The GCC and the energy transition

The conventional approach to analysing the economic impact of the energy transition is that economies highly dependent on the extraction of hydrocarbons will be challenged as the global economy reduces its dependence on hydrocarbons as energy inputs. This economic shorthand suggests that economies in the GCC—where oil and gas still represent a large share of nominal GDP and account for the largest share of fiscal and current account receipts—will need to substantially reform their economic structure in order to achieve long-term sustainable growth.

The need to diversify economies across the GCC away from reliance on oil and gas has been a strategic objective of all economies in the region for decades. Progress has been positive, though uneven, and has mainly been thanks to the development of other industries rather than oil and gas output declining. Oil production capacity in the UAE, for example, was around 2.5m b/d in 2000, 3m b/d by 2015 and is above 4m b/d now. But the added external force of the energy transition raises the economic imperative to lessen the dependency on oil and gas as prime movers in the GCC economies. Progress on “greening” the global energy system will be fitful—oil and gas alone represented 55% of global energy consumption in 2021, with coal taking the hydrocarbon share to more than 82%—but regulation and consumption changes are likely to become more rather than less stringent. France recently took the step of banning short-haul flights internally to push more travellers onto the country’s rail network.

The focus on the GCC as producers of energy, as sources of fossil fuels, obscures another challenge for the region. The region has one of the largest energy consumption footprints in the world, relying heavily on oil and gas as a primary source of energy as well as the main fuel in power generation. Energy consumption in the Middle East and North Africa region represents around 8% of the world total, slightly ahead of the region’s share of the global population (about 6% as of 2021). But growth in energy demand runs among the fastest in the world. On a generational basis—25years—primary energy consumption in the region is doubling. That represents a slowdown from the near quadrupling in energy consumption recorded over the same time period in the 1980s but is still only second to Asia in terms of the pace of energy demand growth, a region which has nearly nine times the size of population as MENA.

Energy consumption in MENA has not only been rapid, but it has also been highly intensive. Energy consumption per capita is among the highest in the world in the GCC economies: the UAE consumed nearly 500 gigajoules per person in 2021, almost the equivalent of 140 megawatt-hours or enough energy to run a washing machine almost 50,000 times. Measured against GDP, MENA is a relatively inefficient region with most economies requiring more energy inputs in order to generate a unit of GDP than peer economies across the G20.

This high overall energy intensity is matched in the carbon footprint of the region where per capita emissions are high along with the carbon intensity of the economy. A high reliance on oil and gas for power generation as well as high levels of vehicle ownership contribute to an elevated level of regional emissions.

But the region is not standing still in trying to change its energy footprint, not least from a desire to meet national determined contributions (NDCs) as all GCC countries have signed up to the UN Paris Agreement. The UAE and Oman have both submitted updated NDCs with the UAE targeting a reduction in emissions of 31% from business as usual (BAU) levels by 2030 and Oman aiming for a 7% reduction from BAU levels by 2030. Several GCC economies also have net-zero carbon emissions targets with the UAE and Oman aiming for 2050 while Saudi Arabia, Kuwait and Bahrain have committed to a 2060 deadline.

In the near term, the region is also spending heavily to increase its solar capacity. Installed capacity in the UAE has increased by an annual average of almost 190% over the last five years, according to data from BP, though it is rising from near zero. The gains have tracked the global increase in clean energy spending with the IEA estimating that for this year total clean energy spending will amount to USD 1.7trn versus USD 1trn for fossil fuels. Renewables as a share of total global electricity generation rose to 12.9% as of 2021, up from a bit more than 7% five-years earlier.

With ambitious net-zero emissions targets and plans to dramatically expand carbon capture and storage, the GCC is aiming to maintain or expand its share of the hydrocarbon economy and provide the “last barrels of oil” that are cheaper to produce, than many other large oil and gas producing regions, and relatively “cleaner” in terms of energy required to produce.

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