The rapid growth of domestic oil consumption in Saudi Arabia and the opportunity cost of oil exports foregone

Abstract

We analyze the rapid growth of Saudi Arabia's domestic oil consumption, a nine-fold increase in 40 years, to nearly 3 million barrels per day, about one-fourth of production. Such rapid growth in consumption - 5.7% annually, which is 37% faster than its income growth of 4.2% - will challenge Saudi Arabia's ability to increase its oil exports, which are relied upon in long-term world oil projections by the International Energy Agency (IEA), US Department of Energy (DOE) and British Petroleum (BP). However, these institutions assume unprecedented slowdowns in Saudi oil consumption - from 5.7% annual growth historically to less than 2% in the future - allowing them to project increases in Saudi oil exports. Using 1971-2010 data, we estimate that the income responsiveness (elasticity) of oil consumption is at least 1.5-using both Ordinary Least Squares regression and Cointegration methods. We believe that continued high growth rates for domestic oil consumption are more likely than the dramatic slowdowns projected by IEA, DOE and BP. This will have major implications for Saudi production and export levels. © 2012 Elsevier Ltd.