NORTH AMERICAN OIL & THE FUTURE OF SAUDI ARABIA

As sources of oil in North America increase, it will put pressure on Saudi Arabia's oil dependent economy.  If new discoveries of oil in North American indeed reach production levels predicted, the price of oil would go down creating severe budget problems for Saudi Arabia's bureaucratic-oriented economy.  And this raises more issues for the Middle East.

Current trends in the global energy market don't look good for Saudi Arabia. First, the International Energy Agency projected in November 2012 that the United States will surpass the Gulf petrogiant as the world's top energy producer by 2020. Then, last week, it revealed that North America, buoyed by the rapid development of its unconventional oil industry, is set to dominate global oil production over the next five years. These unforeseen developments not only represent a blow to Saudi Arabia's prestige but also a potential threat to the country's long term economic well-being -- particularly in the post-Arab Spring era of elevated per-capita government spending.

According to the Arab Petroleum Investments Corporation, the breakeven price is currently $94 per barrel, less than the current spot price for Brent crude. (Iran needs oil to be at $125 per barrel to break even, which explains the feud between Iran and Saudi Arabia within OPEC.)  But absent deep political reforms that create new sources of income, the breakeven price will surely grow. According to Riyadh-based Jadwa Investment, one of the world's most important knowledge bases on Saudi Arabia's economy, by 2020 the breakeven price will reach $118 per barrel. At this point, the Saudi Arabia Monetary Agency's cash reserves will begin to drain rapidly and the breakeven price will soar to $175 a barrel by 2025 and to over $300 by 2030. And this cuts to the heart of the dilemma: In order to balance its budget in the future, Saudi Arabia will need to either drill more barrels and sell them for lower prices or drill fewer barrels -- actively reducing global supply -- and sell each at a higher price.