Oil: Saudis are burning through it

Everyone knows why oil prices, at around $125 for a barrel of Brent crude and $103 for West Texas crude, are so high. The long-term trends are meager supply growth and soaring demand from China and other emerging economies. And in the short term, the market is tight, supplies have been disrupted and Iran is making everyone nervous.

Saudi Arabia, the only OPEC member with enough spare capacity to make up supply shortfalls, is the best hope of keeping the market stable. The Saudis recently reiterated their pledge to keep the market well supplied as American and European Union sanctions hit Iran. Over time, other producers in the Persian Gulf may be able to pump more. Iraq — and Iran itself — have vast oil fields that could eventually provide markets with millions more barrels a day. All this is conventional wisdom.

Yet these calculations do not take account of the region’s growing thirst for its own oil. Between 2000 and 2010 China increased its consumption of oil more than any other country, by 4.3 million barrels a day, a 90 percent jump. It now burns through more than 10 percent of the world’s oil. More surprising is the country that increased its consumption by the second-largest increment: Saudi Arabia, which upped its oil-guzzling by 1.2 million barrels daily to 2.8 million, making it the world’s sixth-largest consumer and burning through more than a quarter of its 10-million-barrel daily output.

Saudi Arabia is not the only oil-producer that chugs its own wares. The Middle East, home to six OPEC members, saw consumption grow by 56 percent in the first decade of the century, four times the global growth rate.

There are three explanations for this. The first is demography. Populations in the Persian Gulf, and in OPEC as a whole, are growing fast. Tiny Qatar’s population trebled between 2000 and 2010. Saudi Arabia’s grew from around 20 million to 27.4 million, a 37 percent increase. Demand for power, water and gasoline has risen accordingly. Saudi power-generating capacity has doubled in the past decade. Partly this is to mitigate the fearful desert heat: air-conditioning units soak up half of all Saudi power at peak consumption periods.

The second relates to economic structure. It takes energy to produce energy: Pumps must be powered and vast quantities of seawater desalinated. Aramco, the Saudi state oil company, sucks up nearly 10 percent of the country’s energy output.

The third reason for rising Gulf consumption is the inefficiency of domestic energy markets. About 65 percent of Saudi electricity is generated using black gold, even as successive price shocks and the relative inefficiency of oil generation have seen it all but phased out in rich countries.

Saudi Arabia has the cheapest fuel in the Gulf and dirt-cheap electricity, too. This has alleviated poverty but it also has encouraged an American-style driving culture (for men) and limited public transport.

Many oil-producing countries (including Saudi Arabia) have pledged to cut subsidies. But this is hard to do when (often unelected) regimes are terrified of unrest.

It is costing Saudi Arabia dear to burn through so much oil. With “lifting” costs of $3 to $5 a barrel, the fuel is cheap but the opportunity cost, given a global price of $125, is huge. And like many Gulf oil producers Saudi Arabia has failed to use its abundant natural-gas supplies properly.

Gas does contribute 35 percent to power generation, but rock-bottom prices and a sniffiness about gas as oil’s poor cousin mean that exploiting its bounty (Saudi Arabia has the world’s fifth-largest gas reserves) has proved hard. Initiatives to attract Western oil companies to get at the gas foundered as low prices and stingy terms failed to attract bidders.

Saudi Arabia is trying to develop nuclear and solar energy, but its oil-fired power stations will keep going for years. And as Mark Lewis of Deutsche Bank points out, two more big ones are now being built. On current trends, the kingdom would become a net importer of oil by 2038 (unlikely though that is).

This puts big strains on oil markets. In the short term, Saudi spare capacity is an important factor in oil prices. As the year progresses, seasonal Saudi demand is likely to jump. Last year the upswing between March and July was 750,000 barrels a day. Much of that will be driven by air conditioners working overtime. This will put pressure on the country’s ability to maintain exports and keep global oil prices stable.

5 Comments on "Oil: Saudis are burning through it"

BillT on Tue, 3rd Apr 2012 3:12 am 



“… Iran is making everyone nervous. …” No, Israel is the one shaking the tree.

As for domestic oil use by S.AA, one article stated that their oil use is growing by 8% per year, meaning that they will likely not be exporting ANY oil in 10 years. Maybe less. Noe will most of the OPEC countries. Mexico is dropping out of the export market now. The major countries with significant oil reserves are…you guessed it… Iraq, Libya, and … Iran. The only other large resource has 12,000 nukes to keep them safe from the Empire. Russia. oh and Canada, but their tar is hard to get and limited by water and energy availability.

Kenz300 on Tue, 3rd Apr 2012 3:46 am 



How long before many oil exporting countries reduce exports due to increasing domestic demand and falling supplies?

Every country needs to develop a plan to to balance population, energy, water, food and jobs. The population growth in the middle east is huge. It is not sustainable.

MrEnergyCzar on Tue, 3rd Apr 2012 4:01 am 



Welcome to the Post Peak Oil world…

MrEnergyCzar

Kenjamkov on Tue, 3rd Apr 2012 7:30 am 



8% per year doubles current usage in about 9 years, so SA will still be exporting about half production… maybe…

9 years from now who knows if anyone is exporting.

BillT on Tue, 3rd Apr 2012 8:00 am 



Kenjamkov, your math is correct, but that assumes that their production does not fall by the same amount, which is likely. Of course, it will be obvious when we think of $200 oil as being cheap. They are already pushing the limits to get what they export now.