* Subsidised fuel encourages energy consumption growth
* Middle East to exceed global energy demand growth
* Saudi Arabia, Iran to drive demand growth
By Luke Pachymuthu and Jennifer Tan
DUBAI/SINGAPORE, March 5 (Reuters) - Middle East oil demand could grow by nearly 5 percent in 2010, outpacing a modest recovery in global energy demand as the world's top oil exporting governments continue spending petrodollars to boost economies, analysts said.
Oil export income has fuelled expansion in the region, and given governments the cash to spend their way through the global economic downturn. Cheap subsidised fuel has encouraged rapid energy consumption growth that some regional governments have struggled to meet.
OPEC's top two producers Saudi Arabia and Iran would drive more than half the Middle East's oil demand growth.
The Paris-based International Energy Agency (IEA) expected demand growth in 2010 in the region of 320,000 barrels per day (bpd) or 4.5 percent, to reach a total of 7.55 million bpd, said Eduardo Lopez, a senior oil demand analyst at the IEA.
That was over twice the IEA's forecast 2010 global oil demand growth of 1.8 percent, the first growth year in three years after recession cut fuel use.
PFC Energy estimates product demand to grow about 3.85 percent in 2010.
Rising diesel and gasoline demand would spur demand growth of 130,000 bpd in top oil exporter Saudi Arabia in 2010, taking total demand for the Arab world's largest economy to 2.76 million bpd. That was higher than demand for Brazil and close to Russia's fuel consumption.
"In Saudi Arabia, the main demand driver comes from the transportation sector, although power generation is also important," said Victor Shum an analyst with energy consultancy Purvin & Gertz Inc.
Reserves accumulated during the oil price rally of 2002-2008 had given the Saudi economy a cushion to absorb the blows the global crisis dealt the region over the past two years.
Steady gains in oil prices during 2009 meant that it had to draw less on those reserves than it would have in a lower price environment.
Saudi Arabia's real GDP growth is expected to be 3.8 percent in 2010, well up from 0.2 percent in 2009 as state spending remains high and private consumption picks up, a Reuters poll showed.
The kingdom would cut diesel exports by 19 percent to around 105,000 bpd in 2010 as domestic demand absorbed more Saudi refinery output.
Seasonal diesel demand peaks in the summer as the population run air conditioning units hard to counter soaring desert temperatures. This year, that peak was likely to be higher than ever as power demand rises.
"Diesel is on par with gasoline in terms of demand growth not only from the transportation but also as power demand continues to accelerate seasonality will increase," said consultancy PFC Energy in a February Gulf Energy report.
In Iran, the world's fifth-largest oil exporter, demand would rise 110,000 bpd to 1.86 million bpd, up more than 6 percent of the year and reversing a contraction in 2009.
Iran's product demand shrunk 5.1 percent in 2009, with diesel accounting for nearly half this decline, according to PFC Energy.
Insufficient supply from domestic refineries and electrol issues have had an impact on demand growth in Tehran.
Despite its massive oil reserves, the Islamic Republic lacks the refineries to meet domestic demand. It imports the shortfall from international markets and then subsidises the price at the pump to offer some of the cheapest gasoline in the world.
"Demand has been largely driven by transportation...downside risk (is) economic slowdown, political uncertainty (domestic and international)," Lopez said.
The IEA is expecting Iran's oil demand to grow by 6.3 percent, Lopez said.
Politicians in the United States have targeted this reliance on international supply as a weakness it may exploit through sanctions to put pressure on Tehran to halt uranium enrichment.
The U.S. and its allies suspect Iran covertly aims to develop atomic arms, while Tehran says its nuclear programme is for electricity generation.
The more demand increases, the more Iran depends on foreign fuel suppliers and the more exposed it is to U.S. political pressure on suppliers to stop selling fuel to Iran.
"Iran's refineries cannot keep pace with demand growth," Shum said." Imports have rapidly increased from essentially none in 2005 to more than 100,000 bpd today."
Smuggling too has played a part in Iran's demand. The country's gasoline is cheaper than its neighbours, encouraging exports.
Oil demand in the UAE is the tale of two contrasting economic stories in Dubai and Abu Dhabi. In the former, the end of a real estate boom and a more recent debt crisis has led to the delay or cancellation of hundreds of billions of dollars worth of construction projects, impacting diesel demand.
But in Abu Dhabi, as in Riyadh, reserves fattened through windfall oil export earnings as the oil price rally allowed the government to continue spending.
Abu Dhabi is the capital of the seven-member federation of the United Arab Emirates, of which Dubai is also a member. The UAE's product demand was pegged at around 304,000 bpd in 2010, up from 294,000 bpd in 2009, according to consultancy PFC Energy.
Gas oil exports from the UAE are expected to dip about 3 percent because of the increased domestic demand.
"The demand is likely to be driven from the boom going on in Abu Dhabi. It would have been much higher if Dubai didn't have its financial problems," said a senior trader based in the Middle East.
2010 2009 2008 TOTAL PRODUCT DEMAND Middle East 4.402 mbpd 4.239 mbpd 4.165 mpbd Saudi Arabia 1.900 mbpd 1.797 mbpd 1.648 mbpd Iran 1.600 mbpd 1.566 mbpd 1.650 mbpd
*mbpd - million barrels per day ==============================================================
(Editing by Simon Webb and Sue Thomas)