While U.S. oil production has increased sharply in the last five years, crude from Saudi Arabia still influences global prices and will for some time, panelists said Wednesday at a forum on energy markets.
The international oil market still depends heavily on Middle East oil exports, and a sudden disruption to its supply in Saudi Arabia would have broad implications for the U.S., said Amy Myers Jaffe, executive director of energy and sustainability at the University of California at Davis.
“A major disruption could happen through a war or from workers deciding to not go to work or it could be a cyberattack,” Jaffe said during the event at Rice University’s Baker Institute for Public Policy. “We don’t know how these things could come about, but there is no replacement for Saudi exports.”
While the uprisings known as the Arab Spring took place in countries with lower oil production levels, Saudi Arabia is not immune to similar political issues, Jaffe said. .
Panelists suggested that a disruption in Saudi production would raise oil prices significantly, recalibrating the cost of an oil-based economy in ways that different interests might view positively or negatively.
A run-up in oil prices could result in a big push for alternative fuels — especially more use of natural gas in transportation.
Other long-term fallout could include increased use of telecommuting and denser urban living as higher-priced crude pushed up what motorists paid at the pump.
Myers Jaffe said higher-priced oil also could accelerate already brisk investment in U.S. shale plays.
But the price of oil also faces possible downward pressure.
The supply from nations outside the Organization of the Petroleum Exporting Countries is expected to increase 6 million barrels per day by 2018. That trend already is prompting Saudi Arabia — OPEC and the world’s largest producer — to try to protect current oil prices near $100 a barrel by tightening production, panelists said.
In April, the Saudis produced about 9.3 million barrels per day, but they have started to tighten the production spigot to shore up prices, said Greg Priddy, director of global energy and natural resources for the Eurasia Group.
“With the output cuts in the fourth quarter of last year, Saudi Arabia has begun a trend toward reducing output to balance the market, given more capacity coming on elsewhere than demand,” Priddy said. “In the short term, it seems clear to me that they will continue with that trend. In the medium term it becomes more of a question.”
Oil exporters have to balance the possibility that lower production will boost prices with its potential for squeezing oil revenue, and Priddy does not expect most other OPEC countries to follow suit unless prices drop dramatically.
“OPEC does not have a lot of cohesion,” Priddy said. “They probably will get Kuwait and Abu Dhabi to help a bit, because they are richer on a per capita basis, and the amount need to balance their budgets is lower.”
Priddy said that Saudi Arabia’s fellow OPEC members usually don’t agree to drop production absent a short term price free-fall.
“At that point, people get worried that Saudi Arabia won’t take one for the team,” Priddy said. “But that is only the case in a sharp recessionary