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Middle East energy demand soaring, matching China

Energy demand in the Middle East is growing as fast as in industrial powerhouse China and will help to offset any decline in the United States, the world’s top fuel burner, as well as keep prices high.

Although it has only a fraction of the population, huge fuel subsidies and an economic boom fuelled by record oil prices have driven a rapid increase in Middle Eastern energy consumption. “Middle East energy demand looks as if it will grow at the same rate as China but with 10% of the population,” said Jeff Brown, managing director of Singapore-based FACTS Global Energy consultancy.

Crude consumption in Asia and the Middle East is forecast to grow by almost 900,000 barrels a day this year, whereas US demand could fall by 400,000 bpd in a pessimistic scenario, said Eduardo Lopez, senior oil demand analyst at the International Energy Agency, energy adviser to developed consumer nations. “The countries driving demand growth are relatively isolated at this point from any financial crisis the United States may face,” said Lopez. Record oil prices, rather than denting demand in the Middle East, will encourage greater consumption as the flow of petrodollars to the region will continue to stimulate rapid economic growth. Huge subsidies, which make fuel almost free in many states, remove any incentives for energy efficiency, while environmental arguments for reducing carbon emissions have made little impact in the region.

Almost all oil-rich countries will continue to subsidize fuel heavily as they have the funds thanks to soaring revenues but also because the region’s authoritarian regimes see cheap fuel as part of a social pact with their populations. “Cheap fuel is seen as a given right. It is a social bargain for political compliance,” said Samuel Ciszuk, Middle East and North Africa analyst at Global Insight. In Saudi Arabia, gasoline costs 12 cents a litre compared with 68 cents in China, $2.14 in Britain and 86 cents in the United States.

The exception is Iran, the world’s fourth-largest crude exporter, which recently started to ration subsidized gasoline to control costs and to curb imports. Iran is different because it has a much larger population, than other Middle East  states and because of US sanctions it finds it more difficult to import fuel, forcing the country to turn to expensive spot market purchases. In addition, relying on imported fuel makes the country vulnerable to pressure over its nuclear program. “Iran is an anomaly in the region. You couldn’t see (rationing) happening in Saudi Arabia or Kuwait as they do not have the same geopolitical problems,” said the IEA’s Lopez. “They are not subject to sanctions so can buy what they need in international markets.” The situation in Iran is likely to change in coming years as the country is increasing its refining capacity and could become a gasoline exporter from 2012.

Middle East oil demand stood at 6.6 million barrels a day (bpd) in 2007, and is set to rise to 7 million bpd this year, according to the Paris-based IEA. Chinese demand is around 7 million bpd and oil use in both China and the Middle East is forecast to grow between 5-6% a year, said the IEA. FACTS consultancy forecasts energy demand in the two regions rising between 400,000 and 500,000 bpd over the next 5-7 years. “If anything, the Middle East looks more robust than China. As oil prices go up, then their economies continue to boom and they don’t feel any price impact at the retail level,” said Brown from FACTS.

The International Monetary Fund this month revised up its forecast for Middle East economic growth by 0.2% to 6.1%, up from 5.8% in 2007. Demand is soaring not only for transport fuels, including diesel and jet, but also for fuel oil for power generation as gas projects have failed to keep up with demand for natural gas for electricity production. Apart from Qatar, all Gulf states are short of gas. The region, especially Saudi Arabia, is planning a big expansion in refining capacity to meet local demand, including from its rapidly expanding petrochemical industry, as well as for export. Much of the extra capacity will come onstream around 2013. (Reuters)