Putting Economic Sustainability First

High-tension electrical power lines dot the desert landscape in this cityscape photo of Dubai, United Arab Emirates, taken in 2008. George Rose/Getty Images High-tension electrical power lines dot the desert landscape in this cityscape photo of Dubai, United Arab Emirates, taken in 2008. George Rose/Getty Images

High-tension electrical power lines dot the desert landscape in this cityscape photo of Dubai, United Arab Emirates, taken in 2008. George Rose/Getty Images

It was on a Thursday in early June 2005 when it happened. That Thursday began like any other day in the bustling emirate of Dubai: expats and locals were preparing for the weekend. They hoped to relax with friends and family, much needed after a tough working week.

The temperature that day was a blistering 41C (104F). People in Dubai often use an expression, ‘It was so hot you could fry an egg on the street,’ but on that day it seemed as if the phrase was no mere joke, as when stepping outside for even a few moments one felt as if one were being cooked alive. When it happened, no one expected it. It surprised most, and it frightened many as to what it could potentially herald for the future. What was it that caused so much trepidation and chaos? The power went out.

Of course, in most countries, occasional blackouts are a fact of life; perhaps more so in developing countries, and a bit less so in the developed world. However, a blackout in the developed world is mostly a headache, a minor hindrance, while in the Gulf it can be life threatening. This is because the average temperature during the region’s summer months can cause heat strokes in even the hardiest of souls. Therefore, air conditioning is a must, a veritable necessity.

The Dubai blackout of 2005 ended up being a one-off event. Power was quickly restored after four hours. But the blackout heralded a disturbing trend. The dilemma that the region is facing is perhaps best reflected by Coleridge’s Ancient Mariner, when he exclaims while lost at sea, “Water, water everywhere, / nor any drop to drink.” While finding enough potable water is an ever-present need for most countries in the Middle Easter and North Africa (MENA), also high on their lists of priorities is being able to supply sufficient amounts of natural gas and power to their growing economies.

[inset_left]The Dubai blackout of 2005 ended up being a one-off event. Power was quickly restored after four hours. But the blackout heralded a disturbing trend.[/inset_left]

But why this contradiction of being petro-states and not having enough energy to supply themselves? After all, the MENA countries have an inheritance to envy. Some of the largest oil and gas reserves in the world lie beneath their territories. The MENA region holds approximately 60% of the global conventional oil reserves and 45% of the world’s conventional natural gas reserves (discounting the shale gas and oil reserves). Yet, just as the Ancient Mariner was stranded at sea, surrounded by water and still dying of thirst, the energy-rich MENA countries are finding it exceedingly difficult to be able to produce enough energy (for the most part, natural gas) to sustain their rapid industrialization and economic growth.

The Dubai blackout of 2005 was one of the first of many blackouts in the region. The Dubai blackout was a harbinger for the gas supply deficit that many MENA countries are facing. While Dubai was able to ensure that it was not hit with another blackout of that scale, principally due to natural gas shipments from Qatar, other emirates and countries have not been so fortunate. Blackouts are now a way of life; they are impacting businesses and residents from Saudi Arabia, Sharjah, Egypt and Kuwait, to just name a few. Energy policies in the region cause many urban areas to experience rolling blackouts and brownouts, which damages local industry and hinders efforts toward sustainable economic development. What is undeniable is that MENA power consumption rates have reached unsustainable levels.

Overall energy consumption and energy intensity throughout the MENA region increased much more rapidly than in any other region of the world over the last four decades. In fact, from 1981 to 2009, the MENA region was the only region of the world without any positive development in energy efficiency. For example, since the beginning of the twenty-first century, energy intensity has outstripped GDP growth by around 14%. A multitude of factors caused these massive increases, including below-market energy pricing policies, economic diversification, the expansion of energy-intensive industries, urbanization and growing populations.

Historically, MENA countries sought to create energy prices that were extremely low. This was to encourage industrialization, as well as well as to redistribute some of the natural resource wealth back to the citizens. Nonetheless, the below-market price of natural gas, as well as power tariffs, resulted in demand spiraling out of control. Nearly every energy-rich MENA country—with the exception of the largest natural gas producer, Qatar—is experiencing stark natural gas shortages. There is a strong relationship between natural gas production and power generation, as the majority of the power generation in the region is produced by natural gas. This is the case especially in the Gulf.

Beginning around 2007–2008, gas deficits began to appear in earnest across the region, due to increases in energy consumption from both a growing population and the energy intensity of the industrial and residential sectors. To compound matters, the onset of the global financial crisis directly impacted regional natural gas production. OPEC countries had to choose whether to sustain oil production and thereby drive the global price of oil even lower than the USD 30 per barrel it reached in December 2012 (down from a record high of USD 145 per barrel in July 2008) or to implement strict oil quotas and reduce their associated natural gas production. They ended up choosing the latter.

Yet as the available supply of natural gas fell dramatically because of the production restrictions, demand continued apace. This demand was not just from the growing population and energy-intensive industries including aluminum, steel, chemicals and cement. After the loosening of OPEC quotas in particular, demand for natural gas was also increasing due to the development of enhanced oil recovery (EOR) techniques that use natural gas to stimulate oil production.

[inset_right]nearly every energy-rich MENA country attempted to achieve economic growth through energy-intensive industrialization.


Additionally, nearly every energy-rich MENA country attempted to achieve economic growth through energy-intensive industrialization. Accordingly, these energy deficits, as well as the only practical means to deal with them—increasing domestic power and natural gas prices—pose a classic catch-22 for MENA governments. The gas shortages undermine the region’s attractiveness to international petrochemical and energy-intensive firms, thereby reducing future diversification. At the same time, increasing domestic energy prices to lower consumption provides its own impetus for these same firms to relocate. Either option stifles the very economic growth that MENA countries hope to encourage.

Currently, petrochemical and energy-intensive industries form the base of regional economic diversification in the energy-rich MENA countries. The rising cost of production of unconventional natural gas poses an immense threat to the MENA region’s economic competitiveness and comparative advantage of low energy costs for the energy-intensive and petrochemical industries. The MENA region’s economic growth based on diversified industries will likely begin a comprehensive slowdown by 2020–2025 due to the relocation of energy-intensive firms and higher expected power and natural gas tariffs.

In tandem with rising energy costs in MENA countries, energy prices are falling in other jurisdictions. China is investing heavily in unconventional gas production, while the US is quickly becoming a major natural gas producer through the production of shale gas. US shale gas production is increasing annually and, as a result, reducing US natural gas prices to an average lower than USD 3 per million British thermal units (MMBtu). Consequently, certain critical industries are relocating to the US or expanding their production base on now-inexpensive domestic shale gas. Additional competition is expected to come from China, among other developing Asian countries, which has plans to increase its shale gas production exponentially by 2020.

In order for MENA countries to stabilize their competitive advantage, they must gradually increase gas prices to a sustainable level, bringing prices at least to the cost of production from unconventional natural gas fields. Undoubtedly, instituting energy price reform in the industrial sector would increase production costs. But, if it is instituted in a phased process, combined with governmental assistance to mitigate structural adjustment, deleterious structural adjustment may be alleviated and mitigate an overall decline in competitiveness.

To accomplish such a task, MENA governments should implement dual-track pricing reforms that aspire to gradual liberalization In enacting sustainable dual-track reforms, prices for the most economically productive sectors, such as industry, should be structured to at least meet the cost of production for the unconventional gas reserves of that particular country. A second track, for residential consumption, should be priced at cost-plus to provide a predetermined margin above the basic cost of production to guarantee a reasonable return on investment. Such a dual-track system would encourage international oil companies to invest their capital, time, expertise and technology in the production of natural gas in the MENA region. Liberalizing prices will have the effect of dampening demand and energy consumption while permitting prices to increase to sustainable levels and encouraging investment in unconventional natural gas production.

Moreover, MENA governments would benefit from implementing minimum energy performance standards (MEPS) to encourage energy efficiency. MEPS are sets of procedures and regulations that legally mandate a minimum energy performance of manufactured products. Through the adoption of MEPS, governments set certain energy efficiency thresholds for products such as home appliances, construction frameworks and industrial equipment to reduce overall energy consumption.

As a corollary, MENA governments should create a regulatory structure to enforce energy efficiency standards in the construction and renovation of buildings, enforce MEPS to reduce life-cycle costs, and promote net-zero site energy use. Net-zero energy use requires that a significant amount of the energy consumed on site is offset by renewable energy onsite, such as through the use of solar panels. The amount of solar energy that falls on the region uniquely situates MENA countries to take advantage of net-zero construction, which can be reinforced by an overall reduction in consumption through MEPS and lighting technologies such as LED lights.

Through the adoption of a basket of policy approaches, centrally focused on energy price reformation and reducing energy intensity, MENA governments may be able to reduce overall energy consumption. It is undeniable that regional energy prices will have to increase in the medium term, by 2020. If structured appropriately, the MENA region should be able to halt the flight of energy-intensive industries to other jurisdictions with lower energy prices, stem the tide of energy deficits and create overall sustainable economic growth for the long-term.