MENA nations face rising demand and over-reliance on oil revenues

06 June 2011 12:20  [Source: ICIS news]

By James Dennis

An oil pump in OmanKUALA LUMPUR (ICIS)--Recent political developments in the Middle East and North Africa (MENA) have ushered in a new era but governments are facing an increased reliance on oil revenue and rising domestic demand, a leading academic expert said on Monday. 

“The pressures in the MENA region have been there for a long while, but the timing came as a surprise,” Dr Bassam Fattouh, of the Oxford Institute for Energy Studies, told delegates at the 16th Asia Oil and Gas Conference (AOGC).

Political uprisings have served to end the notion of “Arab exceptionalism” the belief that people in the region did not have a strong desire for the freedoms enjoyed elsewhere in the world, he said

Events in the region have already had a big impact on oil markets. The protests in Tunisia back in December 2010, the overthrow of President Mubarak in Egypt, the day of rage in Bahrain and the Libyan crisis have all contributed to pushing prices back to levels last seen in 2008.

The ultimate outcome of events in the MENA is hard to predict, with uncertainty likely to be more prolonged than hoped for, Fattouh said, asking: “Will there be greater integration or more segmentation in the region?”, noting the ongoing civil war in Libya.

Fattouh said the response by MENA governments to unrest had not been satisfactory, with a combination of repression, handouts and increases in expenditure.

Saudi Arabia, for example, is now spending more than 25% of GDP on social programmes including building new homes and on unemployment benefits. There has also been an increasing reliance on oil revenues, and a reduction in percentage contribution of non-oil revenues to GDP.

Meanwhile, there has been a slowdown in investment and future production in OPEC nations. High growth production potential in the Middle East is really confined to Saudi Arabia and Iraq. However, he believes that projected Iraqi oil production capacity to 2030 of around 10m bbl/day was overly optimistic.

Historically, output disruptions such as the one in Libya have had a long term negative impact on production. He noted that production in Iraq and Iran has yet to be restored to levels prior to the major upheaveals in those nations.

Commenting on growing demand in the region, Fattouh said “The MENA region should no longer be analysed from the supply side only. The region has become an important centre for growth in energy consumption and will continue to do so.”

The regions share of global oil consumption increased from 3% in 1980 to 9% in 2009. Meanwhile, gas consumption rose from 3% to 14% over the same period.

The region has the cheapest energy prices in the world and is the most intensive user of energy in the world per capita, he added.

“The rapid growth in energy consumption could be explained by rapid population growth and improvements in living standards, but more importantly by economic policy and pricing policy.”

Fattouh said the region faces a demographic and employment challenge. For example in Saudi Arabia, 60% of the population is below the age of 30. Meanwhile, unemployment remains high with official data indicating the unemployment rate amongst Saudi citizens in 2009 around 10.5%.

Current uprisings will make the situation in the region worse at least in the short term by delaying pricing reforms and the development of strategies to diversify the economy in the region, he concluded.

By: James Dennis
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