The World Still Needs Saudi Arabia’s Oil

This article was written by Oilprice.com -- the leading provider of energy news in the world. Also check out this recent article:

Economic analysts are torn as to how important Saudi Arabia will prove to the global economy in years ahead. In the first half of 2014, the US surpassed Saudi Arabia to become the world's foremost oil producer. This sparked widespread predictions that the US would soon become an oil exporter, reducing its dependency on Riyadh and harming Saudi Arabia's leading role in the Middle-East. However, the ISIS invasion of Iraq and Syria, the Boko Haram insurgency and continued oil theft in Nigeria, unrest in Venezuela and ongoing violence in Sudan and South Sudan have changed the deal.

The US extracted a record 11.2m bbl/d in April 2014, as compared to 9.69m bbl/d for Saudi Arabia in March 2014. But this increase in American oil is hardly enough to mitigate the devastating impact on oil prices that would be seen, should oil facilities in countries at war stop producing. ISIS alone has spooked oil markets with its gains. It has captured the al-Omar oil field in Syria (75,000 bbl/d) and five others, seized control of Baiji, Iraq's largest refinery, for over a month, while trouble still brews not far from the Kirkuk oil field (260,000 bbl/d) and repair work has halted on the Kirkuk-Ceyhan pipeline (capable of transporting 300,000 bbl/d). The US may be boasting of energy independence thanks to its shale gas boom, but the situation in Iraq still threatens to deal an uppercut to global oil prices. Exxon and BP even began evacuating workers from Iraq in June as ISIS continued its advance. Spooked markets already saw the Brent crude price in June hit its highest level since September, although it has begun to lower again in July.

The US and Saudi Arabia have stood alongside one another as unlikely partners for decades, ignoring each other's unsavory activities in the name of mutual prosperity and a shared loathing of Iran and Al Qaeda. The UN had the Oil-for-Food program, but Saudi Arabia pioneered the Oil-for-Safety tactic. However, this dependency on American foreign policy goodwill may have had deeper consequences than the House of Saud expected. The administration of US President Barack Obama took a dim view to Saudi Arabia's interference in Bahrain during the Arab Spring, and Riyadh's threat-laden rhetoric against Tehran seems to have abated under pressure.

The US shale boom also seems to have made a direct dent in Saudi Arabia's production plans. Talk of adding 2.5m bbl/d to Saudi Arabia's capacity has stopped as the US has scaled up its daily production ability.  Therefore, could the former oil king be counted upon to scale production up to 12.5m bbl/d, should at-risk OPEC members drop the ball. Seth Kleinman, Citigroup's Head of Energy Research, doesn't think so, writing that "the market has never seen Saudi Arabia hold production over 10 million barrels a day...a combination of skepticism and caution seems warranted." Critics also point out that Saudi Arabia has made no new discoveries in years.

A silver lining came last week in the shape of a deal in Libya between the government and rebels to reopen eastern ports that handle half of the country's oil exports. The agreement to reopen the ports of Es Sider and Ras Lanuf has already led to production restart at the Sharara oil field, with a capacity of 340,000 bbl/d. Active exports are expected in late July, once the Zawiya refinery also gets under way. Despite this good news, it is difficult to see this as anything more than a stop-gap.

US shale finds show no sign of abating but neither do crises in the Middle-East. The good news out of Libya may help to stabilize oil prices for now, but this may not hold true in the long-term. With ISIS now having announced the desire to one day attack Saudi Arabia and destroy the Kaaba, the old pact between the US and Saudi Arabia may gain a new lease of life. While the US maintains its unwilling burden to guarantee the security of its Middle-East allies, Saudi Arabia will remain in the familiar position of being the world's most trusted source of oil.

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