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Scene Setting
For the Middle East, the energy-climate dilemma is causing a shift in strategy. Oil-producing countries along the Persian Gulf are at the epicenter of the energy transition, but its slow pace suggests difficult times in coming decades rather than in the next year or two. Economic risks from softening oil demand loom largest, but others — including the potential reduction in strategic importance to Washington and rebalancing of domestic social contracts — add further exposures. On the plus side, the region holds attributes that give it an edge in cleaning up emissions. But it remains to be seen how assiduously regimes in the Middle East will pursue decarbonization.
The tensions are fundamental. The countries lining the Persian Gulf host the greatest and most accessible quantities of oil and gas resources in the world. Successful development has rendered Gulf economies and governance systems intensely reliant on energy revenues. On average, 70% of government budgets and 30% of GDP arise from oil and gas exports, although those figures vary greatly by country and year.[1]
The Gulf region is also on the leading edge of changes in the climate. The heatwave of 2016 sent temperatures in Kuwait and Iraq to 129.2 degrees Fahrenheit (54 degrees Celsius), the highest-ever reading in the eastern hemisphere.[2] Further warming in one of the world’s hottest regions means that global decarbonization must be prioritized to maintain livability. Emissions from the Gulf countries are substantial, even in comparison with major economies. On a per capita basis, the Gulf Cooperation Council (GCC) countries emit more than the United States (Figures 1 and 2).
Gulf societies have developed energy intensive lifestyles over the past five decades based on cheap — generally subsidized — fuels and energy services. Relative to GDP, the world’s top subsidizers of fossil fuels are mainly in the Gulf, led by Iran. The effects on demand have been stunning. Saudi Arabia ranks No. 41 by population, but is the world’s No. 4 oil consumer, surpassing Japan, Russia, Brazil and Germany (Figure 3).
Consumer subsidies are notoriously difficult to retract. Gulf governments managed partial reforms starting in 2014, which began to moderate oil demand, but growth returned in 2021 as COVID-19 pandemic effects dissipated.
Figure 1 — CO2 Equivalent Emissions in 2023
Note: Gulf Cooperation Council (GCC) does not include Bahrain.
Figure 2 — Per Capita Emissions in GCC Countries, the US, and the World in 2020
Figure 3 — Oil Use in Select Countries, 1900–2023
Alongside these challenges, the already sharp tempo of geopolitical crisis formation in Middle East has surged to brink levels in the past year. Wars focused on Israel and its occupied territories have bled into neighboring countries and sea lanes. Shipping costs and travel durations for the Gulf’s export-oriented economies have rendered their products less competitive in some markets, particularly liquified natural gas (LNG) bound for Europe. Longer term, the transition away from fossil fuels suggests a downgrade in the region’s strategic importance to the developed world.
In short, the Gulf region is the world’s key hydrocarbon supplier and reserves holder, a major consumer and subsidizer of fossil fuels, an early victim of the changing climate, and a global hub of armed conflict. As such it remains difficult to envision successful intervention on greenhouse gas emissions without concerted action by major Gulf governments, such as Saudi Arabia, the United Arab Emirates (UAE), and even Iran. As such, it is highly likely that global interest in the Gulf’s energy-climate travails will only increase.
Of course, with challenges come opportunities, and Gulf countries harbor big advantages that could render them ideal destinations for investment in energy transition technologies.[3] These include copious solar radiation and vacant land, along with carbon-sequestering attributes, such as clustered emissions next to geological storage sites, and expertise and investment capital targeting hydrogen. Buildouts of renewable power generation and low-carbon hydrogen production, along with carbon capture and storage capacity, are in the nascent stages in the Gulf. A concerted push — if it happens — could diversify a preeminent oil supply region into a preeminent carbon management region.
The Road Ahead
Crafting workable policies to deal with the Gulf’s transition dilemma will require international support. In recognition of this and to ensure a voice at the table, Gulf policymakers have openly joined deliberations around the international climate agenda. For nearly 20 years, Gulf governments have pledged to build out renewable power and reduce emissions of carbon dioxide and methane. Early pledges were based around ambitious goals in solar and nuclear power generation. Later, further commitments were enshrined in the 2015 Paris Agreement and the subsequent announcements of net-zero carbon emissions by 2050 by the UAE and Oman or 2060 by Saudi Arabia, Kuwait, and Bahrain.
The evolution of stated goals, aspiration, and reality in the Middle East is characterized by a few targets being hit, but most targets being missed, with new targets being announced. For instance, did Abu Dhabi reach its 2008 goal that 7% of its power generating capacity be provided by renewable sources by 2020? Yes, it did. Did Saudi Arabia build the 23.9 gigawatts of solar generation capacity it promised by 2020? No, it did not.[4] Strategies are evolving and include a variety of technologies.
An Example in the Making? Saudi Aramco’s Hydrogen Strategy
Middle East governments often assign climate policy to their energy ministries and, if they have one, national oil companies. Saudi Aramco, the world’s largest oil producing and exporting firm, is a linchpin of Saudi climate strategy. Due to its world-leading carbon production, particularly the so-called Scope 3 emissions from global combustion of Saudi oil, Aramco holds significant influence in the world’s climate ambitions and agenda, just as decisions made in consuming countries will impact Saudi Arabia’s export revenue. One of the decarbonization pathways that Saudi Aramco has touted involves swapping conventional fuels for low-carbon replacements, many of which revolve around hydrogen. Hydrogen has emerged as a favored energy carrier given the prospects for avoiding greenhouse gas emissions while retaining a familiar business model for fuel supply chains that leverages the resource comparative advantages native to the region.
Aramco’s ambitions on hydrogen are shaping up as an important variable in energy transitions and are an indicator that Saudi Aramco’s remit is broadening from carbon extraction and distribution to full-cycle carbon management.[5] Aramco’s engineering and investment capacity aims to convert the Saudi Arabia into an investment destination for climate‑compliant industrial production. This will be achieved by decarbonizing existing assets — electrifying processes using renewables — and providing services in carbon removal, conversion, utilization, and sequestration.
We Cannot Forget the Centrality of Geopolitics
The Red Sea as a Harbinger of Future Stress?
Geopolitics remains central to any discussion of the Middle East, especially given the region’s makeup of small states with clashing national interests and relations. Most recently, Yemen’s Houthi movement stands out in this regard. The Houthi attacks on global shipping through the Red Sea, for example, has negatively impacted trade in energy commodities, with LNG carriers at the top of the list of cargo types.
The Houthi attacks present a new phenomenon in geo-economic conflict.[6] A quasi-state group is using asymmetric tactics and weaponry not just to fight conventional armed forces, but to selectively thwart shipping in ways that serve as targeted economic sanctions against countries supporting Israel. The Iran-backed Houthi can do this by dint of access to inexpensive innovations in weaponry in combination with control of strategic territory astride one of the world’s great maritime chokepoints: the Bab el-Mandeb Strait.
As of late June 2024, the Houthi challenge to free and secure navigation remains unresolved. International military and diplomatic efforts have failed to halt the attacks, and the Houthi have proven resilient to attempts at deterrence. Regardless of how much longer this goes on, it raises an obvious question about whether the Red Sea shipping conundrum is a one-off or whether it is replicable elsewhere by others inspired by the Houthis’ unorthodox tactics.
Declining Strategic Importance?
The global oil market may be evolving in ways that could undermine the strategic importance of oil-producing countries, at least in the eyes of the U.S. government. The market is being reshaped by electric and more efficient mobility, broadening geographic diversity of oil production, especially from the U.S., and a rising share of oil being diverted to petrochemical use. These trends suggest U.S. voters and future U.S. administrations will be less directly exposed to price swings and other risks in the global oil market, and less reliant on Saudi Arabia for price stability.
Why is this significant? Diminishing risk exposure could reduce the imperatives for U.S. policymakers to spend so heavily on security provision in the Persian Gulf — more than $100 billion per year — or to resolve diplomatic rifts with major producers such as Saudi Arabia.[7] Moreover, it can be argued that the general shift in pressures on the Organization of the Petroleum Exporting Countries (OPEC) cartel — from Russia becoming an active participant in negotiating production quotas to speculation regarding the UAE’s membership — emanate from diverging responses to energy transitions.[8] This, in turn, raises questions about the long-term strategic importance of OPEC and its members, at least from the perspective of developed countries such as the U.S.
That stated, the strategic importance of the Gulf region in the climate equation is increasing. The Gulf’s cooperation is a prerequisite for any workable climate action, and the region’s carbon management advantages and capital investment capabilities make it an attractive partner for future climate actions. While these attributes are unlikely to fully offset the negatives from a decline in oil rents and loss of oil’s monopoly as a transportation fuel, they provide promising pathways for Gulf leadership.
Final Remarks
Under any imaginable scenario, climate change and energy transitions pose a difficult future for the Gulf region. In addition to undermining all-important oil rents — the political lifeblood of these monarchical regimes — these trends threaten the protection and diplomatic support of key allies, the survivability of the Gulf climate, and even the social contract between governments and society. The stakes could not be higher.
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Notes
[1] Jim Krane, “Net Zero Saudi Arabia: How Green Can the Oil Kingdom Get?” (working paper, Rice University’s Baker Institute for Public Policy, October 27, 2022), https://www.bakerinstitute.org/research/net-zero-saudi-arabia-how-green-can-oil-kingdom-get.
[2] Later this year, we will release a full credibility index on the Gulf that measures how well different countries matched their energy and climate pronouncements.
[3] Rami Shabaneh et al., eds., The Clean Hydrogen Economy and Saudi Arabia: Domestic Developments and International Opportunities, Routledge Explorations in Environmental Economics (London and New York: Routledge, 2024), https://doi.org/10.4324/9781003294290.
[4] Krane, “Houthi Red Sea Attacks Impose ‘Economic Sanctions’ on Israel’s Backers” (Houston: Rice University’s Baker Institute for Public Policy, March 1, 2024), https://doi.org/10.25613/64CZ-F553.
[5] Krane, “How the Energy Transition Is Imposing New Strains on US-Saudi Relations,” Orbis 68, no. 2 (2024): 294–314, https://doi.org/10.1016/j.orbis.2024.02.009.
[6] Kristian Coates Ulrichsen, Mark Finley, and Krane, “The OPEC+ Phenomenon of Saudi-Russian Cooperation and Implications for US-Saudi Relations” (Houston: Rice University’s Baker Institute for Public Policy, October 18, 2022), https://doi.org/10.25613/0B0F-J592; Krane, Ulrichsen, and Finley, “Should Abu Dhabi Quit OPEC? Reconsidering the UAE’s Membership” (Houston: Rice University’s Baker Institute for Public Policy, June 1, 2023), https://doi.org/10.25613/dt16-5153.
[7] Unless otherwise noted, the percentages mentioned are author estimates.
[8] Jason Samenow, “Two Middle East Locations Hit 129 Degrees, Hottest Ever in Eastern Hemisphere, Maybe the World,” Washington Post, last modified July 22, 2016, https://www.washingtonpost.com/news/capital-weather-gang/wp/2016/07/22/two-middle-east-locations-hit-129-degrees-hottest-ever-in-eastern-hemisphere-maybe-the-world/.
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