The American Interest
Analysis by Walter Russell Mead & Staff
Saudi Prince: US Shale Threatening Our Economy

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Saudi royal and billionaire Prince Alwaleed bin Talal thinks the US shale boom is endangering his country’s economy. The WSJ reports that the prince published a letter yesterday that he wrote in May to the Saudi Oil Minister and several others, warning of the dangers to Saudi Arabia of American gas production:

Saudi Arabia, the world’s biggest oil exporter, is now pumping at less than its production capacity because consumers are limiting their oil imports, Prince Alwaleed said. This means the kingdom is, “facing a threat with the continuation of its near-complete reliance on oil, especially as 92% of the budget for this year depends on oil,” said the prince.…

In a report last month, OPEC’s own analysts predicted that demand for the group’s crude would fall next year to 29.6 million barrels a day, more than 600,000 barrels a day below its level last year. The International Energy Agency expects demand for OPEC crude to decline again in 2015 to 29.2 million barrels a day, before starting to rise gradually in the following years.

Still, the importance of Saudi oil to the US and to the world market is not diminishing. The Kingdom’s spare capacity and ability to increase exports in times of need (during periods of decreased supply from Iran and Libya, for example) helps keep the global oil market stable. Saudi oil has been consumers’ best shield against price shocks for a while now, and as long as we consume oil, no amount of cheap American gas can make that otherwise.

But if you’re in the House of Saud, that’s not much comfort. There’s no denying that the Kingdom’s economy will suffer under decreased demand for petrochemical exports from its biggest customer—the US. American domestic production means a steep drop-off in demand for the $100 billion Gulf petrochemical industry, and if China masters the exploitation of its own shale reserves, the cracks in the Saudi economic model will grow wider still.

Unless the Saudis do some economic rebalancing to cope with this sea change, they’re in for a rude awakening.

[Image of desert oil tower courtesy of Shutterstock]

Published on July 29, 2013 1:45 pm
  • rheddles

    The Sauds problem is not economic rebalancing, it is cultural rebalancing. Until they develop something better than the Inshallah Work Ethic, they are in trouble. Nonetheless, either way step 1 would be to stop subsidizing terrorism.

    • Philopoemen

      They aren’t lazy or stupid, just complacent. Why bother working harder than you have to when 92% of your revenue comes from oil?

      • rheddles

        “Why bother working harder than you have to when 92% of your revenue comes from oil?”

        Ask the Norwegians. Or the Alaskans.

        • Philopoemen

          Alaska isn’t a country, and Norway’s position in the EU allows it more trade leeway than Saudi Arabia has. Furthermore, oil production is nowhere near 92% of its revenue.

        • Thirdsyphon

          The Alaskans haven’t really branched out into much more than fisheries, which when you think about it is just another kind of resource extraction. The picture in Norway is more complicated, but they were never a fully extraction-based economy to begin with. A better example might be Iceland. Their economy has historically been based on fishing, but since the 1960s they’ve made massive investments in developing their geothermal energy resources and their largest export now is refined aluminum.

          • rheddles

            I haven’t noticed lots of foreigners rushing to Iceland to fish for them. Nor smelt.

          • Thirdsyphon

            Well, there’s not a *lot* of anybody in Iceland, including Icelanders, but they actually do bring in a lot of foreign labor, relative to their population, to help with big industrial projects (including the construction of aluminum foundries) to the point where the immigrant population has become a topic of public debate. See, e.g., http://www.grapevine.is/Home/ReadArticle/Immigrants-Pandoras-Box-in-Iceland

          • rheddles

            Makes my point. The Icelanders want the jobs.

      • Steve Gregg

        Texans bothered to work harder when oil was discovered there. Texas did not outsource the hard work to foreigners.

        • Philopoemen

          Merely a different way of approaching things, like the ant and the grasshopper.

    • http://foobarista.blogspot.com foobarista

      Once extraction becomes less viable, KSA will have to move to more knowledge-based economics. At the moment, the only nontrivial bit of the economy outside oil is Hajj-related tourism. This shift will be enormously hard for them culturally, and the Wahhabis in particular will be a big problem.

      In many ways, much of the ME has been spared the wrenching cultural changes that East Asia has been going through for the past 150 years because of oil. These changes won’t be pretty.

      • rheddles

        Just as oil deprived Egypt has moved aggressively into knowledge-based economics. Or Yemen.

      • Corlyss

        I agree with you. It will be ugly. The usual trick of an endangered government is to export trouble. As if the Saudi’s, principal exporters of Wahhabism, are not already doing their level best to destabilize the rest of the wolrd with that tireless export.

  • Corlyss

    Boo hoo. They can always sell it to China.

  • Fat_Man

    How much will they spend to fund the anti-fracking campaign?

  • cubanbob

    Saudi’s don’t like working. They hire foreigners to do the work. Rebalancing is something they aren’t looking forward to. But that is not our problem. Lets stop wasting time and get on with domestic energy production.

  • Steve Gregg

    The Saudi moment has come and is now going. I look forward to the day when Riyadh lies in ruins and the Saudis are driven back into the desert to preach their Wahhabism to the camel spiders.

  • Laka

    OSOPEC: Organization of Shale Oil Producing and Exporting Countries.

    Chew on that, Prince. And go tend some sheep.

  • ChuckFinley

    “Still, the importance of Saudi oil to the US and to the world market is not diminishing.”

    The importance of Saudi oil to the US would diminish pretty quickly if the EPA were to end its regulations that make it uneconomical to convert existing gasoline engine vehicles to run on compressed natural gas. It costs about $1000 to convert a vehicle to run on CNG and then by flipping a switch run on gasoline but EPA regulations raise the cost to $25,000 for a conversion that complies with EPA requirements.

    If the EPA regulations were made more rational and reasonable, millions of Americans would spend their own money to convert their cars and trucks to run on natural gas and demand for gasoline would fall, causing the price of gasoline to fall as well. The extra money that Americans would have available to spend would do a long way towards reviving the American economy.