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US oil boom shifts alliance as Obama visits Saudi King

BY TARA PATEL & MAHER CHMAYTELLI

(Bloomberg) -- When Barack Obama sits down with Saudi Arabia’s King Abdullah, he’ll do so knowing the United States is importing the least crude in two decades, a shift changing America’s strongest relationship in the Arab world.

Five years after Obama’s first visit to Riyadh, the drilling of shale oil fields from North Dakota to Texas has put the United States on the path to energy independence, weakening economic interdependence between the two nations as they work through disagreements on Syria and Iran.

The United States energy boom that’s upended global markets is now reshaping political alliances built over decades.Almost 70 years after Franklin Roosevelt cemented relations with the Saudi royal family, the United States finds itself free to address policy differences with oil as less of a bargaining chip, analysts said.The shift gives the United States a freer hand in shaping Middle East policy, especially in seeking an accommodation with Iran while lessening Saudi influence in Washington.

“The global picture for Saudi Arabia has changed fundamentally as a result of the growth of unconventional oil in the United States,” said Valerie Marcel, an associate fellow at Chatham House, a think-tank in London.“Saudi Arabia and the rest of the Gulf exporters are turning their attention eastward and that has an impact on how they see the West.”

While the United States stresses the closeness of the relationship on security and counter-terrorism matters, Obama’s likely to confront discomfort on his policy toward Saudi Arabia’s main regional rival, Iran, where he’s pursuing a deal on the country’s nuclear program that may eventually end economic sanctions against the Islamic Republic.

Pursue Policies

“Because of its emerging energy independence, the United States may pursue policies that are not favorable to the Saudis,” said Theodore Karasik, director of research at the Institute for Near East and Gulf Military Analysis in Dubai. “It explains partially the overture to Iran.”

During his meeting with King Abdullah, Obama will discuss United States support for Gulf security, Iran, Syria and Israeli- Palestinian peace talks, Deputy National Security Adviser Ben Rhodes said at a March 21 briefing.

Saudi rulers have criticized the United States decision to abandon plans for military action against Syrian President Bashar Al- Assad. The Kingdom’s Ministry of Foreign Affairs didn’t respond to a phone call and text message seeking comment on United States Saudi relations.

Though greater energy independence has altered the strategic framework, the United States still views Saudi Arabia as a critical player in globally linked energy markets, a senior administration official said.

Energy Markets

Two facts show the scale of change in global energy markets since Obama last visited the world’s largest oil exporter: United States output reached an average of 7.45 mn bpd last year, 39 % more than in 2009. As a result, United States imports from the Organization of Petroleum Exporting Countries, where Saudi Arabia is the leading member,fell to their lowest level since 1996 last year to an average of 3.49 Mbpd.

That’s a decline in trade worth about $166 mn a day based on current prices. Benchmark Brent crude oil traded at $106.95 a bbl.

And the trend isn’t expected to stop soon.United States production is forecast to reach 9.6 Mbpd in 2016, more than Saudi Arabia pumped last year.

Even though Saudi Arabia remains the second largest foreign supplier of United States crude after Canada partly because state oil producer Saudi Aramco has a refinery network that helps ensure an American market for its crude shipments fell slightly last year, according to the United States Energy Information Administration.

Largest Importer

For Saudi Arabia and other Middle East producers, the shale boom is accelerating the redirection of oil shipments toward Asia. China, which overtook the United States as the world’s largest oil importer in September last year,is becoming an increasingly important customer. It imported 53.9 mt of Saudi crude in 2013,or about 1 Mbpd. That’s 28 % more than in 2009, according to Chinese customs data.

“Ten years ago they were very concerned about maintaining market share in Europe and the United States This was a high foreign policy goal” for Saudi Arabia, Chatham House’s Marcel said. “That’s no longer as important.”

Nonetheless, the United States realizes Saudi Arabia’s continuing role as the only major oil producer with spare capacity, allowing it to increase supply in the face of supply disruptions such as the Libyan revolution that overthrew Muammar Qaddafi in 2011, said Mike Wittner, the head of oil market research at Societe Generale  in New York.

Spare Capacity

The Kingdom has the capacity to produce an additional 3 mn bbl of crude a day, or just over 3 % of global demand, according to data compiled by Bloomberg.

“The Saudis will always play a key role,” Wittner said. “They are the only ones with spare capacity and the ability to increase it and willingness to cut when necessary.”

The United States may still need Saudi Arabia’s oil in the long term if its domestic shale oil boom peters out, according to the Paris based International Energy Agency.United States oil production is projected to level off and then slowly decline after 2020. The IEA estimates 2,500 new wells a year are needed to sustain output of 1 Mbpd in North Dakota’s Bakken Shale.

In the meantime, the United States and Saudi Arabia have a chance to reset their relationship after friction over Iran and Syria, said Ayham Kamel, director for Middle East and Africa at Eurasia Group in New York.

“United States energy independence won’t signal withdrawal from the Gulf region, but a reassessment of priorities instead,” Kamel said.“Obama’s visit is a golden opportunity for Saudi officials to discuss a re-framing of their partnership.This would stop the deterioration in the relationship.”

03/27/2014

 

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