When it comes to the future availability of oil, it is impossible to overstate the importance of this spring’s events in the Middle East, which continue to thoroughly rattle the energy markets. According to all projections of global petroleum output, Saudi Arabia and the other Persian Gulf states are slated to supply an ever-increasing share of the world’s total oil supply as production in key regions elsewhere declines. Achieving this production increase is essential, but it will not happen unless the rulers of those countries invest colossal sums in the development of new petroleum reserves -- especially the heavy, “tough oil” variety that requires far more costly infrastructure than existing “easy oil” deposits.
In a front-page story entitled “Facing Up to the End of ‘Easy Oil,’” the Wall Street Journal noted that any hope of meeting future world oil requirements rests on a Saudi willingness to sink hundreds of billions of dollars into their remaining heavy-oil deposits. But right now, faced with a ballooning population and the prospects of an Egyptian-style youth revolt, the Saudi leadership seems intent on using its staggering wealth on employment-generating public-works programs and vast arrays of weaponry, not new tough-oil facilities; the same is largely true of the other monarchical oil states of the Persian Gulf.
Whether such efforts will prove effective is unknown. If a youthful Saudi population faced with promises of jobs and money, as well as the fierce repression of dissidence, has seemed less confrontational than their Tunisian, Egyptian, and Syrian counterparts, that doesn’t mean that the status quo will remain forever. “Saudi Arabia is a time bomb,” commented Jaafar Al Taie, managing director of Manaar Energy Consulting (which advises foreign oil firms operating in the region). “I don’t think that what the King is doing now is sufficient to prevent an uprising,” he added, even though the Saudi royals had just announced a $36-billion plan to raise the minimum wage, increase unemployment benefits, and build affordable housing.
At present, the world can accommodate a prolonged loss of Libyan oil. Saudi Arabia and a few other producers possess sufficient excess capacity to make up the difference. Should Saudi Arabia ever explode, however, all bets are off. “If something happens in Saudi Arabia, [oil] will go to $200 to $300 [per barrel],” said Sheikh Zaki Yamani, the kingdom’s former oil minister, on April 5th. “I don’t expect this for the time being, but who would have expected Tunisia?”The gist of the Wall Street Journal story on the development of the Wafra heavy oil field was really the risk to Chevron, not to the Saudis, but Klare raises a very interesting point.