The OPEC Oil Consumption Cycle and the Dangers of Cheap, Subsidized Energy

OPEC (Organization of the Petroleum Exporting Countries) was created in Baghdad in 1960 as an intergovernmental organization with 5 founding members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.  Since then, other members have come and gone, including Qatar, Ecuador, Indonesia, UAE, Algeria, Nigeria, Angola, and Gabon.

According to OPEC’s site, “OPEC’s objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.”

The following facts about OPEC are taken from Jeff Rubin’s book Why Your World Is About To Get A Whole Lot Smaller (2009) (read my review of Jeff Rubin here).  Rubin brings up some astonishing facts about the OPEC energy situation.  I have to admit much of this is news to me.  I always thought North Americans were the guzzlers of the world – and what about all the rap Americans would take for their SUVs and other gas guzzlers?  Turns out the real guzzlers — of gas, oil and even oil-fueled electricity — are in the Middle East, at least according to Rubin’s analysis.  His point, though, is not to point fingers, but to show how certain is the case that our oil is about to run out faster than we think.

“OPEC is by no means a homogenous group; it is divided by geographic, cultural, historic and religious fault lines.  Yet in countries as disparate as Venezuela, Saudi Arabia, and Iran, there has emerged a common domestic political consensus that their citizens should have an unfettered right to consume as much massively subsidized oil as they desire.  In fairness, that attitude isn’t just found in OPEC.  Where I live, people think similarly about consuming cheap power.  I live only 90 miles away from Niagara Falls, the site of one of the world’s largest sources of hydroelectric power, so I understand how folks feel about oil prices when they lives 90 miles away from Ghawar.”

So You Thought China Was Driving World Oil Consumption? 20 Facts About OPEC Oil Usage

1. Oil consumption in OPEC countries rose from 2004-2007 at average annual pace of 5% (double the world’s pace).
2. In 2007, OPEC plus Russia and Mexico (non-members, but exporters) consumed almost twice as much as China’s 7.5 million barrels a day and at least one million barrels a day MORE than all of Western Europe.
3. OPEC members’ contribution alone to world oil consumption has been almost as great as that of China’s.
4. It’s cheaper, since they own it. When gas prices were $4/gallon for American motorists, gas cost a mere 25 cents on the gallon for Venezuelans, and about 45 cents a gallon for those in Saudi Arabia and Iran.
5. “Drivers in OPEC countries will always see those prices, no matter how expensive oil is trading on world markets.”
6. When the Iranian government tried to raise domestic gas prices in the summer of 2007, motorists rioted in Tehran and gas stations were torched.
7. Iran is the world’s 4th largest exporter of crude oil, but also one of world’s largest importers of gasoline.
8. Iran’s own oil refineries are aging and in need of repair.
9. Iran’s state-owned National Iranian Oil Company operates with huge annual operating losses, subsidized by the government.
10. Chavez’ Venezuela is the world leader in government-subsidized oil consumption both for itself and its political allies.
11. Higher world oil prices actually tend to raise domestically subsidized OPEC oil consumption, since more dollars coming in helps subsidize gas locally.
12. But the more oil consumption grows in OPEC countries, the less they have to export, which causes oil prices to rise even further.
13. By some estimates, as much as 25% of the world’s oil supply is sold to over 50% of the world’s population at well below market prices.
14. Non-OPEC countries like China can’t subsidize their domestic oil consumers because they can’t afford to: they are importers.
15. Saudi Arabia gets half of its total power from burning subsidized oil.
16. Kuwait relies on burning subsidized oil for about 80% of its power.
17. Iraq gets almost all its power from burning subsidized oil.
18. Algeria, Bahrain and Qatar get their electricity completely from burning natural gas.
19. Saudi Arabia plans to triple its electricity production by 2020, and all of that will come from burning more oil sold to the Saudi Energy Company at a mere 7 cents a gallon.
20. Population rates in the Middle East are among the highest in the world, adding tremendous fuel to the subsidized oil consumption fire.

“If you are Hugo Chavez, the oil market is a virtuous cycle, where self-indulgence leads to self-enrichment.  The more you consume of your own oil, the higher the price you get for what’s left to export.”

Oil consumption in OPEC countries often also amounts to subsidized power — “and just as underpriced gasoline is overconsumed, so underpriced electricity is also overconsumed,” explains Rubin.  Saudi households pay about one-tenth what a typical Canadian or American household would pay and about one-twentieth of what they pay in the UK.  Unsurprisingly, “surging power demand growth rates have made the Middle East the highest per capita users of electricty in the world…in Dubai, power consumption is already twice the per capita power consumption in America.”

I guess all that air-conditioning and the world’s largest indoor ski resort (in the middle of a desert!) doesn’t help, either.

I could go on, but the facts get really painful.

Is this the nice tradeoff in place for subsidizing U.S. material goods consumption? The rest of the world buys U.S. debt while the Western world subsidizes crazy Middle Eastern energy consumption.

So what does all this have to do with you, or with your own financial progress? Rubin’s analysis suggests that it is energy consumption which is the real driver of “progress” and “wealth” in the Western world.  Your ability to commute or take public transit to work; the fast-food you eat on lunch break; the diversity of fruits and vegetables on display at your local grocery chain — all of these depend on cheap oil.  The way the world economy is set up today, argues Rubin, it takes money to buy oil and it takes oil to make money.  And according to Rubin, it’s all going to end in the not-so-far future.

When you look at it this way, all the world’s geopolitical (in)stability seems to rest on a fragile network of quid pro quo between the energy producers/consumers and the material goods consumers.  If you ask me, I say it’s plenty time to get out of this mess as much as we can, collectively if possible but individually without a doubt.

Tomorrow I’ll go over one country’s solution to their resources problem: but unfortunately, the solution itself begets another resource problem.

You might also like to read what I recently wrote about this topic:

10 Fast Facts About The World’s Declining Oil Supply and
Where the U.S. Gets Its Oil (can you guess the top 5 countries oil is imported from?)

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Tagged as: Iran, Iraq, Kuwait, OPEC, Organization of Petroleum Exporting Countries, Saudi Arabia, Venezuela