A New Revolution in the Middle East

Jon B. Alterman
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To hear some people describe it, the global energy transition is nigh. Widespread awareness of climate change has galvanized consumers and governments alike to get serious about abandoning hydrocarbons. The financial world has read the new sentiment and pivoted away from oil and gas. Investors are now pouring billions into renewables, and China sees renewable energy as a national security imperative. Soon, oil production will outstrip demand, and as prices fall, producers will produce even more to make up for lower volumes, suppressing prices still further. Oil prices are going to drop off a cliff.

An alternative view is that the energy transition will take decades, and the built infrastructure to consume hydrocarbons ensures a robust market for many years. While electric cars get attention, approximately 90 percent of new car sales are still gas-fueled, and charging infrastructure is still billions of dollars and decades away. Existing homes have gas furnaces and gas stoves, and they last decades. Virtually all of the world’s jet fuel is petroleum based, and the world is becoming ever more reliant on plastics, which are derived from oil. That is to say nothing of the developing world, where most of the world’s population lives, and which often operates on smaller economic margins than wealthier nations. These countries’ consumption is rising sharply as incomes increase, and they are likely to rely on existing equipment and technology for longer. While the wealthy can spend thousands on green products, for much of the world’s population, oil and gas will remain the affordable and available fuels.

There are reasonable arguments for both of these views, and no one can say with any certainty how technology, regulation, or consumer behavior will unfold. For the Middle East, which scenario comes closer to fruition is of profound importance. Oil and gas revenues drive the region’s economies, since the region is comprised almost entirely of energy-exporting states and labor-exporting states. Poorer states send workers to the richer ones, and workers send billions back home to their families. The world’s strategic attention to the region is also contingent on energy production. Religion and tourism will keep the region in the public’s mind, but for governments, the region’s irreducible significance is a product of global energy markets.

The idea that oil prices will drop off a cliff is predicated on the notion that oil is a market, and even small imbalances have large economic consequences. Today, global oil consumption is approximately 100 million barrels/day, and the system has relatively little capacity to produce more. When consumption threatened to outstrip supply in 2008, oil reached $140/barrel. When the Covid-19 pandemic suppressed demand in the spring of 2020, the world began to run out of storage, and oil prices plunged. Saudi Arabia took the biggest hit, cutting production by about 20 percent while prices still dropped below $30/barrel, less than half of their previous level. It took more than six months of reduced global oil production to work through the oversupply.

A sustained drop in global consumption, however small, would pressure Gulf countries to boost production in an effort to drive higher-cost producers out of the market and ensure that they are not left with even lower-value barrels in the ground when consumption drops still further. This partly explains the spat over production this month between Saudi Arabia and the United Arab Emirates.

We don’t know who the winners and losers of the next decade will be in the Middle East. The increased volumes of low-cost producers might make up for lower prices, leading to a renewed strategic focus on Middle Eastern producers. Alternatively, the imperative of market discipline may fall to Middle Eastern producers, who would need to constrain production to prevent prices from collapsing. How this plays out will matter.

Governments throughout the Middle East have been preparing for a post-oil world for years, but they remain far from their targets. In the Gulf states, the transition from high-productivity, low-wage workers subsidizing the efforts of low-productivity, high-wage workers will take years. Private sectors strain to provide jobs for new entrants to the workforce, and youth unemployment tops 30 percent in many countries. Youth alienation is a problem every government is considering in the decade since the Arab uprisings. It is a problem no government is convinced it has under firm control.

And the energy transition will matter for more than just the Middle East. Energy security drives much of China’s recent investment in the region. If the Chinese government decides that its energy security derives from mines in Africa and not wells in the Middle East, we should expect Chinese attention and capital to shift. If there is a more enduring role for oil and gas in the global energy picture, more contestation between the United States and China for regional influence is possible. Finally, it is possible that Western states will turn away from hydrocarbons for ecological reasons, while China and the developing world remain devoted to them for economic reasons. This could manifest almost as a U.S. abdication of a future role in the Middle East, with China picking up much of the slack.

What is especially important to grasp here is how much of how this develops is beyond the ability of Middle Eastern governments to shape. The principal drivers of the global energy transition will come from outside the region. They will have a profound impact inside the region, and they will shape the way the region relates to the rest of the world. To hear some people tell it, that change could be profound, and it could be coming very soon.