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As the energy transition gathers speed, economies reliant on oil and gas risk losing trillions of dollars in revenue thanks to the hit on fossil fuel demand. That's according to a recent study by financial think-tank Carbon Tracker. Looking at 40 economies that are highly dependent on oil and gas, the study projected that revenues would fall from an expected $17tn to just $9tn by 2040 if the world met its climate pledges.
The International Energy Agency has also warned that it expects fossil fuel demand to peak before 2030. To give an indication of how reliant some of these nations are on fossil fuels, in 2021, in each Gulf Cooperation Council, or GCC, state hydrocarbon exports accounted for between 55 per cent and 92 per cent of total exports. And those exports generated between 60 per cent and 84 per cent of government revenue.
But reducing this dependence may not be easy. Along with government revenue streams heavily tied to oil and gas, petro states often have substantial investments in fossil fuel infrastructure and a skilled labour force in the field. Restructuring requires significant investments in new technologies, retraining the workforce, and diversifying sources of revenue.
Initially, at least, this might not be popular with residents. For example, in many petro states citizens have become used to low or non-existent income taxes, high public sector salaries, and a generous welfare state. Meanwhile, private sector activity in GCC countries continues to be strongly linked to government contracts and spending that are funded through oil and gas revenues.
At the same time, private economic activity can often be influenced by impulsive political actions. This increases uncertainty, which can discourage international investment. Most GCC countries do have ambitions to create high-tech knowledge economies, but there is a shortage of skills and research facilities.
Tourism is one industry that has shown promise in the area. And the region does have a local example, which demonstrates how over time a petro state can diversify. Dubai has built a dynamic economy around industries such as finance, property, and tourism. And while, at one point, oil accounted for more than half of that Emirate's GDP, today that figure stands at less than 1 per cent.
