Saudi Arabia's energy production

Official Name: Kingdom of Saudi Arabia

Summary: Saudi Arabia has the world’s largest oil reserves and is the largest oil exporter, with oil accounting for nearly all of its export earnings. About 40 percent of the nation's gross domestic product (GDP) came from petroleum in 2022. The country also has the world’s fifth-largest natural gas reserves.

The Kingdom of Saudi Arabia is the third-largest Arab country and the birthplace of Islam. The holy Islamic cities of Mecca and Medina are in the Hejaz region along the Red Sea. Muhammad first united the nomadic tribes of the Arabian Peninsula, and his successors expanded Muslim-controlled territory in all directions. The political importance of the region diminished as more urban and developed lands joined the Muslim world and its various caliphates, and tribal rule was gradually restored in much of the territory outside Mecca and Medina. This changed when the House of Saud, now the Saudi royal family, emerged in central Arabia in 1744, and the state they established briefly controlled most of what is now Saudi Arabia. Conflicts internally and with the Ottoman Empire postponed unity until after World War I, during which the Ottoman Empire was defeated. Without its suzerainty interfering, the House of Saud managed to reunify Arabia, leading to the creation of Saudi Arabia in 1932.

Cultural Renaissance

Saudi Arabia’s political victories were soon joined by economic ones when oil reserves were discovered along the Persian Gulf coast in 1938. It took a decade for production to reach full swing, but the sudden prosperity fueled a cultural renaissance in the Hejaz region and brought many foreigners to the area. World War II and the ramp-up of industry in its aftermath reinforced the need for and value of oil in the modern world, particularly as Germany’s loss was owed in part to the oil shortages that hindered its ability to manufacture and operate planes and other vehicles. The Trans-Arabian Pipeline (Tapline) was built between 1945 and 1950, transporting oil from Saudi Arabia to Lebanon, having been diverted from its original destination of Haifa, which during the pipeline’s construction was transferred from the British Mandate of Palestine to the newly formed state of Israel. This was for decades one of the principal routes for exporting oil to Europe and the United States, until the Tapline—which had needed frequent repairs—was partially shut down in 1983, with a leg of the pipeline continuing to transport oil to Jordan until it was closed in 1990 in response to Jordan’s support of Iraq during the Gulf War. Most Saudi oil transport is now done by supertankers.

In the 2020s, Saudi Arabia had the world’s second-largest oil reserves, behind only Venezuela, and was the third-largest oil exporter. Much of its government revenue comes from oil, which in turn pays for a welfare state; the oil industry accounted for about 40 percent of the country’s gross domestic product (GDP) in 2022. Until 1973, when the Saudi government was given a 25 percent share from Aramco, the government received no revenue from oil drilled within its boundaries—a change that accounts for the growth of the middle class and the Saudi welfare state in the decades since. In 1980, the government purchased nearly all Aramco stock and soon renamed the company Saudi Aramco. It is run jointly by the government and a traditional board of advisers and chief executive officer, and as the entity controlling Saudi oil, it is the world’s most valuable company, with assets in the trillions of dollars.

Oil Production and Consumption

The government spends billions of dollars on expanding and increasing oil production. Most Saudi crude is shipped by supertanker to oil refineries throughout the world, primarily from the Red Sea port of Yanbu, the Persian Gulf port of Ras al-Ju’aymah, and Ras Tanura, the world’s largest offshore oil-loading facility. The largest oil processing facility and crude stabilization plant in the world is located at Abqaiq, in eastern Saudi Arabia, and processes more than 70 percent of Saudi crude. The country also has the world’s fifth-largest natural gas reserves behind Russia, Iran, Qatar, and the United States, but it has historically not exploited them as well as its oil reserves; until Aramco’s master gas system was put in place, gas coming from an oil well was simply flared off.

Although domestic consumption is expanding as the Saudi middle class grows, most of Saudi Arabia’s 10.05 million barrels per day are exported. The country is the fastest-growing electricity consumer in the Middle East and was the twelfth-largest consumer of total primary energy in the world in 2022. Most of its consumption comes from oil; natural gas accounts for most of the remainder. The country lags well behind most heavy energy consumers in conservation efforts because of the historic plenitude of its supply and the speed with which consumption has increased. In 2001, peak loads were twenty-five times their 1975 levels. The chief executive officer of Saudi Aramco, Khalid al-Falih, speculated that Saudi domestic liquids demand could surpass 8 million barrels of oil per day by 2030 if the country did not make efforts to improve energy efficiency.

Electricity Usage

Since 1998, Saudi Arabia’s electricity sector has been working toward more sustainable usage. So far, little real change has occurred because demand has increased too sharply for reform attempts to keep up. Large capital investments are still needed to fund the expansion of sustainability projects, and Saudi electricity usage remains fundamentally inefficient and unchecked by the time-of-use rate adjustments that are employed in many other countries. It is believed that demand could be reduced by 10 percent without lifestyle changes, simply by persuading consumers to adopt energy-conserving habits and to buy more energy-efficient appliances. Because of the country’s climate, air conditioning is a significant drain on energy, and thus the efficient design of air conditioners, ventilation systems, and buildings is a real issue facing any new construction. In 2023, Saudi Arabia announced plans to start a nuclear energy program. The plans, which were only in their earliest stages as of 2023, would be subject to inspection from the International Atomic Energy Agency.

Saudi Energy Law

A large body of Saudi law is concerned with energy. Because of the importance of Islamic Sharia law in Muslim culture, there is a stigma attached to words such as constitution, which in American usage would imply a law that supersedes religious law. Instead, governance in Saudi Arabia is bound by what is called the Basic Law of Saudi Arabia, which consists of eighty-two articles designed to complement and affirm rather than override Sharia law. Article 14 of the Basic Law establishes that all of Saudi Arabia’s oil and gas wealth belongs to the government:

All Allah’s bestowed wealth, be it under the ground, on the surface, or in national territorial waters, in the land or maritime domains under the state’s control, are the property of the state as defined by law. The law defines means of exploiting, protecting, and developing such wealth in the interests of the state, its security and economy.

Electricity was initially left to the private sector, but in 1961, the Department of Electricity Affairs, within the Ministry of Commerce, was established with a mandate to regulate the power sector. This was succeeded in 1972 by the Department of Electricity Services, independent of the Ministry of Commerce, which was given expanded responsibilities to plan electrical services. One priority established early on was to provide electricity to all the settlements throughout Saudi Arabia, and the Ministry of Industry and Electricity established in 1975 created the General Electricity Corporation (GEC) to coordinate and implement a development plan to achieve this goal. Over time, the various utility companies providing electricity generation were consolidated into four Saudi consolidated electricity companies (SCECOs) covering the Eastern, Western, Southern, and Central regions. The GEC remained responsible for the supply of electricity to rural areas in cases where they were not covered by the SCECOs and for overseeing the country’s electricity system and financing smaller power companies. The sector was reorganized again in 1998, amid other energy reforms, with the establishment of the Saudi Electric Company, a publicly traded company. Between 1970 and 2006, the number of electricity customers grew from 216,000 to nearly 5 million.

Saudi Energy and Foreign Relations

Today, Saudi Arabia is one of the six Arab states of the Persian Gulf, along with the United Arab Emirates (UAE), Kuwait, Bahrain, Oman, and Qatar, all of which are members of the Gulf Cooperation Council (GCC), founded in 1981. The Gulf states have in common their Arab and Muslim heritage and their economic dependence on oil exports, and the GCC was founded to pursue their common goals. Among the GCC’s objectives have been the fostering of scientific progress in Gulf state industries and the establishment of scientific research centers and multinational joint ventures; a unified military presence to protect Gulf state interests; the encouragement of cooperation in the private sector (and the institution of a GCC patent office); and the proposed establishment of a common currency in the region, much like the euro in the European Union (EU). Originally, the currency adoption was scheduled for 2010, but Oman announced in 2006 that it would be unable to meet its target date, and the United Arab Emirates withdrew from the planned currency union in 2009 when it was announced that the GCC’s central bank would be located in Riyadh, the Saudi capital city, rather than in the UAE.

The cultural and economic significance of the GCC has been reinforced by active engagement with the global community, including the holding of the 2006 Asian Games in Doha (Qatar) and Qatar’s successful bid for the 2022 FIFA World Cup and attempted bid for the 2016 Summer Olympics. Doha was also the home of the first meeting of the current development round (called the Doha Round) of the World Trade Organization in 2001, although the events of the world financial crisis caused negotiations to collapse repeatedly.

The GCC common market officially began on January 1, 2008, removing trade barriers among GCC nations; this step was originally intended as a precursor to the currency union that has now been postponed indefinitely. The GCC states, along with Algeria, Egypt, Iraq, Lebanon, Libya, Morocco, Palestine, Sudan, Syria, Tunisia, and Yemen, are also members of the Greater Arab Free Trade Area (GAFTA), established in 1997, which has sought to increase trade and cooperation among Arab states.

OPEC and the Arab League

Saudi Arabia is also a founding member of OPEC, the Organization of Petroleum Exporting Countries, established in 1960 to collectively stabilize petroleum market prices. Its membership has periodically impacted its relationship with the West, particularly during the 1973 oil embargo, when Arab members of OPEC refused to export oil to the United States and Europe because of their support of Israel—a decision that had repercussions that resonate to this day.

Saudi Arabia is also one of the six founding members of the Arab League, formed in 1945 and now consisting of twenty-two countries. The Arab League was founded to facilitate cooperation and collaboration among Arab countries in the new world order established in the wake of World War II. Many of its initiatives have been cultural and educational rather than economic, such as reforming the role of women in Arab society (an area in which Saudi Arabia has been harshly criticized for lagging behind much of the world), promoting child welfare, and developing school curricula. The Arab League has also been instrumental in planning the Arab Gas Pipeline, a natural gas pipeline that transports Egyptian natural gas to Jordan, Syria, Lebanon, and Israel, and is expected to initiate more energy projects in the future.

Saudi Arabia and India

Saudi Arabia has been one of the largest suppliers of oil to India, which was one of the first countries to establish diplomatic ties with the Third Saudi State, which preceded the current Saudi state. Today, India is one of Saudi Arabia’s primary trading partners and the fifth-biggest foreign investor in Saudi Arabia, and about two million Indian workers are resident in Saudi Arabia. Relations between India and Saudi Arabia are sometimes strained by the Saudis’ ties with Pakistan, but they have generally grown strong since the 1990s. In 2006, King Abdullah made the first visit to India by a Saudi monarch in more than fifty years, leading to the Delhi Declaration, a strategic energy agreement between Saudi Arabia and India guaranteeing a stable oil supply to India through long-term contracts and establishing joint Indo-Saudi ventures in developing oil and natural gas in both the public and private sectors. This visit was followed by Indian prime minister Manmohan Singh’s visit to Saudi Arabia in 2010, where he and his delegation were received at the airport by Crown Prince Sultan bin Abdul Aziz and his entire cabinet, a significant show of esteem. The visit culminated in numerous agreements, spanning trade, extradition, and joint research.

The economic liberalization in India since the 1990s has improved trade with Saudi Arabia considerably, doubling between 2005 and 2010, with India exporting rice, textiles, and machinery to Saudi Arabia and setting up educational and research institutes for Saudi students. Together, the countries have invested significant capital in joint ventures in energy projects, and India has been granted 56 foreign direct investment licenses by the Saudi government.

The United States has had an active relationship with Saudi Arabia since the drafting of a mutual defense agreement in 1951, with formal diplomatic relations dating to the 1930s. The Saudi government ended its recognition of the Taliban following the terrorist attacks of September 11, 2001, but the government frustrated American authorities with its lack of cooperation in the investigation of the fifteen Saudi nationals who had been among the hijackers and with its general inaction in combating Islamic terrorism. Saudi Arabia is the second-largest source of American oil imports, which has influenced the diplomatic relationship between the two nations.

Peak Oil

There are many angles from which to consider the future of oil in Saudi Arabia. There is the apparently simple statement that at current rates of production, the estimated oil reserves would last for another ninety years, that is, until the end of the twenty-first century. However, beneath the apparent simplicity lie numerous complications. Some have challenged the accuracy of oil reserve estimations. Others point out that not all oil is equally easy to withdraw from the earth. The major Saudi oil fields are old and have produced for decades; draining them dry will be an expensive and increasingly inefficient process, and current rates of production could be maintained only at significantly rising costs.

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