Beyond Libya: Upheaval in Saudi Arabia Threatens to Send Oil Prices to New Highs

Posted by Josh Garrett on March 7, 2011 at 5:03 pm

Shiite protesters faced off against government forces in an eastern Saudi Arabian province on Thursday. (image: Reuters via uk.ibtimes.com)

Over the last two weeks the groundswell of protests that gave way to near civil war in Libya have kept oil prices on the rise, sending the price of crude past the $100 mark. As the violence in Libya continues to escalate, another scenario that has yet to play out threatens to send oil prices even higher: political instability in Saudi Arabia.

Saudi Arabia is the second-largest producer and largest exporter of crude oil in the world. Its massive oil reserves (estimated at 267 billion barrels) make it the wealthiest and most influential participant on the supply side of the global oil market. According to the US Department of Energy’s EIA, Saudi Arabia produced 8.4 million barrels per day (bpd) of crude oil in 2010. That number dwarfs the 1.7 million bpd of crude produced by Libya under normal conditions. It also clearly outlines why political instability in Saudi Arabia holds the potential to drive oil prices to historic highs.

Although the government of Saudi Arabia is more stable than that of Gadhafi’s Libya, some observers believe that the recent tide of democratic movements in the Middle East is powerful enough to topple more than a few governments in the region. Saudi Arabia’s absolute monarch, King Abdullah, tried to head off a protest movement in his country by announcing a $30 billion program to help young Saudis pay for education and buy homes. But protests have popped up in Saudi Arabia in recent weeks and a demonstration labeled as a “day of rage” is set to take place in the capital city of Riyadh on Friday. The UK’s Independent reported on Saturday that the government has already sent troops to the largely Shiite Muslim northeastern provinces of the country to suppress a movement calling itself the Hunayn Revolt. Like in the neighboring island nation of Bahrain, the political unrest in Saudi Arabia has a sectarian bent to it: anti government protesters are expected to be largely Shiite, and the House of Saud, the long-ruling royal family, is Sunni.

Saudi Arabia’s disproportionate oil wealth makes it the single most important country in our interconnected and petroleum-powered global economy. An armed revolt, regime change, or even a large and robust popular protest movement could constrict the country’s gushing supply of crude to the world market and send prices through the roof. As veteran oil trader Ray Carbone told a CNBC reporter (watch the full video clip below) at the NYMEX on Monday morning,

The disturbing news for me and for a lot of people in the market is the first time we’re hearing protests in Riyadh…a day of rage called for Friday—this is the big domino and this is the major producer, so if any problems happen there, much bigger than Libya.

The unfortunate reality is that while chaos bordering on civil war in Libya has sent shock waves through the world’s oil markets, similar events in Saudi Arabia would upend markets entirely and could very plausibly bring $200 per barrel crude in a matter of days.  Such a massive spike in crude oil prices would of course produce similar spikes in heating oil and gasoline prices.

So keep an eye on Saudi Arabia this week and hope for an uneventful day on Friday.