The tectonic plates that bound the Middle East together have started to shift materially. These changes make for volatile times and markets are likely to place much focus in 2013 on regional flashpoints, from tensions between Iran and Israel to domestic upheavals in Syria and instability in the Yemen. However, beneath the geopolitical headlines there are trends that will have far reaching consequences for the fundamentals of oil demand and supply from the region and hence for global oil markets. It is at this level that we concentrate in the two focus pieces of this Middle East Quarterly.
Saudi Arabia, the world's largest oil exporter, has seen domestic consumption of oil and gas increase steadily over recent decades as a consequence of economic development and especially increased use of both fuels in power generation. In 2011, the swing in Saudi Arabian demand from winter lows to summer highs was 0.75 mb/d. This year, that swing was close to 1 mb/d. The increased use of crude has direct implications for the volumes of Saudi crude available for export. Although the Kingdom has the fourth largest proven gas reserves in the world, a change in policy will be needed to free up crude from power generation for export. Even if the target of 15.5 bcf/d of domestic natural is achieved by 2015, it will only partially displace direct crude burn as major discoveries are in the Gulf, far from power generation in the Western and Southern parts of the country, and the Kingdom lacks gas transportation infrastructure.
Thus, for the next few years, liquid fuel consumption by the power sector is likely to continue to increase at a rapid pace. By 2020, we expect the share of gas in the power fuel mix to reach around 40%, which implies that 1.5 mb/d of liquid fuel will be used in power generation. Beyond 2020 however, we expect the growth rate of crude burn to start slowing as the share of gas in the power mix continues to rise and as alternative sources start to enter the energy mix.
We also examine the outlook for Libya, which has surprised many analysts during 2012 with the pace it has returned oil production to close to levels before the overthrow of the Gaddafi regime. However, with exploration yielding few results in the last decade and the political and security situation still fragile, the prospects for Libyan output increasing in 2013 or even over the longer term are far from optimistic. Libyan output may rise to around 1.6 mb/d in early 2013, but we see little prospect of it exceeding pre-revolution levels in the near future.
Many countries across the Middle East and North Africa have been dealing with rapid and fundamental change since the outbreak of the Arab Spring in 2011. For oil producers in the region, both those still led by established regimes and those under new governments, the challenges are remarkably similar. To take advantage of oil prices remaining above $100 per barrel they must keep production levels high and ensure volumes are available for export and not absorbed by domestic consumption at discounted prices. For many countries, including Saudi Arabia, this is no longer about the luxury of accruing large reserves of foreign currency but instead the realities of making budgets stack up.