Reports out of Abu Dhabi today that Saudi Arabia plans to spend over $100 billion dollars on new energy infrastructure over the next decade failed to rally oil or copper prices Monday. However, the long term impact of this spending is sure to have an impact in commodity markets, adding more demand to several markets that are already in tight supply.
Saudi Arabia is facing rising electricity demand, expected to increase about 8% a year over the next five years, as it builds new cities and diversifies into new energy intensive industries. The $67 billion plan King Abdullah announced March 18 will, among other things, build 500,000 new houses, all of which will obviously need to be connected to the power grid. It is the power grid that will see nearly two-thirds of the $100 billion in spending over the next decade, and the remaining third will be used to build new power plants. The head of the Electricity and Co-Generation Regulatory Authority, Abdullah al-Shehri, gave some numbers that put the expansion in context. Electricity generation capacity must expand to 75,000 megawatts in 2018 and 120,000 megawatts over the next two decades to keep up with the kingdom's demands, from current capacity of 45,000 megawatts. Currently, the Saudis get 60% of their electricity from liquid fueled power plants, meaning domestic consumption of oil is likely to continue to rise in the kingdom as electricity usage picks up. This will likely mean that the Saudis will also need to increase investment in their oil production to help keep pace with increasing demand. In addition, a solar power conference in Riyadh next week will likely see the announcement of large-scale solar plans in the country as a means to diversify energy sources.
This massive spending plan will not only benefit copper miners and oil service companies, but large international construction companies as well. Firms like Flour (NYSE:FLR) and Jacobs Engineering (NYSE:JEC) build power plants and petrochemical plants, both of which the Saudi's will need to produce electricity and the fuel those electricity plants will use. Freeport McMoRan (NYSE:FCX) and Southern Copper (NYSE:SCCO) will benefit as new copper power lines are run to the 500,000 homes being built, and from the copper pipes being used for the plumping in these homes. Oil service companies like Baker Hughes (NYSE:BHI), Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL), and Weatherford (NYSE:WFT) will benefit as Saudi Arabia increases spending to keep up with increasing oil consumption, both inside Saudi Arabia and from the rest of the world.
The new Saudi spending will provide a real, non-speculative bid to the prices of both oil and copper, as more oil is burned to generate electricity and copper is used to build power grid infrastructure as well as homes. As recent high prices for both commodities proves, these markets are already tight, adding to a bullish long term trend. Investors who do not participate in the futures markets for these commodities can consider positions in any of the stocks above as a way to profit from these massive new spending and building plans by Saudi Arabia.
Freeport McMoRan is looked at more closely here.
Disclosure: I am long JEC.