David Rundell, former head of mission at the American embassy in Riyadh and author of Vision or Mirage, is one of Saudi Arabia’s foremost American experts. He was an American diplomat for thirty years, including fifteen in Saudi Arabia. He worked at the American Embassy in Riyadh as well as at the Consulates in Jeddah and Dhahran. He helped negotiate Saudi Arabia’s entry into the World Trade Organization and served in Saudi Arabia during Operation Desert Storm in 1990 and during the al-Qaeda insurgency from 2003 to 2007. Most recently, Rundell is a partner of the consulting firm Arabia Analytica.
What do people who watch energy prices need to know about the US-Saudi relationship?
America’s relationship with Saudi Arabia is unique and remains strong on many levels. First, in no other Arab country has the United States played such an important role in economic development, and no other Arab state has been such a reliable ally of the United States. While this relationship was based on the reliable supply of oil at affordable prices, it has grown to include the maintenance of regional stability, the resolution of the Arab-Israeli dispute, the fight against terrorism and the incitement to a more tolerant version of Islam as well as significant levels of bilateral trade and investment. .
The Americans discovered oil in Saudi Arabia and detained Aramco for forty years. Unlike the acrimonious and sometimes violent events that ended foreign control of oil operations in many countries, the Saudi government bought Aramco from Exxon Mobil.
Equally significantly, Saudi Arabia is the only Arab country that has never been colonized. Its bureaucracy, legal and educational systems were never restructured on European models and when oil revenues began to flow after WWII, Saudi Arabia turned to the United States for help. to modernize. Hundreds of American advisers have arrived to help establish everything from national airline Saudia to central bank SAMA and even the national parks service. Per capita, more Saudi students have attended U.S. universities than any other country in the world. Today, more than half of the men and women in the parliament appointed by Saudi Arabia, the Majlis al-Shurra, have American degrees. The same goes for the Cabinet and the Board of Directors of Saudi Aramco. It is a unique level of cultural and educational exchange.
Today, the United States remains heavily involved in training and equipping the Saudi Army. Ultimately, the Saudis would like to be less dependent on the United States for their security in the face of external military threats. But at the moment, neither their own army nor any other foreign power is likely to provide that assurance.
All of this matters because Saudi Arabia remains a prosperous and stable nation in a particularly poor and unstable region. The Saudis have a lot to lose from regional tensions and dislike anything that can lead to conflict and instability. For example, they have long sought a peaceful solution to the Arab-Israeli conflict. King Fahd and King Abdullah both presented peace plans to bring the Arab consensus to compromise with Israel. As guardians of Mecca and Medina, the Saudis still play a special role in the Muslim world and no final solution to the status of Jerusalem will be possible without their support.
Does the United States need Saudi oil? Does the world?
The United States imports very little Saudi oil and could easily do without. But the United States imports about 6 MMbpd (million barrels of oil per day) from elsewhere. Since oil is traded in a global market, Saudi production affects the price of gasoline in the United States.
Saudi Arabia remains the world’s largest exporter of oil. It has some of the largest reserves in the world and the lowest production costs. However, what makes Saudi Aramco the world’s central energy bank is its spare capacity. Many countries could reduce their oil production by government decree. But only Saudi Arabia retains the spare capacity to quickly bring large volumes of oil to market. Saudi Arabia spends tens of billions of dollars to maintain some 2 million barrels per day of idle capacity that it uses to balance markets when wars, hurricanes or other events disrupt the market.
Is Saudi Arabia Diversifying Its Economy With Industries Other Than Oil? What is their plan for the future?
Saudi Arabia is too dependent on volatile oil revenues for its government budget and economic growth. Vision 2030 is a detailed plan to balance the budget, create jobs and diversify the economy away from oil. The plan set ambitious goals to develop existing industries such as petrochemicals and mining while creating several new ones such as tourism. The Covid pandemic has delayed many of these plans which, even if successful, will complement, not replace, the oil economy. New industries won’t turn Saudi Arabia into South Korea, but they don’t have to. They need only make the Saudi welfare state more sustainable and, in that regard, they have a reasonable chance of success.
What will Saudi Arabia do in the short and long term if the demand for oil drops?
The move away from hydrocarbon-based fuels will not be easy, quick or inexpensive. In fact, the International Energy Agency now predicts that far from declining, global demand for oil is more likely to continue to rise for another decade. Today, hydrocarbons provide 84% of the world’s energy. Oil alone accounts for a third of this energy and has no rival in terms of availability or convenience, especially in the transport sector. The Saudis do not expect a drop in global demand for oil in the near future. Thus, they not only increase their oil production, but also develop renewable energies in order to have more oil to export. Are they correct? They most likely are.
Petroleum overtook coal as the world’s primary energy source in 1964, in part because it is easier to pump gasoline than it is to shovel coal, but mainly because, pound by pound, the petroleum is much more efficient than coal. Pound for pound, oil is also much more efficient than current batteries which will likely never power ships, airplanes or large trucks where the weight of the fuel carried is a major factor.
Hydrocarbons remain the basis of a vast petrochemical industry that supplies everything from plastics, fertilizers and cosmetics to pharmaceuticals and textiles. Finally, there are many industrial processes such as steel smelting and the manufacture of cement or glass which require very high temperatures which are difficult to obtain without hydrocarbon fuels.
Saudi Aramco is convinced that even if the demand does not increase, the supply supplied by the big international oil companies will decrease in the coming years due to political pressure and thus leave more demand for OPEC oil. Finally, even as global demand for oil declines sharply, Saudi Arabia remains among the cheapest producers and will continue to pump profitably long after other companies shut down their wells. The last commercially produced barrels of oil on the planet are likely to come from Saudi Arabia.
Saudi Aramco is responsible for 4.38% of global emissions, making it the most polluting company in the world.
When it comes to drilling for oil, the magazine Nature noted in 2018 that Saudi Arabia is the second greenest producer in the world, behind Denmark. On the other hand, there is a debate about the pollution caused by Aramco’s refining and petrochemical operations. The debate revolves around how pollution at Aramco’s joint venture facilities is attributed. I have never seen data indicating that Aramco’s refineries are more or less green than other facilities in the same country.
How is the Saudi state, which owns and manages Saudi Aramco, dealing with global warming and pollution?
As a desert nation, Saudi Arabia is understandably concerned about rising temperatures, reduced precipitation, increased dust storms, and desertification. For example, Saudi Arabia’s development plan, Vision 2030, set ambitious goals to shift to renewable energy by making greater use of solar and wind power, working on green and blue hydrogen projects, and capturing carbon emissions. Green hydrogen is derived from renewable energies and, when burned, produces only water vapor. Air Products & Chemicals Inc., based in Pennsylvania.
Solar power is also increasingly important in Saudi Arabia. The 300 MW Sakaka solar power plant is already producing and Sudair’s 1,500 MW solar power plant is expected to start operating towards the end of next year. Just a few weeks ago, NEOM announced that it had signed an agreement with the British company Solar Water Plc. to build the very first âsolar domeâ desalination plant. This pilot project hopes to revolutionize the water desalination process.