[Salon] Oil and the US-Saudi shift - ArabDigest.Org

Oil and the US-Saudi shift Summary: a leading energy analyst argues that shifts in how the developed world uses oil will determine the extent to which US and Saudi relations will drift apart. Today’s newsletter is a transcript, edited for length and clarity, of our 21 February podcast with Jim Krane. Jim is the Wallace S Wilson fellow for energy studies at Rice University's Baker Institute in Houston, Texas. He worked for many years as a journalist based in Iraq and Dubai, and is the author of several books, most recently Energy Kingdoms: Oil and Political Survival in the Persian Gulf, published by Columbia University Press. You can find the podcast here. Image from an Aramco marketing video [photo credit: Aramco] Jim, you’ve written a recent paper that argues that as the US is further insulated from international oil market risk, the relationship with Saudi Arabia inevitably is shifting. How is that likely to happen? In the paper I argue that three long-term trends in the oil market right now are starting to undermine oil’s strategic importance, at least for the US and those trends if they really take hold could push the US and Saudi Arabia further apart. The first one is that oil demand is inexorably shifting away from the rich OECD countries and toward the developing world. The OECD share used to be all the way up to about 75% of global oil in the 1970s and that's down in the 40s, I think it's under 45%. Now for the rich world, rich countries plus China, are also the places where oil substitutes for transportation are being developed. So that monopoly of oil as our almost 100%, transportation fuel is finally starting to weaken. Personal transport is also getting more efficient. Besides electric vehicles that don't use any oil, we're seeing more efficient hybrids, plug in hybrids, a lot of E bikes, and other electric vehicle options as well. Now the developing world, the non-OECD, their demand is doing a good job of replacing the flatline or declining OECD oil demand. Oil demand is still growing overall, but it's growing in the underdeveloped countries. And those countries don't have the same military capabilities as the developed world does. They can't offer that same oil for security bargain that the Saudis and the UAE and the others in the Gulf get from their ties with the US. Those countries need oil, but they don't have that same wherewithal to police the trade routes for their oil. The US, we're spending more than $100 billion a year on this. And there's been some pretty consistent calls in Washington to start reducing that commitment. China has a base in Djibouti now, they may be able to do this someday, but not yet. So if the OECD governments see oil is less strategically important, that could affect overall security provision for big exporters like the Saudis. The second trend is that oil is increasingly a feedstock for making petrochemicals, i.e. plastics, That's about 12% of the oil market now and over the next couple of decades that's going up to 16% according to the IEA. It doesn't sound like a lot but that's really where the growth is. The IEA has said that just about all post-COVID growth in oil demand has been in petrochemicals and mainly most of that's been in China. And oil producers love this notion, petrochemicals and making plastics they consider it a climate compliant use for oil and gas because you're not really burning the oil and gas, you're converting it into resins and polymers that become plastics. Plastics, of course, you’ve got a disposal issue but the carbon stays inside the product and the emissions from that industry are from the process that's used to convert that oil and gas into plastics. But plastics aren't as important to the global economy. They don't have that same cachet as oil, as a fuel that powers your militaries, powers global trade. You know, we don’t need the US Navy watching over trade routes for petrochemical feedstocks. The Pentagon is not going to spend $100 billion a year to protect resins and polymers. It’s just not as important. And then the third and most interesting trend here is adoption of electric vehicles among US voters. And voters in other democracies probably. Battery powered cars don't burn oil and oil isn't really even used to make the electricity that you use as a fuel. So electric vehicles really insulate drivers from oil market geopolitics. And here in the US presidential popularity has been pretty strongly negatively correlated with gasoline prices for a long time. When prices go up, the president takes a hit. So it's always a big issue here. And I've seen some research that shows US drivers that have long commutes will even change their votes, based on fuel prices; if they're really upset about high fuel prices, they'll switch. So politicians in America are scared of gasoline prices at election time. And the more you get voters driving electric vehicles, that correlation is going to weaken. So high levels of electric vehicle penetration could give the US president a freer hand in dealing with Saudi Arabia and other oil producing countries. EVs, that’s an interesting one, isn't it? Because there are those in the US who look at EVs with a whiff of suspicion. Would that be a fair way to describe it? Yes it would! EVs like everything else in the United States are getting political. And this trend could actually bleed into US domestic politics. And we could see a partisan split on relations with Saudi Arabia. You know, electric vehicles, it's no secret here, they're trending to blue states that vote for the Democratic Party and Democratic Congressional districts. I've looked at maps of where electric vehicle chargers are, and they are mainly in urban areas that tend to be held by Democratic representatives. And, you know, a lot of rural Americans don't have access to chargers, don't buy many electric vehicle and they tend to vote Republican. By your vehicle, you shall be known That's right. It's more than just a mode of transportation. Here, it's a cultural symbol, and so in the US you might see a Democratic president feeling more liberated from gasoline prices than a Republican, who still has to deal with a base that's driving gasoline powered vehicles. A Republican president might want to be more friendly towards the Saudis. And what happens if the Saudis decide, well, gosh, we better get more involved in US elections through lobbying or even cutting production again to hurt Democrats, which would probably help sell some EVs! So there's a lot of ways that this could go. Let me ask you about COP28, which was held in Dubai last November chaired by the head of ADNOC, the UAE national energy company. ADNOC - and you've made this point before for us Jim - is showing a degree of determination in transitioning from oil. When you look at ADNOC and then Saudi Aramco, who comes out looking stronger in that race to transition. I'm not sure it's really an honest to goodness race to transition but I would say the UAE is definitely in the lead. You can see this mapped out, for example, with their net zero goals. The UAE has set 2050 to get to net zero, the Saudis not till 2060. Both of these countries have absolutely massive carbon footprints. They both earn incredible sums exporting oil, enough to fund government budgets that have very lavish social programmes and other spending. But both of them also have pretty simple pathways to net zero, as we've discussed in the past. The UAE is further along, though, and they've got a few advantages. That might be part of the reason that they wanted to host the COP and are more willing to discuss the agreement that came out of the COP to transition away from fossil fuels. On the attribute side, both these countries have got a lot of sunlight. The Saudis also have a decent wind resource, they've got lots of vacant land around their cities, their power sector could be decarbonised with renewables and maybe a bit of backup power from gas in the short run and maybe batteries later, you know, that's 40% of their emissions. Both of these countries deeply want to reduce domestic oil demand and reserve it for export. So EV adoption would help them with that. Both of these countries are working on carbon capture. It's expensive and pretty inefficient, but they have great assets for that. They've got their emissions clusters, they've got perfect geology for storing carbon. They've got the knowledge, they've got cash, they've got the infrastructure. They're both committed to hydrogen for domestic decarbonisation and for exports. They're both autocracies that are pretty good at making long term policy. But the UAE still comes out on top. They're the richer country. They're way more diversified already. Already, as of the end of last year, about 80% of their power was either renewable or nuclear. Saudis are now at about 4%, just under 4%. So they're behind. That's a big difference and it's an interesting marker, isn't it? But is it also the case that the Emiratis, because they're a small country, they can be a lot more nimble. You look at Saudi Arabia, it's a big country, big population, bigger challenges, Vision 2030, this attempt to diversify the economy, you've got a very, very ambitious programme that Mohammed bin Salman is pumping out. But I look at the UAE and I see some pretty nimble and adept footwork in large part because they don't have the same sort of challenges the Saudis have. That's exactly right. So the Saudis have a huge population of citizens who aren't going anywhere. The UAE citizen population is pretty small, 10% of its overall population and their expats they are kind of cycled through. That gives them a lot more policy options the Saudis don't have, besides having just a smaller problem to begin with. And the UAE, they also have a lot more credibility which is important in reaching these goals. They made some pronouncements back in 2008-2009, about reaching 7% of their generation capacity from renewables by 2020. And they actually got there in full and on time. Saudi Arabia has not reached any of their clean energy goals at all, having made similar pronouncements around the same time and they’ve never come anywhere close. So they've got this propensity to make big announcements and then later ignore them. Going back to COP28 and some of the decisions that emerged from Dubai just had to be taken because these Gulf oil producing states, they need to manage the transition, particularly given that the Middle East is on the frontlines of climate change. It’s a major issue. Climate risk is really crucial in that part of the world. You've got those crazy temperatures you're seeing, this past summer was just so brutal in the region, just heinously hot. They've set temperature records in the Gulf: Kuwait and Iraq, almost 130 degrees Fahrenheit, 54 Celsius. That just means it's going to take huge amounts of energy to stay liveable. And when you have a heatwave like that, your power supply is basically your life support, you need unbroken electricity; even when demand is spiking to the highest levels, that power has got to stay on or people are going to die. So backup generation is going to be critical, you're going to probably need emergency cooling centres. But you don't see a ton of concern in the region about this yet. When I talk to people, the climate is still a threat to their (economic) livelihoods. And they're not so concerned with the physical aspects yet.