Why Saudi Arabia’s oil is vital to the global energy transition
The transition from hydrocarbon fuels will require new technologies, capital investment and political support for change. Saudi Arabia’s unique role in energy markets makes it an important factor in meeting all of these conditions.
Eighty percent of global energy is still produced from hydrocarbons with 30 percent coming from oil. Next year global oil demand is expected to exceed pre-pandemic levels and the International Energy Agency anticipates this demand will grow for another decade.
In large developing economies like India and China demand for oil is growing rapidly. In Europe and North America, the total number of vehicles has plateaued, but in much of the world, where the transition to electric vehicles has barely begun, it continues to grow. Likewise, hydrocarbons remain the basis of the vast petrochemical industry which provides everything from plastics, fertilizer and cosmetics to pharmaceuticals and textiles.
Oil overtook coal as the world’s leading energy source in 1964 because pound per pound it is a far more efficient energy source than coal or our present-day batteries. Existing batteries are unlikely to ever power ships, aircraft, or large trucks where the weight of the fuel carried is an important factor. Better technologies will be needed; developing them will take time.
While demand for oil is not falling, supply may be. The majority of America’s oil and gas production involves fracking which is condemned by environmental activists and has already been banned in some states. New oil and gas leases are being restricted in the United States. Europe’s soaring energy costs this year are in part the result of shutting in the Dutch gas fields due to environmental concerns. Denmark has ended all new North Sea exploration.
Existing oil fields deplete and require continuous drilling to maintain current production levels. Yet, today, major oil companies face growing concerns over stranded assets and new government regulations. Many have slashed their exploration budgets. As climate-aware investors seek to minimize their exposure to hydrocarbons, these firms may have neither the desire nor the ability to maintain production levels.
Energy costs affect every aspect of our economy, from transportation and industry to home heating and electricity. Increased oil prices today will reduce growth and increase inflation, just as they did after the 1973 Arab-Israeli War and the 1979 Iranian Revolution. According to McKinsey’s 1.5-degree-change scenario, building the solar and wind capacity needed between 2020 and 2030 will require capital expenditures of $8.5 trillion. Making capital investments of this magnitude necessitates a growing economy, not one retarded by high energy costs.
While the United States imports very little oil today, many of our most important trading partners, including China, Japan, Korea and Taiwan, remain heavily dependent on imported supplies. Their ability to produce the goods America needs and to purchase the goods America manufactures are closely tied to their access to stable and affordable oil supplies.
Saudi Arabia holds roughly 20 percent of global oil reserves and is by far the world’s largest oil exporter. Every day, Saudi Aramco provides 10 percent of global oil production. It is also one of the world’s lowest-cost producers; so even when demand for oil eventually falls, the Saudis will likely pump the last commercially produced barrels on the planet.
Saudi Arabia gets a lot of sun. It is making major investments in solar power generation and new solar technologies. Yet it is not daily production rates, total reserves or renewables that make Saudi Arabia the “Central Bank of Global Energy.” What gives it importance is a unique level of spare capacity and the ability to quickly bring large volumes of oil into the market by government fiat.
Ultimately, energy transition involves political as well as economic considerations. Soaring gasoline prices will very quickly erode the public’s appetite for the energy transition. It was not hypocritical of President Biden to call upon the Saudis to produce more oil while at the same time reducing domestic production through regulation and taxes. It was a clear recognition that in the short to mid-term Saudi oil production will be important in maintaining affordable gasoline prices and, more importantly, public support for progressive environmental policies.
Avoiding an economic recession or political backlash caused by soaring energy costs are prerequisites for the investment and legislation needed to bring about the clean energy transition. The Saudis are currently investing $300 billion to increase their oil production. As the major international oil companies reduce their exploration budgets, we should be glad that they are.
David H. Rundell is a former chief of mission at the American Embassy in Saudi Arabia. He is the author of the widely-acclaimed book “Vision or Mirage: Saudi Arabia at the Crossroads” and a partner in the consulting firm Arabia Analytica.
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