Saudi Arabia Sees End of Oil Age on the Horizon

Saudi Arabia’s decision not to cut oil production, despite crashing prices, marks the beginning of an incredibly important change.  There are near-term and obvious implications for oil markets and global economies.  More important is the acknowledgement, demonstrated by the action of world’s most important oil producer, of the beginning of the end of the most prosperous period in human history – the age of oil.

In 2000, Sheikh Ahmed Zaki Yamani, former oil minister of Saudi Arabia, gave an interview in which he said:

Thirty years from now there will be a huge amount of oil – and no buyers.  Oil will be left in the ground.  The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.

Understanding Why

The widely held conventional theory is that the Saudis want to shake the weak production out of the market.  This strategy would undermine the economic viability of a meaningful amount of global production.  The theory assumes that this can be done in some kind of orderly bring-down of prices where the Saudis can find an ideal price below the production cost of this marginal oil production but still high enough to maintain significant profits for the Kingdom while this market correction plays out.  The assumption is that following the correction there will be a return to business as usual along with higher prices, but with Saudi Arabia commanding a relatively larger share of that market.   An alternative rationale is that Saudi Arabia is fighting an economic war with oil; a strategy designed to economically and in turn politically cripple rival producers Iran and Russia because the governments of these countries that depend on oil exports cannot withstand sustained low prices and will be significantly weakened.

While there may be some truth to both of these theories, the real motivation lies somewhere closer to Sheikh Yamani’s 2000 prediction.  Saudi Arabia has embarked on an absolute quest for dominant market share in the global oil market.  The near-term cost of grabbing that market share is immense, with the Saudis sacrificing potentially hundreds of billions of dollars if low prices persist.  In a world of endless consumption, this risk would be hard to justify merely in exchange for a temporary expansion of global market share – the current lost revenue would take years to recover with a marginally higher share of global supply.

But in a world where a producer sees the end of its market on the horizon, then every barrel sold at a profit is more valuable than a barrel that will never be sold.  Current Saudi oil minister Ali al-Naimi had this to say about production cuts in late December:  “it is not in the interest of OPEC to cut their production whatever the price is,” adding that even if prices fell to $20 “it is irrelevant.”  Implied, if not explicitly stated, is that Saudi Arabia wants its oil out of the ground, regardless of how thin its profit margin per barrel becomes.

Saudi Arabia is seeing a new and massively changing energy landscape.  The U.S. and China have agreed to bilateral carbon reduction targets.  2014 is now officially the hottest year recorded in human history, a record set almost impossibly without the presence of El Nino.  And on January 7 a report released in Nature lays bare the fossil fuel climate change equation by concluding that to achieve anything better than a 50/50 shot at keeping global warming under 2 degrees centigrade (the most widely accepted threshold for avoiding catastrophic climate change) 82% of fossil reserves must remain in the ground.  That report puts hard numbers on the percentages of fossil fuels that must “stay in the ground” and calls for 38% of proven Mideast oil reserves to never to be pumped from the ground.  That 38% represents some 260 billion barrels of oil – worth tens of trillions of dollars – much of that not held in Saudi reserves.

Saudi Arabia no longer needs OPEC.  Global action on carbon dioxide emissions is gaining global acceptance and technological advances are creating foreseeable and viable alternatives to the world’s oil dependence

All of these threats to oil use are occurring against a backdrop where the acceleration of costs-effective alternative technologies expands the potential of viable alternatives to our current fossil fuel-based energy economy.  Yamani’s prediction no longer seems a fantasy where no one outside of science fiction writers could envision an alternative to the age of oil, but rather a stunningly prescient analysis of the future risk to the value the largest oil reserve on the planet by a man who once managed that reserve.

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