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 Saudi 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. 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.

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:

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

This post originally appeared at Credit Writedowns and is reproduced with permission.