Domestic Oil Consumption in the Middle East may put Pressure on Export Capacity
Posted January 12, 2010 at 8:32 am 
Filed in: While oil prices hover around $80 a barrel, in Saudi Arabia you can buy a barrel – for domestic use – for $5.
The subsidy might not seem so unreasonable in the current climate, when Saudi and other OPEC members find themselves increasingly needing to constrain output during the recession. They are particularly worried by falling demand in the developed world coinciding with a raft of new production from non-OPEC sources. Indeed, the EIA places OPEC crude oil production surplus at 4 million barrels a day (mmbd) in 2009, up from only 1 mmbd in 2005.
Yet in the longer term, the growth in Saudi Arabia’s economy, which includes rapidly increasing industry and automobile ownership, will start to substantially eat into its oil export capacity. Domestic Saudi oil consumption rose 16.4% year on year in August, the FT reports. Inefficient power generators and poor gas supply have resulted in the Kingdom burning 1.25 mmbd of oil for power generation, out of total production capacity at 12.5 mmbd (a historical high). Though the country is investing in both gas and oil production, in the longer term local consumption will continue to rise. This is also true in many other OPEC members, where populations, economies, and oil demand are increasing rapidly.
(Note: Middle East includes Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, Syria, UAE, and Yemen. The percentage was arrived at by dividing annual mmbd oil consumption by mmbd production.)
Middle Eastern governments are investing in new energy-intensive industrial and commercial projects, such as plastics, chemicals, and fertilizers, in order to exploit their natural resource endowments. Further, Middle Eastern populations are expected to rise rapidly. Between 2009 and 2050, according to the Population Reference Bureau, Saudi Arabia’s population will increase 74% , Iraq’s 106%, Kuwait’s 76%, and Iran’s 37%. That’s a lot more people who will increasingly seek higher standards of living – a key marker of which is the personal automobile. When gas is all but free, why not splurge on an SUV?
Amidst the emphasis on increasing Chinese and Indian demand, it is important to also recognize that many of the countries we have traditionally relied on to produce the oil will be taking an increasing portion of it for domestic use. This trend should prod the United States and other non-OPEC consumers to increase domestic oil supply and quickly find alternatives to a completely oil-dependent transportation system.
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