“The world’s largest exporter of oil is consuming so much energy at home that its ability to play a stabilizing role in world oil markets is at stake. Saudi Arabia’s demand for its own oil and gas is growing at around seven percent per year. At this rate of growth, national consumption will have doubled in a decade. On a ‘business as usual’ projection, this would jeopardize the country’s ability to export to global markets. Given its dependence on oil export revenues, the inability to expand exports would have a dramatic effect on the economy and the government’s ability to spend on domestic welfare and services”.
To put it in laymen terms: We are going bankrupt, lest we do something about it.
Reading through the above opening paragraph of a recent study (December 2011) published by Chatham House titled “Burning Oil to Keep Cool: The Hidden Energy Crisis in Saudi Arabia”, I could not help but predict what was about to unfold. You see, for a long time now, forty odd years or more — my country Saudi Arabia was, and still is fully aware of its competitive “dis” advantage: Oil. Whereas once upon a time, the discovery of oil was our national savior and our single source for prosperity, today, and after several failed attempts from our five year national development plans to diversify our economy from, Oil has tragically become our most feared nightmare.
The root of this problem lays in the fact that we have taken this natural God-given resource for granted. Instead of using oil to build our nation, we have made ourselves slave to it. According to some of the key insights showed in the report, Saudi Arabia’s annual energy consumption is growing at double the rate of GDP growth. With high population growth and planned industrial development, growth in power demand will remain high under current policy conditions. The premise suggested by the report is that the longer the problem of low prices is allowed to continue unchecked, the harder it will be for Saudi Arabia to solve. This is evident in other countries that have a long history of holding prices low — Iran, Mexico and Nigeria, for example.
The report begins by highlighting what it believes to be the burning issues at stake for us here in Saudi Arabia. According to Chatham House simulations and based on current local Saudi energy consumption rates and prices, if we continue with our business as usual polices that have given us free access to energy consumption, our ability to export Oil will significantly be limited within the next decade — a fact that will trigger severe consequences domestically since eighty percent of our national budgets depend on oil revenues — Hence our spare production capacity, will be reduced, which in turn will create greater volatility in the world oil markets, and more importantly socio-economic unrest at home.
Next, the report discusses how current Saudi energy policies for cheap domestic oil have not only created a culture of irresponsible consumer habits but it has also given birth to a consequent social contract between government and the people, meaning that if this so called business as usual policy is not altered, it will be almost impossible for Saudi Arabia to reverse these negative trends when hard times demand it — A reality that is hitting home sooner than later.
And finally the report shows that despite the fact that Saudi Arabia is a signatory of the U.N.’s Agenda 21 that commits nations to develop proactive policies to address unsustainable patterns of consumption, including energy, Saudi Arabia has another challenge as it does not have an overarching policy on energy consumption or any inefficient fossil fuel subsidies… a fact that hinders the process of any wishful reform.
Simply put, what the report suggests is that the option of resorting to alternative energies is not a solution for the above predicament, for it only sustains bad consumption habits; instead, the real solution lies in the need to create policies that gradually increase energy prices so that good consumer behavior patterns emerge. Altering energy prices is not only feasible but also successful and the report concludes with examples of some best practices worthy of reading.
The author is president of TLC Consultancy. This article was published in the Arab News on July 6, 2012