Power plants in Saudi Arabia burned an average 0.4 million barrels per day (b/d) of crude oil in 2018 directly for power generation, the lowest amount since at least 2009, the earliest year that data are available from the Joint Organizations Data Initiative (JODI, Figure 1). According to the JODI data, compared with all other countries, Saudi Arabia burns by far the largest amount of crude oil directly for power generation. Between 2015 and 2017, Iraq used the second-largest amount of crude oil for power generation (over 150,000 b/d on average), but has significantly reduced its direct crude burn since then.
During the summer months, Saudi Arabia typically experiences an increase in electricity consumption as domestic demand for air conditioning rises. Saudi Arabia relies on crude oil and other fossil fuels, such as petroleum products and natural gas, for power generation. Saudi Arabia’s direct crude burn reached a record high during the summer of 2015, averaging 0.9 million b/d from June to August. In comparison, direct crude burn in the summer of 2018 was 41% lower at 0.5 million b/d.
Despite continued, steady increases in both population and electricity consumption, Saudi Arabia managed to reduce its reliance on crude oil for power generation by increasing the use of other energy sources, such as natural gas and fuel oil. Most of the natural gas that Saudi Arabia produces is associated gas, which is natural gas produced along with crude oil from an oil well. In recent years, however, nonassociated natural gas production has increased. The Wasit gas plant reached its full operating capacity of 2.5 billion cubic feet per day (Bcf/d) in 2016. The plant was built to process nonassociated gas, which it is currently processing from the Hasbah and Arabiyah offshore gas fields, both of which began production in 2016. Saudi Arabia is investing in more natural gas processing capacity, including the construction of the Fadhili gas plant, which will be able to process nonassociated natural gas from both on- and offshore fields. The Fadhili gas plant is expected to be completed by the end of 2019 with a capacity of 2.5 Bcf/d. Consumption of natural gas in Saudi Arabia has steadily increased, averaging 10.6 Bcf/d in 2017, the latest year for which data are available (Figure 2).
In addition to natural gas, Saudi Arabia has also been using fuel oil as a partial replacement of crude oil in power generation. High-sulfur fuel oil is a relatively cheap petroleum product that can be used to fuel marine vessels and can also be used for power generation. However, because of environmental concerns and competition with other fuels, fuel oil consumption has been generally declining in most regions in the world. In Saudi Arabia, however, fuel oil consumption rose 25% between 2015 and 2018 to 0.5 million b/d on average, according to JODI data. Some trade press reports indicate that one potential side effect of the upcoming changes to the sulfur limits in marine fuels in 2020 is that the stranded high-sulfur fuel oil could be sent to Saudi Arabia to further replace crude oil in power generation.
With less crude oil directly being used for power generation, more crude oil is available for domestic refining and exports. For many years, Saudi Arabia has been working to increase its domestic refinery capacity. Saudi Arabia is able to process 2.9 million b/d of crude oil domestically, which will rise further after the startup of the 400,000-b/d Jazan refinery, which may come online in 2019. Because of its refinery additions, Saudi Arabia has been able to process more of its crude oil domestically. Crude oil refinery runs averaged roughly 1.8 million b/d in 2009 and subsequently rose to an average of 2.6 million b/d by 2018, according to JODI data (Figure 3).
As a result of increased refinery runs, Saudi Arabia was also able to increase the amount of petroleum products it could export. Exports of petroleum products more than quadrupled between 2009 and 2018, from 0.4 million b/d to 2.0 million b/d. Saudi Arabia exports more diesel than any other petroleum product, averaging 0.8 million b/d in 2018. Gasoline and fuel oil were the next two most exported petroleum products in 2018 at 0.4 million b/d and 0.3 million b/d, respectively. Saudi Arabia also imports petroleum products; however, over the past several years, Saudi Arabia has generally become a net exporter of most products, according to JODI data.
In addition to refining more crude oil domestically, using less crude oil in power generation can enable Saudi Arabia to increase crude oil exports, if needed. However, in late 2016 and in late 2018, Saudi Arabia, along with other members of the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC countries, agreed to voluntarily cut crude oil production in order to prevent further declines in crude oil prices. These agreements resulted in lower production of crude oil in Saudi Arabia, which is a more significant factor in how much crude oil the country has available to export throughout the year (Figure 4).
Furthermore, Saudi Arabia has been cutting production beyond its agreed-upon target, meaning that as Saudi Arabia’s crude oil production falls, production of associated natural gas will also decline. Declines in associated natural gas production could result in an increased need for crude oil used for power generation.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price rose nearly 5 cents from the previous week to $2.89 per gallon on April 29, 4 cents higher than the same time last year. The Rocky Mountain price rose over 8 cents to $2.84 per gallon, the East Coast and Gulf Coast prices both increased nearly 5 cents to $2.78 per gallon and $2.58 per gallon, respectively, and the Midwest and West Coast prices each rose over 4 cents to $2.77 per gallon and $3.67 per gallon, respectively.
The U.S. average diesel fuel price increased more than 2 cents to $3.17 per gallon on April 29, 1 cent higher than a year ago. The Rocky Mountain price increased 4 cents to $3.18 per gallon, the West Coast price increased more than 3 cents to $3.73 per gallon, the Gulf Coast and East Coast prices increased 2 cents to $2.94 per gallon and $ 3.19 per gallon, respectively, and the Midwest price increased nearly 2 cents to $3.06 per gallon.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 1.2 million barrels last week to 58.9 million barrels as of April 26, 2019, 10.3 million barrels (21.1%) greater than the five-year (2014-2018) average inventory levels for this same time of year. Midwest, Rocky Mountain/West Coast, and East Coast inventories increased by 0.9 million barrels, 0.2 million barrels, and 0.1 million barrels, respectively, and Gulf Coast inventories increased slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 9.6% of total propane/propylene inventories.
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Supply chains are currently in crisis. They have been for a long time now, ever since the start of the Covid-19 pandemic reshaped the way the world works. Stressed shipping networks and operational blockages – coupled with China’s insistence on a Covid-zero policy – means that cargo tanker rates are at an all-time high and that there just aren’t enough of them. McDonalds and KFCs in Asia are running out of French fries to sell, not because there aren’t enough potatoes in Idaho, but because there aren’t enough ships to deliver them to Japan or to Singapore from Los Angeles. The war in Ukraine has placed a particular emphasis on food supply chains by disrupting global wheat and sunflower oil supply chains and kicking off distressingly high levels of food price inflation across North Africa, the Middle East and Asia. It was against this backdrop that Indonesia announced a complete ban on palm oil exports. That nuclear option shocked the markets, set off a potential new supply chain crisis and has particular implications on future of crude oil pricing and biofuels in Asia.
A brief recap. Like most of Asia, Indonesia has been grappling with food price inflation as consequence of Covid-19. Like most of Asia, Indonesia has been attempting to control this through a combination of shielding its most vulnerable citizens through continued subsidies while attempting to optimise supply chains. Like most of Asia, Indonesia hasn’t been to control the market at all, because uncoordinated attempts across a wide spectrum of countries to achieve a similar level of individual protectionism is self-defeating.
Cooking oil is a major product of sensitive importance in Indonesia, and one that it is self-sufficient in as a result of its status as the world’s largest palm oil producer. So large is Indonesia in that regard that its excess palm oil production has been directed to increasingly higher biodiesel mandates, with a B40 mandate – diesel containing 40% of palm material – originally schedule for full implementation this year. But as palm oil prices started rising to all-time highs at the beginning of January, cooking oil started becoming scarcer in Indonesia. The government blamed hoarding and – wary of the Ramadan period and domestic unrest – implemented a Domestic Market Obligation on palm oil refineries, directing them to devote 20% of projected exports for domestic use. Increasingly stricter terms for the DMO continued over February and March, only for an abrupt U-turn in mid-March that removed the DMO completely. But as the war in Ukraine drove prices even further, Indonesia shocked the market by announcing an total ban on palm oil exports in late April. Chaotically, the ban was first clarified to be palm olein only (straight refining cooking oil), but then flip-flopped into a total ban of crude palm oil as well. Markets went haywire, prices jumped to historical highs and Indonesia’s trading partners reacted with alarm.
Joko Widodo has said that the ban will be indefinite until domestic cooking oil prices ‘moderate’. With the global situation as it is, ‘moderate’ is unlikely to be achieved until the end of 2022 at least, if ‘moderate’ is taken to be the previous level of palm oil prices – roughly half of current pricing. Logistically, Indonesia cannot hold out on the ban for more than two months. Only a third of Indonesia’s monthly palm oil production is consumed domestically; the rest is exported. An indefinite ban means that not only fill storage tanks up beyond capacity and estates forced to let fruit rot, but Indonesia will be missing out on crucial revenue from its crude palm oil export tax. Which is used to fund its biodiesel subsidies.
And that’s where the implications on oil come in. Indonesia’s ham-fisted attempt at protectionism has dire implications on biofuels policies in Asia. Palm oil prices within Indonesia might sink as long as surplus volumes can’t make it beyond the borders, but international palm oil prices will remain high as consuming countries pivot to producers like Malaysia, Thailand, Papua New Guinea, West Africa and Latin America. That in turn, threatens the biodiesel mandates in Thailand and Malaysia. The Thai government has already expressed concern over palm-led food price inflation and associated pressure on its (subsidised) biodiesel programme, launching efforts to mitigate the worst effects. Malaysia – which has a more direct approach to subsidised fuels – is also feeling the pinch. Thailand’s move to B10 and Malaysia’s move to B20 is now in jeopardy; in fact, Thailand has regressed its national mandate from B7 to B5. And the reason is that the differential between the bio- and the diesel portion of the biodiesel is now so disparate that subsidy regimes break down. It would be far cheaper – for the government, the tax-payers and consumers – to use straight diesel instead of biodiesel, as evidenced by Thailand’s reversal in mandates.
That, in turn, has implications on crude pricing. While OPEC+ is stubbornly sticking to its gentle approach to managing global crude supply, the stunning rebound in Asian demand has already kept the consumption side tight to match that supply. Crude prices above US$100/b are a recipe for demand destruction, and Asian economies have been preparing for this by looking at alternatives; biofuels for example. In the past four years, Indonesia has converted some of its oil refineries into biodiesel plants; in China, stricter crude import quotas are paving the way for China to clamp down on its status of a fuels exporter in favour of self-sustainability. But what happens when crude prices are high, but the prices of alternatives are higher? That is the case for palm oil now, where the gasoil-palm spread is now triple the previous average.
Part of this situation is due to market dynamics. Part of it is due to geopolitical effects. But part of it is also due to Indonesia’s knee-jerk reaction. Supply disruption at the level of a blanket ban is always seismic and kicks off a chain of unintended consequences; see the OPEC oil shocks of the 70s. Indonesia’s palm oil export ban is almost at that level. ‘Indefinite’ is a vague term and offers no consolation to markets looking for direction. Damage will be done, even if the ban lasts a month. But the longer it lasts – Indonesian general elections are due in February 2024 – the more serious the consequences could be. And the more the oil and refining industry in Asia will have to think about their preconceived notions of the future of oil in the region.
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Construction supply is an essential part of any construction site too. Construction supply shops are usually limited to the geographic area where they are located. This is because, in order for construction supplies to be delivered on time, they must be close to the construction site that ordered them. But with modern technology and internet connectivity, it has become possible for people to purchase their construction supplies online and have them shipped right to their doorstep. Online stores such as Supply House offer a wide variety of products that can help you find what you need without having to drive around town looking for it.
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