Saudi Arabia may be angling to diversify but oil is still king

A royal delegation from Saudi Arabia is currently visiting the United States with the intention of wooing American businesses to the kingdom. The crown prince of Saudi Arabia, Mohammad bin Salman, is meeting with top government officials and business executives, often surrounded by groups of men wearing the traditional Saudi garb. The focus of all of this is supposed to be his drive to diversify Saudi Arabia’s oil-centric economy by importing foreign companies to jump-start a variety of industries. Yet despite all this talk of Saudi economic diversification, oil remains Saudi Arabia’s focus and the U.S. should take note.  

Saudi Aramco, Saudi Arabia’s national oil company, continues to invest heavily in all aspects of the oil industry. The Saudis are preparing for a future where oil remains just as important to the global economy as it is today. While solar and wind power, batteries and electric vehicles grab headlines, oil’s unshakeable importance to the global energy picture may not be in jeopardy after all. U.S. policymakers would be wise to remember that.

{mosads}Saudi Arabia has the world’s second largest known reserves of oil in the ground, and its oil is generally the easiest and cheapest to access. As it stands, according to Saudi Arabia’s self-reported numbers, it has enough known reserves to continue producing oil at its current rate for about 70 years. But Aramco is not sitting pat. In fact, Aramco has increased its investments in oil exploration, looking for more reserves — and it keeps finding more. 

Aramco is also working on new methods of oil extraction, such as fracking, and improving its own abilities to produce more efficiently and get every ounce of profit it can out of its prized natural resource. And Aramco is doing all of this at a time when all of the other large oil companies have been cutting investment in exploration and production. Aramco already has 12 times the oil reserves of ExxonMobil’s global assets, but Aramco is outspending all the other oil majors in trying to find more oil and develop the capacity to refine and transform it. 

Some oil majors, such as Shell, are predicting the rapid approach of peak oil demand and are working to reshuffle their assets to prepare for it. They are putting money into solar and wind farms, increasing their investments in natural gas and carefully watching the adoption of electric vehicles. But electric vehicle adoption — even under incredibly aggressive projections — may not mean the tempering in oil demand that some expect. 

The CEO of Saudi Aramco said last month in Houston that electric vehicle adoption does not keep him up at night. While some oil majors see oil demand declining, Aramco forecasts just the opposite. Oil demand currently sits at 96 million barrels per day. Electric vehicles may erode some of that demand but cars account for just a fifth of daily oil consumption. Even rapid electric vehicle adoption might only reduce oil consumption in the transportation sector by a few million barrels per day while it grows from other sources of demand, such as petrochemicals. 

There is a warning to heed from Saudi Arabi’s continued focus on oil. While U.S. oil production is growing, underfunded investment in new production, coupled with regional or local efforts to block access to domestic energy resources, could erode our energy security in the blink of an eye. Oil’s lead role in the great global energy drama may well have a second act. It’s a scenario some may not want but it’s one we must prepare for. If not, we could once again find ourselves increasingly dependent on others for the lifeblood of our economy.  

Ellen Wald, Ph.D., is a scholar at the Arabia Foundation specializing on how policy, geopolitics and innovation impact the future of energy and markets. She is the author of the upcoming book “Saudi, Inc.”, a history of Aramco and how the Saudi royal family controls this multi-trillion dollar enterprise.