Like many countries in the region before it, Saudi Arabia is on the brink of a perfect storm of interconnected challenges that, if history is anything to judge by, will be the kingdom’s undoing well within the next decade.
The biggest elephant in the room is oil. Saudi Arabia’s primary source of revenues, of course, is oil exports. For the last few years, the kingdom has pumped at record levels to sustain production, keeping oil prices low, undermining competing oil producers around the world who cannot afford to stay in business at such tiny profit margins, and paving the way for Saudi petro-dominance, Nafeez Ahmed wrote for Middle East Eye.
But Saudi Arabia’s spare capacity to pump excessively can only last so long. A new peer-reviewed study in the Journal of Petroleum Science and Engineering anticipates that Saudi Arabia will experience a peak in its oil production, followed by inexorable decline, in 2028, that is only 13 years away.
This could well underestimate the extent of the problem. According to the Export Land Model created by Texas petroleum geologist Jeffrey J Brown and Sam Foucher, the key issue is not oil production alone, but the capacity to translate production into exports against rising rates of domestic consumption.
Brown and Foucher showed that the inflection point to watch out for is when an oil producer can no longer increase the quantity of oil sales abroad because of the need to meet rising domestic energy demand.
In 2008, they found that Saudi net oil exports had already begun declining as of 2006. They forecast that this trend would continue.
They were right. From 2005 to 2015, Saudi net exports have experienced an annual decline rate of 1.4%, within the range predicted by Brown and Foucher.
A report by Citigroup recently predicted that net exports would plummet to zero in the next 15 years.
Downfall
This means that Saudi state revenues, 80% of which come from oil sales, are heading downward, terminally.
Saudi Arabia is the region’s biggest energy consumer, domestic demand having increased by 7.5% over the last five years, driven largely by population growth.
The total Saudi population is estimated to grow from 29 million people today to 37 million by 2030. As demographic expansion absorbs Saudi Arabia’s energy production, the next decade is, therefore, likely to see the country’s oil exporting capacity ever more constrained.
Renewable energy is one avenue which Saudi Arabia has tried to invest in to wean domestic demand off oil dependence, hoping to free up capacity for oil sales abroad, thus maintaining revenues.
But earlier this year, the strain on the kingdom’s finances began to show when it announced an eight-year delay to its $109 billion solar program, which was supposed to produce a third of the nation’s electricity by 2032.
State revenues also have been hit through blowback from the kingdom’s own shortsighted strategy to undermine competing oil producers.
Saudi Arabia has maintained high production levels precisely to keep global oil prices low, making new ventures unprofitable for rivals such as the US shale gas industry and other OPEC producers.
The Saudi treasury has not escaped the fallout from the resulting oil profit squeeze, but the idea was that the kingdom’s significant financial reserves would allow it to weather the storm until its rivals are forced out of the market, unable to cope with the chronic lack of profitability.
That has not quite happened yet. In the meantime, Saudi Arabia’s considerable reserves are being depleted at unprecedented levels, dropping from their August 2014 peak of $737 billion to $672 billion in May, falling by about $12 billion a month.
At this rate, by late 2018, the kingdom’s reserves could deplete as low as $200 billion, an eventuality that would likely be anticipated by markets much earlier, triggering capital flight.
Saudi Arabia’s oil wealth and its ability to maintain generous subsidies for oil, housing, food and other consumer items, plays a major role in fending off that risk of civil unrest. But then again, it can only last so long.
