The Middle East Shifts Away from Oil Exports

by Tony D'Altorio

The Middle East Shifts Away from Oil Exports

by Tony D'Altorio, Investment U Research

Wednesday, February 9, 2011

For most of the last two years, the oil market ignored the sparks in the Middle East. Traders said there was more than enough to go around, even if supply was disrupted.

But now, as demand hits record levels, the market seems to have finally gotten a clue. Global intake surged by 2.7 million barrels a day in 2010, the second biggest annual increase in 20 years.

Worse yet, consumption is expected to rise by nearly 5 million barrels a day in the 2010-2011 period. That equals over half of Saudi Arabia's current production.

And it isn't just geopolitical risks in Egypt and elsewhere stirring the pot. Like many emerging markets, the Middle East also faces extreme social pressures.

High unemployment and poverty are playing huge roles in the protests across those countries. Its economies have to create enough jobs to absorb their burgeoning population.

Of course, to achieve strong economic growth, they need plenty of energy. So going forward, oil exports from the Middle East could take a tumble...

The Gulf Shifts away from Oil Production... and onto Bigger and Better Things

Due to these mounting pressures, the Gulf region has begun to shift focus away from oil production. Instead, it is increasingly investing in domestic electricity and water developments.

Saudi Arabia, for example, is focusing on power generation and transmission capacity. To keep pace with industrial and desalination needs, it will spend $80 billion over the next eight years.

Darren Davis, managing direction and head of HSBC Middle East's resources and energy group, expects to see much more of that going forward. Already, he sees an increasingly acute power shortage.

"It's less about developing new oil capacity in the Gulf these days," he says, "and more on how to deal with rapidly rising domestic energy demand."

The area's population growth and rising affluence has put pressure on power production, which is mainly needed for air conditioning and water desalination. Those are vital necessities due to the region's scorching sun and lack of rainfall for much of the year.

Meanwhile, energy-intensive industries are rising in the Middle East. And those strain power capacity even further, especially in the summer, when many countries have to burn crude oil to create enough power.

According to a Credit Suisse report last July, the region demanded 3.8% more oil in 2009. Yet total global oil demand fell by 1.7%.

Saudi Arabia's One Million Barrels of Oil a Day and How to Profit from It

Credit Suisse pointed especially to Saudi Arabia. During the peak of the 2009 summer heat wave, the country burned nearly one million barrels of oil per day just to keep its air conditioners humming.

Saudi Arabia sits on a quarter of the world's oil reserves. But its lack of rivers and lakes makes it hard to keep up with rising energy demand, as well as desalinated water for home and industrial use.

Demand for electricity there is expected to rise 8% annually in the years ahead. By 2032, it should triple to 121,000 megawatts.

Senior Saudi official, Hashim Yamani, president of the King Abdullah Atomic and Renewable Energy City, says the nation burns a total of 3.2 million barrels of oil a day. And at the current rate of growth, he warns, the world's largest oil exporter will need 8 million barrels of oil by 2028... just for itself.

Since that roughly equals its current production, large oil consumers like the U.S. will suffer. They'll have to find some other place to buy oil from, as the Middle East consumes most of their own.

Fortunately, the situation looks much less bleak for individual investors. Rising demand in emerging economies, few investments into higher production, and rising domestic usage in the Gulf mean that oil prices will stay up for quite a while.

The United States Brent Oil Fund (NYSE: BNO) makes a great way to play that trend. It is based on a Brent oil futures contract, which reflects the oil market much better than the U.S.-traded WTI oil contract.

And London-traded Brent oil recently went for over $100 a barrel. So buying up BNO on any price pullback looks like a very good idea going forward.

Good investing,

Tony D'Altorio

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