The head of Saudi Arabia’s national oil company Saudi Aramco has warned that total Saudi crude oil experts could begin declining as soon as next year according to Risk.net.
Domestic Saudi oil consumption is increasingly rapidly, and over the next two decades out to about 2028 total Saudi Arabian energy demand is expected to grow 250%.
“Along with China and India, we do expect Saudi Arabia to be one of the largest sources of global oil demand,” says Amrita Sen, oil analyst at Barclays Capital. “And given Saudi’s importance in the oil market as the swing producer, in the longer term, this can impact their ability to control the market at the margin. However, this is unlikely to have a significant impact this year, given the substantial spare capacity it is sitting on, though that buffer could get eroded sooner rather than later in the coming few years.”
He explains how the Saudi Arabian economy’s energy intensity has increased 138% since 1980 and will continue to do so as the economy diversifies into other industries such as manufacturing.
Maybe this is one reason why Saudi Arabia is trying to develop nuclear energy production. Burning oil to produce electricity, as Saudi Arabia does, is horribly inefficient as it stands because coal, natural gas, and nuclear power are generally much cheaper methods when possible.
Regardless, some believe Saudi Aramco is exaggerating the growth of domestic Saudi Arabian oil consumption in order to keep the oil market on its toes:
“I think this is very long term and I doubt much will change in the near future,” says Andrey Kryuchenkov, analyst and strategist for the commodities team at investment house VTB Capital. “I think they are just talking their economy and oil prices up. The original statement came from Saudi Aramco, which needs further investments to cope with growing demand and need for extra capacity. The alleged capacity is around 12.5 million b/d, but the more likely number is just below 12 million b/d at the moment. 2028 is a very, very far-fetched forecast, as they are simply adjusting the current rate of change in consumption.”
“Saudi Arabia is running out of oil and Ghawar field will exhaust itself in the end,” says Kryuchenkov. “It has been producing oil since 1948, which is unprecedented for any field and still accounts for around 55–60% of exports. The decline will accelerate from here and I think these are more immediate concerns than its consumption growing. As a rule of thumb in the oil industry, Saudi Arabia is seen as the following: a 5% decline in production and a 2% rise in consumption is approximately 15% decline in net oil exports. However, this is not the case just yet.”
So this analyst isn’t as concerned about Saudi’s growing domestic consumption as he is about the potential for Saudi output to drop.
Problem is, for those who consumer oil internationally such as the U.S., both of the above commentators seem to expect a potential reduction in international oil supply from Saudi Arabia, even if they are emphasising different causes.
As the world’s most important swing producer of crude oi, one suspects that relatively small changes for Saudi Arabia can have a large impact on the tightness of oil supply vs. demand globally. Thus any decline for whatever reason would be bad news for oil bears.
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