The hydrocarbon bounty held by the six Gulf Cooperation Council countries, Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain, represents one of the world's vital supplies of energy for the coming decades. Global dependence on these resources stems not just from the size of the reserves or the level of production, but from the small populations in these monarchies and their historically low levels of consumption. It is the GCC's large resource per capita that has allowed it to export most of its production and to become a dominant force in international markets.
This story is beginning to change. Rising populations and growing wealth have coupled with low domestic prices to threaten assumptions about the sustainability of GCC exports. At current rates of consumption growth, Saudi Arabia could see oil exports reduced by the end of the decade, much sooner than expected. Peak seasonal consumption in Kuwait is already reducing exports. Oman and Bahrain, the GCC states with the smallest endowments, are in depletion-led decline. (1)
This scenario presents a policy puzzle. Petroleum exports form the bedrock of the GCC political economies. Distribution of oil and gas revenues has cemented near-absolute monarchs in power long after the demise of this form of government elsewhere. (2) Given the vital importance of these revenues, what factors lie behind government policies that encourage domestic consumption of chief exports? How have these policies shaped demand?
With the exception of gas-rich Qatar, these monarchies face an increasingly acute conflict between sustaining exports and maintaining subsidies on electricity, desalinated water and fuels. The era when primary energy was considered nearly free is being eclipsed by one where marginal increases in demand are met by higher-cost resources, either unconventional domestic energy or market-priced imports. For now, governments have absorbed the increased cost and insulated consumers from price signals that might otherwise moderate consumption. This practice only intensifies the call on exportable resources.
The consumption dilemma, coming at a time when opportunity for reform has been constrained by pan-Arab uprisings, presents difficult questions for these regimes. Hydrocarbons help ruling families buy political support, through in-kind domestic distribution; and they provide regimes with economic viability, through export revenues, some of which are also distributed. For the system to continue functioning, resource revenues from the international side of the equation must not be displaced by resource demand from the domestic side.
The choice for regimes is one of short-term political stability versus longer term economic sustainability. As populations rise and energy production reaches a plateau, domestic consumption will gradually displace exports, as has happened in other oil exporting states. Politically difficult reforms that moderate consumption can therefore extend the longevity of exports, and perhaps, the regimes themselves.
This quandary is illustrated in Section 1 by describing the state of primary energy consumption in the Gulf producer countries and the influence subsidized resource distribution. Section 2 examines subsidies' contribution to demand in electricity markets and the mounting cost of keeping pace. Section 3 looks at the equally beleaguered market for natural gas, where fixed prices have exacerbated demand and undercut incentives to increase supply, as the Gulf has transformed into an importing region. The discussion and conclusion examine the implications of shrinking exports and rising fiscal burdens that are symptomatic of maturing resource exporters.
GCC ENERGY CONSUMPTION DYNAMICS
In the past four decades, energy demand in the Gulf Arab countries has undergone a dramatic transformation. At the start of the 1970s, these territories were poor and underdeveloped, with tiny populations emerging from centuries of isolation. Energy consumption in Arabia was less than one percent of global demand. Forty years later, the Gulf monarchies, with just 0.5% of the world's population, consume 5% of its oil. Primary energy consumption in the past decade has grown more than twice as fast as the world average of 2.5% per year. The Gulf's 2001 consumption of 220 million tons of oil equivalent nearly doubled by 2010 and is expected to nearly double again by 2020. Among major oil exporters, only Angola, Algeria and Iraq maintained similar growth (Fig. 1).
Energy demand in the Gulf has escaped notice until recently because of its large reserves, with oil reserves-to-production ratios of 63 years in Saudi Arabia, 79 years in the UAE, 89 years in Kuwait; and, for Qatari gas, more than 100 years (BP 2013). However, with oil production reaching or nearing a plateau, rising domestic consumption will begin to displace exports, regardless of the reserve base, unless production is also increased. Nearly a quarter of GCC oil production is now diverted to domestic use. At the time of the 1973 oil spike, that figure was around 4%.
A remarkable run of rising consumption in Saudi Arabia pushed the kingdom past Brazil and Germany to become the world No. 6 oil consumer in 2009, despite its comparatively small population, economy, and industrial base. (Table 1) In 2011, the kingdom's domestic oil consumption represented lost revenues of more than $80bn, or 13% of GDP, given the average price of Saudi Arabian light crude that year of $108/bbl. (3)
The GCC also represents a major repository of natural gas, but, in contrast with oil, most production is consumed domestically. Only Qatar is a major exporter. The remaining five countries produced 206 billion cubic meters (bcm) in 2012 and consumed nearly all of it, 201 bcm. Overall the GCC held more than a fifth of global reserves, but represented only 6% of global gas demand, which foreshadows difficulties in production, trade and pricing (IEA 2013; BP 2013). The UAE and Kuwait have become net gas importers since 2008 (Fig. 2).
1.1 Consequences of Energy Mispricing
Energy is a key input for industrial development. Most countries increase efficiency as they develop, producing more output from the same input of energy. In so doing, they reduce the overall energy intensity of their national economies, in terms of primary energy consumption per unit of GDP. But in most of the GCC, energy demand is rising alongside energy intensity. (4) In effect, these countries are moving in the opposite direction from most of the rest of the world, growing less economically productive in energy terms (Fig. 3).
Oil exporting countries face depletion at varying time horizons, based on the level of production relative to the size of their resources, and the cost of production relative to the commodity's price. As production reaches a plateau, exports typically drop as domestic consumption rises. Unless an increase in the commodity price makes up for exports foregone, the producer experiences a decline in export revenues as resources sent abroad are gradually displaced by domestic consumption. This trajectory suggests that deriving maximum benefit from natural resources requires careful consideration of domestic use.
Intensity of domestic consumption is a key determinant of the longevity of a country's status as an oil exporter, as Lahn and Stevens (2011) have shown. As domestic consumption outstripped production in China and the United States, for example, these former oil exporters became net importers. Their diversified economies were able to absorb the loss. Oil and gas exporters Malaysia and Indonesia are reaching this stage, and both have significantly diversified their economies for the transition.
How do energy prices figure in this debate? Low pricing encourages consumption at rates above those warranted by the opportunity cost of these fuels on global markets. Low prices also distort energy allocation preferences while undercutting upstream investment and efficiency incentives. Each of these factors has contributed to ongoing shortages of natural gas (Razavi 2009; Darbouche and Fattouh 2011). But the lack of constraints on consumption in the GCC is at odds with its near-total dependence on export revenues. Oil and gas exports typically provide 40% of collective GDP and 80% of government revenues. Such one-sided dependence confers a high value on energy resources that is not reflected in prices.
Converting depletable resource stocks into cash represents a transfer of one type of asset to another. Authors such as Stauffer (1987), Mitchell (2006) and Heal (2007) maintain that these revenues should not be considered income. Sustainable depletion requires conversion of below-ground assets into new forms of above-ground wealth. Heal and Stauffer argue that oil revenues should not even be reflected in GDP figures, since revenues stem from "asset disposal" rather than earnings. Heal contends that a country becomes poorer by spending resource income for any purpose other than capital investment.
By this reckoning, the GCC countries are poorer for not deploying the full investment value of their depleting resource. Much of the Gulf's consumption does not cover cost, let alone create above-ground wealth. Domestic sales of potential oil and gas exports are usually done near the cost of production, rather than at global market prices. Instead of providing income, local consumption thus serves to reduce the state's revenue, either real or potential. Rents are foregone in the failure to sell energy at market prices (an implicit subsidy), and further costs are accrued by below-cost sales of refined fuel and electricity (an explicit subsidy).
Hartley and Medlock (2013) have demonstrated the economic underperformance of state-owned oil companies, finding that national oil companies' social welfare mandates leaves them less revenue-efficient than their shareholder-owned counterparts. In the Gulf region...