BRINK‘s GEOPOLITICS article tells us How Does the Arab World Move Away From Oil Dependence? It also tells us how this part of the MENA region should leave in the ground substantial unexploited reserves of hydrocarbons together with its vast expense of stranded assets for good.
It is now common knowledge that for some time and without dramatic breakthroughs, widespread power generation from solar, photovoltaics and wind will remain more expensive than fossil fuels. And electric vehicles won’t replace gasoline-powered vehicles unless battery costs drop and oil prices go up at unrealistic rates. Analyses by researchers concluded some time back that market forces alone won’t reduce the world’s energy needs to be met by fossil fuels.Economic development and energy in the age of climate change cannot possibly wait for another opportunity. Anyhow, let us what Margareta Drzeniek, author of the article has to say.
The picture above is for illustration and of Arab News.
How Does the Arab World Move Away From Oil Dependence?
A general view of an oil field in Saudi Arabia. Many countries have undertaken major reform efforts to reduce commodity dependency. Photo: Fayez Nureldine/AFP via Getty Images
The Arab world has historically been a hotspot for global risks. Over the past decades, the risk nexus of a tense geopolitical environment, high levels of youth unemployment and governments’ inability to diversify economies has been challenging the region’s leaders.
The COVID pandemic accelerated pressures on income, and the twin transition to net zero and a more technology-driven economy will only exacerbate the region’s exposure to global risks and underlying gaps in resilience. While the region is not homogenous, three interdependent areas are key to strengthen resilience in all countries: economic diversification away from dependence on commodity or low-value exports, private sector growth to enable job creation, and future-proofing skills.
Getting Out of Oil
Many countries have undertaken major reform efforts to reduce commodity dependency. The Gulf countries’ economic development plans — usually dubbed Vision 2030 or the like — have aggressive targets and high ambitions.
For example, Saudi Arabia is implementing Vision 2030, which aims at transforming society, diversifying the economy, creating jobs and increasing the level of ambition throughout.
In the UAE, efforts are taking place at the Emirate level, notably in Abu Dhabi and Dubai, which both have 2030 strategies that aim to strengthen high-end manufacturing (e.g., in medical equipment and aerospace). The objectives are ambitious — Abu Dhabi aims to grow the non-oil sector by more than 7.5% annually.
Similar initiatives are under way in North Africa. Trade agreements with the EU entered at the turn of the millennium have had some success, notably in the automotive sector, where exports increased by a factor of 50 to 60 in Egypt and Morocco and tripled in Tunisia. Nevertheless, countries in North Africa remain dependent on a few sectors, including tourism, agriculture and apparel and on the EU market.
The African Continental Free Trade Area, which started trading in 2021, provides an important opportunity for diversification and integration at the regional level, including regional backward linkages to ensure broader participation in global value chains. Weak infrastructure and connections between countries remain to be addressed to more fully benefit from this opportunity.
Public Sector Still the Employer of Choice
Private sector growth has been a key to building a strong and vibrant domestic private sector that provides employment for the significant youth bulge currently entering the labor market in all countries of the region.
In most countries in the region, the public sector remains the employer of choice due to perceived employment stability over a lifetime, but also because many people lack the skills required in the private sector, notably soft skills such as for example team work, entrepreneurial attitudes and agility.
The transition to a more environmentally sustainable economic model appears to be risky at first glance, but investment in renewables could provide a solution to the unemployment challenge.
However, the public sector is not able to absorb all the young people coming into the market. Private sector growth is necessary for political stability, but it has been hampered by heavy regulatory environments, rent-seeking behavior and governance challenges, and political uncertainty.
Some positive developments are happening in local startup ecosystems, which have been blossoming across the region, enabled by digital business models that circumvent some of the rigidities of the traditional business environment and take advantage of the prevalence of digital technologies.
Energy Sustainability Is the Critical Pathway
The region’s elephant in the room remains environmental sustainability.
It is important in two ways. Firstly, the world’s move to net zero threatens the very economic model of hydrocarbon-exporting MENA countries, and secondly, countries experience significant environmental degradation and are major pollutants.
Qatar places 122nd in the Environmental Performance Index; Saudi Arabia is 90th and Morocco 100th (UAE, however, is a better 42nd). Challenges range from threats to biodiversity, which is low for climatic reasons, and water shortages, to an energy-vore lifestyle coupled with a lack of awareness of sustainability challenges. Gulf Cooperation Council (GCC) countries are also among the top 14 per capita emitters of carbon dioxide globally.
Albeit from a low level, efforts to improve on environmental sustainability are gaining speed. The UAE’s Energy Strategy 2050 aims to double the contribution of renewables in the country’s energy mix, and the renewable energy capacity in the Gulf countries already increased by approximately 313% between 2014 and 2018.
Chinese Partnerships
Strategic investments with Chinese partners are the main channel toward achieving this objective. Deteriorating air quality in the region and its potential impact on health may increase pressures on governments to tackle the issue more holistically.
The transition to a more environmentally sustainable economic model appears to be risky at first glance. Progress in diversification and private sector development has been slow, and although the region is entrepreneurial, youth unemployment remains a key issue. However, recent research shows that investment in renewables could provide a solution to the unemployment challenge.
Renewable energies are generally more labor-intensive than extractives. The International Renewable Energy Agency estimates that current commitments and project plans could create 220,000 jobs in GCC countries by 2030.
To sum up, while economic diversification is crucial, the energy transition provides resilient recovery pathways to the MENA region that could ensure future growth, a stronger intergenerational contract and higher resilience.
Margareta Drzeniek is a managing partner at Horizon Group. She previously led the economics unit of the World Economic Forum and was in charge of the main flagship reports, including The Global Competitiveness Report and the Global Risks Report.
NATURAL GAS NEWS‘ Geopolitical Implications of Global Decarbonization for MENA producing countries by Pier Paolo Raimondi and Simone Tagliapietra, Oxford Institute for Energy Studies (OIES) is an expert’s hindsight in the foreseeable future of the region.
Endowed with half of the world’s proven oil and gas reserves, the Middle East and North Africa (MENA) region represents a cornerstone of the established global energy architecture. As the clean-energy transition gains momentum worldwide, this architecture might shrink—challenging the socio-economic and geopolitical foundations of the region in general, and of its oil and gas-producing countries in particular.
Geopolitical Implications of Global Decarbonization for MENA producing countries
February 21, 2021
This challenge has two dimensions: domestic and international. Domestically, a decline in global oil and gas demand would reduce revenues for producing countries. Considering the profound dependency of these countries on oil and gas rents (the ‘rentier state’ model), this could have serious economic and social consequences. Internationally, the global clean-energy transition might push producers towards a fierce competition for global market share, exacerbating geopolitical risks both regionally and globally.
In 2020, MENA oil and gas producers experienced a situation that some observers have described as a preview of what the future might look like for them beyond 2030, as global decarbonization unfolds. The COVID-19 pandemic resulted in an unprecedented crash in global oil demand. At the same time, oil prices collapsed (for the first time in history, the benchmark West Texas Intermediate entered negative territory) due to a lethal combination of falling demand and OPEC+ coordination failure. All this generated a perfect storm for MENA oil- and gas-producing countries, which led to unprecedented macroeconomic imbalances.
The evolution of oil markets, national stability, and prosperity as well as international influence are closely linked in the MENA region, but MENA oil- and gas-producing countries are far from homogenous. Different countries are likely to experience different impacts from the global clean-energy transition, depending on a number of domestic and international factors.
International factors
MENA producers are likely to be affected by the differences in the trajectories for oil and gas markets, the speed of the energy transition in different world markets, increased competition between energy producers, and increasing penalties for carbon intensity in production.
While gas is set to play a role in the global energy mix for decades, oil is expected to lose relevance as a result of decarbonization policies and technological developments in electric vehicles. BP’s 2020 Energy Outlook warned about the imminence of peak oil demand. In its business-as-usual scenario, oil demand is set to recover from the pandemic by 2025 but drop slowly thereafter. In its rapid-energy-transition scenario, oil demand drops from around 100 million barrels per day (mb/d) in 2019 to 89 mb/d in 2030 and just 47 mb/d in 2050. Such a scenario would represent a challenge for MENA oil producers. By contrast, in the business-as-usual scenario, gas demand is expected to increase from 3.8 trillion cubic meters (tcm) in 2018 to 5 tcm in 2040, underpinned by a massive coal-to-gas switch in Asia and elsewhere. Such a scenario would be beneficial for MENA gas-producing countries such as Qatar and Algeria, which could remain geopolitically relevant by providing an important transition fuel to a decarbonizing world.
In the MENA region, Qatar seems to be the best positioned to preserve its geopolitical role, thanks to its significant liquified natural gas (LNG) capacity and its geographical location between Europe and Asia. Nevertheless, gas-producing countries will not be immune to the challenges posed by decarbonization policies in the long run. Gas demand is especially difficult to predict starting in the second half of the 2030s, as a result of increasing cost competition in power generation from renewables, as well as stricter environmental regulations (e.g. the EU Methane Strategy). It will thus be of paramount importance for MENA gasproducing countries to cut emissions in their gas value chain, in order to preserve their position and geopolitical influence.
The speeds of the energy transition in different world regions will also affect MENA geopolitical shifts. For instance, Europe’s oil and liquids demand is expected to decrease from the current 13.3 million tons of oil equivalent (Mtoe) to 8.6 Mtoe in 2040, according to the International Energy Agency’s stated-policies scenario. By contrast, Asia-Pacific countries’ oil and liquids demand is set to increase from the current 32.5 Mtoe to 37.9 Mtoe in 2040. Thus, MENA producers more exposed to the European market are likely to suffer more—and earlier—from the global decarbonization process than others more exposed to Asian markets. That is, energy demand will increasingly dominate energy geopolitics, especially in an oversupplied energy market.
In such a scenario, export portfolio composition and diversification will determine the evolution of geopolitical influence for MENA oil and gas producers. Exporters that depend heavily on European markets will see their geopolitical position erode and their revenues fall. For example, Algeria, which mostly exports gas via pipeline to Europe, has been an essential element of the European gas supply architecture. Unless it manages to decarbonize its gas exports, this important role will shrink as the European Green Deal is implemented. In 2019, 85 per cent of Algeria’s total gas exports flowed to Europe, 62 per cent via pipeline (mainly to Italy and Spain). By contrast, LNG provides more flexibility to gas exporters, which will enable them to respond effectively to the geographical shifts of the energy demand. Qatar is the world’s top LNG exporter. In 2019, Qatar exported 83 per cent of its total gas exports via LNG. Of this volume, 67 per cent was directed to Asia Pacific countries. Asian markets are expected to drive energy demand growth in general and LNG in particular until 2030. Oil and gas producers will increasingly try to gain market share in such growing energy markets.
While energy demand will be crucial in the future, energy supply issues will not disappear. Competition among producers will persist, and even increase in the foreseeable future. The peak of oil demand will create a harsher world of more intense competition and tighter revenues for MENA oil producers. Regional oil and gas producers are likely to pursue different supply strategies, which will need to deal with the consequence of the global energy transition.
The transition indeed raises an existential dilemma—requiring a choice between maximizing production, which would weaken higher-cost exporters, and coordinating production cuts to increase prices, which could deprive governments of vital revenues. These are not trivial issues, as maximization of production would put into question established assumptions about saving reserves for future production and avoiding stranded assets. An intensification of competition among producers could thus undermine coordinated actions (e.g. OPEC agreements), which are important to oil price stability. This was illustrated by the collapse of OPEC+ talks in March 2020—spurred by disagreements between Saudi Arabia and Russia on the introduction of production quotas, as the two were also competing for market share with US shale oil producers—and the consequent fall in oil prices.
Another example of the growing competition among producers is the growing opposite visions between the United Arab Emirates (UAE) and Saudi Arabia that emerged openly during OPEC talks in late 2020. Although they managed to reach an agreement within OPEC, the UAE’s ambitious plans to increase its oil capacity from about 4 mb/d to 5 mb/d by 2030 puts further pressure on the traditional alignment among Gulf OPEC producers. Moreover, in late 2020 the Abu Dhabi National Oil Company announced a $122 billion investment plan for 2021–2025, suggesting that the UAE had abandoned its more cautious approach to the oil sector. The plan suggested that MENA national oil companies might gain a growing share of world oil and gas production in the future. That is also due to (Western) oil companies’ decisions to cut their capital expenditure and other investments. Such decisions are motivated mostly by low oil prices and their commitment to decarbonization.
In a more competitive world, some MENA producing countries such as Saudi Arabia and the UAE have the economic advantage of vast oil reserves (298 and 97 billion barrels, respectively), the lowest production costs (under $4 per barrel), and the least carbon-intense production. In the next years, due to expected higher carbon prices, carbon intensity will play a key role in determining which oil and gas producers will be able to preserve their geopolitical influence. MENA oil producers with higher production carbon intensity, such as Algeria and Iraq, might thus lag behind.
Domestic factors
The global energy transition can also impact MENA oil- and gas-producing countries’ governance, due to their heavy dependence on revenues from these resources. To address this issue, regional oil and gas producers have launched several strategies (referred to as Visions) aimed at economic diversification (e.g. by increasing productivity, strengthening the private sector, and developing non-oil sectors), as well as increasing the share of renewables in the energy mix. These Visions were largely developed as a response to the 2014 oil price drop; COVID-19 and the acceleration of the global energy transition make it necessary to accelerate them. A country’s chances of success at this are likely to be affected by domestic factors including population size, government capacity, and financial ability to implement diversification measures.
Countries with a large, young, and growing population (Algeria, Saudi Arabia, and Iraq) will encounter significant obstacles to the transformation of their rentier-state model. By contrast, countries with a smaller population, like the UAE and Qatar (9.7 and 2.8 million inhabitants, respectively) are likely to find it easier to adjust.
The ability to govern and finance major domestic socio-economic transformation will also be crucial. For example, North African countries could exploit their geographical vicinity to Europe and become major clean-electricity suppliers. In this sense, the recent EU Hydrogen Strategy considers imports of 40 GW of green hydrogen from the EU’s eastern and southern neighbours. However, countries like Algeria and Libya are experiencing major social and political instability, which undermines such scenarios and discourages the needed foreign investments. Thus, countries with major governance issues like Algeria, Libya, and Iraq are expected to lag behind on energy and economic diversification. The risk is that these countries will focus political energies on an intensifying fight for a share of the diminishing global oil and gas market, rather than on a strategy to reorient their economy. By contrast, countries with stronger governance are better equipped to transform their economies, bear the negative consequences of the transition in the short term, and navigate the geopolitical evolution.
The availability of large foreign exchange reserves will be crucial for the transformation of MENA producing countries. With such reserves, countries could offset the negative economic effects of lower oil demand and revenues in the short term, while investing in renewable energy projects for the medium and long term. Thus, countries like Saudi Arabia, the UAE, and Qatar (with $500, $108 and $38 billion of foreign reserves, respectively) are potentially well equipped to manage the negative effects of lower revenues and foster economic transformation. Additionally, countries with large sovereign wealth funds could use them as an integral part of the diversification effort, for example to finance research and development and renewable-energy projects in MENA countries.
Producers with large foreign exchange reserves, sizable sovereign wealth funds, and small populations to appease are potentially the best placed to navigate the uncharted waters of the global energy transition.
MENA oil and gas producers have also considered developing their high renewable-energy potential, especially solar. This could help them pursue several goals, including economic diversification and reduction of greenhouse gas emissions. It could also free additional oil and gas volumes, currently used to meet fast-growing domestic energy demand, for sale abroad to produce additional revenue—thus avoiding the negative economic effects of growing energy consumption and positioning themselves as major renewable powers in a low-carbon future.
More recently, MENA oil and gas producers have begun to consider the growing interest in hydrogen as a way to preserve their geopolitical influence and remain pivotal actors in the future energy system. Given the region’s abundant renewable energy and carbon capture and storage potential, MENA countries could be at the forefront in both the green and blue hydrogen markets. In the short and medium term, blue hydrogen could benefit from its cost advantages. In the longer term, the MENA countries could exploit their excellent solar conditions and low-cost renewables in order to produce and export green hydrogen. Three MENA oil producers (Saudi Arabia, the UAE, and Oman) have announced major hydrogen plans. For example, in July 2020 an international consortium announced plans for a $5 billion green renewables and hydrogen plant in Saudi Arabia, which aims to begin shipping ammonia to global markets by 2025. In September 2020 Saudi Arabia shipped 40 tons of blue ammonia to Japan in a pilot project undertaken by Saudi Aramco and the petrochemical giant Sabic.
Conclusions
The global energy transition will inevitably affect MENA oil- and gas-producing countries, both macroeconomically and geopolitically. However, not all MENA countries will see their geopolitical influence change in the same way. Some countries are better equipped than others to offset the negative effects domestically and internationally. Internationally, MENA oil and gas producers will start to focus more on energy demand differences among world regions. MENA countries with lowest-cost and least-carbon-intensive production are better positioned to preserve their geopolitical influence. Moreover, export portfolio composition and diversification will crucially define whether a country will lead or lag behind in the energy transition. Oil and gas producers are also endowed with an abundant renewable potential, another possible route to future energy leadership.
Nevertheless, competition among producers will remain or even increase, potentially undermining coordinated efforts to stabilize oil prices. Due to the strong link between hydrocarbons and the nature of the state in the MENA region, the domestic sphere will be a key element in the geopolitical shifts. Population size, strong governance, and the financial ability to adapt to change will help some MENA oil and gas producers to preserve their geopolitical role, while managing domestic socio-economic transformation.
Kirk H. Sowell describes in Carnegie Endowment for International Peace, how a newly appointed government finds it challenging to make ends meet through Iraq’s Dire Fiscal Crisis. In effect, like most oil-exporting countries of the MENA region, Iraq has to come to terms with the changing fundamentals of the world economy as aggravated by the pandemic.
Iraq’s Dire Fiscal Crisis
2 November 2020
Iraq’s Prime Minister inherited a series of fiscal crises. As his interim government struggles to avert a complete economic collapse, austerity measures may come at the expense of much-needed reforms.
Since taking office, Iraqi Prime Minister Mustafa al-Kadhimi has faced a series of fiscal and security crises amid collapsing public services and protests. The collapse in global oil prices due to the coronavirus pandemic and the Saudi-Russia oil price war caused Iraq to face an internal solvency crisis as early as June. This fiscal crisis has short and long-term implications. In the short-term, Baghdad continuously struggles to pay public sector salaries, which required the state to borrow from the Central Bank over the summer. With low oil revenue, the state’s monthly profits are covering just over 50 percent of its expenses. In the longer-term, Iraq faces a looming macro-fiscal state collapse—potentially within the next year.
The state is struggling to cover its monthly expenses. Over successive governments, the size of the public sector has grown to the point that Iraq needs to spend more than its total revenue on basic payments—public sector salaries, pensions, food aid, and welfare—to keep a majority of Iraq’s population out of destitution. In 2019, oil revenue averaged $6.5 million per month, and with modest non-oil revenues (largely customs, well less than $1 billion per month), this covered operational expenses with a small amount left over for capital spending. Since the recovery of oil prices after the March collapse, Iraq’s monthly oil revenues have averaged just over $3 billion/month, hitting a high of $3.52 billion in August. In testimony before parliament in September, Finance Minister Ali Allawi revealed[1] that with revenues at these levels, the government was still borrowing 3.5 trillion Iraqi Dinars (IQD) — just over $3 billion—from the Central Bank each month.
On October 10, as Iraq’s cash crunch became more acute, Allawi explained that state employee compensation rose from 20 percent of oil revenues in 2005 to 120 percent today. To help the public understand why the government of such an oil-rich country was broke, he explained that a government of this size should have at least $15 to 20 billion in funds to pay monthly expenses on an ongoing basis, but when this government took office, only about $1 billion was available.[2] This is in part due to weak revenues, the result of low oil prices and Iraq’s adherence to OPEC’s limitations on oil exports. In the past, Iraq’s oil exports have reached 3.5 million barrels per day (bpd), yet they decreased to 2.5 million bpd in recent months. Prominent figures, including former oil minister Ibrahim Bahr al-Ulum, have argued in favor of leaving the OPEC agreement unilaterally. Yet Allawi, speaking before Parliament, explained that while he agreed that OPEC’s quota formula was unfair, Iraq needs the OPEC agreement to keep oil prices from collapsing. More recently, according to the Iraq Oil Report, the government has signaled that it may try to thread the needle by increasing exports by 250,000 barrels per day to satisfy critics—an amount above its quota, but still about 750,000 barrels per day below peak production, and thus hopefully too small an increase to incur Saudi retaliation.
Iraq’s monthly oil revenue to collapsed from $6.2 billion in January to just $1.4 billion in April. The figure recovered to $2.9 billion in May and has gradually improved since, but in August was still just $3.5 billion. Since the government only had about $3 billion in expendable reserves in May, it became clear that Iraq could not pay state employees in June. Salaries over the summer were paid as money became available. As late as July 28, the prime minister’s spokesman admitted that employees at the Culture & Antiquities Ministry (apparently the lowest priority), were still waiting to be paid.
The government saw this crisis coming and began preparing the public for austerity. Finance Minister Allawi made multiple public appearances, describing Iraq’s situation as dire and arguing for radical reform. In particular, he predicted that the government, while protecting base salaries, would make large cuts to employee benefits and other costs. On June 9, the cabinet followed through when it voted to implement a series of austerity measures, including cutting benefits, cutting unessential spending, and capping income from “double-salary” payments.[3] Kadhimi’s advisor Hisham Daoud described the new policies as “not enough but only a start” toward reform.
Kadhimi, with no electoral base or political base of his own, has faced the fiscal crisis with a weak hand. This became clear when Parliament overwhelmingly rejected the government’s austerity policies on June 10, one day later. Even MPs friendly to the government described the government’s measures as premature, suggesting that they should try to raise revenue through customs first. Parliament eventually passed a borrowing law on June 24 to allow the government to borrow just enough to make basic payments. This law, however, prohibited the government from cutting benefits. Previously, the cabinet had the authority to cut benefits because, unlike salaries set by law, benefits were set by previous cabinet decrees. Thus, Parliament made the long-term problem worse.
In July, protests resurged in Baghdad as a result of the fiscal crisis. The shortage of money caused Iraq’s electricity shortage to worsen dramatically. Outgoing Electricity Minister Luay al-Khatteeb attributed the decline to two factors: lack of maintenance and the suspension of planned electricity projects.
The government has a few possible, but politically difficult, fixes at its disposal. They could cut the subsidy of roughly $1 billion per month to private electricity consumption, which exists because the ministry only collects a fraction of consumer payments. Finance Minister Allawi pointed out that “people don’t pay their electricity bills” and that “95 percent” of consumption costs was absorbed by the state, asserting that “electricity is not a constitutional right.”[4] Yet such an effort will recall former prime minister Haider al-Abadi’s experience trying to extract electricity payments in 2017, which precipitated a strong protest movement. So far, Kadhimi has shown no sign of pushing the issue. His published comments during a cabinet meeting devoted to the electricity issue focused on “reducing bureaucracy” and improving maintenance, sidestepping the fact that maintenance workers have to be paid.
Iraq’s fiscal crisis comes on the heels of the political crisis of the outgoing government, which left the country without a budget for most of 2020. In such cases, Iraqi law allows the government to spend one twelfth of the previous year’s actual spending each month. Since this year’s revenues have been low, it never had the money to spend that much and simply spent what it had on basic payments. In September, the government released a budget for 2020 and the planned deficit was large—well over 100 percent—so as with past budgets much of the deficit will likely not be spent. The total anticipated revenues are 67.4 trillion dinars, or $57 billion, compared with proposed expenditures of 148.6 trillion dinars, or $125.7 billion. Oil revenue in 2019 was $78.5 billion yet is projected to be just $49.3 billion for 2020. The government withdrew the bill just two days after it arrived in parliament.
In September the government ran out of money, having used up the borrowing authority from the June bill.[5] Given the population’s overwhelming dependence on state salaries, this brought the short-term financial problems to the fore. Furthermore, Parliament refused to authorize the new borrowing authority Allawi sought because the government had not submitted a “reform plan.” Thus in early October the government released a “White Paper” reform plan. The plan draws a broad and long path to reform that does not directly address the immediate crisis, except to the extent that its publication formally satisfies Parliament’s precondition for new borrowing.
An important part of Allawi’s efforts was his advocacy of Iraq accepting an International Monetary Fund “Stand-By Agreement” (SBA) which might be the only way to prevent a fiscal collapse next year. The agreement would also require spending cuts that parliament has already rejected. Allawi stressed that the IMF would not require cuts to programs protecting the poor, but rather to public sector compensation that, in Allawi’s view, Iraq needed to cut anyway.[6]
This set the stage for a new debacle as the government then sent a new borrowing law to Parliament only to condemn it. A member of Parliament on the Finance Committee criticized the figures in the bill as irresponsible.[7] Given the parliament’s role in aggravating the crisis, this was grandstanding. The looming parliamentary elections, due no later than 2022 and possibly earlier, are driving the political theater. Parliament will presumably pass an amended version of the government’s borrowing bill to allow the government to pay salaries. In the meantime, with salaries being paid late, disposable income is squeezed, further damaging an already weak economy. But Iraq could face a much worse scenario in 2021, as the IMF’s updated forecast for Brent oil prices projects $46.70 per barrel. Iraq’s Central Bank, which rescued the government over the summer, relies on a steady flow of dollars from oil revenues and given current prices range from $40 to $45, reserves are gradually declining. According to financial analyst Ahmed al-Tabaqchali, at current oil prices the Central Bank can continue to print money to fund the government “for about eight or nine months.”[8]
In terms of immediate steps, at a minimum, a devaluation of the Iraqi dinar (long pegged at 1,182 to the dollar) seems likely in 2021. This would relieve some pressure on the Central Bank and make the government’s expenses cheaper (since its income is in dollars), but it would also drive up inflation over time. The bigger threat is that by mid-to-late 2021, the Central Bank will no longer be able to support the government, forcing austerity through non-payment of operational expenses, including salaries.
It is clear that the government needed to adopt a policy of cutting public sector expenses while increasing its capital investment in agriculture and industry and devoting more resources to education and health. Kadhimi’s reform measures in June were too little, too late. Still, the austerity that Parliament has resisted will be inevitable if oil prices do not rise dramatically in the months to come. A key priority from an international point of view is that the IMF, as a condition for its loans, impose upon Iraq the reforms for which Allawi has been advocating and which parliament has so rejected. It does not seem likely that reform will come to Iraq by any other means.
Kirk H. Sowell is the publisher of the biweekly newsletter Inside Iraqi Politics (www.insideiraqipolitics.com). Follow him on Twitter @uticarisk.
[2] In most of these comments, Allawi gives the figures in Iraqi dinars. I have converted them to dollars. Thus, he said, for example, that the Finance Ministry had 1.3 trillion IQD when he came into office. This is slightly over $1 billion.
[3] When a family received a payment for a deceased breadwinner and receives another government benefit.
[5] Testimony by the finance minister and discussion of the budget starts at 1:38:00.
[6] In the previously cited video from Parliament on September 8, he refers to the IMF briefly around 2:25:00, then again around 2:48:00, and once more near then end of the four-hour video in response to an MP attacking the IMF option.
[7] The reading begins at 00:09:00 and the comments referred to in the text follow.
[8] Author interview conducted on October 28, 2020 via Skype.More on:
The image above is of A Palestinian engineer gestures as he stands next to solar panels in Tubas, in the occupied West Bank July 23, 2018. VIA REUTERS/Mohamad Torokman
If there is one thing that is certain in the Middle East and North Africa (MENA) region, it is that future stability is uncertain. On top of the coronavirus crisis, there is civil war in Syria, the Israeli-Palestinian conflict, the recent tragic explosion in Beirut, and the ongoing threats posed by global warming. With such prospects, what can be done to secure energy needs in the region in the present and the future?
The key lies in continuing to build and expand on regional cross border energy links. The interconnection of electricity lines and gas pipelines might help mitigate the joint energy shortage challenges that the region faces. Countries must also link energy infrastructure so that they can transport energy to where it is needed most. Only such inter-connectivity can overcome threats posed to regional energy security, whether manmade or natural.
Is it sustainable that, while Tel Aviv residents enjoy 24/7 electricity, Gazans ninety kilometers away sit in the dark for more than half the day? Does it make sense that Palestinians, who are among the most economically challenged in the region, rely on the most expensive electricity, using diesel in the Gaza Strip? As Lebanon is thrust into even deeper economic woes, why do the Lebanese people have to generate electricity using expensive power barges? Why must blackouts be the norm in Iraq despite the abundance of natural resources?
No state can be secure as long as its neighbor’s basic energy and water needs are not met.
While the MENA region faces many challenges to stability, one important mitigating factor could be the abundance of natural resources, if used wisely. This could be the basis for cooperative, cost-efficient generation of electricity from both conventional energy sources, such as natural gas, and unconventional sources, including renewables.
Ideally, the MENA region should be generating most of its electricity from clean sources. One of the main natural resources it enjoys in abundance is the sun. Thus, solar energy holds the key to a brighter and more sustainable solution for the region. Many of the most attractive solar panel projects are actually coming from the oil-rich Gulf, with the United Arab Emirates setting an example both in terms of actual projects and innovation. Impressive renewable energy projects in Jordan and Egypt can be emulated in the Palestinian territories, which is compelling considering the potential. Importantly, this will require cooperation and support from Israel, which is making its own strides in the renewable energy sphere.
As countries seek to diversify their sources of electricity generation, it is worth noting that nuclear energy is re-emerging as a significant source after advancements in safety measures and the adoption of state-of-the-art technologies in recent years. The United Arab Emirates is one example of this.
Natural gas offers much cleaner fuel than diesel or coal and exists in abundance in the MENA region. As such, natural gas constitutes an optimal transitional fuel towards cleaner renewable sources. A transitional fuel is necessary so that basic electricity needs of developing countries are met and electricity grids have been upgraded sufficiently to enable the off-take of the electricity generated from renewable energy.
The natural gas discoveries in the Eastern Mediterranean offshore Egypt, the Gaza Strip, and Israel, among others, offer a unique opportunity for energy cooperation in the region and beyond. The key lies in developing these resources and in constructing the means for delivering them to consumers in the region and beyond.
The establishment of the EastMed Gas Forum in Cairo in January 2019 under Egyptian sponsorship is a step in the right direction, recognizing not only the importance of the gas reserves of the Eastern Mediterranean, but also the need for cooperation in developing and transporting the gas to regional and international consumers. Turkey is noticeably absent from this Forum and has contested the rights of some of the Forum members to their gas reserves (despite US and EU rejection of the Turkish claims). This may actually further strengthen alliances within the Forum, as members seek to ward off any Turkish threats to their gas reserves.
The Gaza Marine gas field needs to be developed alongside other fields currently in development off the coasts of Egypt and Israel. This is so that Palestinian consumers of electricity in the Palestinian territories will benefit from this natural resource alongside Israeli consumers benefitting from gas from the Tamar, Leviathan, Tanin, and Karish gas fields. Moreover, the planned regional networks of gas pipelines, such as the Gas for Gaza pipeline to the Gaza Strip, the gas pipeline to Jenin, and the Israeli pipelines to Jordan and Egypt, are the means through which gas from these offshore sources can be delivered to consumers.
While cross-border energy projects cannot possibly be erected without enduring political support, they must transcend politics for the sake of the future of energy security in the region. And, although cross-border energy projects are not a substitute for political solutions for the Palestinian territories or elsewhere, they can constitute an important backbone of state building and regional cooperation efforts. Energy projects can help ensure that basic future energy needs are met, especially when considering political uncertainties throughout the region. Furthermore, establishing energy security will be critical in guaranteeing water security.
It is likely that the regional wars of the future will be over depleting water resources, which cannot possibly be addressed unless there is sufficient energy to desalinate and pump water to help meet the growing demand. This threat is being compounded by the already visible impacts of climate change in the region, which are set to worsen as more energy will be required for residential cooling purposes, agriculture, and industry.
The solution to these energy challenges lies in developing these natural resources and in establishing a network of energy infrastructure that consists of gas pipelines and electricity lines constructed across the region. Building on the Arab gas pipeline and the Arab electricity grid is important. The recent upgrade of the electricity connection between Jordan and the West Bank is also encouraging in this regard.
In commercial terms, the acquisition of Noble Energy by Chevron could serve to incentivize more ambitious regional deal-making considering Chevron’s global strength and footprint in the MENA region.
Putting in place the necessary energy building blocks today will help ensure that an eight-year-old child in Gaza or Beirut need not sit in the dark doing homework by candlelight—a hazard that costs lives annually in Gaza and elsewhere—in the future. Experience has shown that mutual dependencies can help mitigate political tensions, creating incentives to cooperate and possibly facilitating a positive momentum towards solving some of the MENA region’s thornier outstanding political conflicts.
Ariel Ezrahi is the Director of Energy at the Office of the Quartet in Jerusalem. His views do not reflect those of his employer.
Energy generation through renewable sources is improving exponentially and is something that is no longer simply better for the planet but also for investors. Nevertheless, the oil industry has no intention of voting itself out of office and will continue extracting and exploiting the planet’s oil reserves. We don’t have time to wait for investors to tire of these companies. The much-needed end of the oil industry should be brought about not by its profitability or otherwise, because it could linger on for decades, but instead through political decisions guided by scientific evidence, links to which can be found throughout this article. The writing is on the wall, and has been for years; when will we bother to read it? Follow me on Twitter or LinkedIn. Check out my website.
Enrique Dans Teaching Innovation at IE Business School since 1990, and now, hacking education as Senior Advisor for Digital Transformation at IE University. BSc (Universidade de Santiago de Compostela), MBA (Instituto de Empresa) and Ph.D. in Management Information Systems (UCLA).
Earth has been used as a building material for at least the last 12,000 years. Ethnographic research into earth being used as an element of Aboriginal architecture in Australia suggests its use probably goes back much further.
Traditional construction methods were no match for the earthquake that rocked Morocco on Friday night, an engineering expert says, and the area will continue to see such devastation unless updated building techniques are adopted.
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