The MENA Region: An Economic, Energy, and Historical Context

Abstract

The chapter provides an economic, energy and historical context of the Middle East and North Africa region. Outlining the key demographic, economic and energy trends, it seeks to give a sense of the common features of the region while highlighting the great heterogeneity from an economic and energy perspective. By doing so, the chapter sets the scene on the need, capability and challenges as well as opportunities of the energy transformation in the region and its geopolitical consequences.

This first chapter focuses on some key socio-economic features of MENA countries and their impact on the energy sector. It discusses the general present context of MENA countries focusing in particular on demography, economy, energy and history and highlighting differences and similarities among MENA countries. As such, this chapter sets the scene for the whole book which concentrates on the need, the capability, the challenges and the opportunities of the energy transformation and its geopolitical consequences.

The Middle East and North Africa (MENA) region is often considered as a whole, but it includes as many as 18 countries¹ with a total of 425.8 million people (UN DESA 2020). It stretches from the Atlantic coast of North Africa in the West to Iran beyond the Hormuz Strait in the East passing through the Mashreq (Map 1.1). Stretching across such a vast territory, MENA countries present some important features, but they are also characterized by major differences from an economic and energy perspective. Tables 1.1 and 1.2 show this heterogeneity.

Map 1.1

Source Authors’ elaboration on CIA

The Middle East and North Africa.

Table 1.1 Key socioeconomic indicators of MENA countries compared to world’s major economies

Table 1.2 Key energy indicators of MENA countries compared to world’s major economies

1 Demography

The MENA region has witnessed a remarkable demographic growth over the last decades. The total population of the region has grown from 77 million people in 1950 to 425.8 million people in 2019. The exceptional ‘youth bulge’ experienced by this region since the 1950s can be ascribed to the combination of declining infant mortality and high fertility rate, which has triggered a booming population growth for over forty years. The MENA region had the highest population growth rate in the world until 2011, when it was surpassed by sub-Saharan Africa (Cammett et al. 2015).

The youth bulge peaked in North Africa in the 1970s and in the Middle East in the 1990s (Cammett et al. 2015) as a result of declining fertility. Despite the peak and the fall in population growth, the MENA region has continued to expand its demographic basis. The population is expected to grow significantly over the next 30 years with some differences at the country level.

The high fertility rate and low mortality rate have also given MENA countries one of the youngest populations in the world (Fig. 1.1). Even though the share of young population has declined over the past 70 years, the active population has exacerbated national socioeconomic challenges, such as job creation. Indeed, the young growing population has suffered some major socioeconomic limitations, highlighted by the high youth unemployment rate.

Fig. 1.1

Source Authors’ elaboration on UN DESA

Age groups in MENA countries in 1950 and 2020 (% of total population).

The demographic development (and especially the expected growth) is set to further stress the existing challenges of the region’s socioeconomic model as oil exporting countries may distribute oil rents to a larger population, resulting in lower per capita distribution.

2 Economy

The region has been significantly shaped by its abundant hydrocarbon endowment and by the surge of oil consumption worldwide following World War II, which has prompted its socioeconomic growth, shaping its political economy, and consolidating its governance. Before the 1950s, MENA countries had some of the lowest levels of socioeconomic development in the world. However, these countries experienced unprecedented levels of economic growth and social development from the 1950s to the 1980s. In terms of GDP per capita, the region experienced a growth of 3.7% per year over the 1960–1985 period (Yousef 2004). This figure is lower than East Asia and the Pacific region (4.3% per capita annual growth), but higher than Latin America and the Caribbean (1.6%). The rapid economic growth has also triggered major gains in a series of social indicators. By the late 1980s, the Middle East region experienced sharp drops in infant mortality, rising life expectancy, school enrollment levels approaching 100% and higher literacy levels that rose from an average of some 40% of the adult population to almost 60% (Yousef 2004).

Countries in the region have witnessed a strong economic growth over the last decades, underpinned by oil revenues (Chap. 2 will discuss the implications of the rentier state). The economic growth came hand-in-hand with oil price cycles (Fig. 1.2). The first significant economic boom occurred in the 1970s following the two oil price spikes of 1973 and 1979, when oil prices skyrocketed and MENA oil exporting countries earned a sizable windfall. From 1985 to 2000, oil prices remained quite low, reducing MENA oil producers’ revenues. Significant revenues were collected during the second oil boom (Table 1.3)—MENA oil revenues grew fourfold during the 2000–08 period—and ended with the 2014 oil price drop.

Fig. 1.2

Source Authors’ elaboration on BP (2022)

Crude oil prices 1960–2021 (US$/barrel).

Table 1.3 Net oil revenue of major MENA oil exporters (2005–2013, US$ billion) and Brent oil price (US$/barrel)

However, there are some major differences regarding the conduct of MENA oil exporting countries in these two periods. In the first oil boom, oil exporting governments bestowed their revenues to their citizens and oil rents to the oil-poor countries in the region that did not have their own rents. By contrast, in the second oil boom, oil-rich countries initially responded prudently to the massive amount of money they were collecting. Higher savings, slower domestic absorption and greater reliance on the markets are only some of the key strategies of that period, during which total MENA debt fell from 55 to 17% of GDP (Malik 2017). Although ever-increasing proportions of current account surpluses were transferred into regional sovereign wealth funds (SWFs), the rentier-dependent model of development was not overcome during this period. The regional distribution of oil rents was left to the private sector, which looked into opportunities in the neighboring countries, enhancing the economic dependency between the local elites and the rich businessmen from the Gulf (Luciani 2016).

In real terms, GDP per capita has significantly risen across the region, with some of the MENA countries becoming among the richest countries on a GDP per capita basis in today’s world. That is particularly true in the major oil producing countries located in the Arabian-Persian Gulf. Today Qatar is the world’s richest country in terms of GDP per capita. Other high-income MENA countries are the United Arab Emirates (UAE), Saudi Arabia, Kuwait and Israel. On the other hand, there are countries in the region (e.g. Egypt, Jordan and Morocco) that have a GDP per capita rate in the range of $3000–4000.

At the country level, inequality rates are not higher than those in the rest of the world. However, the lack of data on top income shares in the MENA economies made an in-depth analysis impossible. What is striking is the high degree of intraregional inequality (Alvaredo and Piketty 2014). This, in turn, has had a significant impact on wealth accumulation across the region (Idem). Labor migration from other MENA countries to GCC countries has been a remedy for intraregional income disparities. Moreover, the second oil boom contributed to expanding regional inequality, leading to the eruption of the Arab Spring in 2011. People had the perception that different opportunities were distributed both at the regional level (oil-rich vs. oil-poor) and at the domestic level (Luciani 2016).

3 Energy

Regional inequality and labor migration reflect also the unequal distribution of hydrocarbon reserves across the region. In fact, some countries within this area are among the major oil and gas producers in the world, as shown in Tables 1.4 and 1.5. At the end of 2019, the MENA region accounted for about 52% of the world’s total proven oil reserves and for about 42% of the world’s total proven gas reserves (BP 2020). The countries with the largest oil reserves in the MENA region are Saudi Arabia (17.2% of the world’s proved total reserves), Iran (9%), Iraq (8.5%), Kuwait (6%) and the United Arab Emirates (5.7%) (BP 2020). Moreover, in 2019, oil production in the MENA region amounts to 35.6% of the world’s total oil output, with five countries in the top 10 producers (BP 2020). Among the MENA producing countries, Iran and Libya have a higher oil production potential, but it has been substantially hindered by international sanctions as well as security and governance issues. Saudi Arabia, Iran and Kuwait have the largest share of the region’s total proved oil reserves, while Kuwait, the UAE and Qatar have the highest total proved reserves per capita rate, which shows these countries’ wealth (Table 1.4).

Table 1.4 Oil proved reserves, production and share of total, by selected MENA countries, 2019

Table 1.5 Gas proved reserves, production and share of total, by selected MENA countries, 2019

The MENA region is also endowed with conspicuous gas reserves, amounting to 42% of the world’s total proven reserves. Nevertheless, the share of gas produced in the region (21.4% of the world’s total production) is considerably smaller than the share of gas reserves (BP 2020). A perfect example is represented by Iran and Qatar. While Iran ranks second worldwide in proven gas reserves with 32 trillion cubic metres (tcm) (16.1% of the world’s total), Qatar holds the third largest proven gas reserves with 24.7 tcm (12.4% of the world’s total). To put into context, these reserves have a different potential if we consider the countries’ populations: Iran is home to 82 million people (390.2 bcm per capita), whereas Qatar to almost 3 million (8.8 tcm per capita). In terms of reserves, they are second only to Russia, which holds 19.1% of global proven gas reserves (BP 2020). However, their shares of gas production are considerably lower compared to Russia, which produces 679 billion cubic metres (bcm) (17% of global gas production): Iran provides 6.1% (244.2 bcm) of global gas output and Qatar’s production share amounts to 4.5% (178.1 bcm) of global gas output (BP 2020). The discrepancy becomes relevant also when one considers the exports. Russia is responsible for 19.9% of the world’s gas exports (exporting 256.6 bcm in 2019 most by pipeline), Qatar is responsible for about 10% of the world’s gas exports (exporting 128.6 bcm mainly via LNG), while Iran is responsible for 1.3% exporting only 16.9 bcm in 2019 via pipeline. However, most countries in the region are attempting to enhance their gas production both for internal consumption and export, given the increasing relevance of gas in the global energy transition as well as the need to transform the countries’ energy sectors.

Iran, Qatar and Saudi Arabia have the largest share of the region’s total proved gas reserves, while Qatar, Algeria and the UAE have the highest total proved reserves per capita rate, which shows these countries’ wealth (Table 1.5).

The unequal distribution of hydrocarbon resources across the region has marked a major dichotomy between oil-rich and oil-poor. Generally, these countries can also be classified in: net-hydrocarbon exporters (in the Arabian-Persian Gulf) and net-hydrocarbon importers (Western Mediterranean countries, excluding Libya and Algeria, and Eastern Mediterranean). Even though some countries are labelled as net-hydrocarbon exporters, they also import some energy (e.g. transportation fuel and natural gas). Throughout the years, some countries have changed their energy status thanks to the evolution of domestic markets and the discovery of sizeable hydrocarbon reserves. This is the case of Egypt and Israel. Egypt has fluctuated from being a net-hydrocarbon exporter to importer and back again thanks to the discovery of natural gas offshore fields in the Mediterranean, such as the Zohr field. A similar trend is visible in Israel, which has started to export gas to Jordan and Egypt in 2019.

The countries of the MENA region vary considerably in terms of energy features. First, some of them are major hydrocarbon producers (Table 1.6). Most of the Gulf countries (with the exception of Bahrain) are members of this group. Other major producers are some of the North African countries (Libya, Algeria and Egypt) and Iraq. Production has changed throughout the decades, and some countries have emerged as new producers, such as Israel.

Table 1.6 Oil production by selected MENA countries, 2000, 2010, 2019 (mb/d)

Second, MENA countries diverge also regarding the type of fossil fuel that they produce: oil, gas or both. Some countries have historically been associated with oil production, such as Saudi Arabia, Kuwait, Iraq, while others with gas, mainly Qatar. Iran and Algeria have usually stood out as both gas and oil producers in the region. Gas has become increasingly relevant also in key oil-producing countries, for instance Saudi Arabia, where gas is consumed entirely domestically, and Egypt, which has substituted a declining oil production trend with gas production.

Given the vast hydrocarbon resources and relatively small population, MENA countries are among the world’s largest oil and gas exporting countries. Regarding oil exports, Saudi Arabia is the world’s largest exporter followed by Russia, Canada and Iraq (Fig. 1.3). In the last decade, the US has emerged as one of the three largest oil producers in the world. Despite the remarkable export growth, the US exports less oil compared to Saudi Arabia and Russia due to its larger domestic market. Iran’s oil exports are deeply hindered by different cycles of international sanctions, while Iraq managed to increase its oil production hence its exports despite its critical sociopolitical situation. Meanwhile, Algeria has witnessed declining oil exports due to higher domestic consumption and higher competition in the global oil markets caused by the advent of the American shale oil with similar characteristics.

Fig. 1.3

Source Authors’ elaboration on ENERDATA

Crude oil and NGL exports by world’s largest oil exporting countries, 2000–2020, mb/d (left) Mt (right).

Among MENA countries, there are also major gas exporting countries (Fig. 1.4). Qatar stands out in terms of gas exports, with a dominant role in the global LNG markets. The small country also exports some gas volumes via pipeline through the Dolphin pipeline to the UAE and Oman. Qatar has ramped up its LNG exports in the 2000s, but due to the 2005 self-imposed moratorium its exports have remained stationary. Globally, the largest gas exporter is Russia, with a well-developed infrastructure network linked to Europe. More recently, Russia has launched ambitious plans to diversify both in terms of markets (Asia, in particularly China) and transport mode (LNG). Nonetheless, following Russia’s war in Ukraine in 2022 the expansion of Russia's LNG industry may be undermined given the international sanctions that prevent Western technological and financial cooperation.

Fig. 1.4

Source Authors’ elaboration on ENERDATA

Natural gas export* by world’s largest gas exporting country, 2000–2020, bcm.*Both pipeline and LNG export volumes.

Other two major LNG exporters are Australia and the US—thanks to its shale gas—intensifying the competition in the market. Algeria is facing declining gas exports akin oil exports, due to higher domestic consumption. Moreover, Algeria exports the vast majority of its gas to Europe via pipeline. Saudi Arabia represents an interesting example not appearing in the chart, despite being a large gas producer. Indeed, the Kingdom consumes its entire gas production for its domestic market.

Hydrocarbon resource-poor countries (e.g. Morocco and Israel) have strived to attain a certain level of energy security by importing coal and, more recently, by developing renewable energy sources (RES). Thanks to the discovery of sizable natural gas fields offshore in the Mediterranean, Israel has steadily replaced its coal consumption with its domestic gas production. The MENA region has experienced a strong energy and electricity demand over the last three decades with, for instance, power consumption increasing by around 6%/y in average between 1990 and 2018 (IEA 2020). Without any significant changes in these factors, MENA countries’ electricity demand is expected to triple by 2050 (Ghobadi 2019).

Figure 1.5 shows the strong energy demand in MENA countries over the last decades, which has been driven by several factors. Most MENA countries have experienced a strong demographic growth (2.1% in the last 10 years), which is likely to progress in the coming decade (World Bank 2019a). Energy consumption is further incentivized by low prices due to subsidies. A robust economic growth (3.2% at regional level in the last 10 years) has further encouraged energy demand (World Bank 2019b).

Fig. 1.5

Primary energy consumption in selected MENA countries, 1970–2021 (Exajoule). Note Primary energy comprises commercially traded fuels, including modern renewables used to generate electricity. Source Authors’ elaboration on BP (2020)

Another major trend in the region is the extraordinary expansion in electricity consumption over the last three decades (Fig. 1.6). Underpinned by low oil prices and demographic growth, regional electricity consumption surged from 282.6 TWh in 1990 to 1332.9 TWh in 2020. For example, in the GCC countries electricity consumption grows at an average rate of 6–7% per year. Residential use is one of the main drivers of this growth with air cooling accounting for about 70% of residential and commercial electricity demand.

Fig. 1.6

Source Authors’ elaboration on ENERDATA

Electricity domestic consumption in MENA countries, TWh, 1990–2020.

A key factor that contributes to a surge in electricity demand is air conditioning, which will be increasingly needed as a result of economic growth and climate change. The IEA forecasted a skyrocketing growth in cooling units in the MENA region, passing from 52 million in 2018 to 210 million units by 2050 (OECD and IEA 2018). Also, water scarcity represents a pivotal driver in the projected rise of energy demand across the region. The MENA region is the most water-stressed region in the world, with 12 out of 17 of the most stressed world countries present in this region (Bahrein, Iran, Israel, Jordan, Kuwait, Lebanon, Libya, Oman, Palestine, Qatar, Saudi Arabia, United Arab Emirates, Bahrain and Oman) (WRI 2019). According to the World Bank, MENA countries are likely to witness the largest economic losses due to water scarcity within the framework of climate change, amounting to 6–14% of GDP by 2050 (WRI 2019). Water scarcity is a key driver of electricity demand since more and more countries, especially in the GCC, are increasingly relying on seawater desalination plants—a particularly energy-intensive industry—to meet the domestic water demand for households and industries, while they keep relying on fossil aquifers for agriculture. Nowadays, desalinated water accounts for more than 90% of total water supply for households and industries in Qatar and the UAE and roughly 60% in Saudi Arabia (IRENA 2019). An increasing population, economic growth and the localization of industries within these countries make a rise in water demand inevitable, leading to an increasing reliance and use of seawater desalination plants, further boosting domestic electricity demand.

The region’s energy mix relies heavily on oil and natural gas. This is certified by the share of fossil fuel energy consumption of total primary energy supply compared to the other world’s regions (Fig. 1.7). As of today, natural gas and oil account for 97.4% of the total primary energy supply in the MENA region.

Fig. 1.7

Fossil fuel energy consumption (% of total primary energy supply) by world region in 2015. *Data on South Asia and Sub-Saharan Africa are related to 2014. Source Authors’ elaboration on World Bank data

Oil has been inevitably the dominant energy source in the region; however, its relevance has recently diminished due to the higher use of natural gas. The availability of cheap fossil fuels, low domestic energy prices, demographic growth and better economic conditions as well as ambitious industrialization plans (with a specific preference for energy-intensive industries) have contributed to positioning many MENA countries among the highest energy-intensive countries in the world (Fig. 1.8). Countries such as Iraq and Libya experienced a skyrocketing CO₂ intensity rate due to the negative effects of wars and social instability on their GDP. Most MENA countries’ CO₂ intensity rates have been rising, or at least remained stable, over the past decades. This condition is certainly the result of comparative advantage in energy-intensive industrial activities. However, it is also true that current pricing policies encourage wasteful energy consumption, disincentive energy efficiency measures and damage the wider economy along with its environment.

Fig. 1.8

Source Authors’ elaboration on ENERDATA

CO₂ intensity to GDP (in constant US$2015, PPP) in selected MENA countries 1990–2019 (kCO₂/$15p).

It also must be said that in the past four decades, many developed countries decided to relocate their production outside their borders as they were shifting towards a more service-based economy. This process contributed to increasing carbon intensity in other parts of the world, such as the MENA region. Currently, the measurement of carbon emissions is based on a production-based approach, which calculates the CO₂ produced within a country’s borders and does not fairly represent the reality of carbon intensity. A consumption-based approach, which calculates the emissions related to the production and supply of the goods and services consumed in the concerned country, would be much preferable.

4 History

The region has been the theater of multiple conflicts and tensions among which the unresolved and long-lasting Israeli-Palestinian conflict; the Suez Crisis in 1956; the Iran-Iraq war in 1980–88; the Iraqi invasion of Kuwait in 1990; the US-led invasion of Iraq resulting in the overthrow of Saddam Hussein in 2003; and multiple intra-state and inter-state tensions across the entire region, not least the regional turmoil that spread across the entire area in 2011, known as the Arab Springs. The origins of many of these conflicts pre-date oil, and some have ancient causes, such as the early succession to the Islam leadership after the death of the Prophet Muhammad, and later extra-regional influences due to the colonization process. But it is clear that oil is what made the region important in world affairs. Oil has exacerbated the underlying tensions, it has drawn in the great powers—over and over. Giacomo Luciani (2017) affirmed that oil—and more precisely oil rent—has created a regional dynamic whereby major political developments take place at the regional rather than the single-state level. Under such circumstances, all major political movements in the region have a regional, not country-specific, dimension. The Arab Springs embody this feature.

The significant abundance of hydrocarbon reserves has profoundly shaped the regional political economy and its sociopolitical structure, as illustrated by the Rentier State Theory (Beblawi and Luciani 1987). However, fossil fuels are only the latest chapter of MENA’s long history, which has contributed to creating some relevant common features across the region. A first major episode that unified the region was the birth of Islam in 610 A.D. and its impressive expansion after the Prophet’s death (632 A.D.). Another unifying factor is the Ottoman Empire, which ruled a great portion of the region until its collapse with the end of World War I. These two experiences inevitably marked common elements at the regional level, although peculiarities remained at the local level.

Foreign powers played a significant role in the area. At the beginning of the XX century, with the slow decline of the Ottoman Empire, two main powers stepped up as major foreign players in the Middle Eastern and North African countries: the United Kingdom and France. Their early involvement in the region was primarily commercial. Nevertheless, they were also motivated by competition between each other and other powers. Britain attempted to control the power vacuum left by the steady decline of the Ottomans, with the specific goal of preventing potential encroachments by Russia and France to its major colony, India. The involvement of Britain alarmed France, which increased its presence in the entire region and stood up as the protector of the Christians, many of whom were historically concentrated in the Levant.

That growing engagement of some major European countries led to the creation of new borders and mandates, especially with the renowned ‘Sykes-Picot Agreement’ in 1916. Indeed, at the end of World War I, the Ottoman Empire collapsed and Britain and France split up the region and put in place the mandate system, officially becoming the region’s dominant powers. The UK acquired direct control on Palestine and Iraq, while France on Syria and Lebanon. Egypt and the Emirate of Transjordan existed in a state of precarious independence, with Britain remaining the true master of their destinies (Kamrava 2013).

At the beginning of the XX century, oil had a limited relevance in the foreign powers’ diplomacy in the region. As World War I approached, oil started to become more and more strategic. The decision taken by Winston Churchill, as First Lord of the Admiralty, to convert the British Royal Navy to oil from coal before World War I posed oil at the top of the strategic agenda of many countries (Yergin 2009). Later, the widespread use of the internal combustion engine in particular in the automotive sector and its large deployment, starting from the US, dramatically increased the demand for oil. This inevitably raised the issue of a stable oil supply, leading to a growing interest for the Middle East.

With the decolonization process (Table 1.7), the dominance of the European powers over most of the MENA countries started to slowly but inexorably decline. In some cases, political independence happened to be a swift process, while in other cases it was achieved after prolonged conflicts, such as Algeria which suffered a 9-year independence war with France in 1954–62.

Table 1.7 Independence year of selected MENA countries

After World War II, the progressive rise of the American influence has further undermined the European influence over the region. The famous meeting between President Franklin D. Roosevelt and Saudi King Abdul Aziz Ibn Saud on the USS Quincy in the Suez Canal on Valentine’s Day 1945 is considered the dawn of the long-lasting relationship between Washington and Riyadh (Yergin 2009). A simple concept was at the heart of this alliance: the US would guarantee security to the Kingdom in return for access to affordable energy supplies. Since then, energy (i.e. oil) has become a major component of the region’s geopolitics and a major driver of external engagement with the region. Washington began to position itself in the Gulf, taking the leading role at the expense of the Europeans while ensuring oil flows and consolidating its alliance with the Saudis. The European decline and the opposite rise of the US in the region became remarkably clear with the Suez Canal crisis in 1956.²

Although the Suez Canal marked the decline of European influence in the region, European countries did not completely withdraw from this area. An example is the role of the British military, which left the Gulf only in the 1970s. The result was the division of the MENA region into spheres of influences: the US oversaw mainly the Gulf, while the European countries established stronger ties with the North African countries (thanks to their vicinity and historical ties).

Since the end of World War II, energy has become a decisive component of the geopolitics of the region, which would have been very different without its great hydrocarbon endowment. The presence of oil has shaped the policies and alignments of all the countries of the MENA region over the last decades, not only with each other but also with the great global powers. Indeed, although all the countries achieved independence, the influence of external powers has remained a key feature of regional politics. At the beginning, oil was primarily a British interest. The US then expanded their presence, especially in the Gulf, in the post-World War II period. After 1979, the competition between the two main Gulf countries (i.e. Saudi Arabia and Iran) erupted, with the two competing across the region at different intensity throughout the years.

In 2011, with the widespread social revolt movement (‘Arab Spring’), the region experienced a major turmoil. The Arab Spring shocked the political structures in many MENA countries with the collapse of several long-lasting rulers (e.g. Hosni Mubarak in Egypt, Zine El Abidine Ben Ali in Tunisia, and Muammar Gaddafi in Libya). Since then, the region has witnessed a growing competition among regional countries, which could be described as civil war (Luciani 2017). Widening regional inequality, historical rivalries on several issues (e.g. Shiites-Sunnis) and geopolitical aspirations have inflamed regional cleavages (Map 3.2 Chap. 3 Sect. 3.1).

The growing competition among MENA countries is further exacerbated by the foreign interference of old (US and European countries) and new (China and Russia) foreign powers. As MENA countries are deeply exposed to global hydrocarbon markets and trends, the political and economic transformations in the region are further influenced by changing global energy dynamics, such as the shale revolution in the US, the rising energy demand of Asian-Pacific countries, notably China, and the global decarbonization process.

Thanks to its increase of shale oil output (increased by 10 mb/d between 2000 and 2019), the US has become the world’s largest oil producer—17 mb/d in 2019 – reducing its dependence on oil imports and its interest in the MENA region. Furthermore, the rapid growth of US shale oil production has caused an abundance in the global oil market, thus depressing prices between 2014 and 2021, with negative economic consequences for the MENA region. On the contrary, the fast-growing economies of the Asia–Pacific region have increasingly expanded their energy consumption, intensifying their energy trades with oil-exporting countries in the area. Lastly, the global energy transition is gaining a worldwide consensus among governments and the private sector. Some major economies have expressed their commitment to become carbon–neutral by mid-century, which would leave only a small room for fossil fuels in their energy mix. That would reduce the world’s oil demand (prompting forecasts on a looming oil demand peak) altering the strategic relevance of oil for some consuming countries. On the other side, some major emerging countries (e.g. China) may increase their hydrocarbon imports from the region, and consequently relevance in the energy sector of the MENA countries. These different drivers may yield major shifts in the geopolitics of the region.

The history of the energy sector, especially oil and gas, in the MENA region reflects its broader history in political and geopolitical terms. Between the two world wars and until World War II, most countries used to sign decade-long concession agreements with the different governments in the MENA region to develop oil fields with the major international oil companies (IOCs). These IOCs, known as Seven Sisters, included Anglo Persian Oil (later renamed British Petroleum), Royal Dutch Shell, Standard Oil of New Jersey (later renamed Esso, then Exxon), Mobil, Gulf, SOCAL (Chevron) and Texaco. These concessions provided very limited financial benefits for the host governments, which usually received royalties imposed at a flat rate as a percentage of the oil produced. The IOCs held control over all aspects of the industry leaving the host government with a very limited active role. These IOCs established an oil consortium (oligopoly), excluding competition and a free market. During this period, the Seven Sisters managed to keep oil prices under $2 per barrel from the 1950s until 1970 (Krane 2019). The only exchanges of crude oil were made among these companies with fully integrated upstream and downstream activities. Thus, these IOCs would balance oil demand and supply to avoid oil price fluctuations. This system was in place only thanks to the concessionary agreements granted by the host states and the political weight of major powers. Thus, governments in the MENA region, but also in other oil producing regions, were dissatisfied with the terms of the oil concessions.

Some oil producing countries had already tried to free themselves from the IOCs’ excessive power over production strategy and volumes as well as revenues. Lazaro Cardenas in Mexico and Mohammed Mossadegh in Iran are two of the early episodes of expropriation and nationalization of natural resources at the expense of IOCs. In 1938, the Mexican President ruled the overnight expropriation of all foreign oil assets handing the petroleum industry to a newly created national oil company, PEMEX, referring to Article 27.4 of the 1917 Mexican Constitution, which declared that underground resources belonged not to those who owned the property above (i.e. IOCs), but to the Mexican state. In 1951, Mossadegh, the Iranian Prime Minister, took a similar decision targeting British assets, namely the Anglo-Iranian Oil Company. However, in both occasions, foreign players reacted strongly against these attempts. In 1953, for example, a US-backed coup overthrew Mossadegh and restored a large share of foreign control over Iranian oil reserves.

Even though IOCs managed to resist the first wave of nationalizations, from the beginning of the 1960s the Seven Sisters began to see their power and monopoly crumbling. The first major change was the evolution of the oil market. New actors, companies, began to enter into the international oil industry, resulting in the loss of IOCs’ control over oil trade. The advent of Soviet oil in the European markets further contributed to increasing the competition. In the 1950s–1960s, following the movements to achieve full independence from mostly European powers, and the later attempt to diminish external influence, countries in the MENA region also launched a nationalization process of key economic sectors, namely energy, which led to the creation of National Oil Companies (NOCs) (Map 1.2).

Map 1.2

Source Authors’ elaboration

National Oil Companies by country.

In 1960 the Organization of Petroleum Exporting Countries (OPEC) was established in Baghdad to further strengthen the countries’ position in the energy sector with respect to international oil companies, and to coordinate the decisions of the different exporting countries. The founding members of OPEC were Saudi Arabia, Iraq, Kuwait, Iran and Venezuela, but the organization was soon enlarged to also comprise Qatar, Indonesia, Libya, Algeria, the Emirate of Abu Dhabi, Ecuador, Gabon and Nigeria. OPEC, however, failed to gain control of the oil prices, which continued to be determined by the IOCs over the following 13 years. OPEC was a response to the IOCs’ unilateral cut in the posted price of oil, which was the reference price for tax assessment. IOCs were forced to cut posted oil prices to address a situation of oversupply in the oil market between the mid-1950s and 1960 caused by the entry of new actors and the limits on oil imports imposed by the US government (Nakhle and Petrini 2020). Therefore, IOCs decided to reduce posted prices in order to preserve market share and to relieve the pressure on their profits. This strategy inevitably caused a substantial loss of revenues (15% reduction of revenues) for the host countries (Chalabi 2010). According to the concessionary system, government revenues from a barrel were calculated as 50% of the official posted price, less than half of the production cost per barrel.

However, some major changes occurred in the global oil markets in the early 1970s setting the right conditions for the rise of OPEC as a major player in the oil markets. In that period, a market and price setting power shifted from the IOCs to OPEC, mainly driven by the tight supply–demand conditions that emerged in that period. Between 1970 and 1973, global demand for oil increased at a fast rate with most of the rise in demand met by OPEC countries, strengthening OPEC power vis-à-vis IOCs. That is one of the key components of OPEC success compared to the previous wave of nationalizations (Mexico and Iran), which failed to gain control at the expense of the IOCs. In the 1970s, OPEC governments became increasingly aware of such growing power and started to seek higher stakes on their sales. The rise of oil prices in the 1970s (fourfold increase in the oil price in 1973) terminated IOCs’ dominance era. Several factors contributed to the rise of oil prices, which were beneficial also for the IOCs. Indeed, they had the opportunity to start their development and exploration activities in other areas (e.g. North Sea, Alaska, Gulf of Mexico) with higher extraction costs, which were not sustainable under their old oil price regime. The larger this market, the lower the share of market under the Seven Sisters, whose production share dramatically decreased from 85% in 1950 to 72% by 1960 (Cleveland 2009).

Over the years, the role of IOCs in the MENA region decreased, and the different countries established their own NOCs, such as ARAMCO in Saudi Arabia, Sonatrach in Algeria, Qatar Petroleum in Qatar, National Iranian Oil Company in Iran or National Oil Company in Libya and so on. Recently, however, IOCs have again gained positions in this region, due to the internationalization of NOCs, which are willing to expand their activities in other countries and sectors (such as renewable energy) to keep pace with the global transformation of the energy sector. The internationalization of NOCs is also sometimes driven by the need to enhance technical know-how and expertise to be able to fully compete with private companies worldwide.

The nationalization of resources, which led to high levels of oil and gas revenues, also shaped the socio-political structure of both hydrocarbon-rich and hydrocarbon-poor countries in the region. Thanks to the oil rent, governments in the region provide a very generous wealth distribution system (e.g. energy subsidies, cash transfers, and other social benefits) to their citizens without the need to collect taxes from them. That is the root of a social contract between rulers and citizens which guarantees the allocation of wealth to the citizens at the expense of their social and political participation. The term social contract might be defined as “entirety of explicit or implicit agreements between all relevant societal groups and the sovereign (i.e. the government or any other actor in power), defining their rights and obligations towards each other” (Loewe et al. 2019). Building on this bargain, Luciani and Beblawi have coined the term “rentier economy” for natural resource-endowed countries that rely on an external rent, in the absence of a domestic productive sector with a very small share of the population involved in the generation of the rent, while all the citizens enjoy its distribution and benefits (Beblawi and Luciani 1987). Another peculiarity identified is that the government, in a “rentier state”, is the main recipient of the external rent. Consequently, a rentier economy also needs to have a rentier mentality, in other words the reward is not given by work and productivity but rather by luck and by the situation. Thus, in the MENA region, most countries, even the resource-poor ones, have adopted a rentier mentality, namely wealth sharing policies and citizens’ attitudes are at the core of the states themselves. Nationals are entitled to free education (also at the tertiary level), free healthcare, generous subsidy schemes and cash grants, and they overwhelmingly work in the public sector, benefiting from higher wages, earlier pension age, shorter working hours and higher overall security. Patronage and rent sharing are key drivers of the high demand of public sector jobs, even when the sector is saturated (Hertog 2020).

This brief overview aimed at describing the major common features of a complex region such as the Middle East and North Africa. The region is often considered as a whole due to its several similarities in economic, energy and historical terms. Nonetheless, it is also fragmented. What is striking is the regional implications of different phenomena rather than country-level peculiarities. The energy transformation, which is a global development, will deeply affect MENA countries and the region as a whole. However, the different choices of each MENA country will affect other MENA countries as well.