Consumers worldwide are witness to the fluctuations in the fuel prices recently and the Middle East is no exception. Why do fuel prices rise and fall so frequently in a region with such huge oil reserves? In the long term, the greatest single factor influencing fuel prices is the cost of crude oil. However, supply, demand and competition can have a significant impact on fuel prices in the short-term.
Crude oil prices have risen dramatically over the last few years, driven by strong global demand, limited spare oil production capacity, and continuing political instability in certain oil-producing regions.
Increase in International Energy Demand
Surging crude oil demand all over the world is being fueled by strong economic growth, particularly in non-OECD nations. The U.S. Energy Information Administration projects that total world consumption of marketed energy is expected to increase by 44 percent from 2006 to 2030. Reduced spare oil production capacity leaves very little room to compensate for unanticipated supply disruptions in demand. The tenuous balance between supply and demand is even more of a concern when you consider that most of the world’s oil is located in some of the more politically unstable parts of the world. As such, supply disruptions, whether real or perceived, have dramatic effects on crude oil prices.
The energy consumption in the emerging economies of non-OECD countries is expected to increase by 73 percent between 2006 and 2030. This will have a strong impact on the fuel prices in the Middle East with the pressure on the region’s fuel exports.
Uncertainty Causes Price Pressure
Crude oil is refined to produce diesel and petrol and the cost of crude oil is the most crucial factor affecting fuel prices over time. However, with the shortage of refineries to refine the crude, the Middle East is in a situation where the gap between the prices of refined product and crude oil is huge.
Supply remains erratic. A number of other factors also increase the uncertainty of supply and with rising demand, this is creating tremendous pressure on pricing. Political ambiguity in oil producing regions has historically impacted on crude oil prices and the political situation in the Middle East is of global concern.
Are Biofuels the Answer?
In the background of the surging crude oil prices in the Middle East, biofuels have emerged to be the most preferred fuel alternative in the region.
One of the factors that have limited green initiatives in the past is the perception of higher costs associated with renewable energy. This myth is being shattered through the concerted efforts of all stakeholders in the energy sector. As far as the economic viability of biofuels is concerned, there are proven examples of it being cleaner and cheaper than the conventional diesel. For example, biodiesel provided by Lootah Biofuels in UAE is 20 fils cheaper than the conventional diesel available at the ENOC, EPPCO and EMARAT fuel stations.
It is now widely accepted that the long-term benefits of a viable, green energy initiative far outweigh the initial costs. The big challenge now is to engage consumers to be active participants in new and path-breaking initiatives, which are an imperative today.
Shell’s Energy Scenario data estimates that demand for diesel is increasing at an average 4 per cent per annum led by a growth in the cargo business, underlined by the UAE’s status as a global logistics hub. According to the International Energy Agency (IEA) that the global share of biofuel in total transport fuel would grow from 2 percent today to 27 percent in 2050 whereas the share of biofuels in the Middle East is expected to reach 5 percent by 2020.
With more and more biofuel companies coming into the picture in the Middle East, there is an acute increase in the market share of biofuels.
A leading oil and gas company Petrixo is in the process to build its first waste to the Biogas facility in the project site that will utilize waste from the oil seeds to generate electricity for internal use. Once operational, the plant will generate revenue from the production of electricity and the sale of carbon credits generated under the UN clean development mechanism. Petrixo has announced their upcoming BioFuel Refinery in Fujairah, UAE, with capacity of one Million Metric Tons of Different types of biofuels and with investment in excess of US$800 million.
Increased domestic consumption of fuel has a spiral effect on the economy. For one, it increases oil bills, especially in the absence of adequate refinery capability to address local demand. Two, it causes losses to the Exchequer in terms of fuel subsidies. Finally, increased dependence on traditional fossil fuels for powering the economic wheel has a lasting detrimental impact on the environment.
The use of biofuel addresses all three of these concerns, as demonstrated by the Lootah Biofuels project. The potential for biodiesel, generated from used cooking oil, is tremendous in a city such as Dubai that is focusing on driving its hospitality and tourism sectors as part of economic diversification.
The Middle East had the advantage of learning from biofuel initiatives of U.S. and Europe and the challenges they faced due to the subsidized government supported model. Dubai has started off with the biodiesel project and learned from all other models world over. We realized that if we are not able to produce biodiesel consistently at a price at par with Petro diesel in a consistent manner it would become unsuccessful. Our effort was to reduce the cost of raw material, ensure its consistent supply, and to manage the cost of conversion.
With biofuels gaining immense popularity in the Middle East, the active participation of all stakeholders will contribute to achieving the region’s sustainable development goals, thus creating a lasting green legacy for future generations.
Lead image: Middle East map. Credit: Shutterstock.