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Inside the Gulf’s great energy balancing act

The region must be mindful of cannibalising hydrocarbons too early

Gulf energy transition Unsplash/Zbynek Burival
Without deeper economic reform in the Gulf, revenues from hydrocarbons will remain a mainstay

For a region that long has fuelled the world’s industrial economies through its oil and gas exports, Gulf states have shown an early and deep commitment to renewable energy through the investment cycle – whether in technology incubation, or local and global development.

This green pivot makes sense in a region endowed with abundant sunshine, land and even coastal wind. The success in July of Masdar’s first green bond issue underlines the credibility with which investors see the region’s energy transition credentials.

Yet for Gulf economies historically dependent on hydrocarbon export revenues, the drivers for renewable energy are complex.

The path towards net zero adopted by the Middle East’s global trading partners is driving the need to decarbonise. But progress is being made – Saudi Aramco claims its oil operations have the lowest carbon intensity in the world. 

Another structural change looms for oil and gas markets – the prospect that the global electrification of transport will ultimately cause oil demand to peak, plateau and decline.

This does not herald an imminent end for oil. Leading primary energy forecasts like the IEA’s Net Zero projections see significant oil and gas in the global economy out to mid-century.

But the uncertain prospect of a slow-burn twilight for hydrocarbons does offer an economic incentive for producers to maximise their medium-term oil production – or at least optimise their balance of domestic consumption versus exports.

Diversification

This is where renewable energy will play a huge role – allowing Gulf states to reduce their domestic carbon footprint by shifting away from oil and gas-fired power in favour of renewable sources like solar and nuclear.

Crucially, it will also allow producers to reduce domestic consumption of the oil they produce, allowing additional barrels to be allocated to exports, maximising revenue and providing the dollars to invest in economic diversification.

The strategy may not have the weight of the US Inflation Reduction Act (IRA), the legislation that will enable $400 billion of government support to clean energy over the medium term or the copy-cat strategies in Europe and elsewhere.

Europe’s renewables push is also about security of supply – with homegrown renewable energy seen as a more reliable long-term bet than relying on imported gas. This lesson has been driven home hard in the wake of the Ukraine war.

So, deploying renewable energy in the Gulf states is a compelling strategic narrative.

It makes sense in terms of commitments around net zero. It enables the optimisation of hydrocarbon exports as structural challenges loom for those markets.

And it allows the countries to become major players in the global build-out of renewable energy – both as investors and experienced developers of these technologies. 

Challenges

But there is still one area where Gulf policymakers will need to tread carefully.

Opec’s oil supply management has been a key feature of the region’s economic policy since the 1960s. The energy transition means that decisions that affect oil prices now have a more complex impact on the global economy.

The Organisation, along with its Opec+ partners Russia and others, has moved to tighten global oil balances since late 2022 by reducing supply – a measure that will keep oil prices higher than they otherwise would be. 

Higher oil prices offer an immediate positive impact for Gulf exporters in the form of higher revenues per barrel exported. But they also present two profound and important challenges.

Firstly, G7 central banks are in the midst of a monetary tightening cycle that is in perpetual catch-up mode. They have underestimated inflation’s stickiness in the post-Covid and post-Ukraine period.

While inflation is easing, still-rising interest rates threaten to nudge major economies into recession. Higher oil and energy prices do not bring the prospect of any improvement in the situation.

Secondly, higher oil and gas prices will over time incentivise the switch to renewable energy sources and the reorganisation of power markets around lower marginal cost energy sources. The process of redesigning power markets is already underway in Europe. 

Of course, as major renewable energy players, Gulf states will benefit in some ways from the transition. But without deeper economic reform in the region, revenues from hydrocarbons will remain a mainstay.

For Gulf policymakers, this high-wire balancing act may prove difficult to sustain – missteps could hasten the transition away from the hydrocarbons that are still at the core of many of their economies.

Getting energy transition policy aligned with oil policy is critical for those economies which still depend on oil. 

Bill Farren-Price is an analyst and advisor on global energy markets, geopolitics and policy

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