The New Oil Dynamics

The oil market changed back in 2009, but most Americans did not notice.

That was the year, for the first time, China temporarily surpassed the United States as Saudi Arabia's biggest and most important customer.

At the time, Saudi oil minister Ali Naimi said “Ten years ago, China imported relatively little crude oil from us. Now, it is one of our top three markets, and is the fastest growing market for us globally.” He added that this showed the increasing “depth of Saudi-Chinese relations”.

Today, when oil tankers leave Saudi ports with their load of crude oil, they increasingly travel eastward to the rapidly growing economies of Asia rather than to the established markets of western nations.

When looked at historically, this new trend is significant. Remember that the most of the oil industries in the Middle East were originally set up by western companies with the sole aim of providing oil for western economies.

The day when Saudi oil exports to China permanently overtake those to the U.S. has not arrived yet. But it will soon.

Saudi Arabia is also selling more oil to that other Asian economic giant, India. Saudi crude exports to India grew sevenfold between 2000 and 2008. The desert kingdom now provides about a quarter of India's oil.

Meanwhile, total demand for oil in the U.S. and Europe is flat at best.

The changing oil dynamics, however, is not a simple story. It's getting more complicated.

Look at Saudi Arabia. It has its own rapidly growing economy and is consuming more of its own oil. The kingdom consumed 3.18 million barrels of oil per day in the third quarter of 2011. This is only a bit less than the 3.25 million barrels of oil per day used by India during the same time frame.

Bottom line...roughly a third of Saudi Arabia's 9.8 million barrels of oil per day production last month was absorbed by domestic consumption. This means less and less oil is available to sell overseas.

Taken together with increased demand from Asia, it means higher prices for oil down the road for American consumers.