The Middle East’s Voracious Appetite for Energy

Pumping around one-third of the world’s oil, the Middle East is the 800-pound gorilla of oil suppliers. Its enormous crude exports are crucial in slaking the thirst of a world hungry for more.

<!-strCallout1->Yet for all the Middle East’s supply-side clout, it is the region’s rising consumption — a growing appetite for its own oil — that threatens to undermine the world’s energy economy in the years ahead, unless these countries chart a new course.

Unlike the BRIC countries, the Middle East’s strong growth in demand for oil has mostly stayed under the radar. In the first decade of the 21st century, it rose by 56%, more than twice the increase seen across Latin American and Asian Pacific nations, and four times the global average.

Although it was no match for China’s 90% growth, in absolute terms the region gulps close to as much oil (8.1 million barrels a day in 2011) as the Middle Kingdom does (9.7 million barrels a day), according to 2012 data in the BP Statistical Review of World Energy.

The rate of consumption growth in the Middle East has been roughly on pace with the rest of the non-OECD world, where it has risen by 23% since 2005, even as it has been shrinking in developed countries.

What explains the region’s surging oil demand? Per capita economic growth doesn’t account for it. Income growth per head in the Middle East has lagged pitifully far behind the rest of the developing world over the last three decades.

Population growth is part of the story. More people has meant greater demand for vital resources. Additionally, energy demand per capita in the region has soared in recent decades, outpacing even the upward climb in the rest of the non-OECD world.

In 1970, the Middle East’s per capita energy demand was twice the levels elsewhere in the non-OECD. Now it is more than three times as high.

Moreover, Middle Eastern economies have grown much more energy intensive over the last four decades, while the world as a whole has become less so. The energy these countries consume to produce a unit of GDP averages more than twice what China does.

Feeding this energy appetite has been made possible by astoundingly cheap fuel, thanks to massive government subsidies. OPEC countries alone provided $121 billion of the $192 billion of oil subsidies doled out globally in 2010, according to the IEA.

<!-strCallout2->Small wonder, then, that demand growth has continued to roar along in the Middle East when a gallon of gas costs less than a dollar in places like Kuwait and Saudi Arabia ($0.89 and $0.61, respectively, as of August 2012). That means that Saudi drivers are paying just one-sixth of what those in the United States are paying for gas — and just one-sixteenth the price in Norway!

Though Iraq and Iran have taken strides to reduce oil subsidies and Saudi Arabia has pledged to end them altogether, reining in these perks, which are doled out by the governments in exchange for popular support, won’t be easy.

Unless these Middle Eastern countries increase their production capacity, using more oil at home will mean they have less to sell abroad. Though Riyadh relies on oil for about 90% of its export revenues, Saudi Arabia now consumes more than a quarter of what it produces.

The desert kingdom gobbles up more oil than Germany, which has an economy five times as large. Much of this demand comes from rising electricity demand, two-thirds of which comes from burning crude oil. Half of that power feeds air conditioning during the summer months.

If current trends hold, say a host of analysts from Chatham House to Citigroup, Saudi Arabia could go from being the world’s most powerful oil exporter to a net importer as soon as 2030.

That prospect is extremely unlikely, though. It assumes stalled production growth and no loosening of current — and likely unsustainable — oil subsidies. Top decisionmakers in Riyadh, who know the regime’s survival depends on oil revenues, will take whatever measures necessary to keep petroleum wealth flowing in.

Still, these calculations underscore a problematic reality. Unless Saudi leadership puts the country’s energy economy on a new path, the kingdom’s ability to continue stabilizing the world oil market will be in jeopardy.

Saudi Arabia, and to a much lesser extent its Gulf allies, play a critical role in keeping oil prices steady by maintaining a reserve margin of oil production.

<!-strCallout3->This spare production capacity acts as a safety valve for the global market. It allows these countries to pinch hit when supplies elsewhere are interrupted or to meet higher-than-expected demand.

Right now, this reserve margin is far below what oil analysts consider the bare minimum required to keep price stable. Growing domestic oil consumption in these pivotal Middle Eastern producers could wear away this all-important buffer even further.

If that occurs, the likelihood of painful jumps in oil prices crimping economic growth in oil-importing countries like the United States would increase substantially.

Energy-hungry consumers in the heart of the OPEC world pose a challenge to any potential return to low, predictable oil prices. Smart policy decisions in these critical Middle Eastern countries aimed at slowing inefficient oil demand growth, by gradually removing subsidies and switching to other sources of electricity generation, while boosting oil production capacity are vital.