Is America’s Waning Oil Dependency A Saudi Concern?

Roosevelt and Abdulaziz met back in 1945.

On February 14, 1945, US President Franklin D. Roosevelt met King Abdulaziz of Saudi Arabia onboard the US Navy cruiser USS Quincy in the Great Bitter Lake segment of the Suez Canal.  This first face-to-face encounter between top American and Saudi leaders served as the foundation for the longstanding relationship between Washington and Riyadh.

In the nearly 70 years since that historic meeting, the two nations have worked together on a number of bilateral and regional issues, including recent concerns about the crisis in Syria, nuclear proliferation in Iran, counterterrorism, and Middle East peace.  Bilateral trade between the US and Saudi Arabia is enormous, with US exports to the Kingdom exceeding $35 billion in 2013.  These include direct exports of $19 billion, a 76% increase since 2009.

US-Saudi Relationship Wavering?

Saudi Arabia has been synonymous with oil production for decades.  In fact, the Middle Eastern country – home to one quarter of the world’s known oil supply – is one of the largest producers and exporters of oil on the globe.  And guess what?  We’ve been their biggest customer.  The nation supplies about 13% of the petroleum that we import – some 1.3 million barrels per day.  But since 2013, our oil imports from Saudi Arabia have dropped about 2.5%.

US imports of Saudi crude are on a downward trend.

Now, Saudi Arabia is facing the reality that its longtime top customer might well become its top competitor.

In 2012, US crude oil production reached a 20-year high of 7 million barrels a day.  And last year, we actually overtook Saudi Arabia as the world’s biggest oil producer.

That trend is expected to continue, at least for the next few years.  The US Energy Information Administration (EIA) predicted in late 2013 that domestic oil production would increase by an average of 800,000 barrels a day annually through 2016, which would near the record 1970 high of 9.6 million barrels a day.  With that kind of production, the US is expected to be importing only 25% of its oil supplies by 2016, down from 37% today.  (In the not-so-distant past, the US was importing half of its oil supplies.)

Not surprisingly, increased US domestic supplies due to shale’s upsurge have a little something to do with our declining imports.  Equally unsurprising is the fact that the drop in our purchases has caused some serious concern for our longtime friend and trading partner.  The White House claims that even with the increase in US oil and gas production, America’s longstanding bilateral cooperation on energy issues with Saudi Arabia is “getting stronger.” But our diminishing need for imported oil has set off alarms in Saudi Arabia.

In addition to the economic implications, the changing energy production map is also redrawing political alliances.  Saudi Gazette energy analyst Syed Rashid Husain wrote, “Roles are getting switched. Global energy geopolitics is undergoing a major metamorphosis … After all, Washington is no more that dependent on Middle Eastern crude supplies – as it was until a few years back.”

Valerie Marcel, an associate fellow at London think-tank Chatham House, agrees that with oil as less of a bargaining chip, the US has a freer hand in shaping Middle East policy – especially in seeking sanctions against Iran while lessening Riyadh’s influence in Washington:  “The global picture for Saudi Arabia has changed fundamentally as a result of the growth of unconventional oil in the US.”

Although some experts believe that Saudi Arabia will retaliate by cutting back production, which would cause a hike in global oil prices, Harvard’s Joseph Nye thinks that scenario is unlikely. Although the Saudis have some room in their domestic budget, they don’t have much and fiscal stability is essential.

“If the Saudis were to decide to cut back on production, then essentially they could make a scarcity in markets that could help OPEC,” Nye told us. “Really, I don’t think the Saudis are about to do that because if you look at the revolutionary situation in the Middle East, they want to have a lot of walking around money.”

Diplomatic Parting of the Ways

How are the Saudis responding to this shift in energy dominance?  They’re worried, analysts say.

In reality, that concern applies to the entire Gulf Cooperation Council (GCC), says Jim Krane, the Wallace S. Wilson Fellow for Energy Studies with the James A. Baker III Institute for Public Policy at Rice University in Houston.  In addition to Saudi Arabia, the GCC states include Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates.

Jim Krane of Rice University in Houston

“We have developed this relationship with that part of the world under the understanding that it was a mutually dependent relationship,” Krane said during a recent interview. “We were depending on their exports of oil and their supply and their willingness to keep markets supplied with oil.  In return, we were offering them security.  We extended what’s commonly known as our security umbrella over that part of the world.  The ruling families there were basically protected from external threats.”

That relationship was evident in 1990, when the US responded rapidly and forcefully to Iraq’s invasion of Kuwait.  “There’s more to that relationship than just oil for security, but that’s certainly a big part of it,” Krane said.

So now that the US is less dependent on foreign oil, is that relationship in jeopardy?  Not at all, Krane says:  “The Obama administration has made it pretty clear that isn’t the case, and the US is just as committed to the security of those monarchies as it always has been.  One of our key interests in that region is to keep the flow of oil and gas moving from the Persian Gulf to market.  Even if the US is 100% self-sufficient in oil and gas, the price of oil is a fungible global commodity.  Their supply helps keep the price stable – and lower – than what it would otherwise be.”

All the same, Krane said, Middle Eastern leaders aren’t necessarily feeling the love.  “There’s some worry that rising oil security in the US means we’re going to be less concerned with that part of the world and that we may be less willing to go through quite as much trouble as we have over the past four to five decades to extend that security umbrella and keep it as robust as it has been.”

To be fair, there have been signs that the US is going in a different direction, Krane said.  “When the Arab Spring broke out, Washington had a different position on a lot of those uprisings, so we dropped our support for Hosni Mubarak in Egypt and for the Ben Ali government in Tunisia.  We sort of stood by and watched them be overthrown.”  The US and the Saudis weren’t necessarily on the same page, either, when it came to our government’s responses to the violence in Syria or Bahrain.

“There are other signs:  We’ve pulled out of Iraq.  We’re in the midst of pulling out of Afghanistan.  We’ve reduced our presence in the Gulf.  There have been other diplomatic partings of the way.

“It doesn’t have much to do with shale oil,” Krane said.  “Since the end of the Cold War, the US and the Saudis haven’t had quite as much in common.  But in the Gulf, the ruling families – the powers that be – see these growing signs of estrangement and view them with worry.  So there’s all kinds of scrambling to find other ways that they can increase their strategic importance in the eyes of Washington.”

A Farewell to Saudi Oil?

While the US is importing less oil, it continues to import regularly from Canada, Mexico and Saudi Arabia.

“Saudi exports a heavy oil – a sour crude – and our refinery capabilities here are still heavily geared toward heavy and sour crude,” Krane said.  “This light tight oil we’re producing through the shale boom isn’t as useful in that sense.  We still need their supply of heavy sour crude.”

However, that dynamic could be nearing an expiration date.

Chris Faulkner of Breitling Energy Corp.

Chris Faulkner, founder, president and Chief Executive Officer of Dallas-based Breitling Energy Corp., can foresee a future when we won’t be importing oil from Saudi Arabia – or the Middle East – at all.  “I think we can wean ourselves off Middle Eastern oil, possibly even in the next decade,” Faulkner said in a recent interview.

“We have to convert our refineries, which were built to refine Middle Eastern oil, and that can’t happen overnight,” Faulkner said.  “It’s a slow process, but we could free ourselves of Middle Eastern heavy crude within the next 10 years, and that will have a big impact on Saudi Arabia and other OPEC members.  They’ll need to find new buyers.”

It’s Good to be King

That said, Faulkner added that Saudi oil producers still have some aces up their sleeves: “Saudi Arabia has the power to flood the market, like it did in the early ‘80s, and send oil prices plummeting to $50 (a barrel) or less – effectively causing US drilling and production to collapse.  Ideally, growing demand from China and other Asian markets will help sustain Saudi production levels and oil prices even as the Americas become more self-sufficient in oil.”

Not only does Saudi Arabia continue to having pricing influence, it’s somewhat less vulnerable than other petro states to the negative impacts that would come with declining US demand for their oil.

“Saudi Arabia is well insulated, not only because of its huge conventional reserves, but also because it’s already looking at developing its unconventional reserves,” Faulkner said.  “The Saudi oil minister has estimated that the country has about 645 tcf (trillion cubic feet) of technically recoverable shale gas, which would put it after China, the United States, Argentina, and Mexico.  The oil ministry also estimates Saudi Arabia has another 280 tcf of proven unconventional gas reserves.”

We Got Their Attention

The Saudis are keeping a close eye on what’s happening in the US, Faulkner said.  “For proof of that, all you have to know is that the Saudi oil minister at an OPEC meeting said, ‘We should be concerned about what is happening in North Dakota.’  Now, you wouldn’t expect anyone in Saudi Arabia to even know where North Dakota is, but the American shale boom has been loud enough to make even the Saudis sit up and take notice.”

“Officially, the party line in the Middle East is that US shale development won’t have any impact for at least two decades,” Faulkner said. “Unofficially, the boom is already having an impact.”

That impact is a decrease in oil prices, Krane said:  “With rising oil production in the US, we’re not consuming nearly as much imported oil.  That may not have affected Saudi Arabia hugely, but it has certainly lowered oil prices around the globe, so there’s a whole bunch of extra supply on the market right now.  That supply is being produced in the US, and it’s being consumed in the US, but it still has an effect on price and the revenue the Saudis are getting.”

Saudi’s Staying Power

While the US shale boom is having a very real impact on this country and others today, it may not be cause for concern down the road, some analysts say.

The Paris-based International Energy Agency has predicted that US oil production will go into decline beyond 2020, and even the IEA has said that 2,500 new wells a year will be needed to sustain the Bakken shale’s current output of 1 million barrels a day.

For now, America’s decreased dependency could represent an opportunity for increased dialogue between our country and Saudi Arabia – and the possibility of a renewed relationship that takes both nations’ current needs and goals into account.