Saudi Arabia's Overrated Oil Weapon

The Weekly Standard carries the following article that lists the common misperceptions of the Saudi leverage over the oil supply issue.
Saudi Arabia's Overrated Oil Weapon: There's no need for Washington to be deferential to Riyadh
by Max Singer | 08/18/2003, Volume 008, Issue 46

OVERESTIMATES OF ARAB OIL POWER are an important and harmful influence on policy toward the Middle East. The following myths, or outdated facts, support the world's misjudgment of the power of the Persian Gulf oil producers--especially Saudi Arabia, but also Iran, Iraq, and the Gulf states.

(1) Most of the world's oil reserves are in the Middle East. Wrong. That is only true for "conventional" oil, the stuff that flows easily. When you count "unconventional" oil, Canada has larger reserves than Saudi Arabia. There is more unconventional oil than conventional oil, and most of it is in the western hemisphere--principally Canadian oil sands and Venezuelan heavy oil.

Technological developments over the last 10 years have reduced the cost of producing unconventional oil to below $15 a barrel, so that it is being produced profitably at the price at which oil has sold for almost all of the last 30 years. We'll see later why the much lower production cost of Gulf oil gives the Gulf countries less power than people think. Already a million barrels a day of unconventional oil is being produced, and it is just as good as the black goo pumped in the old-fashioned way.

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(2) The world can't get the increased oil supply it will need in coming years without buying a larger share from the Persian Gulf. Wrong. There are many potential sources of increased oil supply--in addition to unconventional oil. In 2020 the Gulf may supply even less than the 23 percent of the world total it provided last year.

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(3) The low production cost of Gulf oil lets the Gulf countries determine how much of world demand they will supply. Wrong. Where the world's future oil supply comes from depends on where oil companies decide to drill wells and make other investments. Since there is much more oil available in the ground than will be needed in the next few decades, oil investors have much choice about where to get oil. Right now there is practically no investment being made in increasing--or even maintaining--oil production capacity in the Gulf region; instead, almost all drilling is being done in other parts of the world.

There are two reasons the oil industry is not investing in the Gulf. Owners, not producers, control the benefit of low production costs, so low costs in the Gulf don't necessarily give companies an incentive to invest in producing Gulf oil. And oil producers have strong incentives to avoid sources that are as politically vulnerable as the Gulf seems to be.

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(4) The United States and other consumers need Gulf oil much more than the Gulf countries need the money paid for the oil. Wrong. Most of the Gulf countries have become very dependent on their oil income, which provides almost all their foreign currency. The oil-consuming countries get less than a quarter of their oil from the Gulf and have stockpiles of oil that could replace Gulf supply for six months or more.

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(5) Saudi Arabia has the power to determine how much the world has to pay for oil and therefore the power to help or hurt Western economies. Mostly wrong. So long as Saudi Arabia has the ability quickly to produce more oil than it is selling, it can bring down prices in periods of tight supply. But the Saudis understand that keeping prices from going too high is in their national interest as well as ours, because they would lose more than most producers if high prices chased consumers to other energy sources.

So, what's the bottom line, then?

When American politicians realize that the new facts of the oil industry destroy the basis for the traditional American awe of Saudi oil power, they will begin to use more normal standards in thinking about Saudi-American relations. To be sure, the Saudis, with or without the other Gulf or OPEC oil countries, can create short-term difficulties for the United States and other oil importers; but such difficulties, springing from normal business bargaining, present a limited danger, comparable to that resulting from labor strikes. There is no reason to be afraid of this.

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In other words, the Saudis' power over the United States is a house of cards that can be blown away by fresh thinking based on a realistic understanding of the current oil business.

The second conclusion is that there is no strategic imperative for the United States to reduce its "dependency" on imported oil by reducing oil consumption. We should make sure that world oil-production capacity stays comfortably ahead of world demand for oil. We should also ensure that there are large stockpiles of oil to improve the short-term balance of supply and demand. And we need to stop feeling dependent when we are not. These measures are all feasible and have moderate costs. They do not require changing our way of life or our economy.