The Energy Boom that Might Boomerang:

No day passes by without news from the Middle East about a mega-energy project, not only in oil and gas, but also in solar, nuclear and energy efficiency. Headlines about “reserves wars” are just sideshows, but they get the attention of the world press more than other, “serious” news. Some countries have already taken the initial steps to build nuclear power plants. Several solar contracts are already a done deal. Abu Dhabi has taken serious steps by spending billions of dollars on Masdar, the Abu Dhabi Future Energy Company, which focuses on renewable energy and clean technologies. Among the recent news items from Saudi Arabia are the creation of King Abdullah City for Nuclear and Renewable Energy in Riyadh, the King Abdullah Petroleum Studies and Research Center, and the National Center for Energy Conservation.

The problem. Booming population, massive urbanization, enormous government spending on infrastructure projects, economic growth and increasing incomes have all led to an unprecedented increase in energy consumption in the region, especially in the oil producing countries, which have benefited from high oil prices in recent years. In fact, growth in energy consumption in some of these countries has been consistently higher than economic growth. Petroleum products shortages, blackouts and brownouts are very common in the summer months, even in the richest countries in the region.

The top 10 countries globally that experienced the highest percentage increase in oil consumption in the last 20 years include Kuwait, Qatar and Saudi Arabia—with Kuwait first in the world, followed by Qatar (China and India are third and fourth, respectively). Oil consumption in the Middle East region doubled between 1990 and 2009. Oil consumption in Saudi Arabia increased by 123% during the same period, while it increased by 83% in the United Arab Emirates and Iran. To put these percentages in perspective, oil consumption in Europe and Eurasia decreased by 17% during the same period, while it increased by only 13% in North America, according to the BP Statistical Review of World Energy.

This large increase in energy consumption has already resulted in reductions of oil exports and will continue to do so in the foreseeable future. Power shortages have exacerbated the problem and reduced oil exports further through three channels:

1. Power shortages increased crude oil consumption. Some countries are burning additional amounts of crude oil in power plants to avoid blackouts in the hot summer months.
2. Power shortages increased private generation, which in turn increased the consumption of diesel.
3. Power shortages increased gasoline consumption: The brownouts and the blackouts are forcing families in some towns in the Persian Gulf region to seek shelter from the smothering heat in their air-conditioned cars. They keep driving until the power comes back.

Energy shortages and declining oil exports are expected to become worse in the coming years, and the whole world might pay for it in the form of higher oil prices. This energy boom in the oil producing countries will “boomerang” if it results in lower oil exports and substantially high oil prices around the world. Such high prices will not only lower global oil demand, but they will also empower policy makers in the consuming countries to go the extra mile to reduce dependence on oil.

The solution. Politicians and policy makers in the Gulf region have realized that to maintain political and social stability, they have to meet the growing energy demand and maintain their oil revenue-dependent government programs, a formula that is difficult to balance. But survival on one hand and the desire to develop their countries on the other hand will help them overcome these difficulties. The interests of politicians and policy makers have coalesced with the interests of the national oil companies, which see a bleak future if their oil exports decline as their production shifts to meet subsidized domestic consumption. In this context, the participation of the national oil companies in various renewable energy projects and energy efficiency programs is no surprise.

Politicians and policy makers realize that despite huge oil and gas reserves, increasing dependence on oil and gas is not the solution to political and social instability and not conducive to economic growth. They believe that natural gas is more valuable for other purposes than to be burnt in power plants, especially if used to diversify their economies and create added value in their industrial sectors. They believe that the use of oil in power plants will eventually lead to lower oil exports and lower oil revenues. Therefore, other energy sources must be used. They favor solar and nuclear. Hence all the news about mega-energy projects in the region, especially in Abu Dhabi and Saudi Arabia.

Saudis have realized that energy diversification is not enough; therefore, they have embarked on a mission to improve energy efficiency. To make energy efficiency a top priority, the cabinet of ministers in early November approved the creation of an independent center for energy conservation with the sole objective of improving energy efficiency. Evidence of energy wastage in the Gulf region abounds, but it remains to be seen how those countries can improve efficiency when energy prices are subsidized. Some experts believe that the creation of the center in Saudi Arabia was the first step to reduce subsidies or eliminate them altogether in the coming years.

To conclude, the increase in energy consumption in the oil producing countries is a double-edged sword: It increases world demand on one hand and reduces oil exports on the other. All current proposed solutions take time, and in the short term, reduction in oil exports in the summer months is inevitable