Many investors are aware of the changes currently sweeping through the Middle East. Regimes in many countries have been toppled or are under extreme political pressure.

Change, though not political, is also swirling through the world’s largest producer of oil, Saudi Arabia. The kingdom is central to the oil market: it produces about 12% of the world’s oil and accounts for more than three-quarters of spare production capacity.
 
So any deviations from the norm bear watching, and the current changes taking place will have profound effects not only on the oil market but also on your portfolio. And as oil prices ratchet higher in the years to come and affect virtually everything, you’ll need to be ready.

Social pressure
The ruling family in Saudi Arabia is well aware of what is going on in neighboring Arab states. They know that to remain in power, they must make at least some changes in order to improve the average citizen’s life.

And in response, they have gone on a spending spree valued at $129 billion this year alone to help meet people’s basic needs including food, fuel and housing. As a reference point, the total Saudi budget for 2010 was $144 billion, the largest in its history. So the added $129 billion is quite a significant rise in spending. This amount is equal to more than half the country’s 2010 oil revenue and will be completely new spending for things such as unemployment claims, which will be a first in the country’s history.

Many veteran oil watchers believe the extra spending will lift Saudi Arabia’s oil revenue needs on a percentage basis closer to those of Venezuela and Iran. Both of these countries are well-known oil price “hawks,” always wanting higher oil prices. So it stands to reason that Saudi Arabia will drift more toward this camp in the coming years. In fact, it may already be happening…

Based on increased spending plans by the Saudi government, it will “need” oil prices to average $83 a barrel this year to balance its budget. Prices have averaged about $93 per barrel higher so far this year. This $83 a barrel price contrasts sharply with the $20 a barrel it needed to balance its budget only a decade ago.

This trend looks set to continue in years ahead. According to the Institute of International Finance, by 2015 the Saudi government will only be able to balance its budget if oil prices are at $115 a barrel.

Electricity and Saudi oil consumption
Much of this increased spending will go toward upgrading the country’s infrastructure.

Take electricity, for example. This past spring Saudi Arabia announced it plans to spend more than $100 billion dollars on power plants and distribution networks by 2020.

 The country has about 45,000 megawatts of generating capacity, according to government estimates. To satisfy future demand, capacity must expand to 75,000 megawatts by 2018 and to more than 120,000 megawatts in the next two decades.

The projected increase reflects in part the country’s goal to electrify 500,000 new homes that are being built in an attempt to mollify political unrest among its population of 27 million people.

Power demand in the kingdom is set to increase by about 8% annually in the next five years, according to government estimates — roughly twice the country’s forecast economic growth rate.

As demand for power surges, it is bringing about another change in Saudi Arabia. It’s a change of which most American investors are unaware.

Saudi Arabia is, of course, best known for its oil production. Last month, for instance, it pumped 9.7 million barrels of oil per day– the second-highest level in three decades. Saudi oil production hit a recent low in February 2009 at 8 million barrels of oil per day.

But to meet the rising demand for power, Saudi Arabia is using crude oil and other liquid fuels to supply about 60% of its electricity. It is estimated the country will burn 581,000 barrels of oil a day on average just to generate electricity this year. To put this in perspective, the smallest member of OPEC, Ecuador, produces about 500,000 barrels of oil per day.

This burning of oil for power is helping to rapidly turn the country into one of the world’s top oil consumers. Saudi oil demand has risen by 75% in the 10 years since 2001, due to strong economic growth and subsidized prices.

This year, Saudi Arabia is on course to consume an average of 2.81 million barrels of oil per day. This makes it the world’s sixth-biggest oil consumer behind the United States (which consumes more than 18.5 million barrels a day), China, Japan, India and Russia.

This year alone, its oil consumption is set to leap by 5.6%, well above the global average of 1.4%.

Oil investment
This is an important development for the oil market and investors alike. As the kingdom’s oil demand surges, the amount of oil Saudi Arabia can export to the rest of the globe shrinks. This tightens global oil markets and puts upward pressure on prices.

Action to Take–> The changes occurring right now in Saudi Arabia add up to one thing — higher oil prices down the road. So the obvious choice for investors is to own an investment that will rise with oil prices. The purest play on rising oil prices is an exchange traded fund (ETF) — the United States Brent Oil Fund (NYSE: BNO).

The fund owns futures contracts on Brent oil, which closely tracks the global price of crude oil. These futures contracts are superior to those that track U.S.-based West Texas Intermediate (WTI) crude oil futures. Prices of WTI oil have been skewed lower by unique conditions at Cushing, Oklahoma, (the point where WTI prices are settled by the New York Mercantile Exchange) where there is a glut of oil due to a lack of infrastructure allowing it to easily leave those facilities.

Investors should consider buying BNO on any short-term weakness.

P.S. — I don’t know if you’re aware of this or not, but a 20-year energy agreement between the United States and Russia is about to expire. The problem is, this deal supplies 10% of America’s electricity. When the Russians refuse to renew the agreement, the U.S. will face an entirely new kind of energy crisis. This disruption could send a handful of energy stocks through the roof. Keep reading…