Assuming this output, Figure 6 compares Saudi Arabia’s historical refinery output 2002-2013 (per OPEC) with what it might reach in 2016/2017 if the new output is added to the level of output in 2013-which, as noted, is less than the Saudi refining system is capable of producing. Seen in this light, the new refineries may create a huge leap in output, raising the questions of where the product will go, and what impact it will have on product prices.
Saudi Arabia and the United States: Two Export Refiners
Saudi Arabia’s decision to reduce crude prices to the United States indicates that it wishes to remain competitive, particularly in the U.S. Gulf Coast. One of the reasons that U.S. domestic crude prices have been suppressed is the localized surplus of crude supplies in the center of the country. Shale oils are produced in this central corridor, and Canadian crudes and bitumen-based products also flow south through this heartland. The U.S. government places restrictions on exports of U.S. domestic crudes, and many American companies have responded by increasing their refinery crude throughput and exporting refined product instead. U.S. refined product exports jumped from 863 kbpd in 2000 to 2,790 kbpd during the first three quarters of 2014.
So, we can now identify an important parallel between the United States and Saudi Arabia: both are export refiners competing in a less than lustrous market. Saudi Arabia will be able to refine an additional 1,200 kbpd within the next two or three years (400 kbpd was added in 2013, another 400 kbpd in 2014, and another 400 kbpd is scheduled for 2016.) By expanding refinery capacity, Saudi Arabia will be able to use an additional 1,200 kbpd of crude to produce petrochemicals and petroleum products without violating its commitment to stay within OPEC crude production ceilings.
Most of the product should flow to Asia, but some additional volumes inevitably will flow into Europe where demand is weak and refinery utilization rates already are low. Although the United States has been exporting most of its refined product to Latin America, it also has exported increasing volumes to Europe. Diesel exports in particular have grown recently, heading for the Netherlands, France, Belgium, Italy, Spain, the United Kingdom and Turkey. While Saudi Arabia and the United States have often been viewed as partners in some ways, they will become more competitive in terms of export refining. Europe is likely to be the key battleground, and it bodes ill for certain European refineries that already are languishing.
A Final Note: Saudi Restraint and the End of the Oil Age?
With such immense resources and wealth, Saudi Arabia still has tended toward restraint in its crude marketing, and it has often served as a market moderator within OPEC. But rather than lose market share, it now seems likely to keep production high and allow prices to weaken.
Saudi Arabian crude exports should remain high. Also, the country has just completed two new refineries of 0.4 mmbpd each, with another 0.4 mmbpd refinery planned for completion within another year or two. Therefore, Saudi Arabia will be able to transform 1.2 million barrels per day of crude into refined products, competing with refineries in Asia, Europe, and the United States. Both crude and product prices are likely to decline, making it difficult for some oil exporters to balance their budgets, but increasing disposable income for consumers.
As a final note, BP places Saudi Arabia’s reserves-to-production ratio at 63.2 years. It does not take a huge leap of imagination to foresee the end of the “Oil Age” within those sixty-three years, and accordingly, it does not take a huge leap of imagination to see how a Saudi Arabian policy of restraining from its past policies of restraint make economic sense in the near- and mid-terms. It is logical to think that there will always be oil available for a price, and it is logical to assume that there will always be some demand for it, but it also makes sense from a Saudi standpoint to use the resource wisely and invest in the future, rather than leave decades worth of oil in the ground while its neighbors continue with business as usual.
Dr. Nancy Yamaguchi is an author and petroleum industry expert specializing in the advanced analysis of energy markets. Dr. Yamaguchi is the President of Trans-Energy Research Associates, Inc. focusing on a wide spectrum of fuel related issues such as economics and the environment. She possesses a strong interest in global oil industry, including supply, demand, trading trends, as well as transport, refining, product blending, alternative and reformulated fuels, product quality and price behavior.
