The US’ appetite for Middle East crude oil grades is unlikely to ebb in the foreseeable future despite a shale boom in the world’s largest oil importing country which has enabled it cut its dependence on oil imports, according to energy experts.
The primary reason for this is that the majority of the US refineries, which are quite old, are configured to process only Middle East crudes and with no new refineries being built in the world’s largest economy due to environmental concerns, its unlikely the demand pattern there would alter drastically.
“GCC will remain a global energy centre accounting for a large portion of the global oil supply and, hence, will remain important politically,” Giyas Gokkent, chief economist at the National Bank of Abu Dhabi told Gulf News.
He added: “Middle East has production capacity of 24 million barrels per day. This is large in the context of global supply of 90 million barrels per day. Oil prices are not currently forecast to fall drastically, but even if they do, Middle East will remain critical as a source of energy supply,” Giyas Gokkent, chief economist at the National Bank of Abu Dhabi told Gulf News.
However, if over time the US reduces its dependence on the Middle East crudes, China, Japan, India and South Korea will meet be able to fill that gap as the extra demand for oil is largely coming from the emerging markets, said Gokkent.
Thomas Pugh, Commodities Economist at the London-based Capital Economics said the price of oil is set internationally, and the Gulf region is the cheapest producer of oil, meaning that “as oil prices fall the Gulf states may gain market share as higher cost producers are forced to scale back.”
How prepared are Middle East oil exporting countries, if prices fall?
According to William Jackson, Emerging Markets Economist at Capital Economics, Qatar and Kuwait are least exposed to a fall in oil prices.
“Their break-even oil price is lower and they have large savings. The key point though is that, at least in the near-term, oil prices would need to fall sharply and stay there before the Gulf countries start running budget deficits. Even then, they have large savings and low debt levels so there won’t be immediate pressure to tighten fiscal policy, so it would mean weaker growth, but not a collapse in growth.”
NBAD’s Gokkent said “Saudi Arabian Monetary Agency alone has foreign exchange reserves of $700 billion (95 per cent of gross domestic product) equivalent to about 5 years of imports. The UAE has sovereign wealth funds with substantial, but undisclosed assets. Kuwait and Qatar are also well prepared.”
He also said traditionally, when oil prices fall development expenditures in Gulf producing countries are typically slashed, while current expenditures also do not remain immune if the decline in the oil price is persistent.
Is there commercially recoverable shale energy to be tapped in the Middle East?
Saudi Arabia’s Oil Minister Ali Naimi estimated in March that Saudi Arabia had 600 trillion cubic feet of technically recoverable shale gas.
The UAE hopes shale gas will complement its energy production in the future, the country’s energy minister said earlier this week.
The minister, Suhail Mohammad Faraj Al Mazroui, however, noted that for the development of the country’s shale resources, infrastructure is needed. “This would have a positive impact on the oil prices,” he added. Capital Economics’ Jackson, however, is sceptical about the Middle East countries’ seriousness to tap into their shale resources.
“Shale hasn’t been explored in much detail in the Gulf. I suspect that low costs of extraction for conventional oil and gas in the region, coupled with large existing reserves, mean there would be little incentive to develop these.”
Al Mazrouei, meanwhile, has said the global crude oil demand is estimated to rise to 104 million barrels per day (bpd) by 2030, from the current 89 million bpd.