Endowed with half of the world’s known oil and gas reserves, the Middle East and North Africa (MENA) region became – particularly during the second half of the twentieth century – a cornerstone of the global energy architecture.
This architecture is currently undergoing a structural transformation, prompted by two different forces: decarbonization policies and technological improvements.
The adoption and quick entry into force of the Paris Agreement marked a major step forward in international efforts to address global warming. For the first time, developed and developing countries committed to act in order to limit global average temperature increase to well below 2 °C, and to pursue efforts to further limit this to 1.5 °C above pre-industrial levels. This should reinforce strong decarbonization measures already being undertaken in different parts of the world, such as in Europe.
Meanwhile, technological improvements have significantly increased the cost-competitiveness of low-carbon technologies such as solar and wind power generation, power storage technologies and electric vehicles (IRENA, 2017). This has already started to reshape the global energy system, notably by giving a greater role to solar and wind in the power generation mix. Global energy outlooks generally see these trends as continuing in the future. Some outlooks even see these trends further accelerating, leading to a peak in global oil demand in the 2020s.
By transforming the global energy architecture, international decarbonization policies and technological advancements could have an impact on the world’s key oil and gas producing regions, such as the MENA. Let’s see how.
The Macroeconomic Context of the MENA Region
The MENA region presents a heterogeneous macroeconomic context, which reflects the irregular distribution of oil resources throughout the region.
For five regional oil exporters (Libya, Kuwait, Iraq, Oman, Saudi Arabia), more than 40% of their GDP is based on oil and on government activities that are heavily funded from oil revenues. In four other oil exporters (Qatar, Algeria, UAE, Bahrain) this share varies between 40% and 20% (Chart 1).
In all these countries, activities in non-oil and non-government sectors are also often linked to oil and government activities. The main sources of manufacturing value-added tend to include refinery, chemical and other mining/extractive industries, while some non-oil sectors, such as construction, depend heavily on government contacts (IMF, 2016).
CHART 1 GDP Composition of MENA Countries (2016)
In the same oil-exporting countries, oil is the primary source of fiscal revenues (Chart 2), and non-oil fiscal revenues are themselves mainly related to oil.
CHART 2 Oil and Non-Oil Fiscal Revenue in Selected MENA Countries (% of General Government Revenue) 2016
Oil makes up more than 50% of total exports from MENA oil exporting countries (Chart 3). This further illustrates the predominance of the oil sector in these economies, and their consequently limited level of economic diversification.
CHART 3 Oil and Non-Oil Exports in MENA Countries (2016)
The compositions of GDP, fiscal revenues and exports illustrate how oil represents a fundamental difference in the MENA macroeconomic context between oil exporters and oil importers. But oil also impacts other macroeconomic variables, such as employment and labour productivity.
In oil-exporting countries such as Kuwait, Saudi Arabia and Qatar, more than 60% of nationals are employed in the public sector. This situation substantially differs from that in MENA oil-importing countries, where a far more limited share of working populations is employed in the public sector.
High shares of public employment, generally characterized by protected jobs with high wages (WEF, 2014), have contributed to lowering the labour productivity of MENA oil-exporting countries.
This trend has become more entrenched since the 1980s, as MENA oil exporters have increasingly imported cheap non-national labour, reducing labour productivity also in the private sector. As a result, the trajectories of labour productivity in MENA oil exporters and oil importers have profoundly diverged over the last few decades (Chart 4).
CHART 4 Labour Productivity in Selected MENA Countries (Index: 1980=100)
This low level of labour productivity is one of the major barriers for economic diversification in MENA oil exporters (Hertog, 2013). It prevents the development of an internationally-competitive private sector.
Furthermore, it should be outlined that high percentages of nationals employed in the public sectors of oil-exporting countries go in tandem with small percentages of nationals employed in the oil sector. This is an important aspect of the social contract in MENA oil-exporting countries, because it shows that only a small fraction of each national population contributes to the generation of the revenue that is used to financially support the vast majority of each population. The support is mainly based on oversized public sectors, but also on expensive and economically inefficient subsidy schemes, such as those for energy.
This excursus through the macroeconomic context of the MENA region illustrates the persistent over-reliance of oil-exporting countries on oil revenues.
The Potential Impact of Global Decarbonization on MENA Oil Exporters
Since the 1980s, global oil demand has constantly risen, while between 2000 and 2014 oil prices boomed. In such a favourable context, MENA oil exporters have had little incentive to diversify their economies, and to evolve from rentier to production states.
With global markets demanding increasing volumes of oil, and even at increasing prices – at least up to 2014 –, why would MENA oil exporters change course and put at risk their established social contracts?
After all, should oil production continue at current levels, MENA oil exporters still have a long way to go before depleting their reserves (Table 1).
TABLE 1 Projected Years of Future Oil and Gas Production at 2015 Reserve Level and Average Production of Last Five Years
|United Arab Emirates||75||112|
Source: produced by the authors from BP 2017.
Because of decarbonization policies and technological innovation, these reserves might become stranded before they are depleted. This is particularly the case for oil reserves. For gas the situation is different because gas is an important component of global decarbonization due to its key role in displacing coal from the energy mix.
With the Paris Agreement, global leaders have committed to strengthening the global response to the threat of global warming by keeping the global temperature rise this century well below 2 °C above pre-industrial levels. Climate scientists have estimated that, to have at least a 50% chance of keeping the global temperature rise below 2 °C throughout the century, the cumulative carbon emissions between 2011 and 2050 need to be limited to around 1,100 gigatonnes of carbon dioxide (Gt C02) (Meinshausen et al, 2009).
Greenhouse gas (GHG) emissions contained in the present estimates of global fossil fuel reserves are estimated to be about three times greater than the global carbon budget (Meinshausen, 2009; Raupach, 2014).
On this basis, McGlade and Ekins (2015) explored the implications of this emissions limit for fossil fuel production in different world regions. According to their study, a third of global oil reserves, half of gas reserves and over 80% of current coal reserves should remain unused from 2010 to 2050 in order to meet the 2 °C target. In this context, they estimate the Middle East to be able to exploit only about 60% of its oil reserves – leaving more than 260 billion barrels underground – and about 40% of its gas reserves (McGlade and Ekins, 2015, p. 189).
Such a development would represent an unprecedented challenge for MENA oil exporters. Their entire economic and socio-political models would need to structurally change in order to adapt to the new reality.
MENA Economic Diversification Strategies
The drop in oil prices that started in 2014 has functioned as a catalyst for new thinking throughout the MENA oil exporters about the unsustainability of their high reliance on oil and about the consequent needs for economic diversification (El-Katiri, 2016).
All regional oil exporters have adopted economic diversification strategies, generally based on the targets of increasing the private sector’s role in the economy, developing small and medium enterprises (SMEs), creating jobs, investing in education and innovation (Table 2).
CHART 2 MENA Economic Diversification Strategies: Key Targets
|Algeria – New Economic Growth Model (2016‑2019) (Launched in 2016)|
|Boost non-hydrocarbon exports to 9% of total exports by 2019, from less than 5% currently|
|Iraq – Private Sector Development Strategy (2014-2030) (Launched in 2014)|
|Increase the private sector to a share of 60% of GDP by 2030Improve the country’s business environment, particularly for SMEsReduce the unemployment rate to 4% or less by 2030|
|Kuwait – Kuwait Development Plan (2015-2020) (Launched in 2015)|
|Increase the private sector to a share of 40% of GDP by 2020Creation of public-private partnerships to carry out infrastructure projects Increase the number of Kuwaiti employees in the private sector from 92,000 to 137,000 by 2020|
|Oman – Ninth Five-Year Development Plan (2016-2020) (Launched in 2016)|
|Reduce the contribution of oil to GDP at current prices from 44% in 8th five-year plan to 26% by 2020Focus on the private sector and activate public-private partnershipsCreate job opportunitiesFocus on SMEs|
|Qatar – National Vision 2030 (Launched in 2008)|
|Increase and diversify the participation of Qataris in the workforceCreate a business climate capable of stimulating national and foreign investmentsManage the optimum exploitation of hydrocarbon resourcesExpand industries and services with competitive advantages derived from hydrocarbon industriesCreate a knowledge-based economy characterized by innovation, entrepreneurship and excellence|
|Saudi Arabia – Vision 2030 (Launched in 2016)|
|Increase SME contribution to GDP from 20% to 35% by 2030Increase Foreign Direct Investment from 3.8% to 5.7% of GDP by 2030Increase the private sector’s contribution from 40% to 65% of GDP by 2030Raise the share of non-oil exports in non-oil GDP from 16% to 50% by 2030Increase non-oil government revenue from SAR 163 billion to SAR 1 trillion by 2030Generate 9.5 GW of new renewable energy by 2030|
Source: produced by the authors based on national strategies.
These strategies reflect the economic policy guidelines generally aimed at MENA oil exporters, developed by international organizations and academics.
However, it should be outlined that these kinds of economic diversification plans have been part of MENA oil exporters’ rhetoric for a long time. For instance, the Kuwaitie government was already discussing the need for economic diversification during the 1950s. After 60 years, oil continues to represent more than 60% of Kuwait’s GDP, and more than 70% of its fiscal revenues.
MENA oil exporters have often set out similar strategies in times of low oil prices, and then rapidly dismissed them once prices recovered. As Hvidt (2013) outlines, MENA rentier states easily give up their well-argued and planned policies when under pressure and fall back on established ways of doing business, namely through patronage and the predominant role of the public sector. There is, therefore, a risk that current strategies could also be quickly forgotten if/once oil prices recover from the current low levels (IEA, 2017).
This problem is further exacerbated by the fact that when oil prices are high, non-oil exporting and import-substituting sectors of the economy become less competitive, because the exchange rate appreciates. Being aware of this problem, private investors tend not to invest in non-oil sectors, even when oil prices are low. This creates a vicious cycle that helps to explain MENA oil exporters’ small private sectors. However, there are remedies to this problem. For instance, sovereign wealth funds could be used to strategically invest in the creation of productive domestic private sectors, instead of being used as tools to perpetuate the rent via financial or real estate speculation. Of course, to be implemented, such strategies require strong governance and forward-looking visions on the part of governments.
MENA oil and gas exporters should look at international decarbonization policies and at low-carbon technology advancements as an opportunity to develop forward-looking strategies to transform their economies.
This transformation should be considered by MENA oil exporters as a structural path, to be pursued without deviation in order to ensure both political stability and socio-economic prosperity – even in a decarbonizing world.
Sovereign wealth funds could be used to strategically invest in the creation of productive domestic private sectors, instead of being used as tools to perpetuate the rent via financial or real estate speculation
Should the world factually pursue the decarbonization pathway agreed in Paris and should MENA oil exporters continue to be unprepared for that, the consequences could be dramatic, socio-economically and geopolitically, for the MENA region and the overall international equilibrium.
 We deﬁne MENA as including the North African countries (Morocco, Algeria, Tunisia, Libya and Egypt), the Levant countries (Jordan, Israel, Lebanon, Syria and Palestine), the Gulf Cooperation Council countries (Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and United Arab Emirates), Iraq and Iran.
 For simplicity, the article uses the term ‘oil’ to mean hydrocarbons. In some countries (eg. Algeria, Qatar), hydrocarbon production includes a significant share of gas.
 It should be noted that the low shares of oil in exports from the UAE and Bahrain are because non-oil exports include a large share of re-exports (IMF, 2016).
BP, BP Statistical Review of World Energy 2017, London, 2017.
El-Katiri, L. Vulnerability, Resilience, and Reform: The GCC and the Oil Price Crisis 2014-2016, Center on Global Energy Policy, Columbia University, New York, 2016.
Hertog, S. The private sector and reform in the Gulf Cooperation Council, LSE Kuwait Programme on Development, Governance and Globalisation in the Gulf States, The London School of Economics and Political Science, London, 2013.
Hvidt, M. Economic Diversification in GCC Countries: Past Record and Future Trends, Kuwait Programme on Development, Governance and Globalisation in the Gulf States, London, 2013.
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