Saudi’s must reduce consumption or “jack” world oil prices to save its faultering economy

The risks of Saudi oil consumption
By Adam Rasmi – The Daily Star – 10 June, 2013

According to a Chatham House report, Saudi Arabia’s surging domestic oil consumption – coupled with its inadequate supply growth – could turn the kingdom into a net oil importer by 2038. Guzzling more than a quarter of its 11.1 million barrel per day production in 2011, Saudi Arabia is the fifth-largest oil consumer in the world. The kingdom even recently surpassed Germany’s consumption level, despite having less than one-third of Germany’s population and one-fifth of its economic output. Continued consumption growth, if left unchecked, could devastate the country’s economy in the coming years.

Demography partly explains this growing use of oil. The population has doubled since 1985 and demand has risen accordingly, but the main culprit is the kingdom’s growing economic prosperity tied with its reliance on oil-fired power generation. Almost all of Saudi Arabia’s energy needs are met by oil and gas – and burning crude oil to overcome gas shortages has increasingly become the norm. Given that oil in particular accounts for nearly 90 percent of the country’s exports and state budget, it is no wonder that Saudi officials hope to rein in consumption as the kingdom continues to eat up more and more of its own export wares.

Rising consumption will have other impacts beyond the country’s energy-led economy. Although close to half of the Saudi economy is derived from the oil and gas sectors, less than 1 percent of the workforce is employed in these industries. To increase employment, the kingdom has become a very bureaucratic nation with over 80 percent of its workforce in the public sector. Similar to other Gulf countries, Saudi Arabia has responded to the Arab Spring with generous public-sector pay increases, highlighting how the country relies on oil revenues to deter political unrest. But diminishing oil revenues in the future could hinder Saudi Arabia’s ability to use its elaborate public sector and welfare system to combat political turmoil.

Saudi Arabia must therefore reduce its oil consumption so it can maintain large state revenues. The first step will require subsidy reform. The price of oil ranges from $5 to $15 per barrel, compared to a global market rate averaging over $110 since 2011. The kingdom’s decision to set the price of oil far below export price is a significant opportunity cost in foregone state revenue – one that also encourages a culture of overconsumption and waste. Saudi Arabia’s poor or unemployed mostly do not benefit from subsidies as the biggest consumers of oil tend to be high-income groups and heavy industries (including the petrochemicals sector) – both of whom are paying unnecessarily bargain rates for oil and gas.
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