Saudi Arabia To Become A Net Importer Of Oil?

Includes: CVX, XOM
by: Shaun Connell

A new headline by Bloomberg news on a recent note by Citigroup (NYSE:C) has made the rounds, causing more alarm for long-term energy investors and doomsday prophets.

The argument is that by 2030, Saudi Arabia will become a net importer of oil. That's only a little more than 17 years away. Business Week reports the reasoning:

"Oil and its derivatives are used for about half of the kingdom's electricity production, which at peak rates is growing at about 8 percent a year, the bank said today in a an e-mailed report. A quarter of the country's fuel production is used domestically, more per capita than other industrialized nations, as the cost is subsidized, according to the note."

The more obvious solution for Saudi Arabia would be to phase out the subsidies and to cut back on consumption, and to up their consumption of natural gas, considering half of electricity comes from gas, and they have the 4th largest reserves in the world.

Is This Really A Possibility?

No, not really. The Saudi economy is still an oil economy, and they're having great growth, but that's not necessarily sustainable. And with most "we're going to run out theories" -- as I've written in my peak oil article -- we see people generally just assume that current consumption trends stay the same without accounting for changes.

One of the most important concepts for understanding long-term human action is the notion of reflexivity. People change because they see trends change. In other words, people react to reality, which changes, and then people react to that reality, creating a feedback loop.

It's the problem with any long-term forecasts based on human behavior, and it's why so many long-term predictions end up being wrong, like Hubbert's peak oil happening in the mid-90s. It didn't happen because he didn't account for alternatives, increased efficiency, and new oil sources.

Of course, every defender of Hubbert will likely argue that it's all going to happen next year, just like they have for almost 20 years. But the evidence remains, regardless of wishful thinking.

What's Probably Going To Happen

Increased fuel efficiency, an economy that doesn't grow at current speeds, changing oil subsidies, increasing natural gas consumption with low gas prices, finding alternative energy sources, and finding new oil reserves with new technology will all contribute to Saudi Arabia not becoming a net importer by 2030.

Forbes reports that they've dumped over a hundred billion -- so far -- into a solar and alternative energy program. Unlike in the US, any real change in alternative electricity generation in that country will have a huge dent in oil consumption since half of their electricity comes from oil, whereas for us, only 1% does.

What This Means For Investors

Don't be alarmed; the predictions of the end of oil are essentially always melodramatic, economic nonsense, and eventually proven wrong. We've seen this for decade after decade, and it won't be changing anytime soon.

Investors looking to invest in companies like Exxon (NYSE:XOM) and Chevron (NYSE:CVX) should still do so -- I am -- because oil prices are likely to keep increasing from this point on over time as the economies of the world begin being pushed toward alternatives and new fuel sources and infrastructure.

Companies that are invested in alternatives, natural gas, and chemical production are in a better position to handle any price and demand changes.

Disclosure: I am long CVX, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.