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Credit: Roger Lockwood
The global consumption of about 100 million barrels of oil per day (mbpd) consists of about 60% that is consumed within the nations that produce oil and about 40% that is exported. It is upon these exports that the Gulf monarchies rely for the money to both bribe and discipline their domestic populations and live their hyper-expensive lives. The largest oil exporters as of 2023 were:
Saud Arabia: 7.4 mbpd (population 37 million)
Russia: 4.8 mbpd (144 million)
Iraq: 3.7 mbpd (45 million)
USA: 3.6 mbpd (340 million)
Canada: 3.4 mbpd (40 million)
United Arab Emirates: 2.7 mbpd (10.5 million)
Kuwait: 1.9 mbpd (4.9 million)
Norway: 1.6 mbpd (5.5 million)
…
14. Oman: 0.9 mbpd (5 million)
Libya: 0.9 mbpd (7.3 million)
Iran: 0.9 mbpd (92 million), increased to about 2.5 mbpd more recently
Qatar (#20 with 0.48 mbpd and 2.7 million) also exports a large amount of LNG. Bahrain (#28 with 0.152 mbpd) has a population of only 1.6 million.
The Middle Eastern producers are the global low cost oil producers, as low as US$4 per barrel, so may always be the “last men standing” as oil prices decline. But they need much, much higher oil prices, perhaps north of US$80 per barrel for Saudi Arabia, to fund the bribing and disciplining of populations (Saudi Arabia 37 million, Iraq 45 million, Kuwait 5 million) that have exploded since the advent of the massive oil wealth from the 1970s onwards; with further increases baked in by their demographics.
At the same time, the area is a hot spot for climate change. With wet bulb temperatures already close to the limits of human survivability in many areas, further climate change may render whole areas uninhabitable outside air conditioned cars, malls, offices and homes. As temperatures rise the strain on air conditioning systems also tends to rise exponentially, along with the energy needed to drive them.
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In a recent regional heat wave that lasted weeks, temperatures were as 52C, with minimum temperatures above 35C all over the region (Iran, Iraq, Kuwait, United Arab Emirates). Normal human body temperature is 37C. This will only get worse as time passes, and climate change is accelerating. At the same time, many households do not have access to air conditioning and many jobs involve being outside.
Net oil imports are dominated by a China and an “EU-28” that imported 11.1 mbpd (down from a peak of 11.3 mbpd in 2023), and 9.9 mbpd (down from 9.8 mbpd in 2023) in 2024 respectively. India is another large importer at 4.7 mbpd (up from 4.6 mbpd in 2023), and then South Korea at 2.7 mbpd and Japan at 2.5 mbpd (down from 2.7 mbpd in 2023). After that the scale of national net oil imports falls off substantially with nations such as Thailand importing less than 1 mbpd.
Over half of global oil exports are going to two nations/regions that are experiencing ongoing falling oil demand. In China that fall will rapidly accelerate over the next few years as EVs may get close to 100% market share for light vehicle sales, older and more inefficient ICE light vehicles are retired, and EVs become a greater and greater share of both the medium and heavy trucking fleet. The “EU-28” is also experiencing a somewhat slower decline in oil demand due to increases in the EV population, generally slow/no economic growth and an increasing deindustrialization. South Korea and Japan are also experiencing falling oil demand due to slow/no economic (and even negative demographics in the case of Japan) growth; and they will be increasingly affected by EVs in the future. With the other nations not able to offset these declines, global oil consumption that has been on a plateau since 2019 will start to decline, and the oil exporters will take the brunt of this decline; through both a drop in prices as well as a drop in volume.
Global oil production is highly inelastic due to the need of many exporting nations to maximize export revenues to fund domestic expenditures. There is also the role of shale oil as a swing provider with a break even point as low as US$60 for incremental new wells (much lower for in place wells where output will decline significantly within a few years), and the ability of sunk cost wells to just cover operating costs (with even Canadian Tar Sands established projects having operating costs as low as US$30 per barrel). Some nations such as China may also keep domestic oil production going at the expense of imports in the interests of national security. The US restricted oil imports in the post-WW2 period, accepting a domestic oil price that was significantly higher than the global one to support the domestic industry. As the OPEC+ nations have found in recent years, it takes a much lower oil price to significantly drive down global oil production; and even then some OPEC+ states may be incentivized to cheat on their production quotas. Such incentives will be much greater in a world of confirmed long-term falling oil prices, where “pump it while you can” will become a substantial driver of production decisions.
The current oil price of US$58 as I write this, is looking to decline further after the blip of the Iran-Israel “12 day war”. It peaked at US$130 at the start of Russo-Ukrainian War in 2022, but rapidly fell when it became evident that many countries would still buy Russian oil and that oil demand growth was not robust. At the same time the US$ has declined in trade weighted terms from 115 to 98, creating a double whammy of lower US$ oil prices and a lower US$ for non-US oil exporters. Giving the lie to claims of “peak oil”, US oil production just keeps on increasing; while Iran, Russia, Iraq and Libya are not fully producing due to sanctions and internal issues, OPEC+ is still producing under capacity, and countries such as Brazil and Guyana are planning to increase oil production.
By 2030 oil imports could be reduced by 2.5 mbpd by China alone, and perhaps that same amount by the “EU-28” and Japan and South Korea. By 2035, these nations could easily reduce oil consumption by more than another 5 mbpd. With other nations, even some of the oil exporters such as the US, reducing oil consumption while protecting domestic producers for economic and national security reasons, the GCC oil exporters will be faced at best with slowly declining oil export demand and falling prices.
Many will point to the huge sovereign wealth funds of the Gulf states that could be used to finance the increasingly large financial deficits (with the local populations continuing to grow) but this misses two points (i) the Gulf monarchies consider those funds to be their own property not that of their populations (ii) there is no incentive to throw money away on a long-term losing proposition. The difficulty that Saudi Arabia found in raising funds from the sale of a share in its Aramco national oil company recently points to such a calculation by investors. And it is Saudi Arabia with its massively increased, and still increasing, population that has the biggest problem. With a 3.8% of GDP government budget deficit at current oil prices and export volumes; utterly dependent upon profits from Aramco. In 2015, when oil prices fell below US$50 per barrel, the Saudi Arabian state ran a deficit of 15% of GDP.
Aided by the post-COVID financial markets bubble, the Saudi Arabian (SA) sovereign wealth fun is valued at US$925 billion, not that much less than the SA GDP of US$1.1 trillion. At a 3.8% budget deficit, the sovereign wealth fund can support SA state spending for decades but at a 15% deficit it would be used up very rapidly. State austerity in SA is extremely dangerous for the monarchy, as both the sticks and the carrots that underly its rule become weakened. With a birth rate that still exceeds the death rate by more than 500,000 per year, the fiscal demands upon the state will only increase as time passes. The ability of the SA state to cut expenditures is limited by its need not to be overthrown.
A possibility would be for SA to seize the much smaller Gulf states (Kuwait, UAE, Qatar, Oman, Bahrain) to forcibly reduce their oil production and gain access to their sovereign wealth funds (if such a move was accepted by the other states that hold those funds). Any such move would signal the beginning of the end for the SA monarchy. The other possibility is that the SA monarchy ramp up repression while significantly reducing state expenditures, including new investments in the oil and gas infrastructure. This would be a “milking the fossil fuel cow” for as much as possible before an exit to safer climbs and the riches of the sovereign wealth fund.
The nightmare scenario for the SA monarchy would be an extended global recession which significantly reduces oil prices, bloating the budget deficit, and leads to a large decline in the value of the sovereign wealth fund. As each year passes and the Saudi population continues to increase, the possibility of this triggering a much wider social crisis and uprising increases. At some point the SA monarchy may choose to exit and very comfortably survive in the face of the existential threat, ironically creating a domestic chaos behind them that may reduce oil production and help support the global oil price for a while; a Libya but on a much greater scale. While to the north, an Iraq with a 40 million plus population, that has been starved of its own oil revenues by the US Treasury, may substantially regress. Kuwait may be caught in the middle of two failing states, both hungry for its oil revenues and massive sovereign wealth fund (600% of GDP).
Another nightmare is that Western governments simply decide to confiscate the sovereign wealth funds themselves, now that the GCC monarchies are no further use to them, taking away the easy exit option for those royal families. Western governments can easily turn on groups that are no longer useful to them, and all those US$ trillions sitting in Western banks may be very tempting for governments experiencing problems with growing government debt and deficits.
Iran is much less economically dependent on oil revenues, having a significant domestic industrial sector and large exploitable gas reserves, and the legitimacy of its leaders is much more supported by religious faith and democratic elections. In addition, its developing role as an east-west and north-south transport hub will help strengthen the economy over the next decade.
As the world increasingly moves away from the use of oil, the possibility of regime collapse and societal breakdown in the Middle East will increase. Ironically, the region is also subject to some of the greatest impacts of climate change; with temperatures in many cities already at the borderline of “wet bulb” temperatures survivable by human beings. Within a decade or two, the Middle East may be reverting to the much simpler times before oil, but with populations ten plus times those of the pre-oil bonanza years. A colossal humanitarian catastrophe in the making, among the sky scrapers and other markers of the massive waste of the oil revenues while they lasted.
Another irony may be that as the Middle East becomes much less important as a source of energy, the West will become much less supportive of Israel. A country which in reality is a European settler colony specifically put in place to help control the fossil fuel rich region. When that region is no longer that important perhaps also Israel becomes no longer that important.
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