As Saudi Arabia’s economy has grown in recent years, industrial capacity and car ownership have increased exponentially with it.
It is no surprise that demand for oil is increasing at such a rate that, when combined with a shortage of gas and the inefficiency of power generators, supplies by the world’s biggest oil exporter are likely to be constrained, analysts warn.
Domestic Saudi consumption of oil jumped by 16.4 per cent year on year in August because of an unprecedented surge in the burning of crude, according to a report by the International Energy Agency in November. As a result, the IEA has revised up its forecasts for Saudi domestic oil consumption to 2.6m barrels a day in 2009 and 2.8m barrels a day this year.
Last year, the kingdom said it increased its production capacity to a record 12.5m barrels a day. But, to meet domestic and industrial power demand, it burns 1.25m barrels a day, according to the ministry of water and electricity.
“We expect the 1.25m barrels to double in 20 years, which will prompt consideration of alternatives like nuclear or solar power plants to produce electricity,” says Saleh al-Awajji, the under-secretary for electricity.
The situation is made worse by subsidy. Although the market price of oil averaged almost $70 a barrel last year and reached a record $147 in 2008, the government sells its oil for domestic use at only $5 a barrel, says the ministry of water and electricity.
The Saudi authorities are not sitting on their hands. Ali al-Naimi, the oil minister, said in November that the kingdom’s gas output would rise 40 per cent by 2014. And the government said last year that $100bn would be spent in the next five years on oil exploration and production.
But, in the meantime, gas shortages mean that power stations are burning oil instead and fuel shortages have prompted the government to postpone some energy-intensive projects, according to al-Eqtisadiah newspaper.
As with other oil-exporting countries, the Saudi government has taken advantage of robust oil revenue to increase spending on new industrial and commercial projects, which has exacerbated local consumption. Four industrial and economic cities are under construction. And with economic growth in countries such as China and India, more markets are created for Saudi’s plastics, chemicals and fertiliser industries, all of them energy-intensive.
Analysts warn that heavily subsidised energy threatens to offset economic gains, particularly in the future when oil prices drop and the population grows. Aramco, the state oil company, has estimated that the kingdom spends about SR30bn ($8bn) on fuel subsidies a year.
Even Saudis complain that subsidised fuel and cheap cars encourage wasteful use of energy, especially by young people who have little means of entertainment in the conservative kingdom except driving or participating in unofficial drag races.
The low fuel price, SR0.45 or 12 US cents a litre, also encourages smuggling to neighbouring countries, particularly Yemen and the United Arab Emirates, Saudis say.
But phasing out subsidies, particularly for gasoline, is not on the cards, because it is part of a political settlement in the region, and particularly in a country that holds one quarter of the world’s oil reserves.
“Policymakers will continue to handle the issue carefully,” Simon Williams, senior economist at HSBC, says.