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The Gulf struggles to reform subsidies as temperatures and domestic energy demand rise

Energy Kingdoms: Oil and Political Survival in the Persian Gulf

Jim Krane
Columbia University Press
220 pp.
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Since the discovery of oil in the 1930s, the six Gulf monarchies—Saudi Arabia, Qatar, Kuwait, Oman, Bahrain, and the United Arab Emirates—have become known for their seemingly endless supply of cheap energy and a growing domestic appetite for it. However, in the face of a changing climate, the very policies that led to their development and prosperity are today posing a threat as the region faces record-breaking temperatures. Jim Krane’s compelling Energy Kingdoms takes readers inside this critical energy conundrum.

Krane, a fellow for energy studies at Rice University, evaluates the forces behind the Gulf region’s “feverish demand for its chief export commodity” and argues that the monarchies’ economic and political systems have created contradictory phenomena: Subsidization of energy, a key political institution, undermines oil and gas exporting, their main economic institution. “[L]ong term, these two crucial components of governance cannot remain in conflict. Either the political structures will bend or the economy will yield.”

Before the discovery of oil, the geographic isolation of the Arabian Peninsula enabled the Gulf sheikdoms to develop “a robust tribal culture and distributional autocratic rule” that would make them ideal hosts for commercial oil development because the autocracies allowed for direct negotiation with rulers. Moreover, oil in these regions was relatively close to the surface, and mineral rights were held by the state.

By 1973, the Organization of Petroleum Exporting Countries (OPEC) controlled 51% of global oil output. That year, the Gulf OPEC members tested their market power by raising oil prices and exercised their collective power by initiating a targeted oil embargo. Krane explains how this reversed existing trade terms, leading to frantic attempts by importing countries to reduce Middle East “dependence” and gain “energy security,” buzzwords that endure today.

Overseas profits meant that Gulf states did not need to raise income through taxation. The kingdoms began to subsidize internal energy services, including electricity, water, and fuel, thus widening the difference between these commodities’ local costs and their overseas selling prices. As their populations grew more prosperous, the subsidies were no longer needed, but the states continued to provide them. “Subsidies, ruling families learned, are sticky: easy to hand out, much tougher to retract,” observes Krane.

Krane reviews four policy options available to the monarchies, who today face an ever-growing increase in domestic demand for energy. These options include (i) to invest upstream or increase oil production; (ii) to diversify energy supply through the development of alternate energy sources; (iii) to diversify economies beyond hydrocarbons; or (iv) to reduce demand, allowing maintenance of export levels. Currently, the monarchies partially exercise all four options, but without retracting subsidies, reducing demand has proven particularly difficult.

In 2010, Iran and Dubai launched ambitious energy price reforms to manage the impacts of domestic subsidies. The lessons Krane draws from these cases are that governments must allow public discussion of proposals (“citizens are more likely to get behind painful policy if it’s explained and makes sense”) and that policy-makers are likely overly cautious; if rulers “level with their people,” citizens may be more willing to accept adversity, as long as it is distributed fairly.

But Krane concludes that there is a more important energy problem facing the Gulf than responding to increased demand. Climate change, he writes, “represents a potential catastrophe for all of humanity, but the Gulf monarchies play starring roles as both major perpetrators and early victims.” Because fossil fuels are responsible for the majority of greenhouse gas emissions leading to climate change, reducing emissions is crucial.

The sustainability of both the Gulf’s economy and its climate cannot be guaranteed unless the energy subsidies are reformed, according to Krane. Flexibility in policy will be crucial as the autocracies prepare for another chaotic change period: the “post-oil age.” Ultimately, Krane posits that the Gulf monarchies will need to diversify their economies in order to remain viable—a change to the states’ status quo.

In the end, Energy Kingdoms provides a fascinating look at the double-edged sword that is the Gulf monarchies’ greatest resource. The states face an extraordinary challenge as “[t]he magical fluid that dragged them from poverty and isolation just a few short generations ago now threatens to render their already intense climate intolerable.” How they choose to proceed will affect the region and the world at large for generations to come.

About the author

The reviewer is at the Centre for Environmental Policy, Imperial College London, London SW7 2AZ, UK.