As the situation in the Middle East continues to spin out of control, new threats to global oil supplies are arising every day.
It is starting to look as if the Libyan uprising could devolve into a prolonged civil war with little if any of Libya’s 1.6 million barrels a day (b/d) reaching refineries in Europe. The Saudis continue to insist that they can and will increase production to make up for the shortfall, but those who understand the intricacies of quickly increasing oil production, finding sufficient quantities of the light sweet oil required by European refineries, and oil shipping schedules continue to express doubts that the Saudis can really fulfill their pledge. As the shipping time for Libyan oil to European refineries is measured in days, we should know in a week or two whether the Saudis and one or two other Gulf producers really can produce and ship the right kinds of oil quickly enough to avoid shortages at European refineries. The alternative would be for the OECD to dig into its stockpiles in order to keep the wheels turning.
If Libya were the only oil-producer with a stability problem, then the situation just might be managed without economy-killing spikes in oil prices. The seemingly large problem is that Libya might just turn out to be a relatively minor problem with relatively minor consequences – like $4 gasoline in the U.S. In recent days we have seen protests or signs of incipient protests in most of the other Middle Eastern oil-producing countries including Algeria, Iraq, Kuwait, Iran, Bahrain, Oman, Yemen, and yes, even Saudi Arabia. Now all of these states are not on the verge of a Libyan-style civil war, may be relatively minor exporters, or may be able to undergo major changes in their governance with little or no reduction in oil exports. However, several of these states are so important to the smooth functioning of the global economy that the loss of output from one or more of them would cause catastrophic repercussions around the globe.
Predicting what would happen to oil prices if Saudi oil production of nine million b/d should suddenly disappear from the export market is impossible to predict. It is likely that oil would sell for hundreds of dollars a barrel when and where it is available. Thoughts of further economic growth would vanish, equity markets would collapse, discretionary travel would halt, and social unrest would be widespread. The same results would be evident from a cessation of oil exports by a combination of smaller producers such as Libya and Algeria, or Kuwait and Iraq. World oil consumption has grown so much in the last 30 years that it is currently bumping up against the global capacity to produce more oil. Gone are the days of 30 year ago when two major producers such as Iran and Iraq could go to war and halt each other’s production without causing a global disaster.
The number one threat to the American way of life would be loss of Saudi oil exports.
The number one threat to the American way of life and that of most other countries would be loss of Saudi oil exports for a temporary or extended period. Although the U.S. only imports about a million b/d or five percent of its daily consumption from the Saudis, the repercussions would be incalculable.
Saudi Arabia is a country ruled by one family, estimated at about 7,000 members, ruling a country of 25.7 million including about six million foreigners. Over the last century, political dissent in the country has been largely an intra-family affair punctuated by an occasional terrorist attack. The present King has moved cautiously to promote wider political participation with the election of half of the members of municipal councils taking place in 2005. Unlike in Libya, the Saudi government spends lavishly on efforts to control political dissent including a new $36 billion program that was announced last week
The bottom line, however, is that a small number of people still exercises unlimited, autocratic power over 26 million people that are increasing digitally connected and networked. In recent days demonstrations, involving at least some violence, have occurred in nearly all the countries bordering the Kingdom. With a sizeable and largely suppressed Shiite minority, some observers believe that it is only a matter of time until the Saudis succumb to the Tunisian contagion and serious social unrest breaks out.
So far Saudi security forces have been closely monitoring the social networks sites and the few crowds that have formed so far have been quickly broken up by police. There are three population centers in the country where large scale protests could emerge, Riyadh with four million inhabitants, Jeddah with two million, and the Shiite region in the Eastern Province. As one Saudi analyst noted last week, “the Saudis are not different from their brother and sisters in the region – they are educated, connected, and angry.” About 60 percent of the 18 million native Saudis are estimated to be less than 30 years of age. As we have seen repeatedly in recent weeks, a few thousand rulers, even supported by competent and ruthless security services is not a match for outraged millions – all it takes is a catalyst.
Last week WikiLeaks released a series of U.S. State Department cables detailing some of the excesses of the Saudi royal family who feel that they own the state and that its oil wealth is really theirs. State stipends for royal family members were running from $800 to $250,000 a month in the mid-90s. The payments to family members are thought to be on the order of $2 billion a year. In addition Saudi princes are allowed to participate in all sorts of skimming schemes that may cost the country another $10 billion annually. If this message makes its way into the consciousness of the 26 million or so who do not partake of the family’s largess, social disorder and the mother of all oil price spikes may not be far away.
Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.