Trump win casts more energy transition doubts on Middle East: analysts

The energy transition in the Middle East has long-since been fraught with complexity: how can a region that depends on oil exports for upwards of 70% of state revenues meaningfully transition away from fossil fuels? With the election of U.S. president Donald Trump, one of the most infamous climate skeptics, doubts remain over how the transition can happen at a pace which conforms with wider global climate targets and not leave the region in a cash crisis.

A key strategy of the Trump administration has been to push down global oil prices in an effort to keep inflation low, while also attempting to weaken the dollar so that U.S. exports are more competitive, Torbjorn Soltvedt, Principal Analyst from the Middle East & North Africa region at risk consultancy Verisk Maplecroft, explained. But this manoeuvre will have ripple effects further afield. Since oil and gas are priced in dollars, a weaker dollar could lessen the amount of funds available from fossil fuel revenues to fund the transition.

“If we saw a weaker dollar, and if we saw lower oil prices, that could be bad news for a lot of these big, ongoing energy transition projects in the Gulf,” Soltvedt told Gas Outlook.

Massive dependence on fossil fuel revenues for state finances, as well as cheap and heavily subsidised fossil fuel prices for domestic consumers, means there is an incentive against actively promoting decarbonisation, Jom Madan, Senior Research Analyst of Scenarios & Technologies at Wood Mackenzie, told Gas Outlook. “[Middle East producers] are able to have a larger revenue stream for longer if they’re able to sell oil for longer.”

Climate diplomacy in the era of Trump is facing its own set of unique challenges. Trump has already backed out of the Paris Agreement, and climate is falling further down the agenda in the context of a global cost of living crisis, Madan said, putting it secondary to defence spending. The risk of Gulf states’ backpedalling on agreements is higher due to a shift in focus by global powers as a result of rising tensions and conflicts around the world and a challenging economic climate.

“This year there’s going to be a lot of new solar projects completed. And so in terms of then overall percentage of total installed capacity that is coming from renewable energy continues to increase very rapidly every year, Torbjorn said. “It’s obviously from a low baseline. And so I guess there is now the concern that, you know, with the U.S. being less committed to things like the Paris Agreement, that it could lead to a loss of momentum in the Gulf.”

But with the Middle East’s huge exposure to climate effects, a rapid turn towards decarbonisation is required to avoid the risk of domestic social and political issues. So far, transitioning to renewable energy in the domestic market has been primarily to free up more volumes to be exported overseas and has not led to a decrease in oil and gas production in the region. Scaling up domestic renewable energy production but exporting the same or more volumes of fossil fuels overseas will do nothing to alleviate global emissions.

“If there’s a delay in the energy transition and a downturn in oil and gas prices, it could lead to significant fiscal strain and leave governments in a vulnerable position,” Soltvedt told Gas Outlook.

Diversification has been on the lips of most energy analysts writing about the Middle East and its energy transition challenges for decades now, but financial incentives to scale up clean energy might be needed.

“At the beginning of the Russia-Ukraine war we saw a big push for renewables from Europe, but now the [price] gap between fossil fuels and renewables has widened,” Madan told Gas Outlook. Newer clean technology, such as hydrogen, is currently cost-prohibitive in the region, and the shift towards EVs has been slow to uptake because at the moment the increased cost falls on the consumer.

The Middle East is caught in a catch-22: it relies on oil and gas revenues to support transition projects, but the more oil and gas that is being pumped into the market, the lower the rate of return, making decarbonisation more challenging to finance. But acting now before a further downturn in oil prices will be favourable for the region in the longer-term.

“If China starts transitioning to EVs even more aggressively, you’re losing half a million barrels of demand every year,” Madan said. “And the assumption is that other developing markets like India, Southeast Asia, Africa would kind of make up that demand as they start developing. But the risk for the Middle East there is that the market is oversupplied.”

(Reporting by Miriam Malek; editing by Sophie Davies)