Posted on 11/24/2015 5:15:41 AM PST by thackney
In downtown Riyadh, SUV-populated intersections and lushly landscaped parks leave little indication that Saudi Arabia is rapidly depleting its oil and water resources. The Saudi predilection for gas-guzzling vehicles and water-intensive leisure spaces is hardly surprising- governmental subsidies have long obscured the true cost of these resources.
Saudis pay about 60 cents a gallon at the pump, which makes the average cost to fill a tank less than $20. Electricity, powered primarily by oil, costs only USD 0.6 per kilowatt hour. Drinking water supplied to Saudi households is so cheap that it is practically free. These low commodity rates are viewed by many as traditional perks of Saudi birthright, and Riyadh has traditionally shied away from raising tariffs and risking public ire. Placating the masses through subsidies and handouts, after all, has been a successful strategy for maintaining the House of Saud's enduring grip on power in a region plagued by uprisings and political volatility. Saudi Oil Minister Ali al-Naimi recently reaffirmed that there is no "dire need" for the Kingdom to cut energy subsidies in response to rumors that Riyadh was discussing adjustments to the subsidy program.
Yet a system of high subsidies is ultimately unsustainable for the Kingdom. Most obviously, the costly system is contributing to a rapid depletion of governmental coffers. With oil prices still slumping, Saudi Arabia faces skyrocketing debt and depleted monetary reserves. Equally important - high subsidies distort the true cost of resources, encourage overconsumption, and foster a public misperception that energy and water supplies are inexhaustible.
Depleting Monetary Resources
The Kingdom's energy subsidy program runs up an annual bill of over $107 billion, or 13.2% of the country's total GDP. This year has seen plenty of additional discretionary spending by Riyadh as well. When King Salman ascended the throne in January, Riyadh doled out $32 billion in handouts as a gesture of goodwill. Saudi Arabia first launched air strikes in Yemen this March, and ongoing military involvement is exorbitantly expensive.
All of these added expenses have steadily hemorrhaged the Saudi national budget at an unprecedented rate, and the rest of the world has taken note. Several weeks ago, Standard & Poor's downgraded the Kingdom's credit rating due to excessive Saudi expenditures and persistently depressed oil prices. After years of healthy budget surpluses from high oil revenues, Saudi Arabia will experience a large budget deficit in 2015 - as much as 20% of the country's GDP. If oil prices fall any lower, that deficit will climb. Even more alarmingly, the International Monetary Fund predicted that Saudi Arabia could completely deplete its fiscal reserves by 2020 if oil prices fail to rebound and high governmental spending continues unabated. If the country does manage to burn through its multi-billion dollar stash of cash reserves, it has only its own negligence to blame.
Depleting Natural Resources
Depleted fiscal reserves aren't the only source of concern for the country - Saudi Arabia is also draining its energy resources, the lifeblood of the country's economy. Domestic oil consumption increases by more than 7% a year, which disproportionately outstrips the population growth rate. The country burns about 25% of its oil on domestic consumption alone, cutting into potential export profits in a challenging energy production environment.
Power demand grows by almost 8% every year, and low electricity prices discourage innovation and investment in energy-efficient alternatives. Tellingly, Saudi Arabia is one of the largest consumers of crude oil for electricity generation in the entire world. Increasing water demand further strains power generation capabilities. The Kingdom depends on desalination plants for the bulk of the country's potable water supply, which require roughly 8 times the amount of energy as traditional groundwater extraction methods.
Domestic energy consumption is so out of control that Citigroup famously estimated that Saudi Arabia could become a net energy importing country by 2030 - an unthinkable demotion for the world's oil kingpin. Even so, the more immediate problem for the Kingdom is a looming water shortage. The World Resources Institute lists Saudi Arabia as one of the world's most water-stressed countries, but the Kingdom continues to consume water at double the average world consumption rate. The effects of never-ending water demand are already apparent. The country's depleted domestic aquifers can no longer support water-intensive agriculture. By 2016, Saudi Arabia will become 100% dependent on foreign wheat imports after years of relative self-sustainability.
Alternatives for the Kingdom
Thus far, the Kingdom has done remarkably little to reduce overconsumption of its depleting resources. Two recent developments are particularly telling, signaling Riyadh's unwillingness to directly confront the subsidy system.
First, Riyadh has attempted to outsource its water shortage by purchasing resources overseas. The Kingdom secured a large swath of fertile Arizona land to grow alfalfa hay for its domestic dairy herds. Purchasing foreign resources remains an option for Saudi policy-makers only if their cash reserves endure. This strategy, however, fails to tackle the underlying problem of overconsumption that led to the country's aquifer depletion in the first place.
Second, the Ministry of Water and Electricity announced plans to double water tariffs for corporations and industries by December of this year. These rates will not impact individual consumers, suggesting that the government is still too afraid of public backlash to charge consumers for the full price.
Saudi Arabia must tackle its issues of overspending and overconsumption more aggressively by cutting dependence on governmental subsidies. Continued subsidization encourages overconsumption of resources, reduces incentive for energy-efficient innovation, and rapidly depletes national savings. The situation in Saudi Arabia may not yet be "dire," as al-Naimi asserts. In the current oil price environment, however, Saudi Arabia should be more concerned about preserving its resources than preventing public disapproval. Otherwise, those luxury SUV sales and grassy parks might not last much longer.
They’re less than a generation away from going back to being the nomadic tribesmen they always were.
> Electricity, powered primarily by oil, costs only USD 0.6 per kilowatt hour.
I think the author neglected to move the decimal point. 60 cents per KWH is no bargain.
Author probably meant .06 because .6 is YYuuuge. Around me electricity is around .13 per KWH for home and .08 for commercial. That's just electricity cost, no taxes, accounting fees or overage penalties are included.
Energy cost are a drop in the proverbial bucket for the house of Saud.
Saudi welfare & export of wahabbiism is where the real costs are. Do Saudi’s work, or is everything done by foreign workers in the country?
“Do Saudi’s work, or is everything done by foreign workers in the country?”
Very few Saudis do blue collar work. That is done by a lower caste of Muslims imported from places like Bangladesh.
My daughter had to tutor some Saudi exchange students while she was in college. She found them to be mentally incapable of holding a job.
am surprised that so much oil is burnt for power generation. I would have thought natural gas would be the main source of power, so they could export the oil which is far more easily done.
Guess they do not have as much gas resources as believed, otherwise it is a no-brainer.
They have been growing their Nat Gas production and power generations somewhat. But Saudi Arabia does not have a surplus of Nat Gas.
“They have been growing their Nat Gas production and power generations somewhat. But Saudi Arabia does not have a surplus of Nat Gas.”
They sure are slow about it. I recall my brother being in Aramco in 1979 and worked Safaniyah(at the time the largest offshore oilfield in the world and producing 3 mmbod) commented to me that 100% of the natural gas was flared.
The only processing they had was some huge GOSPs onshore that separated oil and gas. Zero water was produced. Instead of treating the water to remove it, they simply shutin the offending well.
There was no testing of wells either. His whole charge was to determine via pressure measurements downhole and on the lines how much each well was making. Aramco did not know if a couple of wells were making all that oil.
In the 70’s, that excess flaring was done in a lot places.
Do a search on Arab or Middle East consanguinity for some of the reasons why.
“My daughter had to tutor some Saudi exchange students while she was in college. She found them to be mentally incapable of holding a job.”
Because their culture knows almost nothing about hard work, planning, sacrifice, etc. Most modern Saudis believe they should be managers - the people running things - whether they’re qualified or not. http://www.arabnews.com/columns/saudi-youth-issue-unemployment-and-work-ethic
Which goes to show that many 'analysts' are not worth the cost of a bullet to put them out of our misery. Domestic energy consumption is based on the artificial economy of all the petrodollars being flushed into the system to keep the thugs in the House of Saud in charge. If the internal market in the country comes so unhinged that oil is no longer a net positive contributor to the economy, then any "growth", which everyone knows is completely artificial, will come crashing to a halt.
The fall of the House of Saud will be bad news for America, as we've been propping them up for decades. I strongly suspect their subjects will not be shouting words of praise to the United States, as the heads of the 'sheiks' roll down the streets.
With a bloated population they will never be able to aupport on their own.
The Kingdom secured a large swath of fertile Arizona land to grow alfalfa hay for its domestic dairy herds.
interesting - wonder where the water to grow the alfalfa- is coming from - is Arizona not in a drought
Maybe in the short-run, but a lot of funding for Islamic terror has come from them.
They purchased farms with water wells and are dragging down the area aquifer levels.
Saudi Hay Farm In Arizona Tests State’s Supply Of Groundwater
http://www.npr.org/sections/thesalt/2015/11/02/453885642/saudi-hay-farm-in-arizona-tests-states-supply-of-groundwater
“They got about 15 water wells when they purchased the property. Now, each one of those wells can pump about 1.5 billion gallons of water. It’s an incredible amount of water they’re going to be drawing up from that aquifer underground,” Halverson says.
The land in question had previously been under cultivation for corn, cotton and other crops, including smaller amounts of alfalfa for hay, he tells The Salt. Halverson’s sources told him that the farm is now consuming significantly more water, since alfalfa is a particularly thirsty crop.
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