Interesting read in the Wall Street Journal on June 23, especially in light of the recent announcement by the IEA that member countries would release 60 million barrels of oil from strategic reserves over a 30 day period — not a wise move with respect to oil price volatility and price spike risk later this year or next (but that is a subject for another blog).
The article points to four noteworthy observations on our part:
• First, Iran’s ability to go nuke (weapons, not power generation) is a potential powder keg in an already volatile region of the world. As the WSJ article points out, not only is there a need for nuclear power in Saudi Arabia (yes, that’s right, despite having the world’s largest oil reserves, the kingdom needs nuclear power to satisfy its domestic energy demands), there is the likelihood that others in the region will follow suit. If Iran has a nuke, then others want nukes and will have them. In our opinion, the geo-political risk associated with oil and natural gas disruptions is increasing.
• Second, note the rapid growth in internal oil consumption in Saudi Arabia. It has more than doubled in about 12 years. The more oil Saudi Arabia consumes, the less oil there is for export, which is the principle source of revenue for the kingdom and also means less supply available for importers of crude.
• Third, note that gasoline prices in the kingdom are subsidized. While the economist in the article states that eliminating gas subsidies would curb demand, we believe the reality is, given the political turmoil in this part of the world of late (witness Tunisia, Egypt, Libya, Bahrain, Yemen, and Syria), that it is doubtful this subsidy would be lifted. In fact, the government of Saudi Arabia earlier this year instituted a handout to the people of the kingdom in excess of $100 billion (as a “stimulus”). Once subsidies and handouts are given, they become expected by the recipients…seldom are such endeavors one time in nature.
• Fourth, and related to the third point above, the social costs of producing oil in Saudi Arabia are significant. The subsidies and handouts are essentially a cost of producing oil in the kingdom. As we (at EOCM) have been saying for some time now, the era of cheap, easy to access oil is over…even in Saudi Arabia.
Commentary and article shared with you by Scott Gill, EOCM Portfolio Manager. To contact Scott, or anyone on the Energy Opportunities investment team, please email Angela Hall at ahall@energyocm.com.
WALL STREET JOURNAL
JUNE 23, 2011
Rising Saudi Thirst for Oil Drives Plans to Go Nuclear
DUBAI—Rapid population growth, wastefulness and economic development are driving up Saudi Arabia’s thirst for energy, steadily reducing the amount of oil available for export and driving the kingdom’s interest in nuclear power.
By eating into its own oil supplies, Saudi Arabia risks reducing a formidable spare capacity that it could pump to counter disruptions to output elsewhere.
Spare capacity is also a potential weapon in the kingdom’s efforts to keep Iran in check, senior royal Prince Turki al-Faisal said in comments this month reported by The Wall Street Journal. Prince Turki also implied that if Iran develops nuclear weapons, Saudi Arabia would be forced to follow suit—a scenario that shadows Saudi nuclear-energy plans.
The Saudi government has said it will present a comprehensive energy strategy later this year. Prince Turki said the kingdom was working on developing wind, solar and nuclear sources to avoid sapping oil exports.
But a culture of consumption remains. From dairy farms that run air conditioning for tens of thousands of cows to the Middle East’s largest fleet of private jets, the world’s leading exporter of crude oil is burning more and more energy.
Domestic subsidies keep fuel prices low and give citizens and companies no incentive to cut back.
Peak-time power demand—fueled largely with crude oil—rose by 10% last year, according to the country’s deputy electricity minister.
Some economists say that if Saudi Arabia’s current energy-consumption growth rate of 7% a year continues unabated, the kingdom within 20 years will burn the equivalent of almost all its recent daily output—more than eight million barrels a day—or around two-thirds its total production capacity.
“They’re really within, just mathematically, 20 years of having very little oil to export,” said Brad Bourland, chief economist of Jadwa Investment in Riyadh. “I think it’s a very significant medium-term challenge for them in how they turn it around.”
Saudi officials, and some analysts, have lower projections for consumption growth.
A year ago, Khalid al-Falih, chief executive of state energy producer Saudi Arabian Oil Co., known as Saudi Aramco, said that if left unchecked domestic energy consumption would sap three million barrels a day from crude available for export by 2028. Those numbers are still viewed as correct, Saudi officials said.
Until this year, some analysts believed the kingdom would slash subsidies to slow consumption. The cost of Saudi Arabia’s energy subsidies was second only to Iran’s in 2009, at around $35 billion, or a tenth of Saudi Arabia’s gross domestic product, according to BP Co. PLC. But after unrest shook other Arab states, the ruling al Saud family began pouring nearly $100 billion into the economy to make life cheaper and easier for most citizens.
“As an economist, I say if you want to slow that growth of energy consumption, raise prices,” said Mr. Bourland. “Saudi Arabia pays a very large opportunity cost by not selling oil outside, where it makes a gigantic profit.”
“There was a recognition in the past year or so that demand was growing too fast and they needed to get a handle on it. But now they have to shore up support through cheaper prices,” said Jamie Webster, senior manager at the market intelligence service at PFC consultants in Washington.
The government has been looking more closely at atomic energy. Last year, the government set up the King Abdullah City for Atomic and Renewable Energy, or KA-CARE, to formulate policy on nuclear power.
An agreement with French nuclear developer Areva SA soon followed, leading to expectations the kingdom is considering one or more nuclear plants.
Saudi Arabia will unveil a national energy policy this year outlining how much electricity is to be produced by nuclear plants, and in what time frame, said a KA-CARE spokesman.
“Saudi Arabia’s well behind the curve in getting into nuclear generation, but I’d anticipate they do need to move forward on this,” said PFC’s Mr. Webster.
New safety concerns arising as a result of the crisis at Japan’s Fukushima Daiichi nuclear plant haven’t put a crimp in the kingdom’s energy strategy, a Saudi offical said.
Other options are limited. Electricity plants face stiff competition from petrochemical factories in buying the kingdom’s limited quantities of natural gas. Saudi Aramco is raising its natural-gas production levels, but it has struggled to locate new gas fields after several years of dedicated exploration.
A Saudi official said Saudi Electricity Company was burning 1.1 million barrels a day of crude oil in power stations. Oil analysts say that figure rises during Saudi Arabia’s sweltering summer months.
The electricity ministry said it hopes to cut consumption with efficiency measures, including improvements to power stations and new standards for air conditioning units. But with demand rising so quickly, they can at best delay the problem.
The kingdom says it now has a production capacity of around 12.5 million barrels a day. Officials have previously set an eventual target of 15 million barrels a day of maximum sustainable output capacity, but haven’t recently said they are contemplating an increase from the current level.
