With 810 billion barrels in proven reserves (50~% of global total) and 28 million b/d in production (30% of global total), the Middle East has long been the center of the global oil market. The region (defined as the 12 countries listed here that excludes Egypt) accounts for about half of the 37.8 million b/d international crude oil market. Yet, the Middle East’s future capacity to export might be more constrained than some realize. Growing populations, expanding middle classes, and increasing consumerism have transformed the Gulf states into key energy consumers. The Middle East now uses nearly 33% of the oil that it produces, compared to just 20% in 2000. The overall population is about 260 million, growing 2.2% per year. But, it’s the youth Westerners must take notice of. The Middle East has a rising young population that is educated, Internet savvy, and demands a more open society than the one their parents had. Exporting a combined 12 million b/d, Iran, Iraq, and Saudi Arabia all have about a third of their population between the ages of 15 and 29. High oil prices have driven strong economic growth, and living standards will rise rapidly in the coming decades. Annual GDP growth rates are expected at 4-6%, while real (2010$) GDP/capita is projected to extend from $11,000 today to $16,00o in 2030.
As the Middle East’s economy goes, so does its need for more petroleum. Oil and gas are the only energy sources in the Middle East (i.e., the only ones that register a %), each meeting 50% of supply. And the region has very cheap production costs that promote use. In Saudi Arabia, for instance, it can cost just $5 to extract a barrel of oil. Additionally, huge oil subsidies encourage demand while also encouraging wasteful habits. Saudi Arabia ($50 billion) and Iran ($45 billion) easily hand out the most in oil subsidies that keep prices artificially low. These policies don’t allow the “conservation ethic” to sink into the Middle Eastern psyche.
The Middle East is Young
Source: CIA, World Factbook
In fact, oil is so ingrained in the Middle East’s energy demand structure that it uniquely accounts for nearly 40% of all power generation, which at 350 TWh a year is enough to meet the combined needs of Florida and New York. This is a growing problem for the entire Middle East, a region that constitutes 35% of the ~6.8 million b/d of oil used for electricity in the world. Petroleum has evolved into a designed transport fuel for the rest of the world, and electricity is considered a “low-value use” that needlessly increases costs. For example, oil now generates just 3% of the world’s electricity, when it was 22% in 1970. The IEA reports that generating electricity with oil in the Middle East will cost about $60 per MWh in 2020, but without subsidies, it would cost $215. Even when oil costs over $100 a barrel, power producers can pay just $5 or $10 thanks to subsidies. Middle Eastern nations want to reduce oil in the power sector because it would help expand their more lucrative oil export businesses. Saudi Arabia, for instance, where oil is over 60% of electricity, would have taken in $45 billion more in oil revenues were it not for its own growing needs. With oil sales often accounting for 85% or more of national budgets, low crude prices are again highlighting the need for diversification. Saudi Arabia alone has a $110 billion solar power program and plans $80 billion to build 16 nuclear power reactors over the next 20 years.
Albeit from very low bases, the IEA projects that nuclear capacity in the Middle East will grow (CAAGR) 11% per year, with high annual gains expected for wind (25%), solar (27%), and bioenergy (31%). Gas generation is projected to more than double to over 1,100 TWh by 2030, but the fast-growing LNG export business could entice more production leaving the region. More international energy trade, however, could actually help cut the Middle East’s oil demand for electricity. Deloitte estimates that U.S. LNG exports could help displace 5 million b/d of oil-based power generation around the world, notably in the Middle East. Overall, power demand potential remains high in the region because most countries still fall well below the global average of 3,500 kWh/capita/year (see here).
The Middle East Relies Too Much on Oil for Electricity