otherwise be exported.
At at a time when each barrel of oil produced and exported by the kingdom is being watched by oil market hawks as EU sanctions against Iran loom, the impact of the anticipated rise in Saudi domestic consumption in the coming high demand summer months has taken on an added dimension.
Because Saudi Arabia holds nearly all the world's available spare production capacity, every barrel counts in a market that is bracing for a potential supply disruption from Iran once the EU sanctions come into effect on July 1.
The small volumes lost already from Syria, Yemen and South Sudan do not even make up half of the total amount that independent analysts say Saudi Arabia will burn in the summer, when demand for electricity soars.
With the US looking to the OPEC kingpin to boost its output and help to cool oil prices, the kingdom's role as traditional market swing producer is crucial should the twin US and EU sanctions result in the loss of some 400,000 to 800,000 b/d of Iranian crude oil, as some analysts estimate.
Barclays Capital said in a March report that Saudi Arabia has been caught in the middle of what has become a highly politicized issue in the US as oil prices have risen steadily since the start of the year.
"One complicating factor is Saudi Arabia's own seasonal demand for crude oil for power generation during the Saudi summer," Barclays said, adding that Saudi Arabia's direct burning of crude oil peaked above 800,000 b/d last August, excluding distillates that were also used for power generation.
"The swing up in total Saudi oil demand from a base of March to July amounted to almost exactly 750,000 b/d. So, in other words, if Saudi output really were to remain the same from this point, and were the seasonal pattern in Saudi demand to be the same as in 2011, then the availability of Saudi oil exports to the international market will fall by some 750,000 b/d by July," it said.
A release of oil from strategic reserves might provide some relief to markets but a protracted high level of consumption by Saudi Arabia during the summer would require the kingdom to raise output from an estimated 10 million b/d currently to 10.8 million b/d in order to hold exports constant, and "then spare capacity would be extremely limited."
Saudi Arabia says its total production capacity is 12.5 million b/d, which Oil Minister Ali Naimi said last month could be brought on immediately should the market need it. He has said repeatedly that the kingdom's policy is to maintain spare output capacity of 1.5-2 million b/d at all times to cope with emergency shortfalls.
However, should the Saudis raise output to 10.8 million b/d to accommodate higher seasonal consumption, it would leave the world with spare sustainable capacity of less than 1 million b/d, Barclays said.
The London-based Chatham House think tank went further in December last year, saying that Saudi Arabia's place in the world market was threatened by "unrestrained domestic fuel consumption," which it added was unsustainable.
"The world's largest exporter of oil is consuming so much energy at home that its ability to play a stabilizing role in world oil markets is at stake," Chatham House warned in the report entitled "Burning Oil to Keep Cool, the Hidden Energy Crisis in Saudi Arabia.
"Saudi Arabia's demand for its own oil and gas is growing at around 7% per year. At this rate of growth, national consumption will have doubled in a decade," its authors said.
Saudi Oil Minister Ali Naimi and Saudi Aramco CEO Khalid al-Falih have both admitted that high domestic consumption in the kingdom, where fuel costs to end users and industry are subsidized heavily, should come down and have warned that export volumes will fall in the future without action. However, they dispute the figures cited by analysts.
Falih, in an interview with Platts last December, said the average volume of liquid fuels burned for power generation was closer to 500,000 b/d, including some diesel, fuel oil and crude oil.
"Today if you look at our total energy consumption in barrels, oil equivalent (boe), it is in the range of 4 million boe/d, give or take a couple hundred thousand," he said in the interview. "I believe that what I said was that consumption will double by 2030 to 8.2 million boe/d if we do absolutely nothing."
But, Naimi argued recently, the government is taking action and exploring other options to meet local energy needs, including investments in solar energy projects, expanding its natural gas production, tapping shale and tight gas reserves as well. It is also taking energy efficiency measures.
Speaking at Chatham House in January this year, Naimi made what appeared to be a direct response to the afore-mentioned report, saying: "Warnings last year about what would happen to Saudi oil exports if current levels of domestic usage were left unchecked were taken as fact. But we are not leaving domestic energy consumption unchecked. I would like to state for the record here in London, that the kingdom will continue to be a reliable, steady and dependable supplier of energy to the world. Saudi Arabia's domestic growth will not impact on exports now or in the future. Of this, I am very confident."
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