Despite a rise in oil prices, Saudi Arabia faces "much more difficult energy and revenue future", Jadwa Investment Research Department said in its commentary sent to Saudi Gazette Tuesday. The prediction is based on three trends, which are: q The Kingdom's domestic consumption of oil (and gas) is rising very sharply, reducing the amount of oil available for export. Low domestic prices-oil is sold in Saudi Arabia at between 3 percent and 20 percent of the global price-mean the efficiency of oil use is worsening. Consumption is growing at about twice the rate of non-oil GDP growth. q Saudi government spending is likely to continue rising at an annual pace of 7 percent or more, with ongoing reliance on oil revenues as the primary revenue source. q Saudi oil output has not risen significantly in 30 years, and in our view is unlikely to rise on a sustained basis over the next decade or more. The combination of these trends would leave only sustained sharp rises in oil prices to meet fiscal needs. “While we think prices will continue to rise, we do not think they will rise at the rate required to meet the ‘breakeven' price for the budget. Indeed, a decade-long plateau in oil prices, as the market has previously experienced, would likely lead to a rapid deterioration of the Kingdom's future fiscal position,” Jadwa said. Today the world consumes approximately 88 million barrels per day of oil. Of this, Saudi Arabia produces around 9 million barrels per day and OPEC provides a total of 29 million barrels per day (33 percent of total world consumption). Global consumption grows at about half the pace of global GDP growth, or typically 1.5 to 2.0 percent per year. With the global economy still emerging from recession the International Energy Agency (IEA) forecasts that global oil demand will grow by an average of 1.3 percent per year for the next five years, equivalent to 1.1 million barrels per day of oil per year. Jadwa said new oil discoveries, technology, increasing efficiency of oil use, geopolitical events and changing oil policies all have contributed to lower actual need for Saudi oil than thought previously. "The tendency has been to overestimate the global demand for oil, underestimate the growth in supplies outside the Middle East, then assume that Saudi Arabia, with its vast oil reserves of over 260 billion barrels, would fill a growing gap that actually never materializes." Behind these broad numbers several powerful trends are apparent in global oil consumption. First, oil has largely conceded the market for electricity production to natural gas, coal, and nuclear. Second, there is a clear shift in the growth in oil demand from West to East. Over the past 20 years, Saudi exports to Asia have grown from one-third to two-thirds of total crude oil exports. This trend is likely to continue, due to both the high growth in consumption and Asia's commitment to oil-based transportation in the future. "We think a most likely scenario is that the actual trend of stable to gradually declining Saudi share of global oil output will continue," Jadwas said. By 2030, if global oil production has grown by 1.4 percent per year and Saudi Arabia continues to capture about 10 percent of global market share, then the Kingdom's output would be around 11.5 million barrels per day, versus today's 9+ million barrels per day. This is not a significant change and still well within Saudi Arabia's existing crude oil production capacity of 12.5 million barrels per day, it noted. As global consumption rises, "we think it likely that Saudi policy will be to maintain a spare capacity cushion that tracks a percent of the global total, rather than a constant fixed number." While potentially producing 11.5 million barrels per day by 2030, "we think Saudi Arabia would also seek to have an unused capacity cushion of 2.5 to 3 million barrels per day at that point as well, reflecting the same percentage of the global market.
