What Saudi Arabia Thinks About the U.S. Oil Boom

For some three decades, Saudi Arabia and the rest of the Organization of the Petroleum Exporting Countries, or OPEC, have wielded tremendous influence over the global oil markets. Saudi Arabia, in particular, has enjoyed the unparalleled ability to influence global oil prices by increasing or reducing its production and exports -- an advantage it has exercised at various points over the past few decades.  

But the recent surge in non-OPEC crude oil supplies, fueled mainly by growing production from U.S. shale and Canada's oil sands, has radically altered the game for OPEC, even threatening to reduce the organization's share of the global oil market this year to its lowest level in more than a decade. But far from proclaiming gloom and doom, the Saudis say they aren't worried.

Saudis welcome U.S. oil boom
In fact, according to Saudi Arabia's Petroleum and Mineral Resources Minister Ali I. al-Naimi, the Kingdom welcomes the U.S. shale oil boom because the increase in U.S. crude supplies could help stabilize global oil markets.

"Our No. 1 interest is a well-balanced oil market that promotes a strong global economy," Naimi was quoted as saying in the Oil & Gas Journal.

Naimi also said he expects global fossil fuel demand to remain strong, a belief that sharply contrasts with Citigroup's recent suggestion that global oil demand could soon peak. But despite this, he said the kingdom doesn't plan to substantially increase its production capacity as it has in previous years.

Naimi also cast doubt on the idea of American energy independence within a decade, suggesting that the U.S. will continue to import crude oil from major oil-exporting nations such as Saudi Arabia for the foreseeable future.

"This talk of ending U.S. reliance on imports is naive and simplistic," he said on April 30, speaking at the Center for Strategic and International Studies. "[It] disregards interlinked markets. Just as I didn't accept the peak oil argument years ago, I reject the U.S. energy independence idea now."

U.S. still reliant on Saudi imports
He makes a good point. Even though U.S. oil imports fell to 8.5 million barrels a day last year -- the lowest level since 1997 -- imports from Saudi Arabia and Canada actually grew.

According to data from the U.S. Energy Information Administration, Canadian imports to the U.S. reached a record 2.4 million barrels of crude oil per day, up 8% from the previous year, while Saudi imports increased 14% to 1.4 million barrels a day, the highest level since 2008. 

The increase in Saudi and Canadian imports highlights some crucial points about crude oil: Not all crudes are created equal, and U.S. refinery demand for them varies depending on their qualities, such as density and sulfur content.

For instance, Saudi and Canadian oil tends to be of the heavy, sour variety, which is denser, has a higher sulfur content, and is more costly and difficult to process, while crude oil produced from leading U.S. plays, such as the Bakken and the Eagle Ford, tends to be of the light, sweet variety, which has the opposite qualities.

Why U.S. refiners are still thirsty for Saudi oil
While you'd think the higher expenses involved with processing heavier grades of crude oil would discourage U.S. refiners, that's far from the case. Over the past several years, many refiners invested heavily in the equipment and upgrades necessary to process heavy crudes at their plants.

After all, they had no idea that advances in drilling technologies would unleash a domestic oil boom of epic proportions and thought the nation would continue to import more and more oil from the Saudis. So because they don't want to let their upgraded facilities sit idle, Saudi and Canadian oil remains in high demand.

Meanwhile, though, U.S. refiners have managed to drastically slash imports of light, sweet crude oil -- most notably from Nigeria and Angola -- thanks to booming production from US shale plays. For instance, Valero (NYSE: VLO  ) has replaced all light oil imports with domestic substitutes at its Gulf Coast and Memphis refineries, while Phillips 66 (NYSE: PSX  ) recently said it hopes to process 100% North American crudes at its refineries nationwide within a couple of years.

Final thoughts
The oil import story isn't as cut-and-dried as one would expect. Important distinctions in the physical qualities of different types of crude oil continue to dictate U.S. refinery demand for them. So even as the U.S. oil boom has helped sharply reduce American dependence on countries that produce light, sweet crude oil, it hasn't lessened our reliance on Saudi and Canadian oil, for which demand is likely to stay strong for years to come.

As U.S. refiners boost their consumption of cheap domestic crudes, the midstream companies that help store and transport all that oil also stand to benefit big time. In fact, improvements in pipeline infrastructure will be a defining trend in North America's energy landscape over the next several years -- one that astute investors would be wise to follow. Enterprise Products Partners, the nation's largest publicly traded energy partnership, is at the forefront of this trend and is investing heavily in pipeline infrastructure that will serve the nation's energy companies for decades into the future. To help investors decide whether Enterprise Products Partners is a buy or a sell today, click here now to check out The Motley Fool's brand-new premium research report on the company.


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