A Renewable Arab Spring

Oil economies of the Middle East need to change their course towards politically sustainable means of finance.

Growing from the bottom

      2011 was an interesting year not only for the Middle East. All around the world, governments, nuclear energy and financial markets, among others, are begun to be questioned simultaneously. People are unhappy about them (see article). Obviously, this is a warning for the new democracies of the Middle East to build sounder political and economic systems.

      For the last 50 years, majority of the economies in the Middle East have been depended broadly on oil revenues since they have 60 percent of the total proven reserves on the world. Contrary to popular thinking, oil is often detrimental to economies, particularly for the ones that have yet to be matured. First of all, the increase in exploitation of natural resources cripples efficient and competitive production at the expense of domestic manufacturing sectors (dutch disease). Hence, in the long term, these economies could not perform a healthy transformation to industrial economy. 

      Secondly, oil, as a commodity, is unreliable in terms of public finance. Oil prices are so volatile that every single development in global politics and/or economy leads to confusing results. For instance, Arab Spring did not make the expected effect on the market. Even though, it seems that Tunisia, Egypt and Libya do not have considerable oil reserves to effect prices, it is known that when it comes to price manipulation, the important thing is fear which abundantly exists in the case of Arab Spring. In addition, reserves are not the only thing that matters. Oil market values also the quality (brent crude oil which Libya exports significantly) and shipping routes (choke-points) of the product.

      Same Old Same Old

      In spite of these suitable conditions, prices have not been changed much in the last year. There are three reasons. First, catastrophe occurred in Japan which is one of the biggest crude oil importers in the world, led to a significant decline in country’s oil demand. Second, new economic meltdown started in Europe and spread to U.S. also dropped hydrocarbon imports from the MENA region. Moreover, Saudi Arabia, world’s largest oil exporter, released its spare capacity to offset the decline in Libya’s production, relieving energy markets. Last but not least, 3 of 7 choke-points located in the MENA (Bab-Al Mandan, Strait of Hormuz and Suez Canal) were not effected from the political unrest. They are still operational and ship the half of total world oil exports. Even though there were some sporadic ups and downs throughout 2011, thanks to these stabilizing factors oil  prices settled around 110$. 

      Uncertainties in oil prices also make economic policies harder to forge and fragile to external shocks due to floating export revenues. Whereas a decline could lead to a macroeconomic imbalance, upward trend in revenues could boost over (luxury) spending, mostly on imported goods, making national market dominated by foreign commodities which domestic businesses are inadequate to produce. Ironically, encouraging national enterprises to enhance product capacity and efficiency in order to substitute imported goods would probably increase domestic energy demand which would in turn, also cause oil export revenues to decline. The wheels of this paradox are already in motion.        

      What can be done?

      Renewable energy is the answer. Region’s potential for renewable energy (particularly solar) is vast. Using this potential is the key to not only an environmentally and commercially but also politically sound economy. Besides their positive environmental effects, renewals would enhance export product variety of the MENA particularly in terms of trade with the EU which embraces alternative energy as one of Union’s main priorities. Thanks to financial leverage provided by large hydrocarbon reserves, MENA is poised to make angel investment on the sector and could seize a remarkable market share on renewables, which would decrease the fragility and the effect of demand shocks. Moreover, a balanced and healthy economy is crucial for a stable political system which constitutes the utmost importance at the moment. Even though, high oil prices enable populist policies (subsidies etc.), a sharp and long term decline would probably cause devastating political consequences as well as economic ones. This might lead to a counter revolution, making it possible for the old regime to strike back.   

      Nevertheless, there is a cost. Apricorp, an UAE based company, estimates that 535bn $ is needed for 2012-16 to establish the infrastructure for alternative energy production facilities. However, the cost is rather political. In the coming months, it would probably be hard to witness an elected politician who would be a member of the first elected parliament to stand against foreign energy companies and their domestic appendages, jeopardizing his/her political career at the outset.


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