Ambrose Evans-Pritchard, wrote last week in The Telegraph, Saudi oil well dries up. He presented the following chart of projected Saudi oil consumption, vertical bars, and production, dark blue line.
By these estimates, in 2022, Saudi Arabia will no longer be supplying oil into global demand but will be competing in global demand for foreign oil. Long before we reach the trade-off point, however, certain exigencies will emerge.
First consider the area on the chart between the two curves. This area is highly correlated to their balance of trade and their foreign exchange reserve acquisition. The website Suite 101 states that [t]he petroleum sector accounts for more than 90% of the Middle Eastern country’s exports. If the two curves are at all representational of what is to come, then it should be noted that they are exponential. The implication is the positive Saudi economic position is decreasing exponentially, doubly so between two diverging exponential trend lines. After 2022, their economic position will deteriorate at the same exponential rate.
But this is linear thinking. The strains of a deteriorating economic position will begin to manifest in the economy long before the crossover point is reached. The Saudi’s have been using a large part of their oil wealth to finance internal social programs to pacify a restive young population through subsidized employment. When these programs can no longer be supported the resulting social unrest may lead to revolution and the overthrow of the Saudi Monarchy.
The other aspect of the use of their wealth has been to support other countries and organizations against Iran and Shiite fundamentalism in the Middle East in the age-old Sunni/Shiite sectarian battle. As Saudi influence wanes through the loss of economic power, Iran with its huge oil reserves, may be just ramping up. The result will likely be a shift in the balance of power in the struggle, impacting the entire Middle East.
With respect to oil itself, if Saudi production is not replaced, then the Saudi supply/demand curve becomes global. Oil prices will respond accordingly and global economies will slow in relation to escalating oil prices. If Saudi production is replaced, then there will be a global shift of balance of trade from the existing failing producers to the new producers. This will have geopolitical implications as well.
By. Ian Nunn