Riyadh is less and less able to cushion supply shocks as it consumes more and more of its own oil.


Doha, Qatar
President Obama’s sanctions plan on Iran follows an old Mideast policy playbook. Western moves against an oil-exporting country take place with the cooperation of Saudi Arabia. U.S. strategy requires the Saudis to ramp up production and replace Iranian exports in hope of avoiding a damaging spike in prices.
It’s a familiar scenario: At one time or another, the Saudis have been called upon to replace exports from Iran, Iraq, Kuwait and, most recently, Libya. The idea is to have your cake and eat it—to meet U.S. foreign policy goals without disrupting oil markets and antagonizing the American motorist.
But the old playbook may have to be torn up. This time Saudi Arabia is struggling to assume its usual role as the oil market’s swing supplier. This can be seen in current market tightness and in U.S. gasoline prices, which are edging toward $4, a dangerous prospect at election time.
The Obama administration’s sanctions plan acknowledges Saudi weakness. Rather than try to impose a blanket ban, it has introduced piecemeal measures, such as encouraging China and South Korea to demand discounts for continued imports of Iranian crude. For the first time, Saudi Arabia’s vaunted spare capacity appears insufficient to cover the loss of a major exporter.
When revolution last year took Libya’s 1.5 million barrels a day off the market, the Saudis and other producers were able to fill the gap. A slack oil market helped. But Iran has been exporting roughly 2.2 million barrels a day. And now something else is afoot.
Saudi Arabia isn’t the same depopulated petro-state that the West found itself so dependent on in the 1970s. The kingdom and its oil-rich neighbors have seen their populations and industrial bases swell. They have become huge consumers of their own energy. The ruling sheikhs have cemented themselves in power by erecting energy-driven welfare states which provide some of the world’s cheapest electricity, natural gas and gasoline.
With domestic electricity demand rising 10% per year in Saudi Arabia, the kingdom now devours more than a quarter of its oil production—nearly three million barrels per day. International Energy Agency figures show that Saudi Arabia now consumes more oil than Germany, an industrialized country with triple the population and an economy nearly five times as large.
In the medium-term, Saudi Arabia is in danger of losing its all-important “reserve margin” of oil production that so often calms market volatility. Loss of this spare capacity would remove a crucial safety mechanism from the global economy, to say nothing of tying America’s hands when it comes to future moves against oil states.
Longer-term, the kingdom’s very exports are at risk. A projection by Jadwa Investment of Riyadh shows that, at current rates of consumption growth, the Saudi reserve margin will dwindle until it disappears sometime before 2020. At that point, the Saudis would begin diverting oil destined for export into the domestic market.
Following the trend further, Jadwa finds that Saudi Arabia will consume its entire production capacity of 12.5 million barrels per day at home by 2043. London’s Chatham House finds that the kingdom will become a net oil importer even earlier, by 2038.
These projections don’t take into account the possibility that Saudi Arabia’s production could rise above an expected plateau of 13 million barrels a day, or that ruling sheikhs might stop encouraging their citizens to waste energy by dropping some of the world’s deepest fossil-fuel subsidies.
As U.S. drivers are now learning, however, the Gulf countries have limited ability to increase production beyond current capacity, and they show even less ability to curb their domestic demand. When it comes to competition for supply, they will retain a natural advantage. They own the supply.
America’s Middle East confrontations have long depended on Saudi spare capacity. Without it, as the faceoff with Iran already shows, Washington—and the world—will be less free to intervene in the region without raising gasoline prices at home. And unless the Gulf Arab monarchies can gain control of their own consumption, their role in global energy markets will dwindle, as prices grow even more volatile.



All the attention may be on a loss of oil from Iran these days, but production outages in a variety of spots worldwide is causing about one million barrels of oil a day to sit on the sidelines, helping push oil and gas prices to near record highs.
In places like South Sudan, Yemen and Syria the oil is offline due to violence. In Canada and the North Sea it's due to technical problems.
No one outage is particularly large. But taken together, they rival the amount of oil that could be lost from Iran over the next few months as sanctions take hold.
"There are always disruptions, but when the market is this tight, they have an impact," said Daniel Yergin, IHS CERA Chairman and author of "The Quest: Energy, Security, and the Remaking of the Modern World." "It would be better for the economy if these barrels were there."
Although a variety of estimates exist, this list was compiled by CNNMoney using data from the International Energy Agency and the U.S. Energy Information Administration:
South Sudan: Roughly 350,000 barrels of oil are offline due to a flare-up in violence in the African country.
Production stopped in late January after the government in Sudan confiscated oil from a pipeline that runs through its territory, claiming South Sudan has not paid adequate fees for it.
South Sudan also claimed Sudan recently bombed some of its oil fields.
South Sudan became independent from Sudan in 2011 after years of civil war over territory rich with oil and water.
Christians in the southern part of the country have claimed for years they were mistreated by Muslims in the north.
Libya: Oil production in the war-torn country has rebounded faster than expected.
During the hostilities, all of the nation's 1.6 million barrels of daily production was halted.
Libyan production has since resumed to 1.3 million barrels a day, although 300,000 barrels a day remain shut-in.
Syria: About 230,000 barrels are offline in Syria thanks to the fighting in the country.
Although a tentative peace plan has been crafted, few expect the regime of President Bashar al-Assad to abide by it. The outlook for the country is for more violence as ethnic factions that have been repressed for years rebel against the ruling party.
Yemen: Nearly 140,000 barrels of oil are unavailable from Yemen as the Arabian country battles militants in its south-west region bordering the Red Sea and the Gulf of Aden.
The extremists belong to Ansaar al-Sharia, an Islamic militant network with close links to al Qaeda. The group is trying to establish an Islamic state in the southern part of the country.
Earlier this week they ambushed a military outpost, killing 23 soldiers and making off with three tanks and pieces of heavy artillery. In the past they have disrupted the flow of oil through pipelines in the country.
The North Sea: Over 100,000 barrels a day are offline due to maintenance, pipeline problems and weather in the notoriously harsh region.
Canada: Up to 50,000 barrels a day have been lost in Canada as a result of various equipment problems with machines that turn the oil sands into usable forms of crude oil.
"It's not just Iran," Paul Horsnell, head of commodities research at Barclays Capital, said at a Senate hearing on gas prices last week. "Over 1 million barrels a day in non-OPEC production is out unexpectedly. That is a significant feature of the current market."


Govt offers tax incentives on Iran exports

Govt offers tax incentives on Iran exports
The Union government will offer tax incentives to exporters for sales in rupees to Iran.
NEW DELHI: The Union government will offer tax incentives to exporters for sales in rupees to Iran, in the latest effort by New Delhi to bolster exports in return for oil from the Islamic Republic squeezed by Western sanctions, a finance ministry official said.

Following US and European Union sanctions against Tehranover its nuclear programme, New Delhi is under pressure to cut oil imports from its second-biggest supplier, which provides about 12 percent of its oil needs.

India has publicly taken a stand alongside other rapidly emerging countries, including China and Brazil, that it would follow only UN sanctions, a position criticized by conservatives in Washington.



(Reuters) - A senior Chinese diplomat said on Friday an attack on Iran would invite devastating retaliation that would envelop the region and destabilise the global economic recovery, and added that the international community had to restrain itself from war.
Iran is locked in a dispute with the West over its nuclear programme, which Iran says is for peaceful purposes.
Israel and the United States have threatened military action against Iran unless it abandons activities which the West suspects are intended to develop nuclear weapons.
China, which has close energy and trade ties with Iran, has urged a negotiated solution to the dispute and long opposed the use of force or unilateral sanctions on Iran.
The comments by Chen Xiaodong, head of the Foreign Ministry's West Asia and North African affairs division, was China's strongest warning yet not to use force to resolve the dispute.
"If force is used on Iran, it will certainly incur retaliation, cause an even greater military clash, worsen turmoil in the region, threaten the security of the Strait of Hormuz and other strategic passages, drive up global oil prices and strike a blow at the world economic recovery," he said.
"There may be 10,000 reasons to go to war but you cannot remedy the terrible consequences of plunging the people into misery and suffering and the collapse of society and the economy caused by the flames of war," Chen said on a web chat hosted by Communist Party mouthpiece the People's Daily.
Speculation is growing that Israel could launch some form of strike against Iranian nuclear installations, which Israel sees as a threat to its existence.
During a visit to Beijing last month, Israel's foreign minister hinted it could launch a preemptive attack on Iran despite repeated calls by China to allow diplomacy to take its course.
Chen said the pressing task was for all sides to restrain themselves and resume dialogue as soon as possible.
"The international community has a responsibility to restrain itself from war," he said.
More talks between Iran and world powers are expected to take place this month in an attempt to reach a compromise.
The most recent talks failed in January 2011 after Iran refused to suspend its uranium enrichment work, as demanded by the United Nations in several resolutions. (Reporting by Ben Blanchard; Editing by Robert Birsel)