Research conducted by marketing communications consultancy Orient Planet shows that upcoming upheavals to the international oil supply chain will significantly impact the global economy and oil security. These movements, however, will not be enough to displace the Middle East as a global leader in oil in particular and energy in general.
Aside from having the largest proven crude oil reserves in the world (66% of reserves of OPEC members), the region enjoys close proximity to, and strong economic and cultural ties with, oil-hungry markets such as China and India. China alone is projected to account for half of global oil demand growth in the next five years.
Moreover, Orient Planet’s report notes that the Middle East has had the foresight of broadening its energy horizons to include alternatives such as solar, wind and nuclear power. In addition, while the region has vast oil reserves, it has not yet maximised its production potential. It can still boost output to match surges in global demand as opposed to other countries where production is already at, or near, peak levels.
These are some of the factors that create a substantial buffer for the Middle East to maintain its oil dominance amid short- and long-term market challenges.
In its research, Orient Planet refers to a recent report from the International Energy Agency (IEA) that has managed to stir the global oil marketplace and draw mixed reactions from various industry players, which claims that the surge in oil production in North American will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15. This development merits closer inspection from the Middle East and other key oil players given the constant shifts in market forces.
To say that the US oil boom will significantly impact the global economy is certainly a very bold statement to make, according to the study. Undoubtedly, it will have an influence, but the manner in which it has been discussed and portrayed in the media shows a certain degree of hype and over-excitement. The US has depended on oil imports to sustain its economic growth for a very long time. The possibility of weaning the US off oil imports was therefore big news and the media feasted on it.
US oil demand
The US, despite being the world’s biggest consumer, never had any major breakthrough in domestic production of oil. Until recently, up to 60% of oil supply in the US was imported from other countries. On the other hand, the US imported up to 20% of its natural gas needs based on 2010 records.
However, as the IEA report points out, US oil companies have been able to develop new technologies and techniques that allowed them to produce oil from previously inaccessible locations. Specifically, the energy boom in the US is mainly due to shale gas and high concentration of unconventional oil deposits in various states such as North Dakota and Montana. Largely because of shale gas discoveries, the US is expected to become a natural gas exporter by 2035, according to the IEA. Moreover, oil imports are now expected account for 30% of US energy needs, down from 60%.
Impact in the Middle East
So how does all this affect the Middle East? The IEA and the US Energy Information Administration have already predicted the US to lead the world in oil production as early as 2017, which is only four years away. Will it severely affect Middle East oil revenues as the US becomes the world’s largest oil producer, eclipsing the Kingdom of Saudi Arabia and Russia?
Nidal Abou Zaki, Managing Director of Orient Planet, said: “An objective assessment of the emerging developments in the global oil space and the various economic indicators would reveal that even if the US increases its oil production, it will never dislodge the Middle East as the most influential block in the global oil trade. The primary reason for this is that the region still produces majority of the world’s oil supply. Saudi Arabia, in particular, remains the linchpin in global production because of its ability to increase production at a moment’s notice to augment any shortfall or disruption in the international supply chain.”
Moreover, Orient Planet notes that the percentage of Middle East oil imported by the US is far less than one might expect: just around 16% of total US oil imports. According to the Energy Information Administration (EIA), the statistical agency of the US Department of Energy, the US imported 58.2% of its petroleum (including crude oil) in 2007. Of this figure, only 16.1% came from GCC countries. Countries in the West accounted for 49% of US oil imports, while 21% came from African nations. The top two oil suppliers of the US in 2007 were Canada (18.2%) and Mexico (11.4%), with KSA only running third (11%).
The figures above show that the US accounted for only a relatively small percentage of the Middle East oil exports. Arab oil exporters cater to a global marketplace, not a single customer. This means that given the global customer base of the Middle East, it would not be too difficult to find new markets that would make up for the drop in exports to the US. And this brings the discussion to Asia, particularly China, which is fast replacing the US as the world’s top oil consumer.
Asian oil markets
While the IEA expects the US to gradually become independent of oil imports, it also predicts Asian countries to end up consuming up to 90% of the oil produced in the GCC region. In particular, the fast-expanding economies of China and India will be key markets with their rapidly growing demand for oil. Moreover, with the rest of Asia experiencing energetic economic growth, Arab oil exporters can expect a surge in revenues as they expand and strengthen their presence across East Asia.
It has also been predicted by the IEA that developing countries will soon collectively consume more oil than developed countries for the first time. The Middle East itself will need more oil as the region collectively tries to accelerate its social and economic development plans. Economic diversification has been the primary goal of many Arab countries, particularly the oil exporting states, and this will surely create new demand for energy. On the other hand, the overall global demand for oil has been projected to sustain a 1.2 % increase annually for the next five years.
Given the situation, a decline in oil demand is a distant possibility and certainly the least of Arab oil exporters’ worries, according to Orient Planet’s study. In the long run, global economies will continue to find ways to grow and recover from the recent global downturn. In the Middle East alone, oil demand has been driven by the socioeconomic development programs implemented by different countries. Moreover, studies have shown that non-OECD oil consumption increased more than 40% between 2000 and 2010, with Saudi Arabia one of the countries with the largest growth in oil consumption during the period. The long-term pursuit of economic growth will certainly ensure that oil demand will remain strong in the long run.
Meanwhile, Qatar’s proven oil reserves were the 13th largest in the world at the end of 2012 and the country remains an important supplier of oil to global oil markets. Qatar also holds the world’s third largest natural gas reserves and is the single largest supplier of liquefied natural gas.
The status of the Kuwaiti market is just as favourable. The oil production capacity of Kuwait, the world’s fourth-largest oil exporter, currently stands at 3.1m barrels per day (bpd), versus its quota which was at 2.2m bpd.
Bahrain, on the other hand, plans to invest around $15bn in the oil and gas sector over the next thirty years. Between 2010 and 2020, the government is forecasting Bahrain’s oil production to increase from 46,000 bpd in 2010 to 100,000 bpd before the end of the 10-year forecast period. In 2012, the country’s oil sector accounted for around 22% of GDP and 75% of government revenues.
Orient Planet reveals that, to demonstrate the positive outlook of the Middle East energy sector, many GCC countries are even actively looking at alternative ways to further expand their energy resources as part of a long-term energy strategy. Renewable energy is particularly attracting unprecedented attention in the Middle East given the wide availability of solar and wind across the region. Optimal use of renewable energy sources will strongly complement the abundant oil reserves in the Middle East, sustaining the region’s energy demand for centuries through sustainable and clean electricity.
As mentioned earlier, long-term strategic planning is key in the way the Middle East is handling the regional and global energy situation, as well as short-term and long-term challenges in the global energy market. In this regard, the push towards sustainable energy is in line with the realization that hydrocarbon reserves can be used for other meaningful purposes other than producing electricity. For instance, Arab oil exporters could derive most of their energy demand from alternative sources, freeing up more oil for exports that would generate more revenues. This is crucial as a recent report by the Kuwait-based Global Investment House expects the MENA region’s GDP to grow 3.1% in 2013, in line with growth expectations in the region’s oil exporting countries, and then by 3.7% in 2014.
Dozens of renewable energy projects are now in various stages of implementation in the region, including the UAE and Saudi Arabia. However, while global renewable energy investment reached $257bn in 2011, an all-time high, the MENA region only accounts for only 2.1% ($5.5bn) of total renewables investment for the year, according to the Global Trends in Renewable Energy Investment report. This represents a huge opportunity for the region to further grow its renewable energy capabilities and achieve unprecedented economic benefits.
The UAE was the first in the region to take its renewable energy ambitions to the next level when the country unveiled plans to develop a civilian nuclear energy program in 2009. A $20bn contract was awarded to a South Korean consortium to build four reactors with a total capacity of 5.6 GWe, with one 1.4 GWe power plant coming online every year starting in 2017. Spearheaded by the Emirates Nuclear Energy Corporation (ENEC), the UAE’s civilian nuclear program is crucial to support the country’s spiralling energy demand, which is growing at an annual rate of 9%, or three times the global average.
In Saudi Arabia, the King Abdullah City for Atomic and Renewable Energy (KA-CARE) was established by royal decree in 2010 to oversee the development of KSA’s long-term energy mix. It has been reported that 16 reactors are to be built with a combined capacity of 22 GWe of power, which is about half of the Kingdom’s current electricity production capacity.
While Orient Planet notes that such ambitious renewable energy projects will obviously deliver huge benefits to the region in the long-term, they also clearly show that Arab oil exporters are undaunted by the reported “shake-up” in the global oil marketplace and the impending short-term consequences. The Middle East caters to a global marketplace that has an insatiable appetite for oil. That alone is enough to provide the long-term demand that will support the region’s vast oil production capabilities.