Economic Diversification in the Context of Peak Oil and the Energy Transition

Economic diversification has been a key developmental goal for the Middle East and North Africa (MENA) oil producers for decades as evidenced in their various national development plans. Some countries have made progress over the last few decades in diversifying their economic base and their sources of income. But despite these efforts, most indicators of economic complexity, diversity, and export quality continue to be lower in oil-exporting Arab economies than even in many emerging market economies, including commodity exporters in other regions.

Of late, a renewed sense of urgency has arisen around the issue of economic diversification. The conventional wisdom that dominated oil market behaviour over the past few decades has been based around the idea of ‘peak oil supply’ and ‘scarcity rents’, and that preserving resources for the future by rationing supplies provided a sensible way of managing a country’s oil fairly across generations. The pendulum has swung to the notions of ‘peak oil demand’ and ‘oil abundance’ – where the pace of oil demand growth is expected to slow over time and eventually plateau/decline, resulting in stranded assets. It is generally thought that the world is on the brink of another ‘energy transition’ in which conventional energy sources such as oil will eventually be substituted away in favour of low or zero carbon energy sources.

Rather than debating its definition or measurement, this presentation adds context to the debate on economic diversification, by analysing it against the arguments around peak oil demand and the energy transition – it looks at three questions: how soon can we expect ‘peak oil demand’ to occur, or alternatively, how fast is the current ‘energy transition’? What kind of economic future should MENA countries be planning for? And, how does the emergence of renewables as a competitive energy source impact economic diversification strategies in these countries?

The presentation argues that the starting point of any analysis of MENA oil exporting countries should not be based on an approach solely predicated upon the premise that oil will no longer be in demand and that the oil sector will play a marginal role. The diversification strategy adopted by oil exporting countries will be conditioned by the speed of the energy transition, during which the oil sector will continue to play a key role in these economies including in their diversification efforts. At the same time, oil producers will need to be far more strategic in their use of the energy sector to diversify their economies. In a more competitive world, oil policy will also continue to matter; cooperation between oil producers will be imperative, yet challenging.

Executive Summary

By: Bassam Fattouh , Anupama Sen

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