Shale Gas Could Cut the Riches of Oil Nations

Oil-rich countries could face debt crises of their own in the next few decades as oil exports drop and prices fall -- and countries like the US grow more energy independent. That's the conclusion of two new reports that examine shifts in energy consumption in the US and abroad.

Saudi Arabia expects oil exports to fall significantly as domestic consumption of energy climbs. "The country's domestic consumption of energy, especially oil, at very cheap prices, is... likely to continue to rise rapidly, sharply reducing the amount of oil available for export," according to a new report from Riyadh-based Jadwa Investment. Oil sells for around $10 a barrel in Saudi Arabia, significantly less than the $100 or so it nets on the world market.

Saudi Arabia is "currently enjoying oil revenues in excess of its fiscal needs," but government spending and domestic consumption of crude oil are rising far faster than overall oil output, the report notes. For the next decade, the country will remain in a strong financial condition, with debt just about 10 percent of GDP. However, the situation is likely to change dramatically after "the benign decade" ahead. The report notes:

The government will be running budget deficits from 2014, which become substantial by the 2020s. By 2030, foreign assets will fall to minimal levels and debt will be rising rapidly. Preventing this outcome requires tough policy reforms in areas such as domestic pricing of energy and taxation, an aggressive commitment to alternative energy sources, especially solar and nuclear power, and increasing the Kingdom's share of global oil production.

One of the biggest concerns for oil nations like Saudi Arabia is the new technology that has made shale gas "a potential super-abundant" source of energy in the US and elsewhere. The growing production of shale gas "appears to be contributing to the breakdown of the historically close relationship between oil and natural gas prices. Should gas become a direct alternative to oil, then it could have a dramatic impact on oil prices," the report states.

Right now, gas is mainly a fuel for electric power, and oil is a transportation fuel, so the two are not easily interchangeable. However, in terms of pure energy content, 1 million British Thermal Units (BTUs) of gas has about one-sixth the energy content of one barrel of oil, "suggesting oil would trade in a market of efficient interchangeability at about six times the price of gas."

"Currently gas is about $4.30 per million BTUs, and if it were substitutable for oil as a transportation fuel, oil would trade in an efficient market at around $26 per barrel. Clearly, oil producers are monitoring developments in engine technologies with interest," says Jadwa.

Shale gas is extracted by the use of hydraulic fracturing, or "fracking," which involves the injection of liquids into shale rock that cause the rock to fracture and release the gas inside. The process has been around for some time, but widespread use only began recently as improved technology has made it more economical.

Production of shale gas in the US, for instance, is 12 times greater than it was a decade ago and accounts for about 25 percent of total US gas production. Total conventional and shale gas proven reserves in the US now total 330 trillion cubic feet, equivalent to 59 billion barrels of oil, or nearly one-quarter of the proven oil reserves of Saudi Arabia.

North America contains the largest proportion of global shale gas resources, 24%, slightly ahead of China. The Middle East and North Africa combined has the next largest share, 16%, according to the International Energy Agency.

The report noted that the sharp drop in oil exports constitutes "a major challenge" to Saudi Arabia given its heavy reliance on oil exports in the absence of other major sources of income. Saudi Arabia's oil exports had already plunged from 7.5 million barrels a day in 2005 and could fall even further to 6.3 million barrels a day in 2015. An expected high growth in domestic consumption could further depress exports to 6 million barrels a day in 2020 and to only 4.9 million barrels a day in 2030, according to the report.

Jadwa found that oil consumption is rising rapidly in Saudi Arabia, with domestic oil use averaging 2.4 million barrels a day in 2010, up from 1.9 million barrels a day in 2007 and 1.6 million barrels a day in 2003. The pace of consumption growth has picked up from an annual average of 4.8% between 2000 and 2004 to 5.9% between 2005 and 2009. "If we assume that only transportation and industrial use of oil grows at that rate, while oil used for power generation stays constant, then domestic oil consumption in 2030 grows to 5.5 million barrels a day," the report indicated.

This would leave the country with only around 6 million barrels a day for export. The Jadwa report is in line with earlier remarks by Saudi oil officials, who have been advocating the use of nuclear power and other forms of renewable energy. Saudi Aramco president and CEO Khalid A. Al-Falih said last year that "the oil availability for exports is likely to decline to less than 7 million barrels a day by 2028, a fall of 3 million barrels a day while the global demand for our oil will continue to rise"

Rising US shale gas production will also diminish the power of major natural gas producers in the Middle East, Russia, and Venezuela, and will help limit global dependence on natural gas supplies "from the same unstable regions that are currently uncertain sources of the global supply of oil," according to researchers from Rice University's Baker Institute.

In addition, the development of US shale gas resources "will limit the need for the United States to import liquefied natural gas for at least two decades, thereby reducing negative energy-related stress on the US trade deficit and economy," according to the Baker Institute report, "Shale Gas and US National Security."

"The geopolitical repercussions of expanding US shale gas production are going to be enormous," says Amy Myers Jaffe, director of the energy forum at the Baker Institute and one of three authors of the study.