The Middle East Oil Addiction Could Spell Disaster
The plunge in oil prices has been felt dearly by the top hydrocarbon-producing countries, with all experiencing deep losses in revenue that in better times provides a nice cushion for spending on social programs that keep populations happy and peaceful.
Nowhere is this more true than the Middle East, where governments have fattened their treasuries for years on a steady diet of oil and gas revenues that have made their citizens some of the richest in the world. From a CNBC list of a dozen countries that pay zero income tax, half are countries surrounding the Persian Gulf: Saudi Arabia, Bahrain, Oman, Qatar, the UAE, and Kuwait. Gas-rich Qatar claims the title as the world’s richest country, with GDP per capita of $102,800, according to the CIA World Factbook.
Not only do Gulf citizens get to keep most of their income, they also receive handsome government handouts, all courtesy of massive oil and gas revenues. Saudi citizens, for example, enjoy a cradle-to-grave smorgasbord of benefits, including free health care, free education, and interest-free home loans. In the Middle East, the oil that comes out of the ground and is refined into gasoline costs a fraction of what motorists pay in the United States or Europe. Another list has Iran, Saudi Arabia, Kuwait, and Qatar among the top five countries with the cheapest gas prices. Only heavily subsidized Venezuela’s gas is lower.
Cheap gas aside, the generosity that comes from being the world’s storehouse for petroleum — in 2011, eight Gulf states held just under half of global proven oil reserves, at some 789 billion barrels — is being threatened with low oil prices, leading observers to question whether the good times can continue to roll in the Gulf, or whether the region needs a plan B to deal with the huge hole being blown in oil revenues.
According to the IMF, economic growth for the Gulf States will fall by a whole percentage point to 3.4% this year. For those who think this is only temporary, the IMF says think again, telling oil exporters they should “prudently treat the oil price decline as largely permanent” and reduce spending, the Financial Times reported.
Oil export earnings from the six-member Gulf Cooperation Council (GCC) are expected to fall by $300 billion, a third of their overall economy, compared to the IMF’s previous predictions in October. Kuwait, Qatar, Iraq, Oman, Libya, and Saudi Arabia are the countries likely to be worst affected in the region.
“All Gulf states, with the exception of Kuwait, are expected to have to fund fiscal deficits this year in response to rising social pressures and infrastructure development goals and plunging oil prices,” reports the Financial Times.
Amid the gloom and doom, a senior Qatar central bank official said recently that rich Gulf Arab countries have failed to diversify their economies away from oil and “some may eventually face political challenges as a result.”
The comments by Khalid Alkhater, the Qatar central bank’s director of research and monetary policy, were reported in Arabic. “If low oil prices persist for a prolonged period, it will present challenges to fiscal sustainability and put pressure on social spending programs adopted by some GCC countries in the wake of the Arab revolution and, therefore, there may be political challenges,” Alkhater said at an economic conference in Bahrain.
A quick survey of Wikipedia shows the degree to which the Gulf countries are dependent on oil revenues. In Saudi Arabia, the petroleum sector accounts for roughly 92.5% of budget revenues; the equivalent percentage in Kuwait is 95%, and in Qatar, 70%. Economic diversification is an issue in all of these petroleum-dependent economies, with some doing better a better job of spreading the risk than others.
Bahrain, for example, has expanded heavily into banking, heavy industry, retail, and tourism, whereas in Kuwait, development of non-oil sectors declined after the first Gulf War in the early ’90s, and little has been done since.
As far as alternatives to oil and gas, the Gulf states are starting to embrace nuclear and solar, but these are not considered long-term solutions for the provision of base-load power such as, in the case of nuclear, the U.S. and France.
Abu Dhabi, the capital of the UAE, was the first Gulf state to move into solar, investing $15 billion from its sovereign wealth fund to build its 100-megawatt Shams 1 CSP plant. Masdar City, also in the UAE, is powered by a 22-hectare solar field.
Dubai is also building a 1-GW solar park, while Kuwait, which already has a 50-MW CSP facility, is aiming for 15% renewables by 2030, Nuclear News reported. Saudi Arabia is planning on spending $110 billion on more than 41GW of solar over the next 20 years, while Qatar intends on building 1.8GW by 2020, according to Nuclear News. The Saudis are also currently building the world’s first utility-scale, solar-powered desalination plant in an effort to break away from conventional desalination, which is expensive and uses huge amounts of energy.
Meanwhile, Saudi Arabia’s nuclear ambitions were recently reported by OilPrice.com. In an article penned by The Breakthrough Institute, the Saudi royal family is reportedly planning to invest $80 billion into nuclear within 20 years, with the first nuclear reactor expected to come online in the next eight years. Saudi officials have, of course, assured nervous observers that the reactors will only be used for peaceful purposes.
In fact the Saudis will be playing second fiddle to the UAE when it comes to nuclear. The Emirates have a planned capacity of 1.4GW per plant and is the most advanced nuclear power in the region behind Iran. In September, regulatory approval was granted for the construction of two new pressurized water reactors.
As to whether these renewable and nuclear projects can make any significant progress in weaning the region off traditional oil and gas production, one must be a tad skeptical. The first, obvious reason is that conventional oil and gas production in the Middle East is cheap compared to other regions, meaning there is less of an incentive to move to other energy sources. The other reasons are more subtle.
In 2013, the Oxford Institute for Energy Studies produced a paper that looked at the issue of energy sustainability in the Gulf states. The research concluded that renewables could help Gulf energy producers “re-prioritize their non-renewable oil and gas resources to those domestic industries that do not have alternative inputs, and create value-added to energy exports, for instance existing petrochemicals manufacturing.”
Using solar power for enhanced oil recovery is another possible long-term solution, according to the report’s author, Laura El-Katiri, a research fellow at the institute.
El-Katiri’s research shows that nuclear power in the Gulf could free up crude oil and natural gas for use in other industries, as well as for peak load periods. However, nuclear as a long-term solution is muted by the fact that it cannot achieve the same economies of scale in the Gulf, compared to other large power markets such as France and North America:
“Whether the Gulf’s comparably small individual electricity markets can offer these economies of scale is more than questionable given the absence of alternative options such as intra-regional electricity trade,” according to her report. “This makes it likely that the levelized cost of energy (LCOE) for nuclear power in the Gulf, which reflects the average long-run cost per kWh including both fixed and variable costs, will be high compared to costs observed in other industrialized countries.”
It looks fairly certain, then, that while the Gulf states are definitely looking at renewables and nuclear power as an adjunct to existing oil and gas production, there are serious limitations in how far big a dent they will make in the region’s energy mix. Even as oil prices remain depressed, expect the Gulf to go on, business as usual.
Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.