Abdennour Toumi: Energy policies in the MENA region are witnessing historic and important transformations. What are the repercussions of these developments on the geopolitical situation in the MENA region and on the economic relations with the major global and regional powers, such as the US, China, Russia, and the EU?
Dr. Carole Nakhle: Any oil and gas producer ought to feel the pressure from the intensifying global fight against climate change, since to achieve the scientifically recommended reduction in carbon emissions, our consumption of fossil fuels should be curtailed significantly. For the MENA region, where the economies of oil and gas exporters are largely reliant on hydrocarbon revenues, this creates a serious threat to economic, social, and political stability. In this respect, economic diversification has acquired a new sense of urgency.
Furthermore, the most important and probably only significant growth center for oil and gas demand in the coming years is Asia, particularly China. No wonder why MENA energy exporters have been turning eastward to secure the market for their valuable products. Interestingly, the US, which was once a major oil and gas importer and, therefore, a notable market for MENA, has become an exporter, also targeting Asia among others. In other words, the customer has become a competitor.
Abdennour Toumi: The energy sector has been playing a pivotal role in MENA countries’ foreign policies. It has increased in light of the ongoing Russia-Ukraine War. What is your take on the future roles of these countries in global energy policy?
Dr. Carole Nakhle: Russia’s invasion of Ukraine has created interesting dynamics with a lasting impact on global energy markets and MENA oil and gas exporters, especially if the EU’s sanctions on Russian energy exports are fully effective. For instance, Russia has been a member of OPEC+ since December 2016 and while the alliance’s longevity has exceeded many analysts’ expectations, it has not always been smooth – think of March 2020, or the UAE’s discontent with the ‘special’ treatment of some members, mainly Russia, in July 2021. There were also powerful voices in Russia against the alliance, particularly when it translated into a loss of market share for Russian oil.
Today, if Russia loses access to its most important energy market – that is Europe – two interesting dynamics will emerge. First, Russia will direct its oil and gas, or at least a portion of it, to Asia, which is already an important market for MENA. Second, some MENA producers will try to fill the significant gap that Russia would leave in Europe, which other producers, such as the US, have been aggressively eyeing.
The impact of the war on oil and gas prices has so far been beneficial to MENA producers, who were some of the few countries to see their economic forecast upgraded by the IMF’s April World Economic Outlook as higher prices have translated into substantial windfalls for those economies. However, the risk of demand destruction is real as the global economy feels the burden of the war, particularly in terms of commodity inflation. Should the fears of economic recession materialize, we should expect to see energy prices decline.
Abdennour Toumi: There are news reports that expect the US to become the largest global exporter of liquefied natural gas (LNG) in the world by the end of this year. How true are these reports? What are the repercussions of the emergence of the US as a major global exporter of LNG on the situation of the remaining major exporters of LNG in the global natural gas market, such as Algeria, Qatar, Iran, and Russia?
Dr. Carole Nakhle: The shale revolution in the US has truly revolutionized global energy markets, not only because the US has become a net exporter of oil and gas. In fact, even before the US started to export its excess production, the impact of the revolution started to be felt in global markets. Take, for instance, gas markets in Europe. The LNG that was originally destined for the US pre-shale had to be diverted to other markets – primarily Europe – since it was not wanted anymore in the US post-shale. The additional supplies of relatively cheap gas forced conventional exporters including Russia to revisit the terms under which they sold their gas e.g. by making their contracts more flexible.
It was also the shale revolution that affected OPEC’s decision to abandon all restraints between 2014 and 2016, hoping to kill the expensive shale. But shale proved to be much more resilient, leading to the OPEC+ alliance in December 2016.
Today, the US is clearly emerging as a winner from the crisis in Europe – after all, Russian gas was a serious competitor, and Nord Stream II would have made Russian exports to Europe even more competitive with American LNG. Not anymore!
Abdennour Toumi: The East Mediterranean region seems to be on the verge of further regional crises over energy resources, involving Türkiye, Greece, the Greek Cypriot Administration, Egypt, Lebanon, Syria, and Israel. Would the Eastern Mediterranean become a zone of conflict that makes the MENA region know more tensions and a lack of stability, or do the conflicting countries search for a better way of sharing this energy resource in the aftermath of the Russia-Ukraine War?
Dr. Carole Nakhle: The Eastern Mediterranean region is politically fragmented, and that reality is unlikely to change any time soon. This has impacted the development of the region’s hydrocarbon resources, which were discovered around the same time as those in East Africa. However, East Africa, particularly Mozambique, is at a much more advanced stage in terms of joining the club of notable gas exporters. In contrast, East Mediterranean countries are still debating ways and routes to commercially exploit their discoveries.
Should countries put their political differences aside, the East Med could play an important role as a supplier to Europe. However, with Israel and Lebanon still officially at war with each other, and the ongoing dispute between Türkiye, the Greek Cypriot Administration, and Greece, one should keep expectations low.
Abdennour Toumi: The MENA region is one of the richest regions in the world in terms of energy resources and reserves, the people in the region, however, still suffer from poverty and unemployment. What are the reasons behind this contrast? Is there a good strategic recipe for investing these resources for smart economic development, especially given the global rise in energy prices?
Dr. Carole Nakhle: The World Bank once described the MENA region as “richer than developed”. Such a statement is still valid today. The region’s natural resource wealth has not properly translated into strong economies. Of course, MENA is a diverse set of countries, and some countries such as the UAE, for instance, have fared much better than others, such as Iraq or Algeria, for instance.
But in those countries that have lagged in terms of economic progress despite their hydrocarbon wealth, one typically finds short-sighted policies, weak institutions, and corruption, to name but a few fundamental problems. Even if reforms have been announced in those countries, they gain track initially, but enthusiasm around them quickly fades away. For those countries, the key is to build a strong institutional framework to improve the governance of the oil and gas sector and also the broader economy.