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How Cheap Oil and the Pandemic Threaten Economies and the Energy Transition in the Middle East and North Africa

This post is part of the "Resource Governance and the Energy Transition" series. 

The coronavirus and the collapse in the oil price is testing the precarious economic models in the Middle East and North Africa (MENA). The World Bank estimates that mitigating the economic impact of the pandemic and the sharp drop in oil prices will cost MENA countries approximately USD 116 billion, almost 4 percent of the region’s combined 2019 GDP. Already bloated public spending across the region is growing to fund healthcare and implement measures (such as waiving mortgage and loan repayments and offering access to credit for affected small businesses and low income households) to absorb the domestic economic shock. Such measures, while necessary, will exacerbate the fiscal challenges faced by the hydrocarbon-dependent MENA economies.
Previously the region’s increased domestic energy use has reduced export capacity, and in turn government revenues. Currently, social distancing measures enforced during the pandemic are reducing the region’s energy use. Under normal circumstances, this would be an ideal scenario as it helps reduce the energy deficits of many MENA countries while reducing government spending on fuel and electricity subsidies and freeing more oil and gas for export. However, this fall in domestic energy use has not been enough to offset the fall in oil and gas export revenues, estimated by the IMF at USD 230 billion. 
For instance, Saudi Arabia, already suffering budget deficits since the 2014 drop in oil prices, will likely receive USD 100 billion less oil revenues in 2020 than in 2019. Still, Saudi Arabia will cope better than others as its low oil production cost and foreign reserves may allow it to maintain public spending into 2021. Other countries (such as Algeria) with higher oil production cost, less sovereign wealth fund savings and foreign exchange reserves, and more public debt, face the prospect of an economic crisis.
These challenges will complicate the relationship between states and citizens across the region. People in prospective hydrocarbon-producing countries, such as Lebanon, or in countries with new large gas discoveries, such as Morocco and Egypt, expect to receive bountiful states revenues and abundant fuel and power. But these dreams could be shattered as investment dries up. In hydrocarbon-dependent economies with fragile social orders, disrupted revenues are a recipe for political and social instability. This highlights the urgent need for hydrocarbon-dependent countries, as well as MENA countries with severe energy deficits, to diversify their energy mixes away from fossil fuels.

The dilemma of a necessary but stalled energy transition 
The pandemic’s economic fallout has created a dilemma for governments in the region. It is likely to slow the energy transition of MENA countries in two ways. First investment in renewable energy may fall, as the political will to invest in more sustainable energy is already wavering in the interest of directing spending to healthcare and other public spending programs. State-owned enterprises (SOEs) have been central entities in diversifying energy supplies and developing renewable energy projects. However, in response to the economic crisis, SOEs will cut their spending, and renewable energy is likely to be one of the casualties. For instance, in April, Algeria announced a 30 percent cut in public spending, while keeping public wages intact and protecting health and education spending. While the government is vague on what will be cut, officials asked the state-owned oil enterprise Sonatrach to halve its estimated 2020 expenditure. This is very likely to curtail Sonatrach’s planned renewable projects, upon which the company had embarked as an urgent and necessary measure to reduce the energy deficit and free up gas for export.
Second, in their bid to appease citizens and to revive businesses, MENA governments will likely fall back on the incumbent fossil fuels rather invest in the laws and grid technologies required to develop widespread renewable energy. Consumers also will benefit from the low fossil fuel prices, while governments will benefit from saving on fuel and electricity subsidies. In this way low prices may lead governments to prioritize domestic oil and gas consumption, and therefore production, at the expense of renewable energies. This risk is especially high in MENA, where no laws mandate a transition to cleaner energy.
MENA governments face a dilemma. On the one hand, short term socio-economic and political needs require them to increase public spending while benefitting from the low fossil fuel prices for domestic consumption. On the other hand, while these are necessary immediate measures, if sustained, they risk prolonging MENA countries’ economic and energy dependence on fossil fuels and delaying the much-needed energy transition.
As domestic energy use rises after the easing of social distancing measures, energy deficits will once again burden MENA governments’ budgets, through heavy subsidy bills and loss of export revenues. Therefore, MENA governments deprioritizing the diversification of their energy mixes are missing out on the long-term opportunities renewables can bring.

Hanen Keskes is the Middle East and North Africa officer for the Natural Resource Governance Institute (NRGI).

Photo credit: Travel Aficionado