As a number of OPEC countries face stagnant or falling production and oil prices creep steadily upwards, the question of whether Saudi Arabia can offset further shortages is more pressing than ever.
Saudi Arabia, along with OPEC neighbors Kuwait and the United Arab Emirates, exported a record high of crude oil this August. Despite pumping out 10.2 million barrels per day, the fastest rate in 32 years, Saudi Arabia was unable to offset OPEC’s 0.8 percent decrease in oil production, attributed largely to instability in Libya and tough sanctions on Iran.
Saudi Arabia has traditionally acted as a “swing producer,” utilizing its significant spare capacity to stabilize oil prices and thus buffer the effects of geopolitical upheavals that could otherwise upset the global supply of oil (such as the Libyan civil war in 2011 and the Gulf War in the early 1990s). However, the price of oil has sharply increased from $22-28 per barrel—in the period lasting from the 1980s until 2003—to a high of $134 per barrel in July 2008. The Brent Crude currently sets the price per barrel at $109, a number that could easily increase if OPEC supplies did not match global demand.
Ali al-Naimi, the Saudi oil minister, emphasized Saudi Arabia’s ability and willingness to meet global demand last week. The kingdom currently has an estimated spare capacity of 2-3.5 million barrels per day and plans to begin production in the offshore field of Manifa, which could increase output by up to 900,000 barrels per day.
Despite these assurances, the kingdom faces domestic obligations that in effect constrain its export potential. Domestic consumption of oil has reached nearly 3 million barrels per day and is growing at a rate of 7 percent per year. In order to meet projected domestic and global demand by 2020, Saudi Arabia will have to pump between 12.5 and 15 million barrels per day. This might be achievable with billions of dollars in infrastructure investment.
However, even if Saudi Arabia is able to ramp up production to this extent, it is unlikely that it will keep its single-handed ability to stabilize oil prices unless it also maintains a large spare capacity. Any regional event on par with the Libyan civil war, during which Libyan oil exports plummeted from 1 million barrels per day to barely a trickle, could send oil prices shooting upwards, unless Saudi Arabia retains enough spare capacity to fill the resulting supply gap.
Stable oil prices are critical to global growth. The impact of increased energy and transportation costs reverberate through all sectors of the economy. Countries with little or no domestic oil production and emerging economies are especially vulnerable to high oil prices. Deutsche Bank analysts claim that $120 per barrel, just $10 more than the level at which barrels are currently trading, is the point at which the cost of oil begins to make up more than 5.5 percent of global GDP. This benchmark has historically “been an environment where global growth has come under pressure.” The IMF, meanwhile, estimates that every additional $10 on the price of oil shaves 0.2 percent off global growth.
Saudi Arabia’s ability to meet global demand and buffer supply fluctuations in the long-run may be questionable and thus concerning for global growth. However, recent developments suggest that Saudi Arabia may not ultimately need to be the only one bearing the burden of maintaining stable oil prices. The renewal of talks between Iran and the United States could result in the easing of sanctions and increased Iranian oil exports. Emerging shale gas production in the US holds the potential for the US to become less reliant on OPEC oil, thus decreasing its share of global demand. As energy producing countries diversify and alternate energy sources are explored, it is quite possible that Saudi Arabia may no longer hold, or even have to hold, the key to stable oil prices.