x Abu Dhabi, UAEWednesday 17 January 2018

Middle East's steady evolution in energy could be undone in a flash

The steady evolution of the Middle East's energy world is always liable to be interrupted by another lightning flash - a political, technological or economic revolution.

This could be the year for alternative energy. Eric Gay / AP Photo
This could be the year for alternative energy. Eric Gay / AP Photo

"It lit up reality like a lightning flash," in the words of Lenin. Though speaking of an uprising at the end of the Russian Civil War, he could have been describing the dramatic impact of 2008's economic crash or the 2011 Arab revolutions on the energy world.

By contrast, 2012 saw more of the unsteady unfolding of events already set in motion: Libya's shaky recovery from its successful uprising against Muammar Qaddafi, continuing growth in US oil and gas production, sharp tightening of sanctions on Iran, and rapid progress of solar power technology amid cut-throat competition.

We can venture a guess at six things to watch for in Middle East energy in 2013: three that will happen, and three that are to be hoped for.

Total petroleum production in the United States will jump ahead of Russia and come close to dethroning Saudi Arabia as the world leader. The juggernaut of shale oil and gas will roll on relentlessly, despite all the efforts of environmentalists, including Matt Damon in his anti-fracking film Promised Land.

This surge, combined with growing production from Iraq, will put pressure on Saudi Arabia. The kingdom will have to cut back its record-high oil output in the second half of the year, or even earlier, to sustain prices around $100 per barrel - unless there is another major geopolitical upset.

"The international conditions and the increase in production by some states (in 2013) will have negative effects on prices, that's why we're being conservative," said the finance minister Ibrahim Al Assaf on Sunday. But despite Riyadh's still very comfortable fiscal position, 2013's production cuts will be the first sign of an era of greater financial stringency.

Along with the global oil boom, the golden age of gas will continue to gain pace. We can expect further discoveries in East Africa and the eastern Mediterranean. Shale-gas production will emerge in Australia; we will learn if the suddenly pro-shale United Kingdom has commercial reserves. But relief for high prices in Europe and East Asia will not arrive until later in the decade.

In the category of things to be hoped for, the first is a serious effort to reform Middle East energy subsidies. Only Dubai has made real progress. A long-awaited revision of Saudi Arabia's absurdly low prices needs political will. Handouts are draining economies and fuelling protests in Egypt and Jordan. But neither incumbents nor opposition, such as Egypt's populist former presidential candidate Hamdeen Sabahi, have articulated a coherent policy to protect the poor while undoing ruinous subsidies.

Along with reforming energy prices, there is real optimism that this could be the breakthrough year for alternative energy in the region. In solar power, dramatic cost reductions should continue, Abu Dhabi's Shams 1 and Dubai's Mohammed bin Rashid solar plants will start operations, and both Saudi Arabia and Qatar will tender major projects.

Geopolitical tensions may recede in some places. The chance of a US deal with Iran is not good, but outright conflict - threatening chaos in the Arabian Gulf's oil industry - also seems unlikely, in the absence of miscalculation on either side. Libya and, more doubtfully, Yemen are making unsteady progress; Sudan and South Sudan need to reach compromise over oil transit to avoid economic collapse.

There is hope, too, for the end of the fighting in Syria, and establishment of a representative government. But even the most optimistic case means a ruined and unstable country, with years to pass before Syrians rebuild their own oil industry and can use their geographic advantage for new pipeline routes for Iraq and others.

But the relatively steady evolution of these events is always liable to be interrupted by another lightning flash - a political, technological or economic revolution.

Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis and Capturing Carbon