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Why Are OPEC Countries Abandoning Oil Consumption?

Friday - 5/17/2013, 3:34am  ET

The first thought that comes to mind with OPEC is oil. This collection of countries is responsible for over 40% of all oil production around the world. For many of these countries, oil is far and away the largest source of governmental revenue. In Saudi Arabia, 45% of its GDP is generated from oil revenue. Yet, Saudi Arabia and several other OPEC countries in the Middle East have made moves to halt the consumption of oil within their own borders. Why would these countries, where oil is the most abundant source of energy, give up on this readily available resource? Let's take a look at what's going on, and why.

Any which way but oil
For years, oil has not only been the primary source of revenue for the Middle East, it has also been a primary electricity-generation fuel. Over 33% of Saudi peak electricity generation capacity is from oil, which means the kingdom can consume as much as 1 million barrels per day to meet its electricity demand. Kahlid al-Falih, the CEO of the national oil company Aramco, has stated that if the country does not fundamentally change its electricity production or consumption, the country could expect to consume as much as 8 million barrels per day of liquid fuel -- oil or natural gas liquids -- by 2030.

To combat this large jump in consumption, the country is looking to both solar and nuclear to spread the love around multiple energy sources. Chinese solar company Suntech Power recently supplied the kingdom with 3.5 megawatts worth of solar panels, and plans are in the works to increase the country's total solar generation capacity by more than 2,000 times by the end of the decade to 24,000 megawatts. Saudi Arabia also plans to expand on its nascent nuclear generation capacity to 17,000 megawatts with third generation or higher facilities. While no agreements have been made, only a small amount of companies are able to build these kinds of facilities, including GE's Hitachi division. If these plans continue, Saudi Arabia could be a major revenue source for these companies in the near future. 

Saudi Arabia isn't the only one, either. The United Arab Emirates (UAE), the worlds fourth largest oil producer, announced that it will be targeting 20%-25% of its energy production to come from nuclear power by 2021. According to the UAE's national nuclear company, ENEC, it has signed about $3 billion worth of contracts with Rio Tinto, Russia's Tenex, and France's Areva to supply nuclear fuel and other services for its planned reactors within the country. In order to gain access to this emerging market, U.S. nuclear companies Exelon and Southern are lobbying to ease restrictions for U.S. companies to export nuclear technology.

The United Arab Emirates is also home to the largest single-unit solar facility in the world: Shams-1. The facility, which just recently came online, generates about 100 megawatts of electricity at full capacity. The country plans on adding two more Shams-size projects in the next couple of years. Both Saudi Arabia and the UAE are joined by Bahrain, Oman, Qatar, and Kuwait as countries that have ambitious plans to increase solar generation capacity. 

Keeping the oil for everyone else
For a region so rich in oil, it may seem peculiar to see such a move toward alternative energy. But oil is the exact reason they are doing this, or more specifically, oil exports. By reducing total petroleum consumption domestically, they are hoping that it will translate into greater export capacity and, in turn, greater revenues.

The move toward other power sources could save the Saudi Kingdom as much as 520,000 barrels of oil per day by 2032, which becomes instant export capacity.  At current prices, this would translate into an additional $19 billion per year in oil sales.

With North American oil production expected to increase over the next several years, countries in the Gulf Region need to do whatever is necessary to keep their position in the oil supply market. It appears as though solar and nuclear are a way to maintain that position longer than expected.

What a Fool Believes
As investors, there is a lesson to be learned here. These nations believe that they are too dependent upon one energy source domestically and, if anything in the international market were to drastically affect this product, they could be in trouble. By diversifying their domestic power generation, they will be able to mitigate this exposure. Investors in the energy space should take a similar approach. Rather than focusing on one single energy source as the end-all solution, try to have a diversified approach. The demand for energy is massive and still growing at a rapid pace, so nearly all sources of energy have a place in this market.

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