High stakes of energy conservation in Saudi Arabia
Last year, in a series of articles in Arab News I pointed out some of the risks involved in escalating oil consumption in Saudi Arabia (“Saudi oil: the threat from within” March 10, 2012; “Solutions for runaway oil consumption,” March 17, 2012; “Will Saudi Arabia become an oil importer?,” Sept. 9, 2012).
Saudi Arabia has by far the highest per capita oil consumption in the world. It consumes about four million barrels a day or (1.5) billion barrels per year. This translates into (48) barrels a year for every man, woman and child. By comparison, the United States per capita consumption is about (9) barrels a year and Japan’s is (5) barrels. In other words, Saudi Arabia consumes oil, per capita, at a rate of over five times the US and nearly ten times as much as Japan.
The cost of this waste is staggering: At $ 100 a barrel, domestic consumption is depriving Saudi Arabia of nearly ($ 150) billion of foreign earnings. Opportunity cost is equivalent to 20 percent of its annual budget.
The situation is certainly alarming, but not hopeless. There is a lot that can be done, as most countries have since the 1970s, when the first price shocks changed the way we looked at oil scarcity. Major oil producing nations did not suffer those shocks, and did not have to go through the same stringent conservation requirements as oil importers did. That experience led to profligate energy usage among oil producers, which now realize how such waste is depriving them of resources they could put for better use.
High rates of consumption are especially surprising since Saudi Arabia is not a highly industrialized economy. It turns out that the two main sources of energy waste are housing and private transportation, not industry.
According to officials, housing uses up nearly 80 percent of all electricity produced in the country, 70 percent of which is used for air conditioning alone. Over-consumption is due to two factors. First, the law sets very low standards for energy efficiency in cooling systems and appliances. Second, while building codes suggest insulation standards, they are not binding, only suggestions, and as such most houses lack efficient insulation. Many have no insulation of any kind, since there is no financial incentive, or a legal requirement, to conserve energy.
The second most important source of energy is in private transportation. There are about 10 million passenger cars in the country, the number growing by about 5 percent annually. With the growth in the number of cars, and no restrictions on fuel efficiency, their fuel usage is growing. Saudis’ preference for gas guzzlers is fueled by incredibly cheap gasoline prices. Regular gasoline sells for (12) cents a liter (47 cents a gallon), while premium sells for (16) cents a liter (61 cents a gallon).
Because of cheap and abundant energy, Saudi Arabia has not developed mass transit systems. It relies mostly on private cars, not public transportation to move residents to their places of work, schools, shopping and entertainment. That applies to both city travel as well as travel between cities, towns and villages. There are only a few bus lines, even fewer trains. Air travel is popular, but expensive and infrequent, except between the three largest cities (Riyadh, Jeddah and Dammam). Building public transportation systems could help reduce consumption, but it has to be efficient, fast and state-of-the-art to attract Saudis. Slow and low-quality bus and train systems would likely fail to reduce Saudis’ reliance on passenger cars.
In the meantime, Saudi Arabia needs to set strict fuel efficiency standards for cars to reduce oil consumption in private cars and phase out inefficient cars already in use.
There is much that can be done to improve electricity production efficiency. Currently contemplated plans for upgrade and modernization of aging power plants need to be sped up. Unfortunately, since power producers have to pay only a fraction of the international price for diesel, there is little financial incentive for them to modernize their production.
We reach the unpleasant conclusion that no conservation program could work well without rationalization through the price mechanism, the tool favored by economists. For with such ridiculously fuel prices, there is very little chance of any campaign to reduce consumption. Only through raising the price would industry and individuals be forced to reduce their fuel consumption. The experience of other countries shows that to be the case. Before 1973, energy consumption was growing at a rate of over 3 percent annually with no signs of slowing down. However, following the price shocks of the 1970s, consumer behavior changed drastically, aided by stringent regulatory environment in all industrialized countries. Strong conservation and environmental lobbies added to the price pressures and allowed governments to impose extremely high taxes were imposed on oil derivatives, to discourage consumption further.
In a step in the right direction, Saudi Arabia established the Saudi Center for Energy Efficiency in October 2010, to develop the tools necessary to combat uncontrolled oil consumption in the country. For example, it has developed programs to improve energy efficiency in new housing projects. It also seeks to improve efficiency in existing housing as well.
In February 2013, the SCEE signed several agreements with a number of government and private companies that aimed to reduce energy consumption in housing. While such programs could add to the cost of housing, such costs could be recovered in five years or less, through savings in energy costs.
SCEE needs to move urgently to address other aspects of energy efficiency beside housing insulation and air conditioning. As we saw, the stakes are very high and the payback for better energy efficiency would be tremendously rewarding.
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