The oil and gas reserves of the Middle East are unmatched. It has been the region’s most important source of revenue and wealth for the past decades. Although it is widely accepted that the fossil fuel era will end eventually, some pundits didn’t expect such a serious change in the short term. Recent developments, however, sow doubt as to whether oil and gas-dependent countries can withstand the coming changes. The Covid-19 pandemic, furthermore, has sped up certain predictions.
Over the decades, the Middle East has developed into the world's most important region concerning oil production. Not only are the reserves in the area some of the biggest, but low production costs increase the region’s potential by decreasing investment risks. Despite the shale revolution in the U.S., the Middle East produced nearly half of the world’s oil in 2019.
While fossil fuels are a tremendous source of wealth and a major asset for economic development, most countries in the Middle East haven’t been able to diversify significantly. A combination of political instability, conservative domestic elements, and bad policy mean that global oil prices dictate economic development in the region.
Despite their dependence on fossil fuel exports, some countries in the Middle East are waking up to the potential of renewables. Improvements in production processes and economy of scale have significantly lowered the costs of wind and solar to the level where it's cheaper than fossil fuels in certain regions. The Middle East, especially, possesses a tremendous capacity due to favorable conditions.
While the world is grappling with the Covid-19 pandemic, the long-term effects on oil demand remain uncertain. While some experts remain upbeat about an oil demand recovery due to improving economic conditions in 2021, several prominent energy institutions expect a negative fallout from the pandemic.
Bernstein Energy, Rystad Energy, and the Paris-based IEA expect ‘peak oil’ to happen somewhere in 2030 due to structural changes in the economy and societal pressure in most developed countries. The growing sale of EVs is undercutting oil demand while costs of wind and solar keep decreasing. The incentive for oil-exporting countries to diversify should be obvious. To remain relevant in the 21st century, these states need to take renewables seriously.
Race against the clock
The expectation by certain experts that peak oil will happen in the next ten years is a serious challenge for the Middle East. OPEC, however, remains belligerent and expects demand to keep growing until 2040. This could be a bad omen for the oil-rich countries of the Middle East as it lowers the urgency to diversify.
Besides the threat of decreasing revenues, investing in wind and solar could reduce electricity bills which currently are heavily subsidized. Furthermore, significant volumes of oil are currently used to produce electricity that could otherwise be exported.
Saudi Arabia’s controversial de facto ruler, Crown Prince Bin Salman, has unveiled his ambitious ‘Saudi 2030’ development agenda. The partial IPO of the country’s ‘crown jewels’ Saudi Aramco should have provided the necessary funds. The lack of interest by large institutional investors concerning the IPO is a sign that profitability, in the long run, is uncertain.
While Western societies are increasingly concerned about climate change and put pressure on their respective governments, authoritarian Arab countries don’t experience a similar political development. Beijing, also, has embarked on an ambitious energy transition path due to heavy pollution.
The amazing geographic potential of the Middle East could power the next energy revolution in the region. A variety of countries have already announced several major projects. The UAE has unveiled plans to start construction on several large solar parks in 2021, which together with the Barakah Nuclear Power Plant could provide half of the country’s electricity by mid-century.
Saudi Arabia, also, has big plans. Work has already started on a 400 MW wind farm on the country’s northwestern shores. Despite its modest size, it will provide the necessary experience for future projects. Clean hydrogen exports could become an important export product in the future due to the low production costs in the Middle East. Saudi Arabia intends to build the world's largest hydrogen plant in its new futuristic city called Neom.
Despite the major announcements, a healthy dose of skepticism should be applied when looking at the real intentions of these countries. According to the IEA, renewables accounted for only 26 percent of the total power capacity expansion in the Middle East in 2019. This makes it one of the worst-performing regions. In most areas of the world, this number is nearly three times higher. There is still much work to do.
By Vanand Meliksetian for Oilprice.com
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