Is Saudi Arabia Losing Its Importance in the Oil Market?

For three decades or so, Saudi Arabia has wielded considerable influence on the global oil market. The kingdom's status as the world's only "swing producer" has given it the unparalleled ability to influence oil prices by boosting or reducing its production and exports, which it has done at various times over the past few decades.

Indeed, Saudi Arabia may be the only major oil-producing nation in the world with the ability to influence the global price of oil to a noticeable degree. But now, it appears that the Saudis are gradually losing their powerful grip on the world oil market.

Why Saudi influence could diminish
There are at least two major reasons why we could see Saudi Arabia's influence on oil prices wane over coming years. The first is expected growth in non-OPEC oil supplies, mainly from North American shale and oil sands production, while the second is changing oil consumption patterns among the Saudis themselves.

This year, non-OPEC supplies are expected to increase by nearly 1 million barrels a day, led mainly by production growth from U.S. shale plays like North Dakota's Bakken and Texas' Eagle Ford. Over the past few years, these plays have experienced tremendous growth, as new and improved drilling techniques have allowed operators to coax massive quantities of oil and gas from the ground.

In the Bakken, for instance, Kodiak Oil & Gas (NYSE: KOG  ) , which reported a tripling of average production from 2011 to 2012, is expecting to further double its production this year from last year's levels. And in the Eagle Ford, Chesapeake Energy (NYSE: CHK  ) is hoping for nearly 40% production growth in the play and is targeting a year-end exit rate of roughly 70,000 barrels of liquids per day, after already having achieved an impressive 266% year-over-year production increase in the fourth quarter.

Led by the Bakken, North Dakota's field production of crude oil has soared more than fivefold over the past five years, from 45.1 million in 2007 to 242.5 million barrels last year, while crude oil production in Texas, led by the Eagle Ford and the Permian Basin, has nearly doubled over the same period, from 391.1 million barrels to 721.4 million barrels. Unless production from these key states sees a sharp drop-off, OPEC and Saudi Arabia have reason to be concerned.

Growth in Saudi domestic consumption
The other major factor that suggests Saudi Arabia's influence on global oil prices could wane over the next few years is the kingdom's high and rising consumption of its own oil. In just under three decades, the Saudi population has more than doubled, from a little over 13 million in 1985 to more than 28 million people today. As the population has grown, the nation's demand for energy has exploded.

In fact, Saudi oil consumption relative to its economic output is twice the global average. In per capita terms, the Saudis consume more oil than even the United States. In fact, of the almost 10 million barrels per day the kingdom produces, its own citizens use up roughly a quarter.

That may be surprising considering that women -- who account for about 45% of the population -- are not allowed to drive, but not so much when you factor in the extravagant sports cars commonly sighted on Saudi roads and highways. I may be stating the obvious here, but Bugattis and Lamborghinis don't exactly get the best gas mileage.

As the nation's domestic consumption has risen, its export potential has fallen. From 2005 to 2010, Saudi exports declined 23%, from 7.5 million barrels a day to 5.8 million. With domestic consumption expected to rise in the coming years, exports are likely to fall further.

That's worrisome, because petroleum exports accounted for nearly 90% of total Saudi export revenues in 2011, according to OPEC. Lower export revenues make it harder to sustain the largest welfare state in the world and elevate the threat of internal instability, should dissatisfaction grow among the kingdom's citizens.

Winners and losers
If the Saudis do indeed lose control of oil prices and they fall to a sustained below-$100 level, it would have drastically different impacts on different countries, as Nick Butler of the Financial Times recently suggested. The major winners would be large oil importers, such as the U.S., China, Japan, and Europe, for whom cheaper oil would likely provide a strong economic boost.

On the other hand, the losers would be major oil exporters, such as Algeria, Iran, Iraq, Kuwait, Nigeria, Russia, the United Arab Emirates, and Venezuela, which require high oil prices to keep their national budgets balanced and, in many cases, sustain welfare payments to their growing populations. 

Though Saudi Arabia remains the world's largest producer and exporter of total petroleum liquids and the world's second largest crude oil producer behind Russia, its influence in the global oil market is likely to diminish if current trends continue and non-OPEC producers continue to gain larger shares of global oil production.

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