Massive solar parks… Green hydrogen...
A whole new desert city powered
entirely by clean energy.
THESE are the images leaders across the Middle East want
the world to see.
Their message?
The energy transition is underway.. and we`re at the forefront
of the change.
But that`s only part of the story.
In this video, we`ll be searching for answers to three big questions.
The first thing I want to know is whether investing in
renewables actually translates into quitting fossil fuels.
The second thing I want to find out is how geopolitical relationships
will change as oil becomes less important.
And finally I want to know: what will the decline in oil wealth
mean for ordinary people?
Will we see Gulf citizens paying income tax any time soon?
Stay tuned for the answers - or at least - attempts at answers on
this edition of Business Beyond.
Before we get
properly into this, a super-brief history recap.
After the discovery of oil in the Gulf region in
the beginning to mid-20th century, Countries like Saudi Arabia, Oman,
the UAE, Qatar, Bahrain and Kuwait - all members of a group called
the Gulf Cooperation Council - grew rich incredibly fast.
Others, like Iraq and Iran - overshadowed by conflict -
didn’t become that wealthy.
But their economies still became hugely reliant on oil.
This newfound oil wealth had three broad effects -
at least in that first set of countries.
First: it created a social contract.
Authoritarian rulers were accepted - as long as they shared
the wealth around.
Second, it shaped geopolitical alliances.
The United States became a key ally of Saudi Arabia -
providing it with military backing in exchange for access to its oil.
To this day, it helps protect the Strait of Hormuz, a key
passageway that handles a fifth of the world’s total oil every day.
Finally, it led to complacency.
With so much oil money floating around in state
coffers, less attention was given to private enterprise -
and to key sectors like education.
As this research paper points out, in countries like
Kuwait and Qatar - up to 90 percent of citizens
are employed by the government, and not always productively.
The all-but-guarantee of a cushy government job - often in the
oil industry - means there`s been relatively little
demand for quality education or local entrepreneurship.
But now - after decades of oil-fueled
growth, there`s an urgent reason for Gulf leaders to change course.
With the climate crisis now at the forefront
of public consciousness, Gulf countries know they need to
diversify their economies away from oil.
Environmental protection isn`t their sole motivation.
Just have to look at this chart: in recent years,
oil prices have got incredibly volatile - crashing in
2008 with the financial crisis, then in 2014 as production increased
in North America and in 2020 due to the pandemic.
For oil-reliant economies - that unpredictability is
a huge financial risk.
Saudi Arabia, I think,
earns more than 60% of its total revenue from oil.
Qatar even more.
And many other countries, I think their budget is really very
much based on it.
So the faster the countries manage to diversify the economies and find
other sources of revenue, the less bumpy and painful
would be the road to energy transition.”
So let’s take a look at what these countries are doing to
diversify away from oil.
In Saudi Arabia, Crown Prince Mohammed bin Salman
launched “Vision 2030” - it is a massive plan to fundamentally transform the economy.
As well as pumping billions into renewables, the aim is
also to boost digitalisation and opening up to tourism.
The hugely ambitious plan is typified by NEOM -
a massive urban development and free trade zone that includes:
The line 500 meter high, 200 meter wide, 170 km long city in the shape of a line.
No roads, cars or emissions.
And everything its 9 million residents could ever need within a five-minute walk.
Meanwhile, the UAE has built one of the largest
solar parks in the world, opened a South-Korean-built
nuclear power plant - and invested massively in
carbon capture technology.
Other Gulf countries - Qatar, Kuwait, Bahrain and Oman have
also been working on transforming their economies,
with plans ranging from developing culture and tourism to promoting
green hydrogen and in the case of Qatar, reinforcing its dominance
as the world’s largest exporter of Liquefied Natural Gas, or LNG.
And that’s not all.
In a region famous for luring millions of expats with
the promise of paying pretty much no tax, old assumptions
are being turned on their head.
While leaders have yet to touch
income tax, in the past years, several Gulf
countries have brought in V-A-T and Corporation tax.
All these policies may have you believe that Gulf
leaders are expecting oil demand to drop.
But that may not actually be the case,
at least not if you talk to Ellen Wald.
She’s the author of a book called “Saudi Inc.”
It’s a history of Saudi Arabia and its national oil giant, Aramco.
Here’s where she thinks demand for fossil fuels is headed:
I think demand is going to continue to rise.
If you look at India, you look at China, you look at
Africa, these are all developing areas that are seeking
and will increase their consumption of fossil fuels.
They're not going to be able to do what they want to do
developmentally just with renewables.
Even if they do install a lot of renewables, it cannot replace
the reliability and the efficiency that fossil fuels provide.
India, China and Africa - all parts of the world
that are growing fast and looking for cheap energy to fuel that growth.
According to Wald, Gulf economies - and in particular Saudi`s oil giant
Aramco, have been betting on them for years:
Aramco sends students and has been to China to study in Chinese universities.
They send their employees to do not like, I don't want to say it's
a tour of duty, but they send them out to China to
work so that they understand what's going on there.
The Middle East has been cultivating
this relationship for years now,
whereby they had these lots of
deals with Asia, but also they have invested directly
in, for example, Asian refineries, whereby you build
a refinery that would take specific oil coming from
the Middle east for many years to come.
And that brings us to another interesting point,
because even if oil demand does shrink globally -
which isn’t a given - the Gulf countries could still have
a key advantage.
So in a shrinking
market, the low cost producer is the last to leave the market.
And this is where we look around the world to see who
are those high cost and low cost producers.
And you can easily see that the lowest cost producers in the world
are actually in the Middle east, particularly the GCC countries.
So they will be the last to leave a shrinking market.
And that's what they are betting on.
So we`ve seen that Gulf countries are unlikely to
be short of buyers for their oil - at least in the near future.
But reacting to demand is one thing,
creating it, is another.
A recent undercover investigation by
the Center for Climate Reporting - broadcast by Channel 4 in the UK -
revealed the strategies Saudi Arabia is using to increase
demand for fossil fuels.
Among the plans: to install a fleet of power station
ships off the African coast - using, you guessed it, oil,
to produce electricity.
To promote high-speed “supersonic” commercial aviation - which uses
three times more kerosene than regular air travel.
And: To flood developing markets with cheap - and dirty -
diesel and petrol cars.
So there are two trends happening at once.
Gulf countries are investing hugely in renewables.
But they’re also serving and creating new markets for their oil.
Renewables are not
really replacing oil and gas and
other fossil fuels in the economies
and in the energy mix.
Rather, the increasing share of renewables in the Middle east,
as well as in many countries in Asia,
for example, has just been adding to the overall energy supply.
But I think it's more a reflection of the growing demand for energy.
Remember at the beginning of this video, when we talked about
how American ties with Saudi had been shaped by energy?
I want to talk more about that because since the end of
World War II, the two countries have had
an unwritten agreement: the US gets a reliable supply of oil
priced in US dollars.
And in exchange, Saudi Arabia is guaranteed
military backing - especially against its rival - Iran
The alliance was especially strong during the Gulf War
in the early 1990s when an American and Saudi-led
coalition successfully thwarted Iraqi dictator Sadam Husein’s
invasion of Kuwait.
The relationship subsequently took a dive in 2003, when the US invaded
Iraq - a move Saudi Arabia vehemently opposed.
Another big turning point came in 2008:
and this is the one that`s most relevant to this story.
That was the beginning of the “Shale Revolution” - when the
US began unlocking vast quantities of its own oil and gas through fracking.
With the shale revolution, the US
became a competitor to the Middle east in terms of exporting
oil to the global market, including to Asia.
So we cannot talk about the relationship between the US
and the Middle East without acknowledging that massive
shift in the trade relationship.
That changing power dynamic became apparent in October 2022, when
the oil producing cartel OPEC - of which Saudi Arabia is the de facto
leader - announced a major production cut.
US President Joe Biden - seen fist-bumping Mohamed Bin Salman
just a few months earlier - was angry - fearing higher energy
prices could hit him at the Midterm elections.
If Saudi Arabia does something with
the oil market, if they cut a million barrels a day,
they don't have the same influence on the United States as they used to.
I don't think that the US policymakers realise that yet.
But the United States is the largest oil producer in the world right now.
So to blame Saudi Arabia for high oil prices or
high gasoline prices in the United States doesn't make
sense the way it used to.
This brings up a really interesting point.
If the US is becoming less reliant on Middle Eastern oil,
does it still have an incentive to provide security in the region?
And if so - could another power, say China, take up the role instead?
There are very few powers in this world who
can extend their navy to that extent.
And I'm not convinced that China is one of them.
And China potentially maybe realises this.
For whatever the reason, they're not interested in being the guarantors of
Middle east oil security in the Persian Gulf.
And so when it comes down to it, that does leave the United States.
But bargains in other areas are being made.
Saudi Arabia wants to follow the UAE in developing
nuclear power - and it`s asked the US for its
know-how: The Saudis were saying to the US, look,
we want nuclear power, and in exchange for a new defence,
we're, we're willing to go it your way.
We're not just going to buy nuclear power, from, you know,
Korea or Japan or even China.
We'd like you to support us going through these channels,
and also in exchange, we're going to open relations with
Israel, for example.
So that's a totally new dynamic.
12.41 .
Saudi’s planned normalisation of ties with Israel are now on hold
due to the ongoing conflict in the Middle East.
But the role oil has played in the region`s relationships
does make me wonder about what kind of ties we can expect
to develop in the age of renewables.
The first thing to bear in mind is that the logistics of
trading fossil fuels differs greatly from renewables.
As a rule - clean energy gets transported far
less than fossil fuels do.
That’s because it’s less efficient to do so.
When you transport electricity, say you generate solar electricity
and you store it in a battery, it's losing charge all the time that
electricity is dissipating.
The same thing actually happens with LNG.
There's something incredibly efficient about a barrel of oil or,
say, a lump of coal that we don't necessarily
have in other types of energy.
So I don't think there's any danger in the Middle Eastern countries
becoming, having geopolitical leverage as solar power generators.
I don't think that the logistics of electricity work that way.”
But there is one area where renewable energy do confer
geopolitical leverage:
... the supply of critical materials
which are needed for the production of solar panels, wind turbines,
critical materials like lithium, copper, zinc and many others.
And there you actually have quite a similar geopolitics because
of the very unequal and uneven distribution of
those resources across the globe, and the fact that also the processing
capacity and processing infrastructure is located in just
a few countries, and one of them is China.
So this is where you also see a type of foreign policy relationship that
is somewhat similar to the geopolitics of oil and gas.
But what about that other issue we touched on earlier?
The idea that oil has helped prop up autocratic regimes.
Could that change as the world transitions to renewables?
14.54 - 15.14 21.39 :
There actually have been many studies already on the potential
of renewable energy world and bringing more democracy.
I think probably the transition is not that easy,
and I think, can be also, it's not really linear, it's not
straightforward, because you have to take into account many other factors.
This is bigger risk, for example,
in countries like Iraq, than it is in Saudi Arabia or the UAE,
where governments have been putting more effort to strengthening their
institutions, whereas we still see in Iraq, for example, the corruption
is widely spread, the red tape is also widely spread.
So again, it's not clear cut.
And also in terms of the impact on longevity of these regimes, how
much of those revenues have you saved on the side for the rainy days?
Of course, if you squandered it all and you do have some
structural problems in your economy, then you'll definitely be in trouble.
But if you cleverly invested that revenue, those revenues,
so that they generate income for the years to come,
then you are at a lower risk.
I’ve learned a lot of things from reporting this story.
Mainly that multiple things can be true at once.
Gulf regions are diversifying their economies..
But that doesn't mean they’re quitting oil.
That uncomfortable truth - that investing in renewables may not
actually translate into quitting oil and gas - was a major source of
tension at the most recent COP climate conference that took
place in Dubai.
Led by Sultan Al Jaber - also the head of the Abu Dhabi
National Oil Company, it was always going to be a tricky meeting.
Until the final hour, delegates wrangled about the wording
of the deal - finally agreeing not to phase out oil
and gas but to “transition away” from them instead.
An agreement is only
as good as its implementation.
We are what we do, not what we say.
We must take the steps necessary to turn
this agreement into tangible action.
But what IS tangible action in this context?
Some see the wording of the COP agreement as an admission
that the age of oil is coming to an end.
But for a finite resource, that’s pretty indisputable.
What matters more is that the deal doesn't commit anyone -
not the Middle East nor the rest of the world -
to quitting the stuff any time soon.
I hope you enjoyed this episode of Business Beyond.
If you like what you see here, don’t forget to check out our
playlist - we have a whole host of interesting stories there.
From me and the team until next time
it’s goodbye and take care.