3 Surprising reasons Saudi Arabia may be getting out of the Oil Business

By Juan Cole | (Informed Comment) | – –

Saudi crown prince Muhammad bin Salman announced Friday that Saudi Arabia would use its oil assets to back a $2 trillion sovereign wealth fund. The move suggested to many observers that the kingdom is preparing for a likely end of the petroleum business and transitioning to being primarily an investor. While it is true that the money for the sovereign wealth fund is expected to come from petroleum sales, it also seems clear that the kingdom recognizes that it has a stranded asset that won’t be nearly as valuable in a decade or two as it is now. It could even end up, like coal, being regulated out of existence in many countries.

Here are 3 reasons Saudi Arabia is likely making this massive change in economic strategy:

1. Climate change denial, which the Saudis pushed and helped fund, has failed. A majority of Americans now accepts that humans burning fossil fuels is causing global warming. And that’s in anti-science, capitalist-ridden America. Everywhere else in the world it goes without saying. Since the impact of global warming will become increasingly apparent in the coming decades, likely pressure to abandon burning fossil fuels will grow. Already, most new investment in power plants is in renewables, not coal and gas.

2. Another fossil fuel, coal, is being quickly phased out and will likely be illegal in fifteen or twenty years. It is being phased out by the Environmental Protection Agency because it puts out pollutants, including CO2. The writing is on the wall for coal and petroleum.

3. More affordable, longer-range electric cars are now coming on the market, with the Chevy Bolt due next December and Tesla 3 the following year. Most petroleum is used for transportation, so electric vehicles are deadly to that market. The new generation of electric cars is less than $30,000 in the US after tax rebates. And it typically can go 200 miles on a charge. Tesla is putting fast recharging stations everywhere it can, and people have already gone across the country in a Tesla. Battery costs are falling and batteries are becoming more efficient, so the writing is on the wall for the combustion engine. Consumers are combining electric cars with solar panels on their houses, getting free fuel. Low gasoline prices won’t impede solar car sales because prices would have to fall another dollar US before EVs would not be worth it.

In as little as fifteen to twenty years, petroleum may be illegal in some places; and will be in retreat everywhere. Saudi oil is a stranded asset. So they are attempting to create a revenue stream from investments. As for fossil fuels, their business model is under severe pressure.


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27 Responses

  1. Good but! Saudi Arabia giving up the oil business is like a drug dealer deciding to take his money and go legit.

    Both excellent decisions.

    However the business knowledge that they both had developed does not apply well to any new endeavor. A mountain of money does not guarantee success. Most likely they will return to their old business in spite of their admirable desire to get out.

  2. There’s also some question about Saudi Arabia’s remaining reserves. This could be a sign they’re cutting water and running out. They’ve not been very forthcoming about their remaining reserves and no one will push them for fear of setting off a shock in the market.

    • I think this is it. Though Saudi Arabia has outsize power as a swing producer, as soon as word gets out that its latest, politically-driven burst of production has left the fields in worse shape than ever, there will be an outsize global panic. In the past that might have meant the Saudis could shake down the US for $100 a barrel, but now the US has the brutal alternative of fracking and living with the consequences. Though I don’t think that will happen. Instead, the push for alternatives will accelerate, which is what is forcing the Saudis to diversity their portfolio.

  3. Another Mid-East surprise: Tom Friedman is getting out of the columnist business for (unfortunately just) a while. He apparently finally recognized that on many occasions he didn’t know what he was talking about. – link to mondoweiss.net He should have known better as he confessed “He began reading Electronic Intifada and Juan Cole “surreptitiously, as a guilty pleasure,” and discovered that “ordinary people” are more accurate than the big shots and US envoys he quotes in his reports.”

  4. Actually, looking at the linked story made me understand that this move is part of the agenda of the young neoliberal jerk Prince Mohammad bin Salman, discussed at this site before as the rising villain behind the kingdom’s open militarism and threats to cut social services.
    Privatize, then wage war. That’s an alarmingly familiar formula for Americans. And it may be that he intends to benefit friends in America by letting them back into Aramco. I wonder who he’s backing for President.

  5. There are many reasons the Saudis opened the taps and flooded the world with cheap oil.
    The main reasons is, as mentioned here, avoiding ownership of “stranded assets”.
    Burning fossil fuels will either become illegal or the global economic system will collapse due to climate change etc.
    They want to sell it all now … while they still can.

    • Well, there is also shortterm political desperation. Got to keep revenues and social spending up so they can keep buying off the public.

  6. Pay attention folks–It ain’t that we are using less oil–it’s that there is now too much oil.
    Fracking in north America has made the US the second largest producer of oil in the world.
    For every electric car that the developed world buys–the rest of the world puts 3 gas burners on the road.
    Where do you think electricity to run the Eco friendly cars comes from? It’s produced by burning a fuel. Coal was the favorite fuel to produce electricity–but now it’s natural gas.
    Fracking is north America has produced an over supply of that too.

    • Actually even in the developed world several gas burners are sold per every gas burner. But, electric wise, renewables are coming on fast. At least in the developed world many EV owners are having panels installed -or like myself getting a system upgrade to handle the increased demand.

      Fracking has certainly become a force. USA imports have dropped due to the combination of fracking, and a more efficient fleet of gas-burners.

      • Over 250,000 orders already for the Tesla Model 3. In less than 48 hours. People really want what Elon Musk is selling and it ain’t just electric cars and solar panels, it’s a whole new way of living.

    • The earthquakes are now officially classed by the government as human-induced. That means lawsuits lawsuits lawsuits. They also endanger the Cushing oil reserve in OK. Many frackers are drowning in debt and can’t withstand responsible regulation.
      And the “rest of the world” may turn electric faster than the US and Europe:
      link to greencarreports.com
      link to insideevs.com
      Pay attention to the whole new world being built outside of Exceptional America.

  7. The article linked to saying that “climate denial has failed” seems actually to show the opposite, in that the polls cited say that the number of Americans (at least) who think it’s a big problem has declined significantly.

  8. I think this is not likely to happen. The two reasons are that KSA indeed has enormous reserves despite some rumors to the contrary. The other is that it is the second lowest cost oil producing nation in the world after only Kuwait, with costs as low as $4 per barrel. It will be one of the last to shut down the taps as the oil industry declines in the future.

  9. Haifa Sham

    Saudi Arabia is running out of Oil, because of the Royal family’s greed. Their budget is unknown, so mega fund is to secure them.

    • Could this fund be the Saudi Royals’ “mad money” in case their subjects get restless? According to the Panama Papers, the king has an offshore account.

  10. I think the change to EVs is going to take a bit longer than Juan is letting on. As a family with a Leaf and a plugin, I see my wife taking the older internal combustion car when there is any doubt about range. And co-workers (engineers) who are strongly environmental and have placed PV, are mostly too reluctant to take the electric plunge. The generous federal tax breaks were for a limited number of vehicles per manufacturer, already Tesla with its huge signups for the model 3, is already running into these limits. Its unclear if extensions can be passed. The current EV fleet is too small to impact the oil market, it will have to grow manyfold before it does.

    • Your Leaf was a great pioneer but its range was 80 miles. The Bolt, due in December, will get 200. Likewise Tesla 3 due in 2017; and Tesla has quick charge stations all around the country. So arguing from a 2013 Leaf is a mistake. And, the tax rebates are per buyer federally, not per company.

    • In addition to the Bolt, don’t forget the Volt which has a gasoline powered generator for when the batteries run out, which is around 45 miles. With the generator, it’s range is about 330 miles and then you put more gasoline in to power the generator until you can recharge the batteries. Since about 90% of car trips are less than 50 miles, your effective gas mileage runs to about 98 miles per gallon.

    • The range of the new electric cars makes a huge difference. Part of the issue is that cars now last longer than they did 20 years ago. In a sense, many potential buyers of electric cars are simply waiting for models with longer range. Affordable electric cars with longer range are now arriving. That’s a game changer.

      Republicans at the state and federal level have cut budgets to the bone and little money is being spent at the moment on roads, bridges, schools, water pipes, water projects, fire fighting in the west and flood control in the east. If Democrats win this fall, implementing just a normal budget will make people confident about the economy and the soundness of buying an electric car.

      Sales for electric cars will be increasing but the big growth will probably begin in a year or two. This will bring down costs even further.

      The time frame of global warming is becoming clearer but unfortunately many powerful people do not realize how little time we have to avoid the more serious consequences. The fact that the Saudis take it seriously should speak volumes.

  11. There seem to be several commentators here who think that either KSA is running out of oil or else having major problems with its industry. This could not be further from the truth. The only nation with higher reserves is Venezuela, but they are much higher cost-to-produce tar sands in Lake Maracaibo, whereas the Saudi reserves are far lower cost. They are not having major problems on their production side. They are hurting financially because the low prices mean that they are running budget deficits. But they will be exporting oil when almost nobody else still is.

  12. This will never happen, Saudie Arabia is a muslim country, with fundamental view of the religion. The only thing they can produce is vegetable between prayer

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