Environment & energy, Trade and industry, Science and technology | Asia, The World

4 May 2016

Oil will remain an integral part of the Middle East economies throughout the 21st Century and far beyond. And it could be used to make the desert bloom again, Mamdouh Salameh writes.

Will the next 50 years see the advent of the post-oil era? Some experts say that within five decades alternatives to oil will be fully and cheaply developed, ushering in this change. But for the Gulf Cooperation Council Countries (GCC) – Saudi Arabia, UAE, Kuwait, Qatar, Oman and Bahrain – whatever changes may come, there will be no post-oil era.

Contrary to widely accepted wisdom, oil will remain an integral part of the Middle East economies throughout the 21st Century and far beyond. Even if cheap alternatives to oil in transport, water desalination and electricity generation were to become readily available, oil will not be left underground because the Arab Gulf oil producers will use it to power thousands of water desalination plants to generate enough water not only for drinking, but also for irrigation, thus making the desert bloom again. They will also use it to dominate the global petrochemical industries and any industries in which oil is a feedstock.

The crude oil price has lost 67 per cent of its value since September 2014, and there are no indications yet that it will stop there, in the absence of a major production cut by OPEC. This has adversely impacted on the global economy, global investments and the economies of the world’s oil-producing nations, particularly the GCC countries whose oil-export revenues have declined by an estimated US$200bn in 2015, compared to 2014.

The current turmoil in the global oil market has been exacerbated by OPEC’s refusal, under pressure from Saudi Arabia, to cut production to stem the glut in the market, and also by Saudi Arabia’s oil strategy to defend market share by waging futile price wars against US shale oil producers, Iran and Russia.

Saudi Arabia took a huge gamble when it flooded the global oil market with crude oil to defend and enhance its market share at the expense of its rivals, and also to slowdown, if not undermine altogether, US shale oil production. It was an expensive move, and Saudi Arabia does not have the necessary very deep pockets to continue this oil price war.

There are short-term and long-term strategies that the GCC countries could use in the face of steeply-declining crude oil prices.

More on this: The Middle East: the new Asia? | Talal Yassine

Firstly, OPEC – and by extension the GCC countries – have no alternative but to cut crude oil production by at least 2.30 million barrels a day (mbd). That’s the amount its members are producing above their agreed production ceiling of 30 mbd which is causing the current glut in the market.

Another short-term measure is for Saudi-led OPEC to stop its price war with US shale oil production. Although shale oil production has fallen by an estimated 1.5 mbd since 2014 signifying the impact of low oil prices, shale oil producers are proving very resilient and they will be back in the market in strength once oil prices start to rise.

The GCC countries could also enhance their oil revenues by exporting an increasing proportion of their crude oil as refined products and petrochemicals. Additionally, the GCC countries could invest in refineries and petrochemical assets around the world. These measures would enable them to enhance their market share in the global oil market.

Another measure is to cut wasteful subsidies. The six GCC members spend an estimated US$167bn annually on energy subsidies, according to the World Bank.  Eliminating the energy subsidies altogether would reduce oil-revenue losses in 2016 by 74 per cent.

A long-term strategy is diversification. Part of this diversification should be investing in food production in Sudan, for instance, and also in renewable energy – particularly solar power, nuclear energy and water desalination technologies. Sudan has the third biggest arable landmass in the world, and the water resources that would enable it to become the food basket of the GCC countries and a great source of food export revenues for them. Investing just 5 per cent of their oil revenues in food production projects each year would enable the GCC countries to create a food revolution for their people.

An integral part of diversification is intensive investment in renewable energy, particularly solar power and nuclear energy. Solar power along with nuclear energy could provide all the electricity needs of the Gulf countries and could even enable them to export electricity to Europe.

In the final analysis, oil will continue to fire the economies of the GCC countries well into the 21st Century and far beyond. For the GCC countries, there will be no post-oil era.

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Salameh, M. (2016). Is it all over for oil? - Policy Forum. [online] Policy Forum. Available at: http://www.policyforum.net/is-it-all-over-for-oil/