Arab gas guzzling threatens global energy balance

April 20, 2011

By Christopher Swann and Una Galani
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

NEW YORK/DUBAI — Middle Eastern demand for its own oil could be a bigger threat to the global energy balance than unrest in the region — at least long term. Rising demand at home threatens to limit Saudi Arabia’s key role as the world’s swing producer and could spell structurally higher prices for global markets.

A Saudi official this month expressed unusual public concern about the nation’s energy use. Oil consumption, boosted by car use and air conditioning, has risen by half in the past decade to an estimated 2.7 million barrels per day (bpd) this year. Saudi Aramco, the national oil group, reckons demand could reach 8.3 million bpd by 2030.

Currently, after exports and domestic consumption, Saudi has spare capacity estimated at 2.8 million bpd — a crucial buffer amounting to about 3 percent of global oil consumption. Aramco’s forecast suggests that could be fully absorbed by domestic demand this side of 2025.

Meanwhile, oil consumption in Kuwait is rising fast enough to start reducing exports within a decade, the Brookings Institution says. Even assuming some restraint, the Middle East is likely to be consuming 11 million bpd by 2035, up from roughly 6 million in 2007, according to the International Energy Agency — a rate of increase second only to fast-growing Asian economies.

Indonesia offers a cautionary tale. In 1980, it exported 1.2 million bpd. A trebling of domestic oil consumption since then — driven in part by hefty subsidies — has made it a net importer. Low oil prices at home play their part in encouraging Middle Eastern demand, too. The cost of gasoline in Saudi, for instance, is less than a sixth the level in the United States. Electricity prices are also low.

Attempts to remove these subsidies are politically perilous. But almost giving oil away at home when it could earn over $100 a barrel abroad doesn’t make economic sense. Though Saudi has outlined plans to boost capacity significantly if demand warrants it, some believe it may already be near its peak production. One alternative, nuclear power, isn’t necessarily something Western powers want to see burgeoning across the Middle East.

For now, the world remains amply supplied with oil despite the turmoil in Libya. But the long-term trend suggests a less comfortable future. Saudi is beginning an effort to address its side of the issue. But too much delay by the United States and others in finding alternatives to imported oil could eventually become very expensive.

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Problem is the interplay between the unrest and rising demand.

Part of the reason people riot is economic. Unrest is also encouraged by a rapidly growing (therefore young) population and and older elite.

A growing population implies growing demand for oil. Economic hardship in the Persian Gulf is most easily relieved with oil subsidies.

I see no way out of this.

Posted by Dafydd | Report as abusive