I've seen numerous references in the last several days to a Citgroup analysis suggesting that Saudi Arabia might become a net oil importer by 2030. The premise behind this startling conclusion seems to be that economic growth and demographic trends would continue pushing up domestic Saudi demand for petroleum products and electricity--generated to a large extent from petroleum--until it consumed all of that country's oil export capacity within about 20 years. Even if this trend didn't proceed to conclusion, its continued progression could significantly alter both global oil markets and the context for the current debate about the desirability of achieving North American energy independence.
I'd be a lot more comfortable discussing this news item if I had access to the report on which it's based. Unfortunately, none of the dozens of references to it that I found on the web included a link to the source, which is probably on one of Citi's client-only sites. The Bloomberg and Daily Telegraph articles seemed to be the most complete, with the latter including a couple of charts from the report. As best I can tell, the analysis falls into the category of "If this goes on" scenarios--extrapolations of currently observable trends to some logical conclusion. That doesn't make it simplistic, because I'm sure the author sifted through volumes of data to flesh it out. The fact that many oil-producing countries have gone through a similar cycle lends it further credibility. For that matter, the US was once an important oil-exporting country, until the growth of our economy overwhelmed the productivity of US oil fields early in the last century. The gradual conversion of the remaining oil exporters to net oil consumers is a basic plank of the Peak Oil meme.
This presents a real conundrum, both for the Saudis and for us, because although many of the means by which this result could be averted are obvious, they aren't all feasible within the current political situation in Saudi Arabia, or indeed many other producing countries. Start with per-capita energy consumption, which a chart in the Telegraph article shows to be higher than in the US. Consumption is also high relative to GDP. Energy efficiency opportunities should be ample, but it's hard to make those a priority when retail energy is heavily subsidized and thus cheap. The Citigroup report apparently suggests reducing energy subsidy levels, but that might lead to the same kind of unrest that we've seen in other countries that have cut subsidies. That seems to leave mainly investment-based options for substituting other energy sources for oil, to preserve oil for exports. The Kingdom has already embarked on some of these, including nuclear and solar power. When combined with additional natural gas development, the Saudis certainly have the means and the motivation to shift the current trend of rising internal oil consumption, along with the cash to fund the infrastructure investment involved.
This leaves us with important strategic questions: To what extent should our own energy policy rely on Saudi Arabia succeeding in preserving its oil export capacity by means of substitution or efficiency gains? And if internal Saudi consumption removed just another 2-3 million barrels per day of exports from the market, how would that affect oil prices and the functioning of the global oil market, in which Saudi Arabia has often acted as a moderating force within OPEC? Considering that a narrowing between demand and available supply of about that magnitude was a key factor in the oil-price run-up of 2006-8, this should cause us serious concern.
That brings us to US energy independence, a tired mantra that has been proclaimed by a long succession of US Presidents, despite most experts for the last several decades having regarded it as unrealistic. To be clear, when Americans speak of energy independence, we are referring to oil, because as a practical matter that's the only form of energy we import to any significant degree, if you don't count natural gas from Canada. Yet suddenly energy independence no longer looks like a pipe dream, because of the combination of resurgent domestic oil production and improvements in vehicle fuel efficiency. An earlier report from Citigroup sketched the outline of potential future North American energy independence based mainly on those elements. It's hardly guaranteed, but it's not a fantasy, either.
Despite the risks of a much more unsettled oil market in the future, I continue to see a great deal of misunderstanding about what energy independence could mean for the US. Although it wouldn't cut us off from the global oil market--perish the thought--it would give us a much more flexible and influential role within it, while taking advantage of the benefits of continued trade. No longer being a net oil importer wouldn't insulate us from future oil price movements--it's still a global commodity--but oil prices would be lower than otherwise as a direct result of the substantial additions to supply required to shrink US oil imports to near zero. Prices would be weaker even if OPEC slashed output to compensate, because the resulting increase in spare production capacity would still reduce market volatility. Moreover, while US energy independence would not preclude the possibility of future oil price spikes, the consequences of those would be very different. For starters, they wouldn't entail weakening our economy by transferring tens or hundreds of billions of dollars offshore. Most of the extra oil revenue would stay in the US, and a large slice of it would be captured by state and federal taxes and royalties. Contrast that with what happened in 2008, and is still ongoing to a lesser degree.
The Saudi analysis from Citigroup proposed a fascinating scenario, with many interesting implications, although I'd argue that it's also subject to the simple advice of Herb Stein that "If something cannot go on forever, it will stop." By coincidence, it's also relevant to the energy debate underway between the US presidential campaigns. Although it's highly uncertain that Saudi Arabia's oil exports will dry up by 2030, we shouldn't assume such an outcome to be impossible, any more than we should base US energy policy on the outdated assumption that it's impossible for us to come close to eliminating the need for oil imports from outside North America. It might be uncertain whether we have sufficient resources accessible with the latest technology to reach that goal, but it is essentially certain that the growing but still tiny contribution of renewable energy and the eventual conversion of the US vehicle fleet to electricity couldn't get us there for multiple decades.
