Installing concentrating solar power (CSP) plants that produce expensive electricity, is better than using its valuable supply of oil or natural gas for generating electricity.
That calculus is different than in the United States where we have low-cost natural gas and coal that can generate inexpensive electricity.
The UAE is developing a nuclear power plant for the same reason.
Saudi Arabia is also spending more money on developing new oil and natural gas fields, including the possibility of shale gas. It’s becoming a leader in technology rather than merely a consumer.
It’s important for the world economy for Saudi Arabia to be successful in developing alternatives to replace its use of oil.
Removing an additional 5 mbd of oil, a possibility outlined by King Fahd, in conjunction with increased consumption in Asia, India and elsewhere in the world, could cause the price of oil to increase dramatically.
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