Economic Ramifications of Energy Transition Investments in the Arab Gulf States

Summary

The energy transition process highly depends on investments in clean technologies to cut down carbon emissions in various sectors of the economy. Such investments in clean technologies do not usually increase the productivity of the economic sectors, they may even lower it down. Thus, the energy transition process might lead to a decline in energy return on investment, increasing energy prices, and a fall in economic growth. Unlike advanced economy nations, economic growth is central to developing countries to sustain their basic socioeconomic needs. Hence, taking steps toward energy transition by developing nations may require more time, compared to developed nations.

In reality, funds are limited, and hence, increasing investments in certain sectors results in reducing investments and consumption in other sectors. Building on this reality assumption, a quantitative analysis is carried out to assess the impact of the energy transition process on economic sectors. This paper focuses on the Arab Gulf states – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) – as a case study. All economic industries of each Gulf state were aggregated into eleven sectors. The input-output data tables of the Arab Gulf states were used, and the analysis was carried out using Leontief and Ghosh models to assess exogenous demand and supply change impacts. The analysis was performed by increasing the investments and value added – required for the energy transition – in the oil, gas, petrochemical, and power sectors to assess the macroeconomic impact on the remaining sectors. Results implied that the most vulnerable and exposed sectors to the transition were education and health, finance and businesses, and services sectors. Moreover, policies were proposed to mitigate the negative impact of the transition process on the affected sectors.

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