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Why the Middle East’s Dream of a Post-Oil Economy Is at a Crossroads

by | published February 13th, 2018

In a little more than two weeks, Marina and I will once again be traveling to Windsor Castle outside London.

The occasion?

The annual Windsor Energy Consultation held under royal charter.

This year will mark the ninth year in which I have briefed the gathering. The importance of that meeting, and the way in which it galvanizes global energy conversations, will be something we will continue to cover over the next couple of weeks here at Oil & Energy Investor.

But there is one matter that will be discussed there that I want to bring to your attention today…

It involves a new “Energy Revolution” that is already sending shockwaves throughout the global energy sector.

So let’s take a look…

The Middle East’s Energy Diversification

A central theme at this year’s Windsor gathering will be the Middle East’s move to diversify away from oil – and the impact that has on broader regional economic diversification.

No one expects crude to disappear from the regional economies anytime soon, but reliance on other energy sources is quickly emerging.

Now another voice has entered that discussion…

One with a bit more worldwide visibility – International Monetary Fund (IMF) Managing Director Christine Lagarde.

Speaking on a panel organized by the Qatari Ministry of Finance and the local university in Doha, Lagarde noted that the IMF estimated oil prices would experience a gradual leveling off over the next three to four years, requiring that the Middle East develop a different economic model.

She added that the Middle East needs to invent a new economic model, given the changes in the region and rebalances, especially in the energy sector.

The IMF projection of languishing oil prices is not shared by other estimates.

The International Energy Agency (IEA) in Paris is projecting a modest increase in prices.

The key remains the level of global demand.

There, the projections gravitate to worldwide estimates centering about Asia driving the energy picture for the next several decades.

However, when it comes to oil prices, the outlier continues to be American production.

America’s Energy Dominance

As I noted here in Oil & Energy Investor last week, U.S. production will only be increasing further, resulting in the U.S. becoming a net exporter of energy (both oil and natural gas) for the first time in six decades – ultimately surpassing Russia as the world’s leading producer as early as this year.

This puts additional pressure on OPEC’s drive to limit international production as well as the likelihood that prices will continue shooting up to match the 38% rise we saw between early August of last year and late January.

Now, it’s important to understand that we do not need prices to be that high to make some nice profits from the sector.

Demand will continue to rise – pulled up by Asia – and that will be enough to highlight some nice moves.

This is even the case in the U.S., where the prospects of continuing exports will allow American production to reach the higher-priced Asian market.

All of this is to say that the U.S. is rapidly usurping power from Russia and Saudi Arabia in key overseas markets… opening up massive opportunities for investors.

But the changing mosaic in global energy patterns will adversely impact countries dependent on oil sales to fuel their central budgets.

The Public Vs. Private Sector Dilemma

In her remarks, Lagarde observed that the entire economic recovery for MENA (Middle East and North Africa) should come in at about 3.2% against an average 5.6%; and in the Gulf region, growth is expected to recover to 1.8% this year after declining slightly in 2017 due to oil production cuts.

Compared to the U.S., these figures don’t appear that bad.

Yet, you have to remember that the entire region suffers from persistent low growth, high unemployment, and weak governance.

When age discrepancy is factored in (these countries have the highest percentage of populations under 25, a demographic where unemployment and unrest are even higher), the situation is acute.

Not only are the economies undiversified, the problems are also accentuated by the fact that most of what is generated in revenue comes from the public, not private sector.

In addition to moving from being rentier states (dependent on selling natural resources without value added components), they must likewise wean themselves from public sector-driven employment.

But that’s just one piece of the puzzle.

There is also an added element that is – once again – rising in concern.

An Arab Spring II

I have written for some time about the prospects of an Arab Spring II.

During the first round of unrest that swept the MENA region, most of the countries “bought off” the opposition with centrally-financed (and massive) additions to social welfare and related programs.

The next wave of revolution will not be as amenable.

The government this time around has a reduced ability to finance such a move anyway.

The failure to generate private sector employment and a more stable domestic market will exacerbate the situation this time around.

Heavy state subsidies for energy itself (fuel and electricity) merely makes the problems worse.

That’s why it’s hardly surprising that the largest renewable energy projects are currently under construction in the Persian Gulf.

Initially pursued to provide more oil for export (and revenue), hardly an economically diversifying move, these projects are now likely to initiate at least a domestic widening of energy sources.

Then there is the Saudi Aramco IPO that is regarded as a main move to diversify the national economy.

Assuming that issuance is successful, Kuwait will almost certainly follow suit with a minority sale of its national oil producer.

Qatar has a plethora of offshore natural gas and is already the world’s leading provider of liquefied natural gas (LNG).

The government in Doha will move to attract non-energy investment with what amounts to a considerable amount of collateral.

Unfortunately, other MENA nations are not in such advantageous positions.

Some, Libya and Egypt for example, are currently in, or are facing, renewed civil unrest.

All of which means the need to diversify regional economies will be the only realistic avenue to generate real employment and market prices that reflect more than government subsidies.

Which is easier said than done…

Nevertheless, as the Middle East moves toward diversification, it will have a rippling effect in the global energy market – opening doors to countless ways to profit in the process.

And you can bet we’ll be following this developing story – and the opportunities it leaves in its wake – here at Oil & Energy Investor.

Sincerely,

Kent

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