In June issue of iktissadiat magazine, Bassel Baaklini shares his views on the transformation in energy policy in The Middle East...

Here is the full article.

The silent revolution. By Bassel Baaklini

A transformation in energy policy will reshape the Middle East's profile as a region defined by oil.

The fact that The Middle East owns two-thirds of the world's proven oil reserves means that its status as the world's leading energy supplier is hardly in doubt. Buta paradigm shift in how it fulfils this role may be around the corner. Do not be surprised if the region pioneers the switch from oil and gas to renewable energies.

From the outside, the Middle East is often seen as an undifferentiated collection of greedy, unrepresentative governments conspiring to exploit powerless consumers with their lucrative energy reserves. The stereotype has  had another boost in January 2008, when oil finally hit the symbolic $100-per-barrel mark. Even if the pricehas retreated since then, the strong and rising demand (particularly across Asia) means that the region's energy leverage is only going to get stronger.

Whatever the reasons for oil-price inflation - demand outpacing supply, refining capacity shortages, speculative investors and concerns over Gulf security being just some - the arrival of three-figure oil in 2008 may prove a watershed not only for global consumption but also for the middle east's role in solving humanity's addiction to fossil-fuels.

The region is certainly not about to abandon its hydrocarbon cash cow anytime soon. However, a split is emerging between traditionalist and progressive visions, pitting cautious resource nationalism against creative investments in futuristic technologies.

The governments of such countries as Algeria, Libya and Saudi Arabia can easily afford to rely on high oil and gas revenues to insulate themselves from political opposition, upgrade their infrastructure, further enrich domestic elites and keep business healthy for western defence companies.

But these countries also remember when oil was nearer $10 than $100. They still fear that the current boom, while a safe short-term bet, won't last forever - that a global recession or breakthrough in alternative energy could greatly diminish bring oil demand. The answer is to diversify their economies. But entrenched interests, uncompetitive business environments and lack of immediate incentives stand in the way.

For the Middle East's energy have-nots and its more progressive oil states, the time has come to think creatively and diversify energy sources. Four motives underlie this shift of direction:

▪ Economic booms in countries like the United Arab Emirates (UAE), Qatar, and Saudi Arabia, involving resource-intensive industries and greater car usage, mean energy consumption is rising exponentially

▪ Energy independence removes the political risks of being at the mercy of supplier countries

▪ an unforeseen technological or even climatic change could slash fossil-fuel demand, hitting Gulf oil exporters particularly hard

▪ Iran's nuclear programme is making nuclear power an essential accessory for middle-east states. This is an issue of economic sense as well as regional rivalry and prestige, as it is more profitable to export energy resources than to sell them domestically at subsidised prices.

The pioneers of this brave new world of alternative energy in the Middle East will be the UAE and Israel. This pairing is perhaps surprising, given the UAE's huge oil reserves and terrible environmental track record, and Israel's prior insignificance in global energy markets. But both have strong incentives to embrace renewable energy, and are rolling out ambitious plans to do so.

Dubai's diversification
The Emirates will be a magnet for economic opportunists, traders, and investors for years to come. The attraction is increased by the virtual absence of local politics; those residents that do have a voice have little incentive to rock the boat. While other Arab governments still view economics as means to retain power, Dubai leaders can push ahead without worrying that emergent wealth will bring political instability. As a result, the Emirates' profound cultural conservatism belies an energetic openness to economic opportunity, reinforced by waves of fortune-seeking migrants.

The UAE produces 2.8 million barrels of oil every day,but domestic consumption has been skyrocketing as Dubai and Abu Dhabivie with each other to become the global finance and tourism hub of the 21st century, lying at the epicentre of middle eastern, Asian, European and African markets. A planning and construction boom of epic scale, new business districts, indoor ski slopes, reclaimed archipelagos - is guzzling resources like never before. The Emirates' considerable reserves notwithstanding, finite production capacity means a choice between greater dependence on neighbours and developing new energy sources. It's no surprise, then, that gas-import deals have been signed with neighbouring Qatar and Iran,but these countries too are facing consumption crunches, and Iran's creaking gas sector makes it a particularly unreliable partner for future supplies.

In 2008, the value of Gulf countries' total reserves topped $2 trillion, and might - based on 2008 trends - reach a monumental $9 trillion by 2022. Such enormous sums, combined with abundant supplies of low-paid foreign workers, allow the UAE to spread risk by investing in energy across the board, from hydrocarbons to nuclear to renewables. In fact, it has the luxury of investing enough oil wealth in energy technologies that aren't yet economically viable to ensure they ultimately become competitive.

That's why so much oil wealth is being poured into futuristic projects in solar, photovoltaic, waste-to-fuel and other renewables, from initial research to commercial development. Abu Dhabi's $15-billion Future Energy Co (or Masdar), which will create the world's first carbon-neutral city in the harsh Arabian desert of all places, is a sign of things to come.

But the biggest impact of the UAE's energy revolution may be in solar power. It plans to capitalise on the natural advantage of year-round sunshine by integrating technical development and production facilities for solar panels and associated technologies that are increasingly competitive against hydrocarbons in the global electricity market.This could make it a major exporter of both old and new forms of energy sooner than almost anyone expects.
The UAE's powerhouse neighbour, Saudi Arabia, faces similar energy challenges(and, in the security field, far greater ones), but has different priorities.A rapidly increasing population in which 65% of Saudis are under 25 make job-creation a political, economic and security priority for the al-Saud ruling family. This in turn reinforces the urge to diversify from oil. Hence the creation of six entire new cities throughout the kingdom, from Haiil in the north to Jizan in the south, which use abundant energy feedstock to promote underdeveloped sectors like finance, petrochemicals, aluminium, mining andt ourism. But in comparison with the UAE, Saudi Arabia will struggle to reduce dependence on its vast oil reserves, leaving the real innovation to come from elsewhere.

Tel Aviv's road

Beyond the Gulf, the other place to watch is Israel. The country's ever-present security concerns, its serial government instability, the abortive 2006 war in Lebanon, and the crisis over Gaza in January 2008 suggest that regional peace seems as distant as ever. Yet eventhese troubles have failed to dent Israel's economic growth, and foresight inthe economic field seems in greater supply than in the political or security.

Israel is investing in solar-power on a revolutionary scale. It also plans to exploit its high-tech pre-eminence and small geographical area to become the world's laboratory for electric-car networks. So far, high battery costs, limited mileage capacity, and lack of infrastructure have made the electric-car dream unworkable. But that could change as a nationwide network of recharging stations creates economies of scale.

The success of the Project Better Place initiative in making the electric car a marketable commodity would bring both political and economic rewards. This and its solar-power plans reflect Israel's intention to become self-sufficient in energy and no longer reliant on oil imports within as little as a decade. As transport currently guzzles a quarter of global energy output, an electric car that eventually competes with petrol-fuelled cars worldwide could make the biggest difference of all.

Amid the drum and thunder surrounding energy politics elsewhere, the echo of these lesser noticed developments in Dubai and Tel Aviv - and elsewhere in the middle east - is sure to grow louder