Saudi Arabia's Position in the Global Energy Market

Abstract

Thanks to its rich hydrocarbon reserves, Saudi Arabia has been at the center of global energy markets since the aftermath of World War II. The concession agreement with Standard Oil of California (SOCAL) in 1933 and the discovery of oil in the Dammam field in 1938 fundamentally transformed the country's economy and political structure. This process also marked the beginning of a strategic alliance with the United States. The 1945 meeting between President Roosevelt and King Abdulaziz aboard the USS Quincy, although not based on a written agreement, laid the foundations for the "security for oil" formula, which evolved into the petrodollar system and became institutionalized in the 1970s.

Today, Saudi Arabia is one of the world's leading energy producers, with approximately 267 billion barrels of proven oil reserves and a production capacity reaching 10 million barrels per day. It also ranks among the top six countries in terms of natural gas reserves. Exporting approximately 70% of its oil production, the country generated $181 billion in export revenue as of 2023. 75% of exports go to Asian countries, with China alone purchasing approximately one-third of the total. The US's reduction of imports following the shale oil revolution accelerated Saudi Arabia's Asia-centric strategic expansion, and relations with China, in particular, gained a new dimension.

Organization for Petrolium Exporting Countries (OPEC) is the most important platform consolidating Saudi Arabia's influence in global energy markets. Founded in 1960, the Kingdom holds a de facto leadership position in the organization thanks to its reserves and production capacity. Its substantial reserve capacity gives it the role of a market-balancing producer, allowing it to maintain price stability by increasing or decreasing supply. This role also gave Saudi Arabia a dominant diplomatic position in negotiations with non-producing countries like Russia within the OPEC+ mechanism. The 1973 Oil Crisis is the most striking example of this influence. The embargo imposed on Western countries supporting Israel during the Yom Kippur War demonstrated that oil could be used as a political weapon, causing prices to quadruple in a short period of time. Thus, Saudi Arabia demonstrated that it could utilize its energy resources not only as an economic tool but also as a geopolitical tool.

The petrodollar system, established in 1974, deepened the strategic dependence between Saudi Arabia and the US. The kingdom's agreement to sell its oil exclusively in US dollars strengthened its US reserve currency status and ensured a regular inflow of foreign currency into Saudi Arabia. However, this structure also made the country dependent on US monetary policies. Oil revenues were distributed to society through public spending, subsidies, and large public employment, thus creating a typical rentier state model. This situation limited economic diversification, weakened social productivity, and discouraged political participation.

The complete nationalization of Aramco in 1980 consolidated state control of the energy sector. However, the strategic alliance with the US continued, ensuring a stable oil flow in exchange for security guarantees. In the 2000s, rising Asian demand shifted Saudi oil's direction even more significantly eastward. However, the progress made by the US in shale oil production in the 2010s limited Saudi Arabia's influence on the global market. As OPEC's traditional room for maneuver narrowed, the OPEC+ mechanism was established in 2016, and Riyadh turned to cooperation with Russia. However, the price war that erupted during the COVID-19 pandemic in 2020 exposed the fragility of oil markets and the competition among producing countries.

An economic structure based on petrodollar revenues left Saudi Arabia vulnerable to global price fluctuations. The crises of 1986, 1998, 2008, and 2020 resulted in budget deficits and growth problems. Therefore, the Vision 2030 program, announced in 2016, aimed to reduce energy dependence and diversify its economy by investing in renewable energy, nuclear energy, and green hydrogen. Sectors such as digitalization, tourism, and the defense industry were also among the focal points of the transformation. However, the deep-rooted effects of the rentier state structure raise questions about the feasibility of these reforms.

Consequently, Saudi Arabia remains a central player in global energy markets thanks to its reserves, production capacity, and leading role within OPEC. Oil has not only been the foundation of the Kingdom's economic development but also a diplomatic trump card and geopolitical power in international relations. However, the global energy transformation, the US's growing energy independence, and Asia's rising demand necessitate Riyadh's policy diversification. While the initiatives under Vision 2030 reflect Saudi Arabia's efforts to prepare for a post-oil era, the country's long-term stability is crucial for this transformation.