Javier Blas: "Saudi Consumption — Not Production — Is Key to Peak Oil"

That's an interesting thesis, especially in light of last week's report from the International Energy Agency. 

First up, Bloomberg, June 16:

The kingdom’s staggering use of crude in electricity generation makes it critical to oil demand’s decline in the 2030s. 

The Shoaiba power plant, a sprawling complex of giant boilers and towering chimneys, is the improbable ground zero of the forces reshaping the energy market. Located in Saudi Arabia, it’s the world’s largest oil-fired electricity generator. At its peak, it gulps about 200,000 barrels a day, more than enough to meet the daily consumption of a small European nation like Portugal1.

If global oil demand is to peak within the next five years, as the International Energy Agency just predicted, it will require more than mass adoption of electric vehicles. Ironically, Riyadh will have to slash its own use of its homemade power source, making the Shoaiba and similar power plants the stuff of yesteryear.

The staggering amount of oil the Saudis consume – 3.7 million barrels a day, the world’s fourth most, behind only the US, China and India — means the kingdom would play a key role in shaping demand to 2030, potentially accelerating peak consumption – or delaying it

In its latest projection, released last week, the IEA forecast that Saudi oil demand would see the second-steepest decline in absolute terms between now and the end of the decade, falling by more than 500,000 barrels a day. Only the US, thanks to work-from-home and more efficient gasoline and diesel vehicles, in addition to EVs, would see an even larger drop

Put succinctly, global oil demand can only peak in 2030 if Saudi Arabia plays ball, embarking in a massive oil-saving program. If it doesn’t, the global numbers don’t add up.

The kingdom, a nation of roughly 35 million, needs lots of electricity to power air conditioning during its sweltering summers and to desalinate sea water4. The power-and-water sector accounts for about 25% of total Saudi oil consumption, a global oddity: The rest of the world largely stopped using crude for power generation after the 1970s oil shocks made the fuel prohibitively expensive.

But oil is, of course, cheap in the kingdom, and the Saudis often burn it directly in power plants, without first refining it into diesel or fuel oil. It’s an inefficient and filthy system, but it works, particularly during the summer when the Saudis need to boost electricity production sharply at short notice. At its seasonal peak, typically in late August and early September, Saudi Arabia burns about 1.4 million barrels a day of unrefined crude and fuel oil in its electricity plants — that’s equal to the total oil daily consumption of France....

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And from the IEA, June 12:

Slowing demand growth and surging supply put global oil markets on course for major surplus this decade
New IEA medium-term outlook sees comfortably supplied oil markets to 2030, though unwavering focus on energy security will remain crucial as powerful forces transform sector

Growth in the world’s demand for oil is expected to slow in the coming years as energy transitions advance. At the same time, global oil production is set to ramp up, easing market strains and pushing spare capacity towards levels unseen outside of the Covid crisis, according to the IEA’s new oil market outlook.

Oil 2024, the latest edition of the IEA’s annual medium-term market report, examines the far-reaching implications of these dynamics for oil supply security, refining, trade and investment. Based on today’s policies and market trends, strong demand from fast-growing economies in Asia, as well as from the aviation and petrochemicals sectors, is set to drive oil use higher in the coming years, the report finds. But those gains will increasingly be offset by factors such as rising electric car sales, fuel efficiency improvements in conventional vehicles, declining use of oil for electricity generation in the Middle East, and structural economic shifts. As a result, the report forecasts that global oil demand, which including biofuels averaged just over 102 million barrels per day in 2023, will level off near 106 million barrels per day towards the end of this decade.

In parallel, a surge in global oil production capacity, led by the United States and other producers in the Americas, is expected to outstrip demand growth between now and 2030. Total supply capacity is forecast to rise to nearly 114 million barrels a day by 2030 – a staggering 8 million barrels per day above projected global demand, the report finds. This would result in levels of spare capacity never seen before other than at the height of the Covid-19 lockdowns in 2020. Spare capacity at such levels could have significant consequences for oil markets – including for producer economies in OPEC and beyond, as well as for the US shale industry.

“As the pandemic rebound loses steam, clean energy transitions advance, and the structure of China’s economy shifts, growth in global oil demand is slowing down and set to reach its peak by 2030. This year, we expect demand to rise by around 1 million barrels per day,” said IEA Executive Director Fatih Birol. “This report’s projections, based on the latest data, show a major supply surplus emerging this decade, suggesting that oil companies may want to make sure their business strategies and plans are prepared for the changes taking place.”

Despite the slowdown in growth, global oil demand is still forecast to be 3.2 million barrels per day higher in 2030 than in 2023 unless stronger policy measures are implemented or changes in behaviour take hold. The increase is set to be driven by emerging economies in Asia – especially higher oil use for transport in India – and by greater use of jet fuel and feedstocks from the booming petrochemicals industry, notably in China. By contrast, oil demand in advanced economies is expected to continue its decades-long decline, falling from close to 46 million barrels per day in 2023 to less than 43 million barrels per day by 2030. Apart from during the pandemic, the last time oil demand from advanced economies was that low was 1991....

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So, will slowing demand growth result in lower international prices?

That is, will the still-positive growth be met? And if so would the Saudis still make the shift to natural gas or just burn their depreciating oil reserves.

The Kingdom has an unspoken objective to produce every drop of the goo that they can and in fact would seem to want to be the producer of the last drop to be consumed by burning sometime this century.

(petrochemicals are a different story and will most likely be produced into the 2100's)