Middle East energy demand soaring, matching China

By Margaret Orgill - Analysis

LONDON (Reuters) - Energy demand in the Middle East is growing as fast as in industrial powerhouse China and will help to offset any decline in the United States, the world's top fuel burner, as well as keep prices high.

Although it has only a fraction of the population, huge fuel subsidies and an economic boom fuelled by record oil prices have driven a rapid increase in Middle Eastern energy consumption.

"Middle East energy demand looks as if it will grow at the same rate as China but with 10 percent of the population," said Jeff Brown, managing director of Singapore-based FACTS Global Energy consultancy.

Crude consumption in Asia and the Middle East is forecast to grow by almost 900,000 barrels a day this year, whereas U.S. demand could fall by 400,000 bpd in a pessimistic scenario, said Eduardo Lopez, senior oil demand analyst at the International Energy Agency, energy adviser to developed consumer nations.

"The countries driving demand growth are relatively isolated at this point from any financial crisis the United States may face," said Lopez.

Record oil prices, rather than denting demand in the Middle East, will encourage greater consumption as the flow of petrodollars to the region will continue to stimulate rapid economic growth.

Huge subsidies, which make fuel almost free in many states, remove any incentives for energy efficiency, while environmental arguments for reducing carbon emissions have made little impact in the region.

SUBSIDIES TO CONTINUE

Almost all oil-rich countries will continue to subsidize fuel heavily as they have the funds thanks to soaring revenues but also because the region's authoritarian regimes see cheap fuel as part of a social pact with their populations.

"Cheap fuel is seen as a given right. It is a social bargain for political compliance," said Samuel Ciszuk, Middle East and North Africa analyst at Global Insight.

In Saudi Arabia, gasoline costs 12 cents a liter compared with 68 cents in China, $2.14 in Britain and 86 cents in the United States. nL27166010

The exception is Iran, the world's fourth-largest crude exporter, which recently started to ration subsidized gasoline to control costs and to curb imports.

Iran is different because it has a much larger population than other Middle East states and because of U.S. sanctions it finds it more difficult to import fuel, forcing the country to turn to expensive spot market purchases.

In addition, relying on imported fuel makes the country vulnerable to pressure over its nuclear program.

"Iran is an anomaly in the region. You couldn't see (rationing) happening in Saudi Arabia or Kuwait as they do not have the same geopolitical problems," said the IEA's Lopez.