The oil market is very well supplied at the moment. Supply is exceeding demand, which allows inventories to accumulate (serve as a cushion for future shortages), thanks to the growing production of crude oil in America (USA, Canada, Brazil, Guyana, Argentina…). Furthermore, within the Organization of the Petroleum Exporting Countries (OPEC) there is a large cushion of idle production as a result of the cartel’s cuts. As if all the above were not enough, Saudi Arabia and Iraq have a plan to flood the oil market without the need to produce a single drop more crude oil. How can you achieve something that at first glance seems impossible? Although it may seem contradictory, this plan has a very simple explanation: both Riyadh and Baghdad are going to reduce the burning of domestic oil (to produce energy) with the aim of being able to export much more oil.
The term flooding is frequently used in the oil market to refer to a situation in which producing countries drastically increase exports, lowering prices, thus ‘flooding’ the market in question. In this case, the flood would not be due to an increase in the production of the countries that pump crude oil, but rather due to a sharp decline in the internal demand of these producers, which will allow them to export much more oil to a market that is already well supplied.
Better to sell oil than burn it
Currently, both Saudi Arabia like Iraq and other OPEC countries use large quantities of oil to produce electricity. It seems logical that these countries use their large resources to generate the energy that is consumed domestically. However, Saudi Arabia and Iraq have realized that it is much more profitable to export this oil (whose prices on the international market are expensive) and look for other methods domestically to produce energy. In this way, if Saudi Arabia and Iraq combined produce about 13 million barrels of oil every dayas these new energy generation plans gain traction they will be able to export more of their production.
This was evident in the latest report from the International Energy Agency (IEA) on future forecasts for oil. “Saudi Arabia and Iraq have ambitious plans to reduce oil use in energy generation contribute in a transcendental way to controlling the growth of global oil demand,” the IEA points out. On the one hand, Saudi Arabia and Iraq will be able to export more oil at the same time that their lower demand will impact global consumption. of crude oil.
“It is estimated that the countries of the Middle East They used more than 1.5 million barrels of oil per day to produce electricity in 2023 (only to produce electricity), around 40% of the world’s total and one sixth of the total regional oil consumption,” the IEA states. These countries are rich in oil, but the use of this raw material to produce energy It is a real ‘waste’ in economic terms, since electricity can be generated with much cheaper energy sources. Using oil to provide electricity to homes is like trying to light a bonfire with gold bullion (in case). these were good fuel). For this reason, several countries in the region have begun to invest to modify their energy mix and be able to ‘inject’ new crude oil into an increasingly competitive international market (China, USA, Guyana…).
Fuel oil and direct burning of crude oil each accounted for around 600,000 barrels per day. Much of this is concentrated in Saudi Arabia and Iraq, where it plays a crucial role in managing peak summer electricity demand. “We estimate that this substitution of energy sources, focused on new gas and solar capacity, will reduce the amount of oil used in generation by 1.1 million barrels per day by 2030“.
That is, simply with greater energy generation at through renewables (especially solar), nuclear and gas burningthese countries will add 1.1 million barrels of crude oil per day to the market, almost the amount of oil that all of Spain consumes every day. To the above we should add Iraq’s plans to increase its crude oil production, something that is not analyzed in this article, but that will undoubtedly have an amplifying impact.
Fill the desert with solar panels
Saudi Arabia is currently the world’s largest consumer of oil for power generation, but has announced plans that would end this dependence by 2030 in favor of natural gas and renewable energy (especially solar energy, putting plates in the sunny desert). . The Kingdom’s Liquid Fuel Displacement Program would eliminate approximately one million barrels per day of crude oil, fuel oil and gasoil use through a combination of domestic gas resources, particularly from the Jafurah project, and a huge increase in renewable energy generation, according to IEA projections.
Based on these plans, “we estimate that the direct burning of crude oil will be reduced by 500,000 barrels per day between 2023 and 2030, while the use of fuel oil and diesel will fall by 350,000 and 150,000, respectively. The country has set a goal that 50% of electricity comes from renewable sources by 2030, with a goal of 130 GW of renewable capacity,” they point out from the IEA.
Despite substantial growth in other sectors, sSaudi Arabia’s total domestic consumption is expected to fall by 530,000 barrels per day (14%) between 2023 and 2030. Only the United States will see a steeper decline in absolute terms between 2024 and the end of the decade. These two countries, the world’s leading oil producers, will record the largest drops in demand. It is paradoxical that the two largest oil producers in the world will be the ones to reduce their demand for crude oil the most. In the case of the US, the electrification of the automobile fleet (led by Tesla) will have a lot to do with it.
The curious case of Iraq
The case of Iraq is less relevant due to its lower aggregate impact, but it will also be noted. Iraq’s power grid has been under strain in recent years due to a variety of factors. Power plants have struggled to meet rising summer demand, even with electricity imports from neighboring countries. Currently, the country receives both electricity and gas from other nations, especially Iran.
Besides, The agreement by which Iraq receives Iranian gas was extended for five years in March 2024meaning that domestic generation and new imports from other sources can be used to fill the gap with demand and reduce oil consumption. Burning oil to produce electricity is an ‘economic waste’ that is also very polluting. Why produce electricity with expensive oil when you can produce it with gas or the sun’s rays? This is Iraq’s plan, to import cheap gas from Iran to sell more of its own oil.
The country burns on average about 150,000 barrels of crude oil each day and about 360,000 barrels of fuel oil (also made from petroleum), but began reducing crude oil used in power generation in May. Furthermore, with technological support from the United States, Iraq intends to capture the gas associated with its large fields, which is currently burned in oil fields, for energy generation. Additionally, TotalEnergies is working on projects to develop new gas and solar energy resources within the country.
“We estimate that these changes will result in a reduction of 120,000 barrels in direct burning of crude oil by 2030. These changes would be enough for oil demand from Saudi Arabia and Iraq to peak in the middle of this decade, comfortably ahead of global demand as a whole,” the IEA explains.
But the best of all for these countries is that the oil that they will not use to produce electricity can be sold abroad to increase their export income. This is also highlighted by the IEA in the final part dedicated to the transformation that energy generation is undergoing in these countries: “In the transformation process, substantial additional volumes of crude oil would be available for export”.
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