The geopolitics of energy transition in MENA: Mitigating risks, exploring new opportunities

This article is part of a series that draws on the conclusions of a high-level workshop on economic diversification and the energy transition held on the sidelines of the American University of Kurdistan’s annual Middle East Peace and Security (MEPS) Forum in November 2022.
 

Energy remains at the heart of the geopolitical chessboard. Despite recent advances in the development of renewable energy sources, and the advent of electric vehicles, their share in the energy mix remains limited as oil still meets most of the transportation sector’s needs. The development of renewable energies — wind, solar, and geothermal — is not yet able to drastically change this reality. Fossil fuels still predominate in the global energy mix. Oil accounts for 34% of global energy consumption, gas for 23%, and coal for 28%. The Middle East, including the Gulf region, contains almost half of the oil that is easily accessible. Russia, the Middle East, and now the United States are the main sources of gas. Until after the second half of the 20th century, the world economy benefited from relatively cheap oil, and this critical commodity shaped the era’s geopolitics. In the aftermath of World War II, oil became the main source of energy at the global level. Developed economies realized their strong dependence on this energy source, the main proven reserves of which are in the countries of the Global South and more particularly in the Middle East. This reality has had a strong impact on international relations and the geopolitics of the region. Oil has become a source of wealth and prosperity, but also conflict and misery.

Energy policies underwent a systemic shock beginning in 1973. These policies had been based on the logic of the quest for energy since World War I, and over time this became a major component of diplomacy and international relations, with oil companies playing a substantial role. The first oil crisis, by destabilizing the main world market, constituted a real break, leading to a rethinking of pricing methods. A change in market logic took place, with a transition from a stable price relationship to a volatile one that is increasingly becoming prevalent on the various markets, concomitant with the rise in power of international finance. There are at least three main actors in the oil industry that have unequal bargaining power: oil-producing countries, consumer countries, and transnational oil companies. More often than not, the interests of these three actors do not converge. Conflicts of interest are often first played out at the economic and financial level, with ideological considerations a factor as well (e.g., liberalization, privatization, state control, and deregulation). These conflictual interests lead at times to geopolitical confrontations.

At the national level, for the oil-producing countries of the Middle East and North Africa region, hydrocarbon-based economies and oil rents have long been seen as a blessing. However, the role that oil rent has played in most of the region's economic systems has been detrimental to the polities of the region. Because of oil rent, economic dysfunction and authoritarian modes of governance have prevailed. It fundamentally altered the relationship between the political and economic spheres, and undermined prospects for democratic social contracts and rule-of-law-based governance systems. Rentierism, insofar as it has provided significant budgetary revenues to the state apparatus, blocked political and economic reforms and, most of all, the establishment of a real fiscal system capable of bringing about a compromise with various social groups. What is more, the rentier mode of governance has been able to co-opt elites and redistribute part of the rent in order to silence social and political demands. This contributed to the development of political clientelism as political logic takes precedence over sound economic policies.

This situation makes it difficult to put in place a real economic policy based on a revision of the tax and banking system. The strong dependence of the region's oil-producing countries on their exports regularly leads to macroeconomic instability due to fluctuations in the international oil market. The development of a real national entrepreneurial class is difficult because the economy is so protected and rent-seeking behaviors are so prevalent. In parallel with the development of unsustainable consumption patterns, this rentier system is incapable of creating employment opportunities in line with demographic growth. Moving away from rentier forms of governance implies effective economic diversification, which needs to address the political-economic realities of the governing social contract, in which governments rely on specific economic channels to transfer hydrocarbon wealth to their citizens. These channels often stand in the way of necessary reforms. A process of economic diversification has serious implications in terms of the power structure for ruling elites, who realize this reality only too well. Structural changes demanded by economic diversification would undoubtedly empower business constituencies that could be tempted to challenge the ruling elite. Establishing a new social contract will not be easy even as oil revenues decline.

At the global level, in addition to the economic and socio-political aspects internal to the exporting countries, with oil as the foundation of political and economic structures of several MENA polities, hydrocarbon resources are also a factor of power and influence at the international level. The region, as the largest net crude exporter in the world, home to half of global proven oil reserves and more than a third of gas reserves, has relied heavily on energy in shaping its geopolitical status. The clearest example of this is the enduring political and security alliance between Saudi Arabia and the United States since the 1930s around the export of its oil. This strategic alliance, known as the "Quincy Pact," became an essential pillar of American foreign policy in the following decades. It has also allowed oil-producing countries to exert relative political pressure for political gains at times. Yet, the gradual decrease in imports since the beginning of the 2010s and the prospect of the United States becoming a net oil exporter well before 2030, thanks to the exploitation of unconventional resources, are sources of economic and political concern for the Gulf countries, particularly Saudi Arabia, which may fear a weakening of their alliance with Washington. Qatar is another example: Its liquefaction and regasification capacity has provided the country with a substantial portfolio of international oil company partners and therefore strong political leverage in terms of foreign policy. This has allowed Doha to pursue ambitious foreign policy goals regionally — and at times globally — while shielding itself from major geopolitical shocks, the most recent of which was the Gulf blockade.

The gradual U.S. strategic disengagement from the MENA region, as well as its confrontation with states such as the Russian Federation, Iran, and Venezuela, among others, allowed for the deepening of relations between Moscow and a number of oil and gas-producing MENA countries, thus introducing both a diversification and expansion of energy diplomacy in the region. While several MENA states are traditionally aligned with American positions, they are not ready to alienate Russia. The UAE's abstention from the U.N. Security Council vote condemning Russia’s invasion of Ukraine in February 2022 demonstrates a certain desire for independence, despite its later support for the (legally non-binding) March 2, 2022 General Assembly resolution entitled “Aggression against Ukraine.” With the exception of Kuwait, victim of an invasion by Iraq in 1990, which distinguished itself by explicitly denouncing Moscow, a majority of MENA countries have chosen to be more nuanced in their respective positions. After 2011, with the upheavals in the Middle East and their tense relations with the Obama administration, as well as the sudden withdrawal by the United States from Afghanistan in 2021, certain MENA countries seem to follow geopolitical developments closely and wish to diversify their diplomatic relations. This is all the more important for countries like Saudi Arabia and the UAE, which are mired in the conflict in Yemen. Finally, with oil demand reaching its peak in Europe in the middle of the 2000s, MENA crude exporters accelerated their shift towards Asian markets, charting new paths with immense geopolitical implications.

Against this backdrop, it is widely assumed that MENA producing countries will be negatively affected by the energy transition, and hence their energy-based strategic geopolitical clout would fade away. In fact, as the energy transitions are mostly dictated by concerns over climate change, it is expected that oil demand will decline, and the pattern will shift across geographies, with strategic geopolitical implications. Alongside a decline in fuel oil, demand for liquefied gas and ethane is expected to grow. The new energy mix will also include other types of renewable energies, as all previous energy transitions have been more of a stratification, with the addition of new sources of energy, rather than an all-out shift from old sources to new ones. The global energy transition could help reduce the political benefits that some countries derive from the export of their hydrocarbons. As with coal from the 1960s onwards, oil will continue to be consumed but its economic and geopolitical value will eventually decrease progressively.

While several energy-related factors may contribute to the erosion of the region’s geopolitical status, the strategic loss remains relative and should be construed with nuance. All regions of the world will be impacted one way or another by the energy transition process. For now, in the midst of the ongoing Ukraine war, with sanctions imposed on the Russian hydrocarbon industry, the MENA region’s fossil-fuel producers have become valuable partners. Furthermore, the geostrategic role of gas in the MENA region is set to grow, as this valuable commodity will become an increasingly important part of the MENA energy sector. Iraq, a major flaring country, is working on developing fields in its western region and Diyala Province, while Saudi Arabia is increasingly betting on unconventional gas development in Jafurah and South Ghawar. As for Qatar, it is probably the best example of growing — not diminishing — strategic geopolitical power, with its increasing share in the energy mix, the decarbonization of the gas value chain, and the strengthening role played by gas in the transition phase.

Thanks to unconventional hydrocarbons, U.S. energy production has increased over the past two decades, allowing the country to practically achieve energy self-sufficiency. This changes the geopolitical balance and the close relationship that the United States, given its long-standing dependence on energy imports, had developed with MENA countries since World War II. The United States is now free of this dependence and has a great deal of latitude in its foreign policy. China, by contrast, is now the world's largest net importer of oil. With its reserves in the Middle East, China is developing in-depth relations by investing in oil and gas exploration and production projects in Iran, Iraq, the UAE, and Qatar. China is therefore set to play a growing role in geopolitical issues in the region. The turn of MENA energy-exporting countries towards the Asian market, with the growing economic and political power of states like China and India, has created new opportunities for exporters to impose themselves as major players as clean energy geopolitics grow in importance, thus mitigating as much as possible the potential loss in terms of geopolitical influence induced by the energy transition.

Younes Abouyoub, PhD., is a senior research fellow in the Department of Political Science at the University of New England in Maine, USA. He has worked in different capacities for the United Nations on issues of peacebuilding, conflict resolution, and sustainable development, including in the MNA region.

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