Saudi Oil For Industry & Western Energy Needs

My younger daughter asked me the other day if I thought that technology would still be radically changing our lives in the future.

Though only 11, she is aware of how different the world is now versus even a decade ago. With text messaging on cell phones, laptop computers and online gaming, she can't imagine how much more advanced technology will get as she becomes an adult.

After considerable thought, I replied that as long as there are problems to solve, technology will probably continue to change things radically, although, as in the past, in ways we have yet to fully comprehend or expect.

As I reflected on a Wall Street Journal article in last Wednesday's (week ago) edition concerning Saudi oil usage, it occurred to me that perhaps it portended the source of the changes I mentioned to my daughter.

In a week in which I saw John McCain refer to the recent Democratic Congress' energy bill as containing "no new energy (sources)," it dawned on me that our Federal legislators now have the mistaken impression that, by enacting laws, they can somehow 'create' energy sources.

Truly, King Canute had nothing on them.

As if by raising CAFE standards, more energy will suddenly materialize on our shores. In fact, as Holman Jenkins wrote in an October WSJ editorial, on which I commented here, nothing could be further from the truth.

All of which brings me to this post's main topic- innovation and Saudi oil consumption.

The intriguing Journal piece of last week stated,

"So Saudi Arabia is on a building binge. In the works are new seaports, an extended railroad system, a series of new industrial cities and a score of refineries, power stations and smelters. Over the next dozen years, such Saudi investments are expected to consume $600 billion.

But they'll also consume something else: large quantities of Saudi oil -- oil that otherwise could help slake other countries' growing thirst.

The problem is that with output slumping in places like the North Sea and Mexico, the world is counting on increased oil supplies from the Middle East, and above all from Saudi Arabia. Global oil demand, now just over 85 million barrels a day, is expected to exceed 100 million barrels a day within 10 years. So the question arises: Can the kingdom continue to satisfy the world's growing oil needs at the same time as its own economic engine demands ever more crude?

Within Saudi Arabia, there's heated debate over the wisdom of staking development on industries that use so much energy. A big aluminum smelter being built on the Persian Gulf coast, for instance, will consume upwards of 60,000 barrels of oil a day -- because the Saudis are turning to crude oil to make electricity. Yet the smelter will create fewer than 10,000 jobs.
Some boosters want to build 10 smelters. They'd devour nearly 7% of the Saudis' current oil production.

Abdallah Dabbagh is a proponent of the industrialization push, as head of Saudi Arabian Mining Co., which is building the east coast smelter. Yet even he says, "I think the Saudi government will have to stop and think at some point if this is the best utilization of Saudi's crude."

Suppose you had a diet that consisted mainly of corn. But you didn't have a farm. If your neighbor, who owned large corn fields, began using his corn for fuel, instead of letting you buy it as your food, what would that mean?

Probably that, long term, you had better find something else to eat. You could ask your neighbor not to be so wasteful as to burn food for fuel, but in the final analysis, it's his property. He can do what he likes.

Bottom line? You'd better get busy finding alternative food sources.

So, what's more important, an energy 'policy,' or economic reactions to the economic actions of others with respect to resource usage?

Rather than global warming or clean air, I think the Journal piece reveals what's really going to drive new energy technologies in the West. Here's more from that article,

"The result is that 22 barrels of every 100 the Saudis produce stay at home, compared with under 16 of 100 seven years ago. Forecasts from the U.S. Energy Department and the International Energy Agency say that by 2020, Saudi Arabia will be consuming more than a third of its own oil -- leaving a lesser share for American cars, Indian airliners and Chinese factories.

Many of these extra barrels will never leave the Middle East. A Lehman Brothers report predicts that oil needs in Saudi Arabia, Kuwait, the UAE, Qatar and Bahrain will jump by almost 200,000 barrels a day next year alone.

Saudi leaders had a different model in mind when they launched their bid to remake their economy a decade ago. The plan was to fuel the industrial boom -- from new power stations to petrochemical plants -- with fresh stocks of natural gas. Saudi Arabia is thought to sit on the world's fourth-largest gas reserves, after Russia, Iran and Qatar. Geologists spent years in the mid-1990s identifying deep pockets of gas below giant oil fields.

But Aramco has been slow in bringing this gas on line. Saudi Arabia broke with longstanding practice starting in 2003 by signing deals with foreign oil companies to prospect for gas in the Empty Quarter. Despite more than $1 billion spent, the companies haven't found commercial quantities of gas.

So the Saudis switched course. Last year, King Abdullah mandated that crude oil be used to fire nearly all of the kingdom's soaring electricity needs. Natural gas, the government said, would be reserved increasingly for the booming petrochemical sector.

Even oil-rich countries normally scramble to avoid burning oil in their power plants, because oil is so easily sold and transported on the international market, while gas isn't. But Mr. Barrak estimates that by 2012, petroleum will fire nearly 60% of Saudi's mounting electricity needs."

Pretty scary stuff, isn't it? In the US, we began to wean ourselves off of burning oil, which is uniquely suited as a transportation fuel, just to make electricity. Now, the guy who owns the oil is reversing all of our carefully-planned and implemented substitution of oil in utilities with natural gas and coal. Or, in the future, probably gassified coal.

As I told my daughter, I think cars of the future will use other fuel sources than petroleum, because of the long term consequences of the world's major oil supplier electing to consume its own commodity for rather uneconomic purposes.

And, by the way, when the Saudis burn oil to make electricity, they are doing the equivalent of a Dutch tulip 'investor' buying a bulb in order to destroy it, and make his own worth that much more. The more oil the Saudis foolishly waste, the more valuable their remaining below-ground reserves.

In a world like this, American innovators have historically stepped in with creative solutions. In fact, this situation is virtually identical to our invention of synthetic rubber (the Buna process) before WWII, when the Japanese seized the Southeast Asian natural rubber plantations.

More than any other single driver of a change in how we fuel US autos, trains, planes and ships, this looming demand increase by the Saudis for their own commodity will, I think, cause a radical change in fuel technologies in this country over the next twenty years.

As I explained to my daughter, the car I drive does not differ all that much, functionally, from the one my grandfather drove. Sure, it's safer, probably quieter, and has some added creature comforts. But fundamentally, a gas tank and carburetor feed gasoline into a metal engine block where the gasoline is exploded to physically drive a cam shaft that powers a drive train which turns the wheels.

My daughter's children will probably drive cars with a very different power technology. CAFE standards will likely be laughably outdated and moot for that new technology.

Rather than governmental standards, I told my daughter, you can usually count on some creative, hungry American inventor to develop a technological solution to the problem of ever more scarce and expensive gasoline to power our cars.

Imagine, a decade from now, Dupont, GM and ExxonMobil collaborating to power, build and fuel new technology cars. Or perhaps not Dupont, but some venture-capital funded new fuel technology startup. With the assurance of the production of the fuel, GM will build vehicles using it, and ExxonMobil will use its existing fuel distribution system, if relevant, to provide the new fuel's ubiquitous availability.

But the Saudi developments don't just stop at oil and transportation fuel. The Journal article concludes with this passage,

"Aluminum Corp. of China Ltd. has signed a $3 billion deal with a Saudi consortium to build one of the region's largest aluminum smelters at the Jazan economic city. The smelter's proposed $2 billion power plant, by one estimate, could require more than 70,000 barrels a day of crude oil.

The country's mining giant, called Ma'aden, recently plunged into a vast mining enterprise deep in the northern interior. Ma'aden's Mr. Dabbagh, standing in front of a big map of the kingdom in his Riyadh office, traces how a new railroad line under construction will bring tons of bauxite, phosphates and magnesite from the mine to the Persian Gulf city of Ras az Zwar. "Here," he says, jabbing the map, "we are going to have the largest sulfuric-acid plant in the world, the largest phosphoric plant and the largest ammonium plant." The factories, he says, "will make Saudi Arabia a major player in fertilizer in the same way we are already a major player in energy."

The coup de grâce is the $7.6 billion aluminum smelter, which Ma'aden is building in partnership with Rio Tinto Alcan, a unit of Rio Tinto Group. The smelter will mark Saudi Arabia's first plunge into one of the most energy-intensive industries, with others sure to follow. And similar smelting projects are in the works for the UAE, Qatar and Oman.

"Eventually," Mr. Dabbagh says, "everybody is going to come to the Gulf to make aluminum because this is where the energy is."

Meaning, of course, goodbye to even more primary industry jobs and infrastructure base in America. When the owner of much of the world's oil decides not only to consume its own resources, rather than sell them on the open market, but, explicitly subsidizes others to create new chemical and metals production in their country, a lot of basic materials industry will move to the Mideast.

The implication for America is to further cast ourselves as the global knowledge and innovation capital. Not only won't we own so many raw materials anymore, but we won't even be producing basics like aluminum or chemicals onshore, either. No amount of Congressional legislation will change this.

So the one thing that will continue to drive US jobs, incomes and wealth growth will be our reliance on an educated populace to use our relatively free-market economic system to out-innovate and create the rest of the world. And, in the process, earn more intellectual property-based income and create ever more value-added through ownership of design and implementation of advanced products and services.

With the world's owners of basic commodities gravitating toward consuming those resources themselves, and using them to climb up the supply chain by adding basic materials production, the US has to sustain its lead in the creation of value through innovation. Or face a long slide into nationwide poverty, and loss of control over our own future.