Saudi dependence on oil will continue

So much for Vision 2030. Saudi Arabia’s plan to reduce its dependence on oil will have to wait. The recent controversy over the death of Saudi dissident Jamal Khashoggi threatens to curb international investment in the kingdom.

Hints from Saudi spokespersons of retaliation via the country’s contribution to the world’s oil supply will cause concern just when Iran’s crude production is falling. Eyes should instead be trained on US shale oilfields.

Any worries about the tone of Saudi Arabia’s response to tough, and warranted, criticism of the regime are understandable. Saudi Arabia, along with Russia, provides the lion’s share of the world’s oil. In 2018 the two countries will meet nearly a quarter of global demand, about 22-million barrels daily, according to Energy Aspects.

Both nations have become international pariahs in 2018. That helps explain why Brent trades near $80 per barrel and is one of the best-performing commodities in the year to date. And why listed oil producers’ share prices have outrun world market indices.

However, it is the US that has put more barrels on to the market in the past few years. In 2018 alone, the US’s production growth should be almost 2-million barrels per day. That is a rapid increase. It covers all of the world’s demand growth and more. Almost all of this pick-up has come from the onshore shale regions. That has led to a major export push.

Five years ago the US exported virtually no crude. That has jumped to 1.8-million barrels per day in October. There is just one problem: a lack of US pipelines and other handling facilities means the pace of output expansion will slow in the year ahead.

Forget plans for infrastructure, tourism and other promised transformations. All future investors in Saudi Arabia will see for now is the dirty oil underneath the sand. /London, October 22