During the next decade, the Middle East will contribute about 25% of total global oil-demand growth, second only to China (52%), according to Deutsche Bank AG.

The major drivers for demand growth are strong population increases and a huge “youth bubble”; rapid GDP growth but rising unemployment and urban poor; high car penetration; and strong oil-demand growth subsidized by major oil producers.

Senior analyst Paul Sankey notes that the Middle East’s oil consumption matches China’s and is growing almost as fast. The oil intensity of both populations (oil demand per capita) and economic growth (oil-demand growth versus GDP growth) are high and not notably falling. The demand-growth profile is unique, due to the combination of massively subsidized fuel in all but a few Middle Eastern markets. Dominant economies Saudi Arabia and Iran heavily subsidize local oil prices.

Barring revolutions or wars, Middle Eastern oil demand is pro-cyclical—it rises faster with higher oil prices, as high oil prices drive more oil-intense economies, attract more immigrants and make subsidies more affordable. Also, there is a high car ownership proportion across the region, with Saudi Arabia at 40% vehicle ownership and Iran’s second-largest industry being its car industry.

Fast-growing populations (>2% region-wide), strong GDP growth, high car penetration and subsidized prices will combine for sustained demand growth, according to Sankey. The company expects 3.5% annual growth in gasoline demand through 2020, and 2.5% annual growth in total Middle Eastern oil demand, with both projected to be under upward pressure.

The downside risk to the youth bubble is enormous, notes Sankey. Young growth populations are increasingly urbanized, unemployed and poor. Nearly 750,000 young Iranians join the workforce every year, and official unemployment is nearly 12%, with unofficial estimates closer to 25%. Volatile conditions in major cities make the removal of oil subsidies an extremely difficult and challenging undertaking—such actions did not end well for Indonesian president Suharto, he noted.

Saudi Arabia has similar demographic issues, but with so much oil relative to its own consumption, domestic oil prices will remain subsidized and power- generation-capacity growth will be oil-fired.

Sankey says these themes strongly support Deutsche Bank’s thesis that the negative impact of government ownership of remaining oil reserves on oil supply, combined with major demand growth from emerging econo­mies, will force oil markets to ration demand through high prices.

With price and currency distortions in major growth drivers such as China and the Middle East, and with high taxes in Europe and Japan, Deutsche Bank views U.S. oil demand as the price rationing point, at around $4 per gallon gasoline, or $150 to $200 per barrel of oil—a spike the bank expects during the next five years.

Comments