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.