US Energy Boom Is Great, Unless You're the Saudis
The idea of an energy-independent United States—thanks to a revolution in the way North American shale is harvested—is reigniting vociferous debate about what it could mean for global markets, and especially the oil-rich Gulf states of the Arabian Peninsula.
"Reduced demand for oil from the US could undermine the oil price globally, thereby placing pressure on regional budgets which are increasingly reliant on the price of oil staying firm," Tim Fox, chief economist at Emirates NBD, Dubai's largest bank, explained to CNBC.
A downside pressure on prices would arguably come at an unfortunate time for countries like Saudi Arabia, still the world's top oil exporter, where government spending has risen in order to help keep the turmoil affecting the broader Middle East from hitting the country domestically. Saudi Arabia's budget is directly linked to the global price of oil.
The degree and timing of any problems for the Gulf States are hard to pin down. The American shift to shale, described by many analysts as a game-changer, will take time. Experts reiterated to CNBC that current technologies in place at many US refineries were designed to process heavier types of crude. Furthermore, new innovations with regard to shale will eventually spread to other parts of the world as well.
"The US is just one player in the oil market. Other countries will follow, including Saudi Arabia, which will probably increase their reserves as well," Fahad Al Turki, head of research at Riyadh-based Jadwa Investment, told CNBC.
Jadwa Investment believes that even if prices were to soften, Saudi Arabia has plenty of breathing space. Saudi Arabia and many of its oil-exporting neighbors need a global oil price of about $74 a barrel in order to keep meeting their budget demands. Brent crude was trading just above $100 on Wednesday.
But with OPEC members Algeria and Iran already calling for cuts in output, the issue becomes whether the Kingdom should bring its leverage as a swing producer to bear early, rather than later.
"Certainly, adjustments to oil output might be one way to react," Fox pointed out. "Given that US oil self-sufficiency is still likely to be a number of years away—estimates are 10-15 years— it is hard to prejudge the exact circumstances that might apply at that time".
Demand for Saudi Oil From Somewhere Else?
Another factor is the rising demand scenario forecast for China and even from Africa, which has several high-growth economies and which could render pre-emptive cuts unnecessary.
"While increased US oil output might be one factor in the oil price equation, potentially dampening prices, another factor might well be increased oil demand from emerging markets such as Africa and Asia, exerting an upward bias to price," Fox added.
Meanwhile, Oil Minister Ali Naimi appears unperturbed by suggestions of bad consequences for Saudi Arabia. During a speech at the Center for Strategic and International Studies last month, he described talk of an end to US imports as "naïve, a rather simplistic view."
"Talk of energy independence fails to recognize the interconnected nature of global energy markets," he stated. "So just as I didn't buy into the peak oil theories, I do not go along with the opinion that increasing US liquid production means the United States could and should detach itself from international affairs."
"I don't believe that is in anyone's best interest," he said, "and I don't think it will happen."
Carl Sheldon, CEO of the Abu Dhabi National Energy Company, in an interview with CNBC's "Access: Middle East" on the sidelines of the World Economic Forum in Davos, had a similar perspective.
"I think that's a long way off. The more interesting question will be, politically what impact is this energy self-sufficiency have on US foreign policy," he said.
A declining US interest in the region as a whole is yet another worry in the gamut of considerations beyond mere oil prices, possibly endangering the traditional trade-off between the US and Saudi Arabia: cheap energy from the Saudis in return for a security guarantee from the U.S.
"I think the US has a policy of engagement, as it always has," Sheldon said.