The American Interest
Analysis by Walter Russell Mead & Staff
Saudis Sweat Bullets As Energy Revolution Changes the Rules

The US shale gas boom, drastically cutting the cost of gas, is shaking the foundations of the Saudi Arabian economic model—and more is coming. The highly profitable $100bn Gulf petrochemical industry is taking a hit as its biggest customer—the U.S.—is importing less and relying instead on domestic production.

US petrochemical companies, propelled by cheaper access to raw materials, are competing effectively against companies like the Saudi Basic Industries Corp (Sabic), the world’s largest chemical maker. Sabic also has some home-grown problems. The rapidly growing Saudi population wants to consume (subsidized) petrochemicals at home, air conditioning Saudi houses and running Saudi cars instead of exporting product abroad.  Falling production, demand, and prices are beginning to hurt the once stalwart $89bn company. The Financial Times reports:

“The cyclical Gulf petrochemicals industry is already suffering, as lower prices have coincided with higher raw material costs. Sabic…has reported declining profits in every quarter so far this year.

In the third quarter net income fell 23 per cent from the year-earlier period; it fell 35 per cent in the second and 5 per cent in the first quarter.”

US gas prices have plummeted due to new techniques, known as fracking and horizontal drilling, developed to extract the vast deposits of shale gas in the North American bedrock. Production has jumped by nearly a quarter since 2000, reducing demand for Saudi gas. If China figures out how to exploit its own shale gas reserves the Saudis will have every reason to be nervous. The two pillars of the Saudi economy—oil and petrochemical exports—will both be on shaky ground.

But the changing energy landscape threatens more than economic consequences for the Gulf state. The US could surpass Saudi Arabia as the world’s leading oil producer by 2020, and this could mean big changes for US foreign policy and the domestic economy.

Via Meadia recently wrote that the Gulf region, Russia, Venezuela, and other former oil monopolists will see their power and influence decrease in the face of a new American led energy order. Countries like Brazil, China, Canada, and Israel will also make gains due to the discovery of their own energy reserves.

To add icing to the geopolitical cake, America’s energy revolution could jolt some much-needed life into the long term prospects of the US economy. Since the 2008 financial crisis, more than 600,000 new jobs have come from the fracking industry, and these jobs pay well. The new industry will draw workers away from the coasts and into the American heartland, reviving the surrounding states.

As the energy revolution unfolds, the Saudis are likely to have less discretionary money for missionary projects and the United States will be in a stronger position to press its longtime partner on a variety of issues. Interesting times.

Published on December 29, 2012 12:10 pm