Saudi Arabia: When surging oil demand meets limited supply

The following note from Gulf News reinforces the concept that high population growth in the Middle East will slow the amount of oil available for export (hat tip Andy Lees). I believe the consequences are higher prices.

Saudi Aramco has forecast that the kingdom’s daily energy demand will reach an equivalent of 8.3 million barrels by 2028, more than double the 3.4 million barrels equivalent in 2009.

Currently, of the 8.3 million barrels daily in oil production, more than three million barrels are consumed by the domestic market mainly to fuel national industries.

In the meantime, the National Industrial Clusters Development Programme (NICDP) is promoting solar energy, value chain products to support solar power plants, which are envisioned to be established across the kingdom as a component of the country’s resolve to harness renewable energy to meet increasing electricity demand.

Saudi Arabia’s industrial clusters programme in solar energy products is introducing the polysilicon and photovoltaic technologies, said Azzam Shalabi, president of the National Industrial Clusters Development Programme.

[…]

Saudi Arabia has now resolved to harness solar power and renewable energy to meet its increasing electricity demand and, thereby, in the process, curb its dependence on crude oil.

According to the Electricity and Co-Generation Regulatory Authority (ACWA), an initial investment of more than $100 billion (Dh367.3 billion) will be needed to expand electricity power generating capacity and transmission grid, build renewable energy plants, and set up nuclear power installations.

A third of the $100 billion is expected to fund the building of solar power plants and other renewable energy resources.

The Saudi Electricity Company’s current generation capacity is about 45,000 megawatts, which is projected to increase to 75,000 megawatts by 2018 and to more than 120,000 megawatts by 2030.

Clearly, the Saudis want to have oil capacity available for export. The more they consume domestically, the less revenue available to the government for domestic programs – hence the drive for alternative energy. Given where Saudi Arabia is located and the sunlight it gets, solar is a good fit. This week the earth is supposed to pass the 7 billion person figure. This presents enormous challenge in a world of limited resources. Clearly, demand for energy must increase with the rise in population or we will have to lower the use of energy person in proportion with the rise in population. Peak oil is a big part of how this will be achieved.

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What is peak oil? Chris Nelder and Gregor Macdonald use a good explanation by Chris Skrebowski in a  recent article for the Harvard Business Review. Peak oil is where:

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the cost of incremental supply exceeds the price economies can pay without destroying growth at a given point in time.

As the population of Saudi Arabia (and other oil exporting countries) grows, the incremental supply of oil for export at any given price will be diminished. And that means higher prices for everyone. Where is the pain threshold? When does demand destruction kick in? In April and May, I predicted oil prices had peaked, suggesting further that demand destruction had already kicked in, meaning the rise in oil prices is one big reason the economy has rolled over. Indeed, prices have peaked but they are still more than double the prices at their nadir in 2009.

Chris Nelder and Gregor Macdonald suggest $90 as the pain threshold:

We know that the economy fell on its face at $147 per barrel in 2008, and brought growth to a halt in 2011 at $120. The new pain tolerance limit appears to be $90 in the U.S., but $100-110 in China. At the same time, it costs $80-90 to bring a new barrel of supply online from marginal resources such as deepwater, tar sands, and the Arctic.

We are near that point now. Until we dramatically reduce oil intensivity globally and reduce personal oil consumption, the rising global population and population in oil exporting countries coupled with this pain threshold will be a recurrent source of economic weakness.

Source: Saudi oil Saudi energy demand to double by 2028 – Gulf News

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10 Comments
  1. andrew lainton says

    This phenomena with oli exporting countries is known as the ‘export land’ effect – look it up on the oil drum

    1. Edward Harrison says

      Thanks for the comment. I have a link to a Wikipedia article on that term. If you have other suggested links feel free to post them. Cheers.

  2. Dave Holden says

    I don’t know a lot about US cars but when I here people from there bragging how they’re getting 30mpg I can’t help but think there’s a lot of mileage (pardon the pun) left for improving efficiency over there.

    1. Edward Harrison says

      Agree. A lot of the problems from peak oil will come from improved efficiency. We see that in China with their drive to reduce the energy intensivity of their manufacturing sector. For westerners, especially in the US, Canada, Australia, there is a lot left to do to reduce the use of oil if these economies don’t want to suffer from spiking oil prices.

      1. Matt Stiles says

        Ed, are you aware that 56% of Canada’s electricity generation comes from Hydro? In BC and Quebec specifically, it’s 94% or higher.

        We’re only really dependent on oil for transportation. And it seems fuel efficiency in vehicles is keeping up with rising prices of oil (and rising taxes on those prices).

        1. Edward Harrison says

          Yes. I see Australia, the US and Canada as all having the same problem with large distances and dependence on cars. They all use a lot of energy per citizen.

      2. Dan Lemnaru says

        On the other hand, these countries still have clear room for improvement, so they have the capacity to adapt. Would Europe be able to do the same, or would everybody here have to switch to low powered Fiat 500s?

        Sure, a quick way to correct the pain would be to lower the huge fuel taxes, but do you see that happening? It didn’t happen in 2008, it didn’t happen now and, in both cases, despite very valid reasons to consider that the huge fuel costs were choking the economies all over.

        1. David Lazarus says

          There were some cuts in fuel duty in the UK, but the end result was that the oil companies took the cut as extra profits. We still had the same high oil prices. The average car in Europe is far more efficient than US Canada or Australia cars.

  3. Blissex says

    The rational economic thing to do in the case of higher oil prices because of diminishing supply is to INCREASE oil taxes, and increase them a lot, and bear with it. But the usual scammers will instead push for lower oil taxes, in order to seriously enrich oil companies and oil exporters.

    Because if it is strategic goal for SAUDI ARABIA to «curb its dependence on crude oil» in 20-30 years then every other country should do that much faster.

    Indeed if the Saudi government had a brain instead of investing in buying USA and other banks they would have been investing starting 20 years ago across the world into desalination research, solar cell research, solar turbine research, nuclear power research (I particularly like, as a non-expert, the solar turbine system developed by AGIP in Sicily, but there are many other usable designs).

    Instead the biggest pushes into this have been done by China, Germany, Japan, and France.

    1. David Lazarus says

      There is the problem of the high over heads of buying off the extended Royal Family, which IIRC numbers some several thousand. They have been investing for many years so can get a return on their investments in future. Though another problem is that Saudi Arabia is dependant on migrant workers for even retailing jobs.

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