Comment: An Oil Fix for a Prince and a President

Source: By Liam Denning, Bloomberg • Posted: Tuesday, April 26, 2016

Ten years after one old oilman pledged to break his country’s addiction to crude, a much younger one half way around the world is doing the same.

The older man is President George W. Bush. The former oil executive and governor of Texas surprised everyone during his January 2006 State of the Union speech with a statement that America was “addicted to oil” and needed to go cold turkey.

The young man is Saudi Arabia’s Deputy Crown Prince, Mohammed bin Salman. He’s spent the past few months also challenging some conventional thinking, culminating in Monday’s unveiling of his “Saudi Vision 2030” plan to transform his country’s economy, in part by addressing its own “addiction” to oil.

The millennial faces a much tougher task, and the older man’s experience helps to show why.

That isn’t because the president got it right. His focus was on cutting U.S. dependency on imports of oil from the Middle East, replacing “more than 75 percent” of them by 2025. One of the ways this was to happen was by encouraging more ethanol production, including the cellulosic kind made from switch-grass rather than corn.

Coming amid the unfolding insurgency in Iraq and ahead of mid-term elections, a speech appealing to defense hawks, farmers and the wider public’s general unease about depending on foreign oil made political sense.

A decade on, though, it isn’t moonshine that has reduced U.S. dependence on foreign oil. Instead, it’s market forces, technology, and an intervening recession.

As it happens, net imports of oil from the Persian Gulf did drop in the decade after President Bush made his speech, but only by about a third. Overall, though, net imports plunged by almost two-thirds.

The main reason was a surge in domestic production of crude oil (and, not shown in the chart, natural gas liquids) due to the shale boom. This happened amid a decline in domestic consumption and tightening fuel-efficiency standards. And all of these changes — even , arguably, the regulatory ones — were far more a reaction to high oil prices than any cohesive plan emanating from Washington.

At this point, it is also probably worth pointing out that the U.S. still uses more than 19 million barrels of oil a day. America hasn’t ended its addiction, it just manages it better.

There are two things to take away from America’s experience when considering Saudi Arabia’s new vision.

First, one has begotten the other. Riyadh’s sudden openness to such previous unthinkables as listing Saudi Aramco is a result of what shale hath wrought. Shale has opened up a competing and surprisingly resilient source of oil supply that has also, because of its provenance, stoked doubts about America’s long-standing commitment to Saudi Arabia’s security.

These were already out there when President Bush made his speech just over four years after the September 11, 2001 attacks. But they have reached a new intensity due to Washington’s nuclear deal with Saudi Arabia’s arch rival, Iran. Riyadh even recently threatened to dump its holdings of Treasuries in response to a bill in Congress that would open up Saudi Arabia to being sued over any role in the 9/11 attacks.

So Saudi Arabia is not merely facing a cyclical downturn in oil prices, but a structural change in the market’s competitive dynamic and its own geopolitical position. No wonder they’ve called in the consultants.

The other lesson from the past decade, though, is potentially more problematic.

America has dealt with its addiction by sourcing its own supply and easing up on usage — useful outcomes, but utterly different from what the then-president or anyone else was expecting at the time.

Saudi Arabia, in contrast, plans on nothing less than the transformation of its economy within 14 years. To say that this may not turn out quite in line with the vaunted “Vision” in a country as closed and conservative as Saudi Arabia is, at best, an understatement.

The very fact that the government wants to sell part of Aramco in order to help prepare for a world in which it isn’t relying so heavily on Aramco speaks to the pressure it is under.

For while America was, and remains, addicted to oil, Saudi Arabia isn’t quite in the same boat. Its position is arguably worse: A dealer who has remained too reliant, for too long, on one product. Dealing with that won’t just be a risk factor to be detailed in any Aramco prospectus, but a wildcard for the global energy market.