The Political and Economic Impact of Fossil Fuel Depletion in Saudi Arabia

By Max Dunn
July 2008

Introduction

All oil fields peak in production and then decline. However, it is not easy to predict accurately when the peak will occur nor how fast the output will decline. Further compounding this problem with the world’s largest oil fields in The Kingdom of Saudi Arabia (Saudi Arabia or the Kingdom) is that Saudi Arabia releases only very limited data about their oil fields, so there is even less insight into what the timing  and shape of their peak and decline production curves might look like.

However, all oil fields follow a roughly bell shaped production curve. By looking at other super giant fields, we can get a feel for what the production curve of Saudi fields will likely look like.(1,288) In general, super-giant fields achieve a high, steady production for lengthy periods of time before peaking, and then production falls rapidly.(1,291) In many cases, production declines to 50% with ten years of the peak, but many fall more quickly.(1,288) Ominously, the second largest producing oil field in the world, Cantarell in Mexico declined 33% year on year in April 2008, which means it fell to 50% of its peak in only 4 years.(2)

Economic Impact

Saudi Arabia is essentially a welfare state with free or subsidized housing, education, healthcare, food and utilities. King Abdullah states this openly on the Ministry of Education site: “We have to wage battles to build an ideal welfare state where nobody is in want, a land of justice and moderation far removed from hatred and extremism.”(14) 

A very large part of the Kingdom’s oil income goes towards supporting this welfare state. The oil sector in Saudi Arabia accounts for about 70% of state revenues, 35-40% of GDP and 90-95% of export earnings.(11,119) So any decline in oil revenues would have a significant impact on the Kingdom’s income.

In 2008, Saudi Arabia budgeted for an oil price of $40 to $45 per barrel and a production volume of less than 9 mbd.(3) Population has been growing at about 3% per year but recently has slowed down to below 2%.(4)(5) If the 2% growth rates holds, this means that in 10 years the Kingdom’s population will increase by 22% and after 15 years it will increase by 35%. Given that most of the Kingdom’s expenses are related to running its welfare state, its costs will likely go up at least as fast as its population increase. 

So if oil production stays the same, then to afford the same budget, oil prices would need to be at least $55 per barrel in 10 years and $61 in 15 years. Even if oil production decreases, and taking the most drastic case by 50%, then oil prices would need to be $110 per barrel in 10 years and $122 in 15 years to maintain the Kingdom’s budget. While $122 seems a lot, as of June 6, 2008, oil prices were $134 per barrel. And if the output from Saudi Arabia were to decline precipitously, then oil prices would likely shoot up to even higher levels.

So in the near term, Saudi Arabia is likely to have enough oil income to cover its budget. However in the long term, it is likely that oil revenues will fall dramatically and the Kingdom will no longer be able to afford its lavish welfare state. 

Political Impact

The Kingdom of Saudi Arabia is in delicate balance. The legitimacy of the Al Saud family to rule Saudi Arabia is based on upholding the Saudi form of Islamic religion as well as providing a welfare state. While its social and human rights fall far below that of developed nations, its people are largely conservative and want to preserve the Kingdom’s traditions and culture while also becoming a modern state.(16)

Many of the issues that concern Saudi citizens are economic in nature. For instance, some of the top concerns are: economic difficulties, increased personal indebtedness, population growth and unemployment. Many Saudi citizens also believe that their rulers are out of touch with the needs, demands and wishes of their people.(15,54)

If oil production were to decline enough to cause the Kingdom’s oil revenue to fall, it would require cutbacks in benefits. This in turn would undermine one of the pillars of the Al Saud royal family’s legitimacy to rule and become an increasingly greater threat to political stability.

Unemployment

Another political threat is unemployment. More than 41% of the population is under 14 years old and another 18% is between 15-24 years old. This represents a fast growing labor force which means the Kingdom will need to produce 200,000 new jobs every year.(19) 

When oil revenues declined in the 1990s and the government cut back on the lucrative benefits given to all Saudi citizens, many young Saudis became embittered by rising unemployment and the loss of privileges once taken for granted.(20,76) 

Without continually increasing oil revenues, it will be hard to sustain economic growth and create new jobs, so these unemployed youth may drift into extremism and become another threat to the regime. 

Extremism

The threat posed by anti-Saudi extremists was first revealed in November 1995, when a massive truck bomb shattered the headquarters of the Saudi Arabia National Guard in Riyadh. Seven months later, another truck bomb killed nineteen American serviceman at the Khobar Towers. Then in 2006 there was an attack against the oil-processing facility in Abqaiq.The attackers in these cases are widely assumed to be members of militant antigovernment Islamic organizations.(20, 75)

The aim of these organizations is to overthrow the existing Saudi regime and replace it with an even more conservative Islamic government. They believe that this is needed because the Al Saud royal family has become so corrupted by its massive oil wealth and ties to the West that it can no longer be considered worthy to govern.(20,76)

It is likely that production declines in the Kingdom would create unease and even panic, and that extremist groups would take advantage of this to press forward with recruitment and attempts to overthrow the government.

Strategic Impact on the US

Fossil fuel depletion in Saudi Arabia would have an impact on the US both by direct economic consequences as well as by inciting a militarily response.

From an economic standpoint, Saudi Arabia is currently the second largest supplier of oil to the US providing about 1.5 million barrels per day of oil(7) which is about 8% of our total oil usage of about 20 million barrels per day(8). 

If this supply were to be decreased, it would have severe economic consequences. America’s National Commission on Energy Policy looked at the impact of a supply disruption amounting to just 4 percent of the world’s oil supply and concluded that oil prices would almost triple and push the world into the worst recession since the oil shocks of the 70s.(10,166)

Besides having an economic impact, depleting fossil fuels in Saudi Arabia would likely result in military intervention by the US. The US has had a long strategic relationship with Saudi Arabia providing external security for the country in return for oil supply preferences.(9,212) Any political struggle that threatens the supply of oil will almost certainly be met with US involvement.

Along with providing external security, internal protection of the Saudi regime has been a basic feature of US security police since 1945 when President Roosevelt met Ibn Saud and assured him of America’s support. At the core of this arrangement is a vital but unspoken quid pro quo: in return for protecting the royal family against its enemies, American companies would be allowed unrivaled access to Saudi oil fields. (20,75)

To fulfill its part of the bargain, the US has provided assistance in the creation of a large, efficient, and well-equipped domestic security force, the Saudi Arabia National Guard (SANG). From its inception, this force has received most of its training, equipment, and technical support from the US Department of Defense or from American military contractors. (20, 77)

Ultimately though, the US is prepared to intervene with its own forces to defend the Saudi regime against internal attack. This was made abundantly clear in 1981 when President Reagan declared that the US would not allow any insurgent movement to overthrow the Saudi monarch. Now, with the US even more closely wedded to the Saudi regime, this commitment is even stronger.(20,78)

The US also continues to show through its own military might that it considers the Persian Gulf the “American Lake.” For instance, in May 2007 a combined-carrier operation that was officially labeled a training exercise was in reality intended to demonstrate the ability of the US to maintain security in the region.

However, any military action by the US to prop up the Saudi regime which is widely considered by the Arab world to be corrupt and unfit to rule could lead to dire consequences for the stability of the region and could even result in other Middle East nations refusing to provide oil to the US.

Strategic Impact on China

In 2005, Chinese purchased 5.9 million private vehicles to become the world’s second largest automobile market. At the current rate, auto sales will surpass the US by 2020 and by 2030 there will be 270 million cars in China.(9,69) This is one reason why China has become the second-biggest oil consumer after America and demand continues to grow. According to the DoE, China will go from using 6.4 million barrels of oil per day in 2004 to 15.7 million barrels per day in 2030.(9,72) Ominously, the IEA has noted that new supply sources are not expected to satisfy this rising demand.(9,64) 

China has invested a great deal of effort in cultivating close ties with the Saudi royal family and other elements of Saudi leadership. As recently as 1995, China obtained only 60,000 barrels per day from Saudi Arabia. By 2003, the amount had risen to account for 16.8 percent of China’s oil imports.(9,194) In 2006, Saudi Arabia assured China that Aramco’s crude oil exports to China would jump from 445,00 barrels per day to 1 million barrels by 2010.(9,198)

China has been growing at around 10 percent a year since it opened its economy to the world in 1978.(10,194) This growth is necessary to provide jobs to the hundreds of thousands of people moving away from the agricultural countryside into the cities each year. 

The Communist Party’s mandate to rule largely stems from is success in raising living standards.(9,68) Without this growth (which would not be possible without continually increasing oil and energy supplies) it is possible that the Communist Party’s monopoly on rule could be threatened. If Saudi Arabia runs into fossil fuel depletions problems and is not able to double its exports to China as promised, it could set off severe economic and political repercussions in China.

Strategic Impact on Iran

Iran does not currently pose a direct threat to Saudi Arabia. However, by building up its navy and deploying anti-ship missiles along its coasts, Iran could imperil oil shipping through the narrow Strait of Hormuz through which passes over 15 million barrels of oil per day.(20, 73) As General Zinni said in 1999, “Iran remains potentially the most dangerous threat long-term to peace and stability in the [Persian Gulf] region.”(20,72)

Iran’s leadership bounces between encouraging peace and displaying aggression. For instance, President Khatami who was elected in 1997 spoke of his desire to improve relations with GCC states and major Western powers.(20,74) However, President Ahmadinejad elected in 2005 has a very aggressive posture towards the West, has strengthened ties with Russia and Syria, made comments that “Israel should be wiped off the map” and flaunted UN ordered inspections of its nuclear program. 

Iran occasionally issues territorial threats. Hossein Shariatmadari, editor of the hard-line daily newspaper Kayhan, caused a stir recently with an editorial reviving the claim that Bahrain was historically part of Iran. Reciprocally, articles recently appeared in the Iranian press of alleged Saudi Arabian claims on some of Iran's oil fields.(17) 

So while there are no major outstanding territorial disputes between Iran and Saudi Arabia, the history of aggression between these countries and Iran’s desire to take over Saudi Arabia’s role as the main power in the Middle East could lead to military action by Iran if it senses weakness in Saudi Arabia due to declining oil production or political instability.

Conclusion

It is unlikely that Saudi Arabia will ever publicly announce that their oil fields are in decline. Not only would this accelerate the discontent with the Al Saud family rule, but they would also lose the power they currently enjoy as being the only OPEC country that is thought to have spare production capability. Instead, the Kingdom will likely continue to cover up any production declines by declaring that there is enough oil production to fill demand, that they have decided to leave oil in the ground for future generations, or that they are using more oil internally and therefore have less to export.

So it will be difficult to know exactly when and how fast fossil fuel depletion will occur in Saudi Arabia or even if it is already occurring. However in the near term, it is likely that oil revenues will be able to continue financing their lavish welfare state. In the long term though, falling oil revenues will likely force a severe cutback of benefits, cause rising unemployment and suppress economic growth. This will produce widespread discontent and growing political and extremist opposition to the continued rule of the Al Saud family.

With America’s long history of protecting the Saudi regime and the possibility that regime change would further reduce oil imports from Saudi Arabia, it is likely that the US would become militarily involved in propping up the Saudi regime. This could destabilize the entire region and also result in a Middle East embargo of oil to the US. In any event, reduced fossil fuel depletion in Saudi Arabia would cause severe economic problems in the US.

China would likely suffer economically even more than the US from reduced Saudi Arabia imports because a higher percentage of China’s oil comes from Saudi Arabia and they are counting on doubling that amount in order to sustain a high level of economic growth. In addition, reduced economic growth in China could spur uprisings that threaten the monopoly of the Communist Party.

Finally, it is possible that Iran may try to take advantage of a weakened Saudi Arabia to take military action against it or other Gulf countries.

 

References

1. Matthew R. Simmons “Twilight in the Desert”
2. Output slumps at Mexico's Cantarell superfield: http://www.odac-info.org/node/2486
3. Saudi Arabia's 2008 National Budget - Highlights and Analysis: http://www.alrajhibank.com.sa/NR/rdonlyres/C525DCB0-8FF4-4E7E-857C-765DC1E273AD/0/2008Budget11final11.pdf
4. CIA World Factbook - Saudi Arabia: https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html
5. U.S. Department of State - Background Note - Saudi Arabia: http://www.state.gov/r/pa/ei/bgn/3584.htm
6. (not used)
7. EIA: Crude Oil and Total Petroleum Imports Top 15 Countries: http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/import.html
8. EIA: Petroleum Supply and Disposition: http://tonto.eia.doe.gov/dnav/pet/pet_sum_snd_d_nus_mbblpd_m_cur.htm
9. Michael T. Klare “Rising Powers, Shrinking Planet”
10.  Vijay Vaitheeswaran “ZOOM: The Global Race to Fuel the Car of the Future”
11.  Philippe Le Billon “The Geopolitics of Resource Wars”
12.  (not used)
13.  CIA World Factbook - Saudi Arabia: https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html
14.  Ministry of Education: Kingdom of Saudi Arabia (Right sidebar):  http://www.moe.gov.sa/openshare/englishcon/index.htm 
15.  J.E. Peterson “Saudi Arabia and the Illusion of Security”
16.  Saudi-US Relations Information Service - Saudi Arabia: Opposition, Islamic Extremism, And Terrorism: http://www.saudi-us-relations.org/defense/islamic-extremism-terrorism.html
17.  Iran's Ambitions Spark Fears in the Muslim World: http://www.npr.org/templates/story/story.php?storyId=12841320
18.  (not used)
19.  AME Info - Saudi Arabia – demographic trends to watch for: http://www.ameinfo.com/123859.html
20.  Michael T. Klare “Resource Wars”