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The Changing Saudi Energy Outlook:
Strategic Implications
Abstract

For a long time the conventional wisdom in Middle Eastern Studies has been that oil and regional security constituted the basis of relations between the United States and Saudi Arabia. Riyadh would ensure adequate supplies at reasonable prices, and in return, Washington would guarantee the Kingdom’s security against regional threats. In recent years, the two nations’ energy landscapes have changed dramatically. The United States is projected to become less dependent on foreign energy sources, while Saudi Arabia has allocated substantial resources to diversify its energy mix, utilize alternative energy, and reduce consumption. This article examines the recent Saudi efforts to develop nuclear power and renewable resources; and also provides a preliminary assessment of potential strategic implications of these efforts for US-Saudi relations.

Modern societies require energy services to meet basic human needs (e.g., lighting, heat, mobility, communication) and to serve productive processes (e.g., agriculture, industry, and service sectors). Thus, energy is the lifeblood of modern civilization. For human development to be sustainable, “delivery of energy services needs to be secure and have low environmental impacts.”1 For the last few centuries most of the world’s energy supply has come from burning fossil fuels (coal, natural gas, and oil), with oil providing the largest contribution in the last several decades. This global energy mix is not likely to change in the foreseeable future. According to a recent report by ExxonMobil, fossil fuels will constitute about 80% of total energy consumption in 2040.2

Not surprisingly, energy security has primarily been associated with the sustainability of the world’s oil supply at low prices. Recent geological, economic, and political developments have added more complexity to the establishment of energy security both at national and international levels. In 2011, the Paris-based International Energy Agency (IEA) introduced a comprehensive definition of energy security. This definition underscores four dimensions: geological availability, geopolitical accessibility, economic affordability, and environmental and social acceptability.3 Two conclusions [End Page 565] can be drawn from this broad approach. First, there is a strong and growing connection between energy security and environmental concerns (i.e., the transition to a low-carbon economy). Second, both the supply side and the demand side of the energy equation need to be addressed. Very low energy prices in countries such as Saudi Arabia lead to overconsumption and waste. Such high consumption rates could eventually eat into oil-producing countries’ export capacities with serious domestic and global ramifications.

In 2012, Saudi Arabia was the world’s largest producer and exporter of total petroleum liquids, as well as the world’s largest holder of crude oil reserves. Furthermore, the IEA and the Energy Information Administration (EIA), among others, project that a growing share of the world’s demand for oil in the coming decades will be met by Gulf producers, led by Saudi Arabia and Iraq.4 Finally, since the late 2000s, the Kingdom has maintained the world’s largest spare production capacity. This large capacity gives Riyadh a leading role in stabilizing global oil markets in times of natural or political crises.

This rosy picture, however, does not tell the whole story. While the Kingdom is fortunate to have abundant hydrocarbon deposits, these oil and gas deposits are finite. In the last several decades, most countries, both energy producers and consumers, have invested in diversifying their energy mix, focusing particularly on nuclear and renewable power. Another important side of the energy equation is the rapid increase of Saudi oil consumption. In 2000, the Kingdom consumed approximately 1.5 million barrels per day (b/d). Ten years later, the country’s consumption almost doubled, to about 2.8 million b/d. This trend has significant domestic and international ramifications. Simply stated, more domestic consumption results in less oil available for export. Oil revenues serve as the backbone of Saudi Arabia’s national income. Oil products dominate Saudi Arabia’s total exports, averaging over 83% of annual export revenues for the past three decades.5 These massive oil revenues are the main driver of Saudi economic prosperity. In May 2013, the International Monetary Fund (IMF) concluded that the Kingdom has been one of the best performing economies of the G20 in recent years, with the average rate of real gross domestic product (GDP) growth from 2008 to 2012 third behind China and India.6 Diminishing revenues would lead to economic stagnation and weaken domestic social and political stability.

Soaring petroleum consumption will have global ramifications. Despite efforts to diversify energy mix, the world still runs on oil, and Saudi Arabia is the leading player. The global oil market is well-integrated, so that lower Saudi oil exports would decrease the supply in the international market, which could raise prices and deal a heavy blow to the global economy. Under such a scenario, all countries would be impacted.

The good news is that this bleak scenario is not imminent. There is a small window of opportunity to reverse this trend. Equally important, Saudi leaders seem to be aware of the challenge facing their nation and the necessity of taking drastic actions to [End Page 566] articulate and implement appropriate strategies. Minister of Oil ‘Ali al-Na‘imi argues that using alternative sources of energy that are sustainable will free more oil for export and “reduce dependence on hydrocarbon resources and keep them as a source of income for a longer period.”7 In the last few years, the Saudi leaders have taken several initiatives to utilize the nation’s largely untapped solar power resources. In addition, the authorities have developed plans to build nuclear reactors in coming years.

This article examines Saudi Arabia’s efforts to diversify its energy mix, shifting away from oil and utilizing alternative energy resources, mainly nuclear and renewable power. Several other countries in the Middle East (and elsewhere) are pursuing similar strategies. The Saudi approach, not different from its neighbors, is to focus on the supply side. Saudi Arabia currently has ambitious plans to build nuclear reactors and solar plants that are either under consideration or already in the early stage of implementation. If these plans are fully implemented, the Saudi alternative energy program would be considered one of the most aggressive in the Middle East. However, this article argues that similar efforts need to be made to restrain the surge in domestic consumption. In recent years several Saudi officials have underscored the need to promote energy conservation. A comprehensive and sound energy security strategy should simultaneously seek to diversify the energy mix and improve efficiency.

In the following section I examine the drivers of nuclear and renewable energy initiatives in Saudi Arabia. This will be followed by a discussion of the steps that have already been taken to bring these initiatives to fruition. Special references will be made to the efforts to build and develop Saudi technical and educational infrastructure, particularly King Abdullah City for Atomic and Renewable Energy (K.A.CARE), King Abdullah University of Science and Technology (KAUST), and the King Abdullah Petroleum Studies and Research Center (KAPSARC). The subsequent section will address the need to promote energy efficiency and restrain consumption. The concluding section provides a preliminary assessment of the strategic implications of the changing Saudi energy landscape, particularly with regard to relations with the United States.

The Drivers of Nuclear and Renewable Energy Initiatives

Ambitions and aspirations to claim regional (and global) leadership have always played a role in making policy. Several Middle Eastern countries have invested substantial resources and made significant progress in their efforts to diversify their energy mixes and utilize both nuclear and renewable power. Some of them, such as Israel and Iran, are Riyadh’s adversaries, while others are close allies (i.e., the United Arab Emirates). As the largest economy in the Gulf region, the holder of massive hydrocarbon deposits, and custodian of Islam’s holiest sites, Saudi Arabia claims, with strong justification, a regional leadership status. Watching the race for nuclear and renewable energy, Saudi leaders do not want to fall behind other regional powers. Rather, they aspire to be at the forefront leading other countries in utilizing these important sources of energy. [End Page 567]

Perhaps more important than enhancing the Saudi leadership’s credentials, demographic, economic, and geographic forces are driving Riyadh to reduce its heavy reliance on oil in favor of nuclear and solar power. First, Saudi Arabia has one of the highest population growth rates in the region. For cultural and historical reasons the Kingdom has very little, if any, family planning. As a result, the population more than doubled in the last two decades. In addition to its own fast-growing population, the Kingdom hosts millions of expatriate workers, who increase the country’s energy consumption.

Second, the common perception that Saudi Arabia is one of richest countries in the Middle East is not accurate. The Kingdom has the largest economy in the Middle East, but given its large population, some of its neighbors, with smaller populations, enjoy higher per capita income. Still, with $16,267 gross domestic product (GDP) per capita in 2010,8 the Saudi per capita income is higher than many other countries in the region (with the exception of Israel and the other five Gulf Cooperation Council (GCC) states: Bahrain, Kuwait, Oman, Qatar, and the UAE). Generally, affluent people drive bigger cars, longer distances, live in bigger homes, and use more energy than poor people do.

Third, while it is true that Saudi Arabia is blessed with massive hydrocarbon reserves, on the other hand the country suffers from severe water scarcity. Meanwhile, its rate of rainfall is one of the lowest in the world. In short, the Kingdom’s water supply is already exploited beyond its proper capacity.9 To compensate for this shortage, the Kingdom depends mostly on two sources: underground aquifers and the sea. The Kingdom has access to salt water from the Gulf in the east and the Red Sea in the west. Through desalination, Saudi Arabia transforms salt water into potable water. With approximately 27 desalination stations producing more than three million cubic meters a day of potable water, Saudi Arabia is the world’s largest producer of desalinated water.10 These plants provide a large and growing share of the water consumed in residential and all other economic sectors. Water desalination is an energy-intensive process and the majority of desalination plants run on oil. In the coming years the Kingdom will burn more oil to produce more water.

The combination of these three factors (booming population, developing economy, and water scarcity) has compounded Saudi electricity demand. The demand for electricity has risen at an annual rate of 8% in recent years and is expected to triple by 2032.11 According to a study in 2010, the electricity consumption per capita in Saudi Arabia was more than three times the global average.12 In order to meet this surge in electricity demand the Saudi government is investing $80 billion to boost existing power generation capacity.13 The goal is to generate 123 gigawatts (GW) by [End Page 568] 2032, which would require more than doubling the 2012 total capacity of 55 GW.14 Furthermore, the Ministry of Water and Electricity has developed plans to “cut consumption with efficiency measures, including improvements to power stations and new standards for air conditioning units.”15

This surge in demand for electricity is closely linked to the Kingdom’s rising oil consumption. More so than the other five members in the GCC, oil is the dominant energy source for generating electricity and powering water desalination in Saudi Arabia. This heavy dependence on oil to generate electricity has two major negative impacts: it contributes to air pollution and carbon emissions, and it reduces the amount of crude oil available for export. Meanwhile, top Saudi officials have already pointed to the connection between rising domestic oil consumption and shrinking revenues. Khalid Al-Falih, the president and chief executive of the national oil company Saudi Aramco, stated that domestic energy consumption was expected “to rise from 3.4 million b/d of oil equivalent in 2009 to about 8.3 million b/d of oil equivalent by 2028 or a growth of 250 percent.”16 At that rate, Al-Falih concluded that the oil availability for exports is likely to “decline to less than 7 million b/d by 2028, while the global demand for our oil will continue to rise.”17 Hashim Yamani, president of K.A.CARE, echoed similar sentiments, saying, “Oil exports and economic growth will be constrained if there is no mix of alternative energy.”18 This projected combination of rising domestic consumption and shrinking export volume is certain to represent a major challenge to internal socio-economic and political stability, particularly given that national income is heavily dependent on oil revenues. In January 2012, Oil Minister ‘Ali al-Na‘imi stated that Saudi Arabia would like to stabilize oil prices at a level around $100 per barrel — higher than the $75 per barrel considered a “fair price” by King ‘Abdullah in 2008.19 This higher price reflects the Kingdom’s desire to counter shrinking export volume and rising public spending. Against this background, developing alternative energy (mainly nuclear and solar) can simultaneously provide fuel to domestic consumption and save oil for export.

Nuclear Power

After widespread stagnation in most of the 1980s and 1990s, nuclear power has since attracted a growing interest since the early 2000s. Several factors contributed to this global interest in nuclear power. The threats to oil supplies and fluctuation in prices have raised concerns about over-dependence on fossil fuels. Carbon-free, nuclear [End Page 569] power can help slow the increase in greenhouse gas emissions (primarily from the combustion of fossil fuels). Finally, barring the 2011 Fukushima accident, the safety record of nuclear reactors has improved. Despite these advantages, much uncertainty still remains about nuclear power’s prospects. One of the main hurdles is the large overlap between civilian and military application. Another is the uncertainty regarding what to do with the nuclear waste. As of June 2013, there are 434 commercial nuclear reactors operating in 31 countries, providing approximately 13.5% of the world’s electricity.20

Saudi Arabia’s interest in nuclear power dates back to the late 1970s when it carried out feasibility studies on utilizing nuclear energy to power desalination plants. The Kingdom also conducted “limited experiments to produce radio isotopes.”21 This early start did not produce any viable nuclear power program. However, the rising domestic demand for energy and the broad, intense interest in nuclear power expressed by numerous states both in the Middle East and worldwide have given momentum to the Saudi nuclear ambition since the mid-2000s. In March 2006, ‘Amr Musa, then Secretary General of the Arab League, called on Arab states “to enter into the nuclear club and make use of nuclear energy for peaceful purposes.”22 Several months later, in December, the GCC summit held in Riyadh commissioned a study to set up a common GCC nuclear program.23

This initiative to coordinate nuclear policy between the six members of the GCC has not made much progress. Instead, each country has since sought to draw its own nuclear power policy. In June 2011, the Saudi government spelled out plans to build 16 nuclear reactors over the next two decades. The first two reactors are planned to be running in ten years followed by two more each year until 2030. The goal is to provide for 20% of the nation’s electricity demand.24 The 2011 disaster at Japan’s Fukushima Dai-ichi Nuclear Power Plant has cast some uncertainty over the future of nuclear power. Some countries have chosen to phase out nuclear reactors while others opted to reassess the role of nuclear power in their energy mix. Meanwhile the disaster does not seem to have weakened Riyadh’s determination to proceed with its nuclear ambition.

Like most other nuclear power aspirants, Saudi Arabia seeks foreign assistance. Since the late 2000s, Saudi authorities have negotiated nuclear agreements with a number of governments and specialized private companies. In 2011, Riyadh signed three nuclear power development agreements. The pact signed with France allows Saudi experts to “study the French technology options, their financial requirements [End Page 570] and implications for developing qualified national human resources.”25 Argentina’s National Atomic Energy Commission and Argentinian technology firm INVAP have developed a simplified water reactor design aimed at small-scale electricity generation and water desalination projects.26 The Kingdom expressed interest in this water-reactor design and the two sides signed a deal to boost cooperation. The third nuclear agreement the Saudi government signed in November 2011 was with South Korea. The two governments agreed to cooperate in the “design, construction, operation, maintenance, and development of nuclear power plants.”27 They also agreed to cooperate in research, training, safety, and waste management.

In January 2012, Chinese premier Wen Jiabao visited Saudi Arabia. One of the outcomes of this high-level visit was the signing of an agreement to promote cooperation in the area of peaceful atomic power. Both sides agreed to work together on the maintenance and development of nuclear power plants and research reactors as well as the manufacturing and supplying of nuclear fuel.28

The role the US government and American nuclear firms might play in the Saudi nuclear plan remains uncertain, though the United States and Saudi Arabia have been close allies for decades. During George W. Bush’s 2008 visit to Riyadh, Secretary of State Condoleezza Rice and Foreign Minister Saud Al-Faisal signed a Memorandum of Understanding (MOU) in which they agreed to establish a “comprehensive framework for cooperation in the development of environmentally sustainable, safe, and secure civilian nuclear energy through a series of complementary agreements.”29 Two years later, a consortium comprising the US Exelon Corporation, the Shaw Group, and the Japanese firm Toshiba announced plans to build and operate nuclear reactors in Saudi Arabia.30 These significant steps, however, remain tentative and little progress has taken place.

In addition to potential substantial commercial profit, the United States has significant strategic interests in promoting cooperation with Saudi Arabia. A Saudi nuclear program built in cooperation with the US government and American companies would send a strong message to Iran that full transparency is the “right” way to pursue nuclear power program. Washington would also be in a better position to ensure that nuclear materials and know-how would not be transferred to military applications.

Despite these apparent common commercial and strategic interests, significant hurdles have prevented real progress between the two countries. One main issue is the uncertainty in allowing Riyadh to enrich uranium or reprocess plutonium to make nuclear fuel. Washington prefers that nuclear power aspirants follow the example set by the UAE, [End Page 571] which voluntarily gave up its nuclear ambitions in a 2008 agreement with the US. Section 123 of the US Atomic Energy Act (AEA) of 1954 lists nine criteria to which a nuclear pact partner should adhere (unless the President gives an exemption). One of these provisions bans “enrichment or reprocessing by the recipient state of transferred nuclear material without prior approval.”31 Essentially, the Atomic Energy Act serves as a prerequisite for nuclear cooperation between the United States and other nations. Washington and Riyadh have yet to sign a nuclear cooperation agreement outlining AEA terms.

The concern of some members in the political establishment in Washington over Riyadh’s stance on nuclear proliferation was heightened by statements in 2011 made by Prince Turki Al-Faisal, former head of Saudi intelligence and former ambassador to the United Kingdom and the US. Prince Turki suggested that if Iran acquired nuclear weapons, Saudi Arabia would do everything it could to match its neighbor’s capability.32 However, the Kingdom is a partner in a number of international agreements that support the nonproliferation of nuclear weapons. Among them is the Global Initiative to Combat Nuclear Terrorism (GICNT), an international partnership of more than 80 countries who advocate “working individually and collectively to implement a set of shared nuclear security principles.”33 Another agreement is the Proliferation Security Initiative, which aims to “stop trafficking of weapons of mass destruction, their delivery systems, and related materials to and from states and non-states actors of proliferation concern.”34 Finally, Saudi Arabia has a safeguard agreement with the International Atomic Energy Agency (IAEA). These agreements give the IAEA the power to verify that the signatories live up to their commitments not to use nuclear programs for nuclear weapons purposes. The Kingdom, however, has so far failed to sign the Additional Protocol, which gives the IAEA additional inspection authority over its nuclear developments.35

To summarize, in pursuing nuclear power, Saudi Arabia has already signed cooperation agreements with France, Argentina, South Korea, and China and has sought and negotiated assistance from several other countries including the United States and Russia. This drive to secure foreign partners and the significant steps to develop an indigenous technological infrastructure suggests that the Kingdom is determined to acquire nuclear power.

Renewable Energy

Renewable energy is any form of energy from solar, geophysical, or biological sources that is replenished by natural processes at a rate that equals or exceeds its rate of use. It is obtained from the continuing or repetitive flows of energy occurring in the natural [End Page 572] environment.36 Biomass, geothermal heat, hydropower, solar power, and wind power are all different forms of renewable energy. The transfer toward the use of renewable energy sources is inevitable, as fossil fuels are finite. In recent years, renewable energy has expanded rapidly and its use is projected to grow faster than that of fossil fuels in the 2010– 2030 period.37 A 2012 International Energy Agency (IEA) report projects that renewables will become the world’s second-largest source of power generation by 2015 (roughly half that of coal), and that by 2035, they will become the primary source of global electricity.38

Efforts to promote renewable energy can potentially provide a variety of environmental, economic and social benefits. In addition to reducing carbon dioxide emissions and providing public health benefits, renewable energy diversifies the energy mix and provides “green jobs.” Some renewable energy sources can provide electricity to rural and isolated communities at a lower price than traditional fossil fuels or nuclear power plants. Forms of renewable resources are available everywhere, but their contribution to the energy mix varies by country and by region.

Saudi Arabia is developing a plan under which renewables will receive subsidies to make them competitive in power generation and allow firms, including Saudi Aramco (which has renewable energy pilot projects), to compete in a more open power market. The aim of the plan is to produce half of Saudi Arabia’s power from renewable fuels by 2020.39

Solar power offers some substantial advantages over other energy sources, reducing the need for centralized power plants and transmission lines and they “do not require the additional infrastructure for mining, transport, and disposal that nuclear and fossil-fuel powered technologies necessitate.”40 Saudi Arabia’s enormous solar energy potential has long been recognized as an untapped resource.

Saudi Arabia was one of the first countries in the Middle East to utilize solar power. The Saudi Solar Village Project was sponsored by the Saudi Arabian National Center for Science and Technology and the US Department of Energy as part of a joint cooperation agreement signed by the two governments in 1977.41 This initiative provided solar-powered electricity to three small villages outside Riyadh. Despite this early achievement, there was no persistent interest in solar power and no subsequent efforts were made to utilize solar power.42 The Kingdom has continued to make negligible use of this abundant and clean source of energy.

However, since the mid-2000s, Saudi leaders have increasingly shown interest in reducing their nation’s heavy dependence on petroleum and diversifying the Kingdom’s energy mix. In 2008, Oil Minister ‘Ali al-Na‘imi voiced his nation’s ambition, “One of [End Page 573] the research efforts that we are going to undertake is to see how we make Saudi Arabia a center for solar energy research, and hopefully over the next 30–50 years we will be a major megawatt exporter.”43 Three years later, ‘Abdullah al-Shihri, governor of the Electricity and Cogeneration Regulatory Authority (ECRA), echoed a similar sentiment. Shihri stated that the Kingdom views solar power and other non-hydrocarbon sources as “crucial parts of a plan to boost generating capacity by 50 percent in this decade.”44 In addition to generating crucially needed electricity, ECRA seeks to create thousands of new jobs in solar farms, assembly plants, and factories that make panels and other equipment.

In 2011, the Saudi authorities took a significant step to translate these ambitious goals into action. The first solar power station, located on Farasan Island, was inaugurated. The plant contains 6,000 solar cells and will produce 864,000 kilowatts.45 Solar Frontier, the company that built the station, is a joint venture between the government-owned utility Saudi Electricity and the Japanese company Showa Shell Sekiyu. Solar Frontier is currently building another giant solar station in Dhahran called Saudi Aramco North Park that will provide 10 megawatts of power.46 Another joint venture between Saudi and Japanese firms is led by the Saline Water Conversion Corporation, which runs dozens of desalination plants in the Kingdom, and Hitachi Zosen Corporation. The two sides signed an agreement in 2011 to carry out research on utilizing solar energy to power desalination plants.47 Similarly, Saudi Arabia is now working with the US National Renewable Energy Laboratory, funded by the US Department of Energy, to measure solar resources, gauge the best locations for solar power plants, and train Saudis to operate and maintain solar instruments and stations.48

These ambitious Saudi initiatives to utilize solar power have to overcome several hurdles. One of them is the intermittent character of solar power. In many countries, fossil fuel-fired stations supplement electricity generated by solar plants. Technology addressing the reliability of solar power has substantially improved in recent years in addressing this reliability challenge. Another hurdle is the huge investments needed to build large scale solar plants and connect them to the transmission grid. As discussed above, several international companies have agreed to invest billions of dollars to build solar plants in the Kingdom.49 Much more investment is still needed. According to ‘Abdullah al-Shihri, the country will need investments of more than $100 billion over [End Page 574] the next decade.50 In addition, the authorities need to articulate and approve a regulatory framework for investment in the solar power sector. A third challenge facing the Saudi government is the need to develop the necessary human capital and technological infrastructure to bring to fruition its ambitious plans in both solar power and nuclear energy.

Human and Technological Infrastructure

In recent years Saudi leaders have shown a broader understanding of their nation’s need to reduce dependence on fossil fuel and to establish the regulatory and educational institutions to build and promote nuclear and solar power. They are not satisfied with importing foreign technology, but rather seek to create indigenous capacity. One of the first steps toward achieving these goals was the establishment of the National Solar Systems (NSS) in 2004. The NSS’s responsibilities include:51

  • •   Feasibility studies

  • •   Engineering and design services

  • •   Material supply and component sales

  • •   Installation services and supervision

  • •   Commissioning and start-up services

  • •   Operations and maintenance

The NSS carries out these responsibilities in cooperation with international partners, and since its establishment the NSS has signed collaboration agreements with several international companies specialized in solar power.

The growing official Saudi government interest in nuclear and renewable sources since the late 2000s has given momentum to establishing research institutions working on alternative energy in Saudi Arabia. In 2009 King Abdullah University of Science and Technology (KAUST) was founded in Thuwal on the Red Sea. Initially the national oil company Aramco played a major role in funding and managing KAUST52 With one of the richest endowments in the world, KAUST is a multibillion dollar research institution with alternative energy at the top of its core research agenda. KAUST researchers carry out their work on nuclear and solar energy in coordination with their counterparts at King Abdullah City for Atomic and Renewable Energy (K.A.CARE).

In April 2010, just six months after KAUST’s official inauguration, the Saudi government announced the creation of K.A.CARE in the capital, Riyadh. Article Three of the royal decree creating the City highlights the main objective of K.A.CARE. The city “shall aim at contributing to the sustainable development in the Kingdom through utilization of science, research, and industries related to atomic and renewable energy for peaceful purposes.”53 An official statement adds that developing [End Page 575] solar, wind, and geothermal resources, alongside atomic energy, will “help transition the Kingdom to a balanced energy mix and strengthening its ability to meet international demand for oil and make it a world leader in alternative energy.”54 In order to pursue these ambitious goals, the decree appointed Hashim Yamani, a Harvard-educated physicist and former minister of commerce and industry, head of K.A.CARE. In February 2013, K.A.CARE announced the launch of its Renewable Energy Competitive Procurement Portal and released a white paper outlining how the procurement process will take place.55

It is important to point out that the official interest in building and developing technical infrastructure to pursue nuclear and renewable energy has not neglected the oil sector. The Saudi government has recently established the King Abdullah Petroleum Studies and Research Center (KAPSARC), a nonprofit institution. The center’s mission is to promote research in energy economics, policy, technology, and the environment.56 Additionally, in early 2012, Khalid Al-Falih, president of Saudi Aramco, announced the launching of a youth development program that will train two million Saudis by 2020.57

These programs and institutions — NSS, KAUST, K.A.CARE, and KAPSARC, among others — have been tasked with building a strong indigenous technical infrastructure and training Saudi citizens to initiate and support the nuclear and renewable energy industry in particular and the energy sector in general. These initiatives are well-funded, enjoying support from and cooperation with top international counterparts. Still, the learning and training processes take time, and will need sustained official backing for many years to come. Meanwhile, the efforts to expand production and diversify the energy mix should be paralleled by similar attempts to promote and improve efficiency.

The Other Side of The Energy Equation: Efficiency and Conservation

Middle Eastern countries in general and oil-producing countries in particular have lagged behind the rest of the world in terms of energy efficiency (the ratio of energy use to GDP). Indeed, the region’s demand for both primary fuels and electricity has been far above the rest of the world’s for many years. Improvement in energy consumption takes place when “energy inputs are reduced for a given level of service or there are increased or enhanced services for a given amount of energy inputs.”58 In other words, energy efficiency means the consumption of less energy to produce the same output. This improves energy security by increasing the sustainability of energy sources. In addition, by reducing pollution, energy efficiency contributes to maintaining a cleaner environment. [End Page 576]

One approach to enhancing Saudi Arabia’s energy security is to improve efficiency and conservation. The Kingdom is the world’s sixth largest oil consumer after the United States, China, Japan, India, and Russia. All these countries have much larger population and more diversified economies than Saudi Arabia. Saudi per capita energy consumption is four times higher than the world average.59 On average, a Saudi citizen consumes a little more than a US citizen and around twice as much as a Japanese citizen.60 Many countries’ economies have grown faster than their energy consumption, but the Kingdom is moving in the opposite direction, meaning energy efficiency is getting worse. This poor performance is due to heavy concentration on energy-intensive industries and the energy demands of the residential and transportation sectors. Furthermore, high energy consumption is heavily supported by subsidies on fuel prices and electricity. These subsidies constitute a significant share of government spending.

Like their counterparts in other oil-producing countries, Saudi citizens enjoy generous social and economic benefits, including heavily subsidized petroleum products. According to a report published by the IMF in January 2013, worldwide energy subsidies reached $480 billion in 2011, with oil-exporting countries accounting for about two-thirds of the total.61 Indeed, the prices of fuels, electricity, and desalinated water in Saudi Arabia are just a fraction of their market values. Proponents of subsidies argue that they shield the population against price fluctuations, ensure that the poor have access to electricity and fuel, distribute hydrocarbon wealth, and buy domestic political support.62

However, since these government subsidies do not distinguish between the poor and rich, the greatest benefit goes to those who consume the most energy — namely, wealthier firms and households. Thus, some argue that subsidies should not be considered an effective way to redistribute public wealth. By encouraging overconsumption, subsidies waste precious natural resources, which in turn contribute to pollution. The weight of the Kingdom’s ballooning subsidy program is beginning to impact the economy, and several top Saudi officials have spoken out in favor of subsidy reform. Economy and Planning Minister Muhammad al-Jasir stated that energy subsidies “have become increasingly distorting to our economy.” Similarly, Saudi Electricity Company CEO ‘Ali al-Barrak said, “Subsidies should be revised and done in a different way to support the low-income people.”63

Precedents in several other countries show that reducing subsidies is likely to be strongly resisted by large segments of the population who have grown accustomed to low energy prices. Political upheavals in the Arab world since early 2011 have further [End Page 577] complicated the debate over slashing subsidies. Saudi Arabia and the other Gulf states have opted to increase public benefits and spending. Thus, given the current political environment, the Saudi government’s heavy subsidies and low energy prices are likely to endure in the foreseeable future.

This, however, does not mean that the Saudi authorities have given up on trying to reduce energy consumption. In 2003, the government established the National Energy Efficiency Program to “assist the energy sector to meet the rapidly growing power and energy demand through efficient and rational consumption patterns.”64 The program supported energy auditing and regulations, information exchange, and efficient technologies. In November 2010, the cabinet replaced the program with the independent Saudi Center for Energy Efficiency. The center is housed at King Abdulaziz City for Science and Technology (KACST) and chaired by its president, Dr. Mohammed Ibrahim Al-Suwaiyel. Representatives from the private sector and several government entities are members of the center. The center’s goals, similar to those of the National Energy Efficiency Program, are to promote energy conservation and study methods appropriate for the Kingdom’s environment and culture.65

Conclusion: Strategic Implications

In 1970 US crude oil production peaked, then declined continuously for more than 20 years when tight oil first began to flow after 2008.66 Since then production has risen due to a technological innovation known as hydraulic fracturing (fracking), which unlocks oil and gas previously trapped in shale rock. In late 2012, the IEA projected that the United States will become the largest global oil producer by 2020 and North America will become a net oil exporter around 2030.67 Given this very promising outlook, former US energy secretary Steven Chu suggested that Riyadh and Washington need to form new relationships. Speaking along the same lines, Chas Freeman, former US ambassador to Saudi Arabia, said, “We are still partners but less intimate than we once were.”68 In short, some analysts project that the US-Saudi special relationship is likely to become less special.

This article disagrees with this line of analysis for several reasons. First, US-Saudi relations are multidimensional: the two nations have other mutual interests apart from oil. These include counterterrorism, nonproliferation, and regional security. Second, in May 2013, Oil Minister ‘Ali al-Na‘imi stated that Saudi Arabia will [End Page 578] continue to make the most of the competitive advantage presented by the country’s abundant oil reserves. But the “ultimate aim is to diversify away from our over-reliance on oil revenues.”69 American private companies are playing a major role in helping the Kingdom pursue these goals.

Third, it is important to distinguish between the quantity and quality of oil. For a long time, many oil analysts have raised concerns about the availability of adequate supplies (the so-called peak oil theory). The US oil boom helps to alleviate these concerns. As Saudi Aramco president and CEO Khalid Al-Falih argues, “By pushing concerns about security of supply into the background, the shale boom helps encourage technology and policy choices that will lock in demand for oil.”70 In other words, Saudi officials welcome the boom in US fracking because it will reassure consumers about the reliability of oil supplies. Fourth, the rise in and improved efficiency of US oil production are the main reasons for substantial reduction in the volume of oil imports from Saudi Arabia. Despite lower US oil imports from the Kingdom, Saudi exports to the US remain very significant. The Kingdom exported an average of 1.4 million barrels per day of total petroleum liquids to the US through 2012, ranking second only to Canadian oil exports to the US, and accounting for 16% of total US oil imports.71 This can be explained by the ability of US refineries to process Saudi oil.

Finally, Saudi Arabia now exports more oil to China than to the United States. The strategic significance of this development should not be overestimated. The United States, not China, is the main security partner to Saudi Arabia and other Arab states on the Gulf. Additionally, the global oil market is well-integrated: it makes little difference who buys and who sells. As the largest economy in the world, the US has an interest in securing adequate oil supplies to the global marketplace. Saudi Arabia has the required resources to meet these demands. In short, close relations between Washington and Riyadh are likely to endure in the coming years despite, or maybe because of, the US oil boom and the increasing diversification of Saudi Arabia’s energy mix. [End Page 579]

Gawdat Bahgat  

Dr. Gawdat Bahgat is professor of National Security Affairs at the National Defense University’s Near East South Asia Center for Strategic Studies. Bahgat published nine books including Alternative Energy in the Middle East (2013), Energy Security (2011), and Proliferation of Nuclear Weapons in the Middle East (2007). His work has been translated to several foreign languages. Bahgat served as an advisor to several governments and oil companies.

Footnotes

1. Ottmar Edenhofer, Ramón Pichs-Madruga, and Youba Sokona, eds., Renewable Energy Sources and Climate Change Mitigation: Special Report of the Intergovernmental Panel on Climate Change (Cambridge, UK: Cambridge University Press, 2012), p.164.

2. ExxonMobil, 2012 The Outlook for Energy: A View to 2040, http://www.exxonmobil.com/corporate/files/news_pub_eo2012.pdf.

3. Jessica Jewell, The IEA Model of Short-term Energy Security (MOSES): Primary Energy Sources and Secondary Fuels (Paris: International Energy Agency, 2011), available at http://www.iea.org/publications/freepublications/publication/moses_paper.pdf.

4. For detailed analysis, see, International Energy Agency, World Energy Outlook 2012: Executive Summary (Paris: OECD/IEA, 2012); and US Energy Information Administration, Annual Energy Outlook 2013: With Projections to 2040 (Washington, DC: US Department of Energy, 2013), http://www.eia.gov/forecasts/aeo/pdf/0383(2013).pdf.

5. Niklas Johan Westelius, “External Linkages and Policy Constraints in Saudi Arabia,” IMF Working Paper 13/59, Washington, DC: International Monetary Fund, March 2013, p.4.

6. International Monetary Fund, “Press Release: IMF Mission Statement at the Conclusion of Article IV Discussions with Saudi Arabia,” May 20, 2013, http://www.imf.org/external/np/sec/pr/2013/pr13184.htm.

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49. April Yee, “Saudi Arabia Embraces Solar Energy,” The National, March 10, 2011, http://www.thenational.ae/business/energy/saudi-arabia-embraces-solar-energy.

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66. Tight oil refers to light conventional oil with low sulfur content trapped in unconventional formations, which make it difficult to extract.

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