Energy security in the Gulf faces plethora of threats
Policymakers in the Gulf face the same energy “trilemma” as elsewhere: Assure access to energy, meet global climate change commitments, and manage costs and prices. But, as energy producers for the world, they also face additional concerns. Recent attacks by the Islamic Revolutionary Guard Corps (IRGC) and its proxies against oil tankers and installations represent another set of challenges. I addressed those challenges at the Arab-British Business Summit held in London this month, and suggested that dealing with them requires joint efforts between governments and through innovative partnerships with the business community.
One of the main regional challenges is that demand for energy greatly outpaces economic growth and population growth. Low local prices, which are out of sync with international prices or the actual cost of production, have contributed to runaway energy consumption growth. While several regional countries have established energy efficiency entities, their effect on energy consumption rates has been limited. Inadequate public transport drives up energy consumption, with population growth and the need to use private cars instead of public transportation. There is limited awareness and support for alternative energy sources. There needs to be built-in incentives for the use of those alternatives and disincentives for the overuse of fossil fuel sources.
These are some of the challenges that are common to most regions, and there are common solutions for them that could be borrowed and implemented. But what about the peculiar difficulties that energy producers in the Gulf face?
First, dependence on oil and natural gas has become a strategic liability for some countries in the region. For decades, they relied on oil and gas to fuel growth, exports and fund government services at levels reaching 90 percent of government revenue and of export earnings, but declining reserves and prices are limiting those traditional roles. Oil and gas still represent 95 percent or more of their energy supply, with no developed non-fossil fuel alternatives. For a country running out of oil and gas, such as Yemen, that dependence has been catastrophic, with intense fighting over diminishing reserves. Other oil exporters with declining reserves have had to borrow heavily to sustain their previous welfare levels, or cut services drastically.
Fluctuating oil prices have led to fiscal volatility and difficulties in planning accurately. They put a strain on foreign exchange reserves and governmental ability to continue to support low energy prices. Energy price reforms are underway in Gulf Cooperation Council countries, but they are still much lower than international prices.
Fluctuating oil prices have led to fiscal volatility and difficulties in planning accurately.
Abdel Aziz Aluwaisheg
Diversification plans are underway and they are precisely meant to address these challenges. They imply several meanings, all of which are priorities. First, “economic” diversification aims at increasing the share of non-oil goods and services in the gross domestic product. Second, “government revenue” diversification seeks to develop non-oil and gas sources, such as taxes and returns for non-oil and gas investment. Taxation in itself is a challenge and needs to be calibrated economically and politically, because it is somewhat new and could have contractionary effects on the economy. Third, “export mix” diversification means encouraging non-oil exports and setting realistic targets for raising the share of non-oil exports to end the current dominance of oil and gas exports. Fourth, “energy” diversification is pursued to increase the contribution of renewables in the mix of energy sources.
These four levels of diversification are being pursued by almost all regional governments, but it is a long-term process. Until sustainable levels are reached in each area, policymakers will have to rely on improvised ways to reach the goals they set for optimal diversification. Growing pains are to be expected, and regular recalibration and fine tuning will be needed.
These days, the biggest challenges facing the region emanate from armed attacks on oil and gas production installations and transportation, and cyberwarfare against energy infrastructures. Recent attacks by Iran’s IRGC on oil tankers, and by their proxies on oil installations, are jeopardizing the energy supply to the world.
The security of the Gulf is essential for the global economy and the prosperity of billions of people around the world. The Gulf is home to about two-thirds of the world’s oil reserves — 26 percent of the world’s reserves are in Saudi Arabia alone. The Gulf produces about one-third of the world’s oil. Saudi Arabia also has the largest excess capacity in the world, which can be used to mitigate against supply disruptions anywhere. The Gulf is also home to about 35 percent of the world’s gas reserves.
As such, the Strait of Hormuz is the most important oil passageway in the world: More than 20 million barrels of oil pass through it daily, or about 20 percent of global oil consumption. Bab Al-Mandab Strait is another chokepoint for oil exports, where about 5 million barrels of oil pass daily.
It is clear that, by necessity and under international law, keeping these passages safe from attack is a global responsibility. The US and its allies are building up defenses to prevent a major disruption to the flow of oil from the Gulf and that should be extended to the Red Sea and Gulf of Aden. Following repeated attacks in the Gulf and Red Sea, and considering the heightened threats from Iran, it is extremely important to stay vigilant.
Cyberwarfare against oil facilities and other critical energy infrastructure is an emerging challenge for policymakers in the region. For years, Iran has engaged in cyberattacks against its neighbors. While a major catastrophe has so far been averted, future attacks could disrupt oil supplies.
While political and energy officials grapple with these challenges, the business conference organized by the Arab-British Chamber of Commerce this month broke new ground in suggesting business solutions to address some of those energy security challenges. Those ideas need to be followed up and quickly translated into concrete projects.
- Abdel Aziz Aluwaisheg is the GCC Assistant Secretary-General for Political Affairs & Negotiation, and a columnist for Arab News. The views expressed in this piece are personal and do not necessarily represent GCC views. Twitter: @abuhamad1