Saudi Arabia's Essential Oil

Why Riyadh Isn't Worried About the U.S. Gas Revolution

By John Sfakianakis

January 8, 2014

http://www.foreignaffairs.com/articles/140639/john-sfakianakis/saudi-arabias-essential-oil

Camels near electricity poles erected east of Riyadh, April 23, 2012. (Fahad Shadeed / Courtesy Reuters)

Last year, it was nearly impossible to miss headlines proclaiming the United States’ coming energy windfall. According to the U.S. International Energy Agency’s latest forecast, thanks to booming output from shale gas formations, the United States will be nearly energy self-sufficient by 2015, surpassing both Russia and Saudi Arabia in energy production. All this might seem like bad news for Saudi Arabia, which could see its regional and economic influence wane and its decades-long economic boom come to an end.
But the shale oil bonanza in the United States is actually a good thing for Riyadh. Over the last few decades, oil markets have experienced sharp price fluctuations, particularly with growing demand for oil in the emerging Asian economies. Oil is Saudi Arabia’s main source of revenue, so any price swings create big risks for the kingdom. Unpredictable oil prices and a collapse in revenues in the 1980s and 1990s made Saudi Arabia particularly wary of uncertainty. Over the next few years, the increase in energy production in far-flung locations and diverse sources, including from shale, will help mitigate those swings. Eventually, increased supply will also help create stable new price floor for oil, which is now estimated to cost around $80 per barrel.