[Scott] Up next on "Energy Switch," two Middle East experts weigh in on energy and the economy.

- About half of global oil reserves are in the eight countries surrounding the Persian Gulf.

It's also where the spare capacity is, right?

So Saudi Arabia holds spare oil production capacity, which is really important.

You know, if there's a war and prices go up, they might bring some of that back to market.

- You cannot not care about what happens in the Middle East because whatever happens in that part of the world does not stay in that part of the world.

It affects everybody else.

So even if the American people don't buy any single barrel of oil from the Middle East, if there is a problem in the Middle East, the American driver will pay that higher price at the pump.

[Scott] Coming up on "Energy Switch," the timely topic of Middle East energy.

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[upbeat music] - I'm Scott Tinker, and I'm an energy scientist.

I work in the field, lead research, speak around the world, write articles, and make films about energy.

This show brings together leading experts on vital topics in energy and climate.

They may have different perspectives, but my goal is to learn, and illuminate, and bring diverging views together towards solutions.

Welcome to the "Energy Switch."

This discussion was filmed just before the Iran conflict, which has stressed the importance of Middle East energy.

The region holds half the world's oil reserves and produces one third of our oil, giving it an oversized influence on global politics and the economy.

Within the Middle East, countries have very different energy needs and incomes.

Some export oil and gas, some import it, all have electricity challenges.

We'll discuss with my two expert guests.

Carole Nakhle, is an energy economist and the founder and chief executive of Crystol Energy, an energy consultancy, strategy, investment, and training firm.

She's originally from Lebanon.

Jim Crane is a Sabbagh Fellow in Middle East Energy Studies and Co-Director of the Middle East Energy Roundtable at Rice University's Baker Institute for Public Policy and author of the "Energy Kingdoms."

Coming up on "Energy Switch", the timely topic of Middle East energy.

Well, Carol, Jim, welcome.

Really glad you joined us today.

If we could try to kind of divide the Middle East into sort of two types of countries, is that possible?

Could we do that?

And how would that look?

- So often people think about the Middle East as just the major oil and gas producers, wealthy countries, but you also have those who are energy poor.

Lebanon is one country where I come from.

We don't have a single drop of oil or a molecule of natural gas, and they are exposed to what happens in global energy markets.

And they don't have the wealth that their neighbors have.

- So some are importers and some are export.

Is that fair?

Some are importers, some are exporters?

- Yeah, that's kind of how I break it up, you know?

So, you know, energy poor importing countries that often send labor to the big exporting countries, so they still get, you know, secondary effects from the oil.

So you have the ones that have really big exports and big reserves and small populations like Qatar, Kuwait, UAE.

And then the ones that also have big reserves often, but also have larger populations, so they're not quite as wealthy.

So Saudi Arabia, not as wealthy as the others.

And, you know, Iraq and Iran also, you know, even less wealthy.

I mean, so you have countries that kind of oscillate between those two spaces too.

You have like Egypt, which was until recently, you know, an exporter of gas, and now it's a net importer.

Israel exports gas, but imports oil.

Kuwait is a big oil exporter, but it imports natural gas.

Actually even imports sometimes a cargo or two from the United States, actually.

Texas LNG floating all the way to Kuwait.

- Quite complex.

OPEC, you've grown up in the region, you know the region very well.

What is OPEC?

Why does it exist?

What's its work?

What does it really do, Carole?

- So OPEC stands for the Organization of Petroleum Exporting Countries, and it was formed in 1960.

Actually, it was a replica of what the big oil companies that dominated the industry back then started, you know, we call them the seven sisters.

- Oh right.

- But then after the Second World War, oil became a really strategic commodity.

And the oil exporting countries, the major ones, came together and set up this organization which give them the full sovereignty in terms of controlling their oil production.

Because when you control the supply, you kind of reduce the fluctuations in prices.

But if you take away OPEC from the market today, oil prices would have been much lower.

So you do have this group of countries that control supply to achieve a certain price level that is deemed acceptable to those members and to the industry.

- It's been called a cartel.

- First of all, cartels don't last so long.

- Yes.

They are short-lived and they've been around for- - It's a much better government.

- And I tell you what I found fascinating about OPEC.

It's a group of countries that don't necessarily get on well with each other.

So yes, saying that you might think, okay, this is not good from an economic perspective, but it's also bringing some stability.

And to be honest, higher prices for the industry.

So the oil producers, including in the U.S., can sustain their production and make some money out of it.

- Yeah, so I mean, Carole's last point actually is, you know, I would want to highlight that.

You know, we might not have an oil industry in the United States if it weren't for OPEC.

And they do this through, you know, taking existing production offline, but they also do it by not investing in the world's cheapest oil resources as much as they might if, you know, if they weren't government controlled, which allows these higher cost producers like the U.S.

to get in the game.

- And Saudi in terms of reserves compared to other nations, Jim.

- I mean, it's number two after Venezuela, but about 300 billion barrels of oil producible at today's prices.

- Three hundred billion.

- Which, you know, that number has held steady for decades, right?

And it even ticked up a little bit.

Some of these big Middle Eastern oil exporters, I mean, they haven't even finished exploring the territory over there.

- Pretty impressive.

- Let me elaborate a little bit on this reserve that the Saudis have is just above 17% of global reserves.

And Venezuela, 17 and a half.

When we talk about reserves, these numbers, we're talking about proven reserves.

And these are the reserves that we know they have more than 90% chance of being produced.

But there are other reserves and resources that are still available.

So when the technology improves and the economics improve, then those that say probable or possible reserve become upgraded to proven.

So that's why the number is dynamic rather than fixed in stone because of that.

- Yeah, and I'm glad you said that.

How important is the oil revenue to the Kingdom of Saudi Arabia?

- I mean, it's a lifeblood of the kingdom.

You know, I don't think we would have so many absolute monarchies, you know, in the world were it not for oil rents.

You know, so you, you can afford to keep an absolute, you know, ruling sheikh or king in power as long as there's enough oil rent coming in and he can distribute that in the form of jobs and benefits to citizens.

You basically buy public support, you know, with oil rents for people and they forego the, you know, the right to participate, so.

- I would like to go back to this topic of the oil price, and just to contrast it with how much they need to balance their budget.

This is the irony in the region that they do have the lowest cost of extraction of oil in the world, but they need much higher oil price because you have lots of spending.

If they do some economic reforms and they have started to be fair for the last several years, they've been trying to diversify their economy and they have built new industries.

They have started new tax paying sectors across the whole country, the GCC, but they still have to do much more to reduce this kind of dependence on oil revenues.

- Sure.

We've been talking a lot about oil.

Let's look at the region for natural gas.

Where's the remarkable story there?

- I mean, it's got to be Qatar, right?

I mean, that is, you know, they sit on top of the North Field, which they share with Iran, the world's largest gas field.

You know, Shell discovered this field back in 1971, and it was a big disappointment at the time.

There was no oil in it.

You know, there wasn't a lot of gas demand in the region.

You know, Qatar looked like a place that was too risky to invest in LNG, which kind of was a new technology then.

So they capped it, they capped this field and didn't do anything with it for a couple of decades.

And then tried to sell some of the gas to neighboring countries.

They had a lot of difficulties.

So they began talking to Japanese investors on the Japanese government.

You know, Japan had been importing LNG for a long time, and these big companies really pitched in and helped Qatar build that sector.

Then BP left.

So they were one of the original investors in Qatar Gas.

They pulled out and Mobil moved in.

And so you had a big U.S.

company that was willing to join in.

And all of that said, gave investors, you know, allowed them to relax about the political risk there.

It's been a huge boon ever since, right?

So Qatar's basically parlayed that big gas field into incredible wealth and political influence.

They're the wealthiest country on earth right now on a per capita basis.

- How big is that north field when we say big?

What is it?

- It's the largest in the world.

I mean, the bigger chunk is in Iran, and then the second is in Qatar.

But this is, again, interesting contrast that they share the same field.

And yet Qatar made wonders with all LNG and Iran does not export gas.

And actually the field there, that part of the field requires lots of investment, needs lots of maintenance, rehabilitation.

So this is really speaks in favor of what the Qataris have done.

But countries focused more on oil exploration because traditionally there is more value, economic rent in oil than you have in gas.

That said, today we see a big push across the region, especially in Saudi Arabia, in terms of increasing their production for gas.

And who knows, maybe start exporting at some point.

So gas is receiving greater attention outside Qatar as well.

- And the exporting of gas is done how and where does it go?

- From Qatar, it's LNG.

And Qatar's main market is Asia because of the geographical proximity.

And also Asia likes what we call long-term contracts.

But after the war in Ukraine, Qatar became a more important player in Europe.

So they signed deals with Germany.

But globally, if you ask me who are the main players in LNG export, I would say Qatar and the USA.

- Okay, what else does the region use their natural gas for?

Is it just exports or are they doing other things now?

- No, no, they definitely consume a lot of it domestically for power generation along oil.

Actually, when I think about who is exporting in the region, if you take Qatar out of the picture and to a certain extent Oman, the region becomes a net importer.

- Right, how'd they get electricity in the Middle East?

- I mean, until recently, it's all been oil and gas.

Some countries there still burn oil in power generation.

Small island states are still doing it and countries in the big oil producers in the Middle East.

So, Saudi, Kuwait, and Iraq are the main oil for power countries.

So solar is starting to come in around the the margins now.

I mean, it's all, you know, there's a huge comparative advantage in solar.

And where the load is, you know, where the power demand and AC demand is, there's great solar resource right outside the city and vacant land, so.

And then nuclear power is now starting to come in as well.

So you got two countries in the region now producing nuclear power.

And then so Iran was the first.

UAE now has six, almost six gigawatts.

And then Turkey and Egypt are building Russian plants.

- Interesting.

- So yeah, so similar to the one in UAE.

[Scott] In UAE.

- Given all the controversy surrounding nuclear energy and all the regulatory framework around it and the safety, I think the UAE was pretty the exception.

And not the norm.

- We hear this, but they don't like to test out brand new technology in that region.

- Especially nuclear.

- So they're like, you know, I think they like to see it, you know, working, functioning really well somewhere else.

And then they'll, they'll pull it in.

I mean.

- What are the other demands for energy in the region or energy types?

- Solar is just under three percent of the total generation of electricity in the region.

But funny, you don't see when you look at the roofs of buildings across the region, you hardly see any solar panel.

I don't know if you saw that, Jim.

No, it's mainly concentrated big farms in the desert, but not really at the domestic level.

As you see, for example, if you go to Germany.

- Well, solar seems to be the one that's really taking off right now.

I mean, huge investments.

Capacity factor for solar.

So the amount of time it's on and generating power is way higher.

So it's about triple than it is, you know, Northern Europe, for example, right?

So the same panel.

- It's always sunny.

- Makes three times as much electricity if you bring it to the Gulf than it is, you know, in say Denmark.

Saudi Arabia is the number five installer for battery backup systems now.

So, solar and cheap Chinese batteries.

And they're saying, you know, that they can generate base load power now with renewables and batteries.

So Abu Dhabi's got this new project with, you know, I think it's five plus gigawatts of solar and around 20 gigawatt hours of battery storage next to it.

So, you know, they don't put solar panels on rooftops there as much as they could for a couple of reasons.

One is, you know, a lot of these countries are subsidizing power.

So, you know, the homeowner or the renter doesn't really have incentive to put them up there.

- Talk more about subsidies.

How heavy are they or expansive?

- Huge range of subsidies, right?

So, and electricity was, you know, the main area that was getting subsidized.

And a lot of it was based around, you know, this social contract that we were talking about where these are, you know, absolute monarchies that want to stay in power, they want to provide.

Subsidies is kind of an easy way of doing that.

If you have a government that doesn't have a lot of administrative capacity, you know, you could just make things cheap or free, and they've distorted you know, demand in the kingdom and emissions, like carbon emissions in, you know, in all the countries in, in the Middle East.

- By that you mean if it's subsidized, they don't really care, so I just use a bunch of it.

- Demand is massive.

[Scott] Air conditioning.

- Yeah, it's 60% of the load, 60 to 70%.

The subsidy in Kuwait is about the same magnitude as their annual budget deficit, right?

I mean, it's a huge problem.

You know, a house in Kuwait, the average home in Kuwait is consuming, you know, more than 100,000 kilowatt hours of power a year.

Whereas in Arizona, it's about 15, 17,000.

- That's 6X?

- Yeah, it's about, yeah, 6X, 7X.

I mean, some of them are-- - I didn't know that at all.

- They go on up from there.

I mean, it's just massive amounts of power.

- How are we going to reverse that trend of massive consumption of electricity and heavily subsidized electricity?

Which isn't the greatest thing for the environment.

How do you see it changing?

- The most powerful tool to manage demand, to make people more conscious of their behavior and the way they are using energy is the price signal.

And when you have subsidies, you are distorting that price signal.

I have seen pricing reforms across the region.

The problem, they are not like affecting everyone.

They tend to be applied on foreigners.

So foreigners would pay much higher prices than the locals.

And the bills they are paying is absorbing a big chunk of the income they are making now.

So what worries me now is actually the growing demand for electricity coming from data centers.

If you look at countries such as Saudi Arabia and the UAE, they have very ambitious plans to build some of the biggest cities and hubs for AI in the world, in the region, that by itself is going to put tremendous stress on their own grid.

And the big question is where the electricity is going to come from.

Are they going to burn more oil to generate more electricity and therefore they would lose more export revenues?

And also what about upgrading their national grids?

Because infrastructure also needs upgrading.

There are lots of things they can do to improve the efficiency of using electricity in the country.

But I have big questions about where that electricity will come from.

- Sure, is CO2 emissions a high priority there or not, relative to the things we've been talking about?

Are there low carbon energies, other ones that they're discussing?

And how high does that rank compared to energy security for them?

- The companies, the national oil companies, the big players in the Middle East have not abandoned their targets to reduce their carbon emissions.

They haven't abandoned their project in carbon capture and storage.

CCS, they are still investing in it.

They are still investing in hydrogen, though not necessarily the hydrogen that comes from renewable energy, but hydrogen coming from gas.

So they are trying to build on what they are already doing and where they have an advantage.

And that's where they focus their climate change policies without necessarily doing it for the sake of saving the climate, but I would say it's a strategic choice.

- But one thing they don't seem to focus in on as much as the actual CO2 and greenhouse gas emissions coming out of that region, which are huge, right?

So the Middle East as a region is emitting more than the EU, you know, more than all the, you know, 54 countries of Africa.

Iran by itself emits more than Japan.

- And that's just because of the combustion of oil and gas for so many things as we've talked about.

- It's cheap energy.

It's rich people.

And, you know, they've got hot weather.

- And also gas flaring.

Flaring of gas is still widely practiced.

Again, they have been taking measures to improve that, but it's not just a waste of resource, but adds to carbon emissions.

- Sure.

Water, huge resource.

How's that happen in the Middle East?

- They bolt on a desalination unit to their power plants or to their big aluminum smelters, right?

So they use waste heat and, you know, basically fossil fuels to make power and water, right?

- Pull the salts out.

- And then they dump the brine back into the Red Sea or into the Persian Gulf.

I mean, it's a- - It's already pretty salty.

I mean, you can walk on it soon.

- you need goggles when you swim there.

But since you mentioned desalination plants, that's another area where they can improve efficiency.

Their plants are pretty old and pretty inefficient.

So they are not using the latest technology.

And I think if there is a switch, and I think they are already looking into that, even though they are desalinating more, but their energy consumption can be much less.

- I mean it's also a great fit for solar because you don't need you know, constant 24/7, 365 power.

You can use intermittent power to fill up a tank with water.

[Scott] Perfect, or wind.

- Yeah, whatever.

So it fits pretty well with that too.

- China's been involved.

Any Chinese financing or bank structure deals?

- I'm not quite sure about the lending because those countries are not really, especially the rich ones are not really borrowing.

But the Chinese have a big footprint in the region.

China is the largest importer of crude oil in the world.

So naturally you would expect the Middle East to have very close relationship with the Chinese.

Okay.

But we have to be very careful here because one thing I don't see is full trust in China.

So Middle Eastern economies and Middle Eastern countries know that they need China, but they also know that their security of demand resides in diversification of their markets.

So they don't want to put all their eggs in Asia, but I wouldn't say that it's solid and it's going to continue to flourish all the time.

- I appreciate that insight.

That's an interesting perspective.

As oil begins to plateau globally in the distant future sometime, nobody really knows, what's the region begin to look like in that timeframe?

- The region has a clear advantage.

They are the low cost producer.

In this kind of world, the low cost producer has the upper hand.

But it's not their only advantage.

They also have the lowest carbon intensity.

However, their main weakness is the lack of economic diversification.

So I would say that today, economic diversification is much more important than ever across the region.

And if they can hit that part quite well then they would still be in good business for many years to come.

- Sure, sure.

Jim, when you think about the region, the whole Middle East what gives you hope?

- I guess one of the things that gives me hope is that this is a part of world that can do long-term policy.

You know, one of the benefits of autocratic governance is that you have a lot of continuity.

You know, and so that gives me some hope on climate action, right?

I mean, this is a part of the world that's incredibly climate stressed.

And it's their economies that are going to be damaged from, you know, reducing demand for fossil fuels.

And they need to figure it out because of all the world's regions, the Middle East is facing the largest costs for climate damage, right?

About 20% of their GDP decline by 2050.

- Wow, that's a big deal.

- But, they've got lots of great opportunities at the same time in new energy sources, in carbon capture and storage.

And, you know, a lot of these countries also have the cash to invest to do this.

So, you know, one day we might even see them providing carbon services for countries that don't have these attributes.

So that's probably my positive-- - Hopeful, outlook, that's nice.

How about you, Carole?

- I used to be very pessimistic whenever I looked at the Middle East because I have the experience of my own country, Lebanon.

And given the political fragmentation, the influence of different religious groups and ethnicity in the region, I was afraid that we will never see the Middle East growing.

But then when I look back and I see how amidst all this instability and fragmentation, somehow we do have stability and we do have progress.

The first time I went to Saudi Arabia was in 1991.

I hated every minute I was there.

Now, I love to go there, and I cannot believe this is the same Saudi Arabia.

And they have not really lost being true to themselves.

We did not see a massive shift in the culture, in the beliefs.

It was just kind of the progression, the investment in technology, how they are going on in terms of AI, data centers.

But I would say, above all, I would say the young generation.

How they are really switched on.

They are well aware of climate challenges, of competitive pressures, and they are thinking beyond just oil and gas.

They are thinking big.

And energy is at the heart of that story.

- Yeah, that is hopeful.

Well, look, it's been just a wonderful dialogue.

I know the region a bit, but I've learned a whole lot today.

So really appreciate you taking the time to be with us and share your knowledge and your expertise.

Scott Tinker, "Energy Switch."

Carole, thank you so much.

That was really nice.

In the Middle East, there are rich oil and gas exporting countries, poor energy importing countries, and a few in between.

OPEC is an alliance of oil exporters who control supply to try to influence price.

Ironically, their higher price allows higher priced producers, like those in the U.S., to remain competitive.

92% of the region's electricity comes from burning gas and still some oil.

Solar is growing, making up 3% of electricity production, but with great potential in this sunny place.

And nuclear is growing, with Iran and UAE leading.

Electricity for residents is subsidized by the kingdoms, making it so cheap it's wasted.

This costs governments money and drives the region's CO2 emissions higher than Europe.

Decades from now, when oil demand declines, the Middle East will be the last cheapest producer standing.

The key to their success then will be to diversify their economies away from oil today.

That's perhaps the biggest challenge in Middle East energy.

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