The quiet revolution: energy futures in Iran, the Gulf, and Israel

James Howarth
7 February 2008

The middle east's ownership of two-thirds of the world's proven oil reserves means that its status as the world's leading energy supplier is hardly in doubt. Buta paradigm shift in how it fulfils this role may be around the corner. Don't be surprised if the region pioneers the switch from oil and gas to renewable energies.James Howarth is co-director of the middle east and north Africa division ofthe political risk consultancy ExclusiveAnalysis. He has worked as an advisor and as a translator, including of Messagesto the World: The Statements of Osama bin Laden (Verso, 2005). He appears frequently appear in the broadcast media as a regional analyst

Also by James Howarth on openDemocracy:

"Jordan's 9/11" (10 November 2005)

"The fallout from Amman" (16 November 2005)

"Al-Qaida, globalisation and Islam: a response to Faisal Devji" (20 January 2006)

From the outside, the middle east is often seen as an undifferentiated collection of greedy, unrepresentative governments conspiring to exploit powerless consumers with their lucrative energy reserves. The stereotype hashad another boost in January 2008, when oil finally hit the symbolic $100-per-barrel mark. Even if the pricehas retreated since then, the strong and rising demand (particularly across Asia) means that the region's energy leverage is only going to get stronger.

Whatever the reasons for oil-price inflation - demand outpacing supply, refining capacity shortages, speculative investors and concerns over Gulfsecurity being just some - the arrival of three-figure oil in 2008 may prove a watershed not only for global consumption but also for the middle east's role in solving humanity's addiction to fossil-fuels.

The region is certainly not about to abandon its hydrocarbon cash-cow anytime soon. But a split is emerging between traditionalist and progressive visions, pitting cautious resource nationalism against creative investments in futuristic technologies.

The governments of such countries as Algeria, Libya and Saudi Arabia can easily afford to rely on high oil and gas revenues to insulate themselves from political opposition, upgrade their infrastructure, further enrich domestic elites and keep business healthy for western defence companies.

But these countries also remember when oil was nearer $10 than $100. They stillf ear that the current boom, while a safe short-term bet, won't last forever - that a global recession or breakthrough in alternative energy could greatly diminish bring oil demand. The answer is to diversify their economies. But entrenched interests, uncompetitive business environments and lack of immediate incentives stand in the way.

Tehran's telescope

A similarly profligate underuse of resources is occurring in the home of the world's second largest conventional oil and gas reserves, Iran, which also has enviable solar- and wind-power potential. The Islamic Republic is dedicating enormous political capital to nuclear energy to defiantly affirm its rights, rather than focusing on its actual interests. The shortsighted economic policies of a fractious government are squandering all those plentiful petro-euros, with minimal planning for the impending demographic bubble.

Iran's energy policy is determined disproportionately by political concerns. Its invitation to Russia's Gazprom to invest is a case in point. The logic is clear: to avoid the embarrassment of gas-supply cuts in such a resource-rich country, to reduce import dependence on fickle neighbours like Turkmenistan, and to drive a harder bargain for investment by European energy majors. But Tehran's broader purpose is arguably to pave the way for an international gas cartel involving the Gas Exporting Countries Forum (GECF) countries (primarily Russia, Iran, Qatar and Algeria). A "gas Opec" - the GECF's associates command over 70% of global gas reserves and 40% of output - would further highlight the faltering strategic power of the United States and European Union, already demonstrated by Russia and China's effective siding with Iran over the nuclear issue.

The long-term contract models already in place mean that such an organisation couldn't regulate gas prices as Opec does for oil. But Iran still sees the potential for a "gas Opec" that would give it considerable strategic leverage over Europe. Moreover, the development of a liquefied natural gas (LNG) market in the next few years, whereby gas becomes a tradable commodity transported in tankers, will be more amenable to Opec-style price manipulation.

But Iran is here - as in other respects - something of an exception in the region. For the middle east's energy have-nots and its more progressive oil states, the time has come to think creatively and diversify energy sources. Four motives underlie this shift of direction:

▪ economic booms in countries like the United Arab Emirates (UAE), involving resource-intensive industries and greater car usage, mean energy consumption is rising exponentially

▪ energy independence removes the political risks of being at the mercy of supplier countries

▪ an unforeseen technological or even climatic change could slash fossil-fuel demand, hitting Gulf oil exporters particularly hard

▪ Iran's nuclear programme is making nuclear power an essential accessory for middle-east states. This is an issue of economic sense as well as regional rivalry and prestige, as it is more profitable to export energy resources than to sell them domestically at subsidised prices.

The pioneers of this brave new world of alternative energy in the middle east will be the UAE and Israel. This pairing is perhaps surprising, given the UAE's huge oil reserves and terrible environmental track record, and Israel's prior insignificance in global energy markets. But both have strong incentives to embrace renewable energy, and are rolling out ambitious plans to do so.

Dubai's diversification

The Emirates will be a magnet for economic opportunists, traders and investors for years to come. The attraction is increased by the virtual absence of local politics; those residents that do have a voice (and even the many thousands of exploited Asians that don't) have little incentive to rock the boat. While other Arab governments still view economics through the prism of the need to retain power, Sheikh Khalifa of Abu Dhabi and Sheikh Mohammed of Dubai can push ahead without worrying that emergent wealth will bring political instability. As a result, the Emirates' profound cultural conservatism belies an energetic openness to economic opportunity, reinforced by waves of fortune-seeking migrants.

The UAE produces 2.8 million barrels of oil every day, most of which go to Japan. But domestic consumption has been skyrocketing as Dubai and Abu Dhabivie with each other to become the global finance and tourism hub of the 21st century, lying at the epicentre of middle eastern, Asian, European and African markets (see Faisal Devji, "Dubaicosmopolis", 18 April 2007). A planning and construction boom of epic scale - building the world's tallest tower (BurjDubai), new business districts, indoor ski slopes, seven-star hotels, multi-storey malls, reclaimed archipelagos - is guzzling resources like never before. The Emirates' considerable reserves notwithstanding, finite production capacity means a choice between greater dependence on neighbours and developing new energy sources. It's no surprise, then, that gas-import deals have been signed with neighbouring Qatar and Iran, which share the world's largest gasfield. But these countries too are facing consumption crunches, and Iran's creaking gas sector makes it a particularly unreliable partner for future supplies.

In 2008, the value of Gulf countries' total reserves is set to top $2 trillion,and will - on current trends - reach a monumental $9 trillion by 2022. Such enormous sums, combined with abundant supplies of low-paid foreign workers, allow the UAE to spread risk by investing in energy across the board, from hydrocarbons to nuclear to renewables. In fact, it has the luxury of investing enough oil wealth in energy technologies that aren't yet economically viable to ensure they ultimately become competitive.

That's why so much oil wealth is being poured into futuristic projects in solar, photovoltaic, waste-to-fuel and other renewables, from initial research to commercial development. Abu Dhabi's $15-billion Future Energy Co (or Masdar), which will create the world's first carbon-neutral city in the harsh Arabian desert of all places, is a sign of things to come.

The Masdar masterplan includes the world's biggest hydrogen energy plant, to be developed with BP. Although commercial use of hydrogen energy still faces tough obstacles, this project has potential for huge environmental as well as commercial advantages. In theory, the plant's carbon dioxide by-product could replace the natural gas used to enhance oil recovery, thereby creating a simultaneous fourfold benefit: capturing and storing the greenhouse gas, reducing wasteful flaring, freeing up more gas reserves, and making the whole process more economically and environmentally sustainable.

But the biggest impact of the UAE's energy revolution may be in solar power. It plans to capitalise on the natural advantage of year-round sunshine by integrating technical development and production facilities for solar panels and associated technologies that are increasingly competitive against hydrocarbons in the global electricity market.This could make it a major exporter of both old and new forms of energy sooner than almost anyone expects.

Meanwhile,it is also politically unthinkable for the UAE to lag behind in the new era of nuclear power. Its investment in this area, albeit in the absence of an indigenous enrichment capability, will no doubt help it to meet the domestic energy-demand crunch while these other ambitious projects arrive to join the energy mix.

Among openDemocracy's articles on the political economy of energy in the middle east and beyond:

Godfrey Hodgson, "Oil and American politics" (2 October 2005)

Paul Rogers, "The United States vs China: the war for oil" (14 June 2006)

Dieter Helm, "Russia,Germany and European energy policy" (14 December 2006)

Richard Youngs, "Europe'senergy policy: economics, ethics, geopolitics" (10 January 2007)

Marcus Noland & Howard Pack, "Peoplepower: Arab economies in a global era" (27 June 2007)

The UAE's powerhouse neighbour, Saudi Arabia, faces similar energy challenges(and, in the security field, far greater ones), but has different priorities.D emographic realities (a rapidly increasing population in which 65% of Saudis are under 25) make job-creation a political, economic and security priority for the al-Saud ruling family. This in turn reinforces the urge to diversify from oil. Hence the creation of six entire new cities throughout the kingdom, from Haïl in the north to Jizan in the south, which use abundant energy feedstock to promote underdeveloped sectors like finance, petrochemicals, aluminium, mining andt ourism. But in comparison with the UAE, Saudi Arabia will struggle to reduce dependence on its vast oil reserves, leaving the real innovation to come from elsewhere.

Tel Aviv's road

Beyond the Gulf, the other place to watch is Israel. The country's ever-present security concerns, its serial government instability, the abortive 2006 war in Lebanon, and the crisis over Gaza in January 2008 suggest that regional peace seems as distant as ever. Yet eventhese troubles have failed to dent Israel's economic growth, and foresight inthe economic field seems in greater supply than in the political or security.

Israelis investing in solar-power on a revolutionary scale. It also plans to exploit its high-tech pre-eminence and small geographical area to become the world's laboratory for electric-car networks. So far, high battery costs, limited mileage capacity, and lack of infrastructure have made the electric-car dream unworkable. But that could change as a nationwide network of recharging stations creates economies of scale, with motorists subscribing to network access like mobile phones or topping up as they go.

The success of the Project Better Place initiative in making the electric car a marketable commodity would bring both political and economic rewards. This and its solar-power plans reflect Israel's intention to become self-sufficient in energy and (providing renewable energy is the primary source for car batteries) no longer reliant on oil imports within as little as a decade. As transport currently guzzles a quarter of global energy output, an electric car that eventually competes with petrol-fuelled cars worldwide could make the biggest difference of all.

Amid the drum and thunder surrounding energy politics elsewhere, the echo of these lesser noticed developments in Dubai and Tel Aviv - and elsewhere in the middle east - is sure to grow louder.

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