The Twilight of Oil in an Age of Uncertainty: Regional Analysis

Dramatic aerial twilight view of Riyadh city skyline with lit streets. by Abul Lais via Pexels

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The Twilight of Oil in an Age of Uncertainty: From a Vicious to a Virtuous Cycle

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The Middle East and North Africa (MENA) region has been a major producer and exporter of hydrocarbons since the 1930s. In 2025, around 30 percent of global hydrocarbon exports originated in the MENA region, with collective regional revenues amounting to over $1 trillion.¹ Since 2000, when the second oil boom began (the first being in October 1973), MENA has sold $25 trillion worth of oil and gas (adjusted for 2025 prices). As demonstrated by the conflict between the United States and Iran, events in the region remain consequential for international energy markets. But equally, hydrocarbons have shaped the region’s economies, governance structures, and societies in ways that now define the nature of the challenge ahead.

The challenge in question is one of fundamental economic transformation. The global hydrocarbons order is facing profound change, as environmental and geopolitical pressures undermine the foundations on which many MENA economies have rested. In this context, economic diversification is no longer optional; it has become both strategic and urgent. Yet diversification is not merely a technical exercise. It brings with it at least three types of fundamental and interconnected challenges. The first is economic, and involves countries determining how to increase their labor productivity and build sustainable productive capacity outside hydrocarbons in economies long structured around resource rents. The second challenge is social and political, affecting how to renegotiate social contracts that support more inclusive societies. The third is regional, where the success or failure of transformation will depend not only on domestic reform, but on whether a more stable regional order can emerge, one in which economic cooperation prevails over conflict, fragmentation, and escalating tensions. Escaping the current vicious cycle and turning it into a virtuous one is essential for the region’s future.

This paper does not offer a single prescription and acknowledges that the MENA region encompasses countries at very different stages of development, with very different resource endowments, institutional capacities, and political settlements. The analysis focuses on three groups of countries: high-income hydrocarbon exporters (Gulf Cooperation Council (GCC) countries), middle-income hydrocarbon exporters (Algeria, Iraq, Libya, and Iran), and middle-income hydrocarbon importers (Egypt, Jordan, Lebanon, Morocco, and Tunisia). We offer an integrated approach to the economic, political, and regional dimensions of the diversification imperative and the need to strengthen productivity, as well as policy recommendations organized around the five key questions that structured the commission’s deliberations.

The first question is the most fundamental one: Why must MENA countries diversify, and why now? For all the countries examined here, the answer is that, for various reasons, the demand for hydrocarbons is falling in a world shaped by a volatile energy transition and a pressing imperative of energy security. This will inexorably reduce oil and gas exports and revenues over the medium to long term, sharply constraining these countries’ access to foreign exchange and deepening their fiscal pressures. Many of the hydrocarbon exporting countries understand therefore that, because they will not be able to finance employment of their growing labor force in the public sector, they must immediately begin investing in productive jobs if they are to meet future challenges. Energy importers face a different challenge: They realize that it will be impossible in the coming years to export carbon-intensive manufactured goods to Europe as carbon border adjustment mechanisms and other environmental regulations take effect. The war with Iran has exacerbated such tensions. For one thing, oil revenues will fall more rapidly, implying a need to diversify more rapidly. Additionally, the war is likely to force changes in the way in which diversification takes place. The oil importing countries, especially Egypt, Jordan, and Lebanon, will sustain indirect losses, which is one more reason why they need to try harder to improve their labor productivity through growth-enhancing reforms.

The second question concerns the current state of play: What is the situation when it comes to diversification efforts in the MENA region? The picture is highly uneven:

• GCC countries are heavily engaged in investing in productivity and diversification, but the results remain mixed. The most dynamic sectors have been oil products, entrepôt trade, tourism, hospitality, entertainment, and more recently renewables and artificial intelligence (AI) centers.² However, generating productive jobs has been challenging, and the globally oriented model that underpins Gulf diversification strategies is threated by regional instability. The ability of the GCC countries to navigate a turbulent global energy transition is also in jeopardy.
• Among the middle-income hydrocarbon exporters (Iraq, Algeria, Libya, Iran), the pattern is one of rent consumption rather than investment. Productivity growth is absent, rent per capita is falling, and there is as yet no credible exit path from this trajectory.
• Middle-income hydrocarbon importers present an equally troubling picture, as they have been stuck in a severe form of the middle-income trap: They are operating below potential, with fragile social and financial situations, and are failing to pursue growth-enhancing reforms. Savings are low, as is investment, underemployment is rampant, and these countries each face a brewing debt crisis, while state services have been severely rolled back. The main problem is an unbalanced form of capitalism dominated by a closed economic elite that is unwilling to allow space for competition from firms not under its control. Political connections are based on loyalty, not productivity, which represents a key obstacle to transformation.

The third question is political. What are the social and political implications of the current trajectory? Across the MENA region, the social contracts that offered material provision in exchange for political acquiescence are under mounting strain. The generation now entering the labor market is better educated than its predecessors, holds higher aspirations, and has grown up with direct exposure to different global living standards. However, it also faces higher unemployment than preceding generations, deteriorating public services, and more precarious labor markets. The nature of this strain diverges across country groups, reflecting fundamentally different distributional bargains. In the GCC, the rentier bargain is being restructured through nationalization of the labor force and subsidy reform, generating grievances with few formal outlets to express them.³ In middle-income hydrocarbon exporting countries, revenues sustain narrow patronage networks, but cannot finance mass consumption or broad legitimacy. In hydrocarbon importing states, such as Egypt and Jordan, external geopolitical rents that once underpinned the social contract are being eroded, leaving governments with shrinking fiscal space and facing rising social instability.

What unites all three country groups is the dilemma of how to deal with the fact that the reforms needed to build productive diversified economies are politically costly in the short run, even as inaction is economically unsustainable in the long run. Faced with this dilemma, governments have responded across the board by centralizing power and intensifying control, either to manage reform (in the case of the GCC countries) or avoid it (in the case of other states, such as Algeria, Egypt, Jordan, and Tunisia). However, this approach is straining the very foundations on which a durable economic transformation must rest—rule of law, investor confidence, legitimate channels for objection. The difficulties reformist politicians are facing are complex. They must propose attractive reforms that generate support from a coalition of reformist parties or pressure groups, create mechanisms that compensate losers and bring them into the fold, put in place checks and balances to avoid costly mistakes and learn from experience, and finally permit the voicing of grievances to avoid the type of explosion that was common during the decade of Arab uprisings.

The fourth question concerns the external environment. How do regional and global dynamics shape, and potentially undermine, diversification efforts? Falling hydrocarbon revenues will intensify regional competition in the oil and gas market if it is not matched by improved regional cooperation, as countries seek to defend their share of a shrinking market. This reality has become more acute since the beginning of the war with Iran, which dampened global appetite for Gulf oil and gas due to elevated perceived risks. Moreover, increased insecurity has also disrupted Gulf diversification strategies in areas that are highly sensitive to security conditions—foreign direct investment, tourism, or trade.

In this more volatile environment, countries need to imagine growth paths that are more resilient to shocks and less likely to generate them. This requires building regional economic interdependencies, which today remain underdeveloped. It would mean expanding intraregional trade and investment, advancing a regional security architecture that reduces business risk and lessens reliance on any single external guarantor, and diversifying external economic relationships in a world increasingly organized around geopolitical blocs. To be able to sustain diversified relations, stronger regional bargaining power helps. This could come in the form of more robust soft power derived from better management of regional public goods such as defending the environment, improving security, caring for refugees, and preventing states from failing. There are other arguments for improved regional cooperation in the form of the growth of a regional market: the need to bring some accumulated savings in the form of globally placed Sovereign Wealth Funds’ assets closer to home, given rising expropriation risks; the fact that environmental challenges are regional; and the advisability of preserving and diversifying regional trade routes.

The fifth and final question is a holistic one: How do these elements interact, and under what conditions can the region move from a vicious to a virtuous cycle? The elements discussed above can interact positively or negatively. The status quo increases regional tensions, political risk, and doom loops—or self-reinforcing cycles that exacerbate problems—of economic decline and violence. The overlapping aspects of the transition—economic, social, political, and environmental—create structural tensions, but progress on one front can create momentum for broader reforms and a virtuous cycle that facilitates progress:

• A regional security deal would be much enhanced by regional economic cooperation. Moreover, the financial rates of return to the region of sovereign wealth fund investment would be greater if invested in large rather than small markets. Cooperation is also needed to fight climate change.
• The ability to implement industrial policy to develop new value chains in a secure regional environment would enable the region to bargain for a fairer role in a fragmented world order.
• Reduced regional instability and the development of a regional market would create positive incentives for recalcitrant regimes to invest in growth, especially in middle-income countries.

Read the whole article from the Carnegie Endowment for International Peace.

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