Originally published on Forbes.com on October 21, 2021

Saudi Aramco is convinced that even if demand does not increase, the supply provided by major international oil companies will decline in coming years due to political pressure and thus leave more demand for OPEC oil. 

David Rundell, a former Chief of Mission at the American Embassy in Riyadh and the author of Vision or Mirage, is one of America’s foremost experts on Saudi Arabia. He served as an American diplomat for thirty years, fifteen of which were spent in Saudi Arabia. He worked at the American Embassy in Riyadh as well as the Consulates in Jeddah and Dhahran. He helped negotiate Saudi entry into the World Trade Organization, and served in Saudi Arabia during Operation Desert Storm in 1990 and during the al-Qaeda insurrection from 2003-2007. Most recently, Rundell is a partner at the consulting firm Arabia Analytica.

What do people who watch energy prices need to know about the US-Saudi relationship?

America’s relationship with Saudi Arabia is unique and remains strong on several levels.  First of all, in no other Arab country has the United States played such an important role in economic development and no other Arab state has been such a reliable ally of the United States.  While this relationship was founded on the dependable supply of oil at affordable prices, it has grown to include maintaining regional stability, resolving the Arab Israeli dispute, fighting terrorism and prompting a more tolerant version of Islam as well as significant levels of bilateral trade and investment.

Americans discovered oil in Saudi Arabia and owned Aramco for forty years.  Unlike the acrimonious and sometimes violent events that ended foreign control of oil operations in many countries, the Saudi government purchased Aramco from today’s Exxon Mobil and Chevron in a structured buyout. 

Just as significantly, Saudi Arabia is the only Arab country that was never colonized.  Its bureaucracy, legal and educational systems were never restructured on European models and when oil revenue began to flow after the Second World War, Saudi Arabia turned to the United States for help with modernization.   Hundreds of American advisors arrived to help establish everything from the national airline Saudia to the central bank SAMA and even the national park service.   On a per capita basis, more Saudi students have attended American universities than any other country in the world.   Today more than half of the men and women in Saudi Arabia’s appointed parliament, the Majlis al-Shurra, have American graduate degrees.  The same can be said for the Cabinet and the Saudi Aramco Board of Directors.  That is a unique level of cultural and educational exchange.

Today the United States remains heavily involved in training and equipping the Saudi military.  Ultimately, the Saudis would like to be less dependent on the United States for their security from external military threats.  But for the time being neither their own military or other foreign powers are likely to provide that assurance. 

All this matters because Saudi Arabia remains a prosperous and stable nation in a notably poor and unstable region.  The Saudis have a lot to lose from regional tensions and do not like anything that could lead to conflict and instability.   For example, they have long sought a peaceful solution to the Arab Israeli conflict.  Both King Fahd and King Abdullah put forward peace plans to move the Arab consensus towards compromise with Israel.  As the Custodians of Mecca and Medina the Saudis still play a special role in the Muslim world and no final solution to the status of Jerusalem will be possible without their support.

Does the US need Saudi oil? Does the world?

The United States imports very little Saudi oil and could easily do without it.  But the United States does import roughly 6 MMbpd (million barrels of oil a day) from elsewhere.  Since oil is traded on a global market, Saudi production does affect the price of gasoline in the United States. 

Saudi Arabia remains the world’s largest oil exporter.  It has some of the world’s largest reserves and lowest production costs.  However, what makes Saudi Aramco the central bank of global energy is its spare capacity.   Many countries could reduce their oil production by government fiat.  But only Saudi Arabia maintains the spare capacity to bring large volumes of oil into the market quickly.  Saudi Arabia spends tens of billions of dollars to maintain some 2 MMbpd of spare capacity which it uses to balance markets when wars, hurricanes or other events disrupt the market. 

Is Saudi Arabia diversifying its economy with industries other than oil? What is their plan for the future?

Saudi Arabia is overly dependent on volatile oil revenue for its government budget and economic growth.  Vision 2030 is a detailed plan to balance the budget, create jobs and diversify the economy away from oil.   The plan has set ambitious targets to expand existing industries such as petrochemicals, and mining while creating several new ones such as tourism.  The Covid pandemic has delayed many of these plans which even if successful will supplement, not replace, the oil economy.   New industries will not turn Saudi Arabia into South Korea, but they do not have to.  They need only to make the Saudi welfare state more sustainable and in this regard they have a reasonable chance of success.

What will Saudi Arabia do in the short term and long term if oil demand drops?

The transition away from hydrocarbon fuels will not be easy, quick or inexpensive.  In fact, International Energy Agency now predicts that far from decreasing, global oil demand is more likely to continue rising for another decade. Today, hydrocarbon fuels provide 84 percent of global energy.  Oil alone accounts for a third of that energy and has no rival in terms of availability or convenience, especially in the transportation sector.  The Saudis do not expect global demand for oil to decline in the near future.  So they are not only increasing their oil production, but also developing renewables so they will have more oil to export. Are they correct?  Most likely they are.

Oil overtook coal as the world’s leading source of energy in 1964 in part because it is easier to pump gasoline than shovel coal, but primarily because, pound per pound, oil is far more efficient than coal.  Pound for pound, oil is also far more efficient than present-day batteries which are unlikely to ever power ships, aircraft, or large trucks where the weight of the fuel carried is an important factor.

Hydrocarbons remain the basis of a vast petrochemical industry which provides everything from plastics, fertilizer and cosmetics to pharmaceuticals and textiles.  Finally, there are numerous industrial processes such as smelting steel and producing cement or glass that require very high temperatures which are difficult to obtain without hydrocarbon fuels.

Saudi Aramco is convinced that even if demand does not increase, the supply provided by major international oil companies will decline in coming years due to political pressure and thus leave more demand for OPEC oil.  Finally, even should global demand for oil decline sharply, Saudi Arabia remains among the lowest cost producers and will continue pumping profitably long after other firms have shut in their wells.  The last commercially produced barrels of oil on the planet will likely come from Saudi Arabia.

Saudi Aramco is responsible for 4.38% of global emissions, making it the most polluting company on earth. 

When it comes to actually drilling for oil, the magazine Nature noted in 2018 that Saudi Arabia is the second greenest producer in the world, behind only Denmark.  On the other hand, there is debate over the pollution caused by Aramco’s refining and petrochemical operations.  The debate centers on how one attributes pollution from Aramco’s joint venture facilities.   I have never seen any data indicating that Aramco refineries are any more or less green than other facilities in the same country.

How is the Saudi state, which owns and runs Saudi Aramco, addressing global warming and pollution?

As a desert nation, Saud Arabia is understandably concerned about rising temperatures, reduced rainfall, increased dust storms and desertification. Thus, Saudi Arabia’s development plan, Vision 2030, has set ambitious targets for shifting to renewable energy through greater use of solar and wind power, by working on green and blue hydrogen projects and by capturing carbon emissions. Green hydrogen is derived from renewables and when burned produces only water vapor.  Pennsylvania-based Air Products & Chemicals Inc. and the Saudi firm ACWA Power International are building the world’s largest green hydrogen plant at Neom on the Red Sea coast. Blue hydrogen is produced from natural gas, with the exhaust greenhouse gas emissions being captured. Saudi Aramco is leading the nation’s efforts with blue hydrogen.

Solar power is also increasingly important in Saudi Arabia.   The 300 MW solar plant in Sakaka is already producing and the 1,500 MW solar facility in Sudair should begin operating near the end of next year.  Just a couple of weeks ago, NEOM announced it has signed an agreement with UK-based Solar Water Plc. to build the first ever “solar dome” desalination plant. This pilot project hopes to revolutionize the water desalination process.