A Way Out: The Middle East Can Harness Renewable Energies to Break Free from Oil

For the past half decade, the Middle East, and in particular the Gulf region, has been dependent on oil revenues to sustain development plans and grow the economic pie. However, as the world gradually turns away from fossil fuel sources, renewable energy is quickly becoming an attractive means to spur foreign and domestic investment in the region. Specifically, solar energy is positioning itself as a highly valuable source of energy for the Middle East. This technological breakthrough, which has made strides internationally, can prove incredibly lucrative to countries such as Saudi Arabia, Egypt, and Kuwait. The resource is also becoming more enticing because of its scalability possibilities. A few years ago, solar panels were mostly used in households for personal purposes. Today, governments across the region are enacting legislation to promote the technology at larger scales and industries. This reality is exemplified by the International Renewable Energy Agency (IRENA)’s recent statement: “Solar photovoltaic (PV) technology is now ‘the most competitive form of power generation’ in the Gulf. The Gulf Cooperation Council (GCC) countries plan to ‘install a total of almost 7 gigawatts by the early 2020s.” Additionally, the World Bank projects that prime energy demand will rise at an annual rate of 1.9 percent through 2035, ensuring long-term necessity for new resources and generation (Arab News). These exciting developments are promising for the region’s energy stability and economic diversification.

The governmental shift from skepticism to interest could not come at a better time. A few months ago, the world witnessed how vulnerable oil-dependent nations were to external shocks. Specifically, Gulf countries have and continue to suffer immensely from the sharp drop in demand for oil due to COVID-induced lockdowns across the globe. Furthermore, the demand decrease was compounded by an OPEC+ spat between Russia and Saudi Arabia. The two countries could not come to a consensus on production cuts, which further brought down the price of the barrel globally. In fact, future barrel prices actually went negative in the United States for a few days prior to the long-awaited agreement (Forbes). Oil prices have severe implications not only for these countries’ economies, but for their policy options as well. For example, Saudi Arabia might come to reconsider its protracted war in Yemen due to the tighter revenue this fiscal year. The decrease in revenue also limits the country’s ability to undertake its Vision 2030, championed by Crown Prince Mohammed bin Salman and intended to diversify the Gulf state’s economy. All signs point to the fact that Saudi Arabia and other countries in the Middle East should reduce their reliance on oil for state revenues. 

The Middle East is at a critical juncture. The United States is becoming decreasingly reliant on the region’s main export, as it has undergone its own shale revolution back in 2014. While China and Japan continue to import vast amounts of oil from the region, they too are gradually transitioning to alternative renewable energies. For instance, China is the world’s leader in hydropower generation and solar grid installation (Solar Feeds). Furthermore, the IMF projects that global oil demand will peak in 2040, a rapidly-approaching date (CNBC). The Middle East is therefore sensing the change in tide and has begun to act accordingly. The UAE and Saudi Arabia in particular have set ambitious goals for themselves. Saudi’s government is currently committed to generating 27.3 GW in renewable energy by 2023; a target raised from 9.5 GW in January 2019 (The Economist). Similarly, the UAE, and Dubai in particular, has fostered a market for the solar industry, recently recording its lowest prices ever in a bidding to develop its 5 GW Mohammed bin Rashid al-Maktoum (MBR) solar power park. The issue for these two countries pertains to the targets. It is essential that the two countries not lose sight or interest in reaching these objectives nor be discouraged by lower barrel prices, which render the financing of these efforts more difficult. Saudi Arabia in particular, in light of the muddled Aramco IPO and debt levels, might need to incur further amounts of debt to enact the diversified economy it seeks. Therefore, countries in the MENA region might suffer short-term losses for longer term gains, a narrative often espoused by developed nations. 

Transitioning to green energy might actually contribute to the region’s future economic viability. Indeed, a feasibility study conducted in April 2020 found that 100 percent renewable energy electricity systems could cut costs by between 55 and 69 percent compared to a business-as-usual scenario (GreenTech Media). The study further found that solar and wind sources are the most attractive options for the MENA region, owing to solar exposure and wind speed, respectively. The research also underscored the importance of incorporating natural gas in the countries’ transition to green energy, a factor that has been seized upon by developed countries as well, including the United States. Finally, the study concluded that the interconnection of MENA countries could reduce the overall cost of the system (ScienceDirect). This last point is critical to highlight. It is well known that there are intra-regional divisions in the Middle East, from Saudi Arabia and Qatar, to Lebanon and Syria, but this economic reality should be of interest to Arab states. This shared opportunity could be a catalyst for greater regional cooperation and integration. While the region does not have a comprehensive trade agreement, memoranda of understanding might be worth pursuing regarding transportation, installation, and distribution of the energy generation. 

Of course, there exist several non-negligeable barriers to achieve this energy transition. A research paper by the Oxford Institute for Energy Studies from 2014 describes some of these obstacles: electricity pricing and the domestic pricing of fossil fuels (Oxford Institute). First and foremost, electricity pricing has been historically skewed due to the perception that the high levels of oil and natural gas are effectively a “public good”. This paradigm explains why Kuwait’s average residential electricity tariff stands out as the world’s lowest.  Syria and Iraq have similarly charged less than a quarter of the average electricity prices in liberalized markets. The other issue concerns the under-pricing of fossil fuels to such an extent that alternative energy sources will remain uncompetitive on a cost basis even where genuine economic value would be generated. With that in mind, the paper maintains that the region needs a structural reform in domestic energy market pricing. The paper also argues that MENA has been suffering negative externalities stemming from the environmental costs of using fossil fuels. In particular, air pollution and water contamination have had a deleterious effect on the region’s population. Economically, climate change has impacted the region’s fishing industry, which has long been a critical source of revenue for coastal cities and countries. Therefore, health and economic arguments exist for transitioning to solar and wind energies in the coming years. 

The nature of fossil fuel consumption means that international demand and supply can fluctuate heavily. As global markets witnessed in September 2019 after the attacks on the Saudi oil facilities and recently during the COVID-19 pandemic, countries reliant on oil exports are at the mercy of external factors. Therefore, transitioning to renewable sources of energy may increase domestic resilience. Citizens may not rely on government income to finance electrical needs if domestic infrastructure for renewable sources is adequate. Communities in remote areas could gain access to electricity as well by using small-scale solar panels. Increasing renewable energy generation could also address the impressive projected population growth in the region. An energy transition at the micro level therefore also makes economic and regional developmental sense.

Finally, a regional transition to renewable energies could prove highly beneficial with regard to job creation. A study from January 2020 by PV Tech found that the Middle East could see massive employment creation in this field. Specifically, it projects that nearly 1 million jobs in the PV sector could emerge out of all 1.7 million energy jobs created by 2050. An additional 193,000 citizens could be employed in the same time table in storage jobs (PV Tech). This projection bodes well for the region, which suffers from chronic high unemployment and a burgeoning youth population. Directing the younger generations into this line of work could do marvels for social cohesion and economic stability. Ultimately, the MENA region can wean itself off of oil by gradually transitioning to a green economy. From increased market resilience, to job creation, to regional cooperation, the opportunities are vast and exciting but must not be squandered.

Works Cited:

1. Anderson, Kerry Boyd. (2019, February 6). Renewable energy on the rise in the Middle East. Arab News. Accessed June 15 on https://www.arabnews.com/node/1448021

2. Hansen, Sarah. (2020, April 21). Here’s What Negative Oil Prices Really Mean. Forbes. Accessed June 15 on https://www.forbes.com/sites/sarahhansen/2020/04/21/heres-what-negative-oil-prices-really-mean/#1525af2c5a85

3. Chakrabarti, Sumit. (2019, August 22). Solar Power Statistics in China 2019. Solar Feeds. Accessed June 15 on https://solarfeeds.com/solar-power-statistics-in-china/

4. Ellyatt, Holly. (2020, February 6). Global oil demand to peak around 2040 or ‘much sooner,’ IMF says. CNBC. Accessed June 15 on https://www.cnbc.com/2020/02/06/global-oil-demand-to-peak-around-2040-imf-says.html

5. The Economist Intelligence Unit. (2019, October 22). Gulf states plough on with renewables development. The Economist. Accessed June 15 on http://www.eiu.com/industry/energy/middle-east-and-africa/saudi-arabia/subsector/renewables/articlelist

6. Deign, Jason. (2020, April 27). Study: Middle Eastern Countries Would Save Money by Ditching Fossil Fuels in Power Mix. Greentech Media. Accessed June 15 on https://www.greentechmedia.com/articles/read/how-mena-could-go-from-oil-rich-to-carbon-free

7. Aghahosseini, Arman; Bogdanov, Dmitrii; Breyer, Christian. (2020, March). Towards sustainable development in the MENA region: Analysing the feasibility of a 100% renewable electricity system in 2030. ScienceDirect. Accessed June 15 on https://www.sciencedirect.com/science/article/pii/S2211467X20300201?via%3Dihub

8. El-Katiri, Laura. (January 2014). A Roadmap for Renewable Energy in the Middle East and North Africa. The Oxford Institute for Energy Studies. Accessed June 16 on https://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/01/MEP-6.pdf

9. Martin Rojo, Jose. (2020, January 22). Study: PV, storage poised to become top energy job creators by mid-century. PV Tech. Accessed on August 8 on https://www.pv-tech.org/news/study-pv-storage-poised-to-become-top-energy-job-creators-by-mid-century