INTRO: Saudi Arabia is
universally known for their massive oil reserves and extreme wealth. Their flagship company,
Saudi Aramco, is worth over $2 trillion and has annual earnings exceeding a quarter trillion
dollars. They also apparently have 266 billion barrels of oil which works out to roughly ⅙ of
the entire world’s reserves. With such large reserves, you would think that the country
would avoid importing oil like the plague, but Saudi Arabia has actually been doing the exact
opposite. They’ve actually been doubling down on oil imports since June. And this isn’t the
first time Saudi Arabia has leaned into imports either. Historically, Saudi Arabia has embraced
oil imports whenever they need more oil. But, why would a country like Saudi Arabia ever need more
oil? Wouldn’t it always just be cheaper to use their own? I mean just take a look at Venezuela
who is able to offer subsidized gas for just 8.4 cents per gallon. Saudi Arabia, on the other hand,
comes in at $2.34 per gallon which is really not that impressive for the world’s oil kingdom. So,
why in the world is Saudi Arabia importing oil and why are gas prices so high in Saudi Arabia itself?
OIL IMBALANCES:
One of the primary reasons that Saudi Arabia turns to imports is because of the different types of
oil. To most of us, all crude oil probably appear the same, but there’s actually six different types
of oil. These oils are usually classified into three main categories which are light, medium,
and heavy. The attribute that differentiates these three categories is a scale called API
gravities that essentially ranks these oils based on their densities in comparison to water. Within
these main categories, you have two sub categories which are sweet and sour. These sub categories are
reflective of the given oil’s sulfur content. The lower the sulfur content the sweeter the
oil. Technically, we do have processes to convert between the various types of oil.
At the end of the day, it really just comes to removing impurities or varying the sulfur content.
But, more times than not, it’s cheaper to use these oils in their natural state than trying to
convert them into a different state. Light crude oil is generally the most valuable type of oil
given that it’s the easiest to refine and has the largest amount of use cases. This is type of oil
that is used to produce gasoline, diesel, and aviation fuel. In other words, this is the type
of oil that runs the world. Heavy crude oil, on the other hand, is also pretty useful given that
it’s what’s used in most manufacturing processes. Heavy crude plays an essential role in producing
industrial products such as asphalt and plastics. With light and heavy out of the way, that leaves
us with medium crude oil which is usually the most underappreciated. Medium crude is actually
the most common type of oil, but there aren’t very many uses for it in its natural state. So,
medium crude is usually distilled to create light crude. With the three main categories out of the
way, we can move onto the subcategories are sweet and sour. For the most part, sweet crude is what
the world craves and sour crude is generally just converted into sweet crude. With that being said,
the most valuable type of oil has historically been light sweet crude due to the exponential
growth within the automotive and aviation industries. But, as the world’s oil consumption
started to stabilize, it became evident that oil giants may have diverted too much of their focus
to light sweet crude. We were starting to get into a positon where there was an oversupply of light
crude and an undersupply of heavy crude. So, while light sweet has historically demanded a premium,
much of that premium has slowly eroded away over the years, and in some cases, light crude even
trades at a discount. I know that all of that info may have been a little dense, but I think it’s
important in understanding a country’s complex oil needs. So, now that we have a basic technical
understanding regarding the various types of oil, let’s delve into why Saudi Arabia imports oil.
SAUDI ARABIAN PRIDE:
Given the success of Saudi Arabia’s oil industry, I don’t think you’d be surprised to hear that
their reserves primarily consist of light crude. Saudi Arabia does produce five different grades
of oil which are Arabian Heavy, Arabian Medium, Arabian Light, Arabian Extra Light,
and Arabian Super Light. But, as you can see, three of these are simply sub categories of light
crude which makes the country prone to imbalances. Something else to note is that virtually all of
Saudi Arabia’s oil reserves are sour oil. The only exception to this is the offshore
Safaniya oil field. Fortunately, this happens to be the world’s largest offshore oil field,
but even Safaniya is only able to produce roughly 1 million barrels per day. Now,
that’s not a bad amount by any means, but in comparison to Saudi Arabia’s total oil
output of 10 million barrels per day, that’s only 10% meaning that 90% of Saudi oil is sour. So,
while Saudi Arabia has enormous oil reserves, the vast majority of it is light crude sour oil.
Naturally, this leads to imbalances which Saudi Arabia has to make up for using imports. Also,
something that we should note is that Saudi Arabia is not only looking to make up for
internal imbalances but international imbalances. You see, even though Saudi Arabia doesn’t have
the world’s largest oil reserves, they’ve become the dominant voice within the industry
and they’re trusted around the world as the oil bankers. Saudi Arabia takes this responsibility
extremely seriously and for them, it has become a matter of pride and control. Now, this doesn’t
mean that if Botswana has a shortage of oil or if gas prices are skyrocketing in Europe,
Saudi Arabia is gonna come to the rescue. But, what this does mean is that they’re willing to
do whatever it takes to deliver the oil that they have promised to deliver. And this includes
importing oil to make up for supply/production shortages. A perfect example of this was in
2019 when their oil processing facilities were attacked. Drones were used to severely damage oil
facilities in Abqaiq and Khurais which disrupted the vast majority of the country’s oil output. A
rebel group from Yemen would claim responsibility, but given the sophistication of the ordeal,
Saudi Arabia suspects that it was actually Iran. Iran has profusely refused involvement,
but really, the identity of the perpetrator is not really important for what we’re talking
about. The point is that Saudi Arabia’s oil facilities were significantly damaged which
lowered output by 5.7 million barrels per day. Given the circumstances, I don’t think
anyone would have blamed Saudi Arabia if they fell short of their delivery numbers. But,
despite this, Saudi Arabia would import oil from a bunch of foreign oil producers to quote “give
customers every drop of oil they’ve ordered.” Pride no doubt plays a role in this decision,
but there’s a substantial amount of strategy here as well. By stepping up to the plate even during
a national crisis, Saudi Arabia has shown the world that they will stop at nothing to deliver
on their promises. And this has have given the world very little reason to diversify away from
Saudi Arabia. Now, imagine if Saudi Arabia didn’t import oil. Sure, no one would’ve blamed them,
but Saudi Arabia’s customers would’ve probably diversified to other oil producers for their own
security. But, by stepping up, Saudi Arabia was able to maintain the loyalty of their customers
and more importantly maintain control, and at the end of the day, that’s the name of the game.
OPPORTUNIST:
Keeping control and maintaining pride is not the only reasons that Saudi Arabia imports
oil. Another key reason for Saudi imports is opportunity and profits, and with the whole
Russia situation going on, this avenue is more open than ever. By now, I’m sure all of you guys
are familiar with the Russian oil sanctions. The west has decided to boycott Russian products in
order to hurt them economically and quote on quote “teach them a lesson”. And given that Russia was
the world’s second largest crude oil exporter only beaten out by Saudi Arabia themselves,
this has disrupted the global oil supply chain leading to the super erratic gas prices that we’ve
seen over the past several months. While this is terrible news for westerners, this has been
a godsend for oil producing countries like Saudi Arabia who have seen record profits. Higher oil
prices aren’t the only area in which Saudi Arabia is profiting though. Even though global oil prices
have been skyrocketing, Russian oil prices have been falling off a cliff given that no western
country wants to touch their oil. On average, it appears that Russia is offering a 30% discount on
their oil in comparison to the global benchmark. If Saudi Arabia really wanted to push the
envelope, what they could do is import Russian oil at a 30% discount and then sell it as their own at
market price. But, it’s more than likely that they’re not doing this. It’s simply not worth
risking international oil partnerships for an arbitrage opportunity. But, these rules only apply
to exports to western countries. Many of Saudi Arabia’s customers are not western countries and
they do not care about the source of their oil. Two of Saudi Arabia’s largest customers are China
and India and these guys have actually gone out of their ways to import Russian oil directly. So,
they definitely do not have a moral dilemma when it comes Saudi Arabia repackaging Russian oil.
Someone else who doesn’t have a moral dilemma with Russian oil is Saudi Arabia themselves. It
makes very little sense to use your own oil which can be sold for top dollar to western countries
when you can import Russian oil at a 30% discount. It’s honestly a no brainer and it’s no wonder that
Saudi Arabia has been leveraging this strategy. The real losers in this situation are everyday
westerners who are paying top dollar for Middle Eastern oil. Not to mention, western countries
are basically still supporting Russia just through a proxy. This isn’t to say that Russia isn’t being
hurt or that the sanctions aren’t effective. I mean they’re literally having to sell their oil
for a 30% discount, so clearly they’re being hurt. But, the thing note is that western
countries aren’t just hurting Russia but they’re also hurting themselves. And the ones that are
truly benefitting are the countries in the middle like China, India, and of course Saudi Arabia.
SAUDI IMPORTS EXPLAINED: In the end, while Saudi oil imports
may seem confusing at first glance given their massive oil reserves, they actually make a lot
of sense when you take a closer look. First of all, there’s several different types of oil,
and Saudi Arabia primarily only has light crude sour oil. So, they often have to import oil to
make up for internal imbalances. But, it’s not just internal imbalances that they’re looking
to make up for. All of Saudi Arabia’s power originates from their dominance on the global
oil markets. If they lose this dominance, they also lose their power and influence on the world
stage which is obviously not something that Saudi Arabia wants to do. To keep their power,
Saudi Arabia is willing to go to extreme lengths to meet their production numbers and
deliver to their customers. And yes, this includes importing oil at a loss to make up for production
shortfalls. Imported oil doesn’t always have to be expensive or undesirable though. Russian oil
is extremely desirable right now given that it’s selling for a 30% discount. While Saudi Arabia
can’t just turn around and sell this same oil to western countries, they can use it themselves and
sell it to neutral countries. This way, they can save all of their own oil production for
western markets where it can be sold for absurd profit margins, allowing Saudi Arabia to profit
$1 billion on a daily basis. And that’s why Saudi Arabia is importing record amounts of oil. Would
you be willing to arbitrage between Russia and the West? Comment that down below. Also,
drop a like if you’re hoping that these oil games come to a close sooner rather than later.
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