Translating energy into lasting prosperity

In a series of posts leading up to the World Economic Forum’s Energy for Economic Growth report launched on Wednesday 7th March 2012, Khalid A. Al-Falih explains what energy-rich countries can do to translate their resources into broad economic development and growth.

It is often said that petroleum energy is the lifeblood of modern civilization: the indisputable driver of the unprecedented development and prosperity the world has experienced over the past century. But how can that precious energy source translate effectively into economic growth and higher living standards in the very nations that are blessed with an abundance of oil and gas?

When we review the performance of oil-producing countries in attaining broad economic development, we find mixed results.

Of course all host countries, whether developed or developing, are driven by budgetary needs to maximize tax revenues from their petroleum resources. While taxation is necessary, I believe it is insufficient to achieve desired development objectives. The development of oil and gas resources depends more on capital than labour, and exporting oil and gas neither generates maximum returns from these precious resources nor creates large numbers of jobs within the local economy. As a result, the benefits are typically not shared broadly across society.

In my view, a set of key strategies or “levers” can be used to improve that performance and achieve more significant socioeconomic development in resource-rich states.

The first lever would be the creation of oil- and gas-based industries that use energy as fuel and feedstock. This ticks off both the value-added and job-creation boxes by going beyond simple extraction and exportation. However, if these activities are limited to the production of commodities, their contribution to the economy and job creation will be somewhat constrained.

If this strategy is to add greater value to commodities and spur significant job creation, resource-rich states need to produce more semi-finished and finished goods domestically, while emphasizing the role of small-to-medium-sized industries. Saudi Aramco adopted this strategy with its large-scale investments in integrated refining and chemicals facilities. These will serve as hubs for new industrial clusters and associated industrial parks that are being created and promoted.

The second lever involves resource-rich countries developing their own energy service sectors, not just to support domestic petroleum activities (including processing-related industries) but eventually to enable these services to compete abroad, thus creating additional value for the nation and its people. You can see this approach at work in places like Stavanger, Norway, which is becoming the hub for equipment and services specializing in Arctic petroleum development, and Aberdeen, United Kingdom, which has established itself as a global nexus of offshore activities.

The third key strategy focuses on using the various industrial and commercial activities associated with petroleum and related industries to catalyze advances in education, science, technology and innovation. Nations cannot achieve first-tier economic performance simply by producing and exporting goods. Rather, they must be able to create their own differentiating knowledge through investments in education, research & development and a vibrant entrepreneurial ecosystem.

Physical infrastructure remains important (particularly in developing nations), but concurrently investing in the development of a knowledge-based economy is essential to sustaining healthy economic growth and creating well-paying jobs in a highly competitive, ideas-driven global economy.

The final lever involves striking a delicate balance between raising living standards, creating local competitive advantage and protecting the environment. Energy is needed to meet the growing demands of transportation and utilities, power the economy and fuel broader economic development. Yet resources must be managed responsibly and energy efficiency should be encouraged. Per capita energy consumption has long been considered an indicator of national prosperity and a key enabler of economic growth and development. Between 1990 and 2008, per capita primary energy consumption grew by about 10% in the mature economies of the OECD countries, but doubled in China as that country grew rapidly and many Chinese citizens
enjoyed more affluent lifestyles.

However, energy producing countries must be mindful of energy intensity: the amount of energy used to create a given unit of output. Energy intensity is better (or lower) in developed countries than in developing countries, but in general it has declined in most nations. Unfortunately, in the energy-rich Middle East, energy intensity has risen by more than one-third over the last 20 years. Improved efficiency is imperative given that it can help decrease emissions and reduce energy costs while helping to maintain living standards and economic growth. Resource-rich nations should not ignore efficiency simply because energy is abundant.

It would be a mistake to believe that environmental protection and economic growth are mutually exclusive. Instead, resourcerich states can take several actions that advance economic development and minimize environmental impact. For example, this could be accomplished by improving energy efficiency; utilizing cleaner fossil fuel technologies; consuming cleaner natural gas; moving industries down the value chain to add greater value and create higher-paying jobs while consuming less energy; reducing carbon emissions through the use of high-end technologies; and introducing renewables in a deliberate and pragmatic manner as their economic viability improves.

By thoughtfully applying these levers and exercising wise resource stewardship, energy-rich countries can achieve sustained prosperity for their own people, while also contributing to global growth and development.

Author: Khalid A. Al-Falih is President and Chief Executive Officer, Saudi Aramco, Saudi Arabia 

Pictured: A truck drives past an oil refinery, January 4, 2012. REUTERS/Michael Buholzer