Insulating against revolution?

insulated coolerIn New England where I’m writing this, insulation is typically thought of as a way to keep the cold out and heating costs down. In hot climates, however, it’s a way to keep the air conditioned cold in and the hot out. Think of your beach cooler keeping the ice from melting and, in turn, your beer cold. Same concept.

A recent Reuters story notes that the Saudi government is undertaking an ambitious program to cut energy use by some 40 percent, “largely by enforcing investment in insulation”. So, why the Saudi push to insulate? They need the money – specifically, the money made selling oil. The Reuters story quotes a Saudi official noting that 70-80 percent of their energy use goes to air conditioning and they use oil to generate the majority of their electricity. With a growing population and an extreme dependence on fossil fuels to subsidize the amenities of a comfortable life (cheap electricity, plentiful food, cars, roads, etc), the Saudis are staring at a classic export land problem.

Almost half of Saudi Arabia’s GDP is directly related to oil exports. Some 75 percent of its government revenue comes from the oil industry. The more oil the Saudis use, the less is available for export, even as production from their aging oil fields slowly declines. The reduction in exports helps push up prices on the open market, increasing cash flow which encourages domestic economic growth and energy use. Eventually, this domestic demand increases enough to materially reduce revenue from oil exports, squeezing subsidies that support things like cheap and plentiful food and fuel. Exposing the national population to unsubsidized prices is politically perilous. Hello Cairo.

Saudi marketIran is caught in a similar rock-and-a-hard-place bind. Indonesia dropped out of OPEC in 2008 when declining production and increasing consumption pushed it from being a net exporter to net importer of petroleum.

So, what does the export land issue mean to us, the oil importers? We don’t generate much electricity in the United States with oil these days, but it certainly is vital to our transportation system. Whether by car, truck, train or plane, our consumer lifestyle is powered by petroleum. Gasoline, diesel and kerosene move everything from people, food and building materials to toys, toothpaste and auto parts. As oil prices rise, transportation costs increase, putting a drag on an already weak recovery. Hard to insulate our way out of that.