The world is moving towards the use of non-fossil fuels and this has placed the Middle East at an important crossroads. As hydrocarbon exports form a structural element in the economy of most regions, the rapid shift to renewable energy is posing a direct threat to economic stability. With oil and gas demand bogging and prices becoming highly unpredictable, the Algerian, Iraqi and Libyan states suffer dire fiscal susceptibility.
Oil revenues have over the decades been the backbone of national budgets, social expenditure and investment in infrastructure. The loss of these incomes poses the risk of shaking the social contracts of the past where governments offer subsidies, employment and welfare in return of the political acquiescence supplied. As soon as this system becomes flawed, the chances of mass protests, strikes and political turmoil increase exponentially.
According to economic studies conducted by regional financial institutions in 2025, a number of the regional economies in the Middle East will run out of fiscal buffers by the end of the 2020s unless there is quicker diversification. Specifically, Iraq is a nation that relies on petroleum as a source of more than 90 percent of its state revenues, which makes it prone to economic meltdown. Lacking any significant changes, the process of debt accumulation, currency devaluation, and a drop in the wages of the people working in the state institutions may drive the fragile states to economic disasters like those seen in Lebanon in 2020-2021.
Petrostates Funding Militias and Geopolitical Proxies
As the energy shift is weakening financial power, the regional powers still attempt to assert power using non-state actors and militias. The continuation of proxy networks is one of the key defining characteristics of Middle Eastern geopolitics of the post 2010 era despite the growing pressure on resources.
Strategic Leverage Through Proxy Networks
Iran, Saudi Arabia, and the United Arab Emirates all have large networks of fund and logistical pipelines to militias within the war-torn Yemen, Syria and Libya. These organizations are an expansion of the state power, filling the declining direct state power. However, with a drop in hydrocarbon revenues, the maintenance of these proxies puts a burden on the national budgets and breeds national dissatisfaction.
In the case of Iran, the reduction in fiscal space related to decreasing oil exports and international sanctions in 2025 has caused allocations of the budget away from the social services to the expenditure on defense. This redistribution increases the social frictions especially among the youth who see their levels of unemployment and inflation increasing. According to the International Crisis Group analysts, further funding of the proxies during economic distress will create a threat of triggering internal opposition movements, which would undermine the legitimacy of these states that they are attempting to maintain.
Security Fragility and Resource Strain
In the case of Gulf countries such as Saudi Arabia, the dilemma is between high costs that are being incurred in the region with local modernization agendas such as Vision 2030. Diversification efforts in the country would be weakened by the increasing expenses of maintaining military activities overseas. The decrease in the oil revenues implies a loss of the ability to maintain these two-tiered policies, making the prospect of regional retrenchment or a strategy reevaluation in foreign policy more probable.
The economic strains would also lead to changes in security alliances in the region, in which states would be willing to find short-term ceasefires or even partial normalization agreements with each other as a cost-saving measure. But unless conflict resolution structures are extensive, such arrangements can be easily broken and unbroken.
Energy Diversification Challenges Feeding Unrest
The system change to renewable and green energy creates a socioeconomic challenge that is deep within the Middle East. Even with grandiose national plans, there is still a limitation in the implementation due to deficit in governance, lack of technology, and political inertia.
Structural Obstacles to Green Transition
Although this has been observed to make apparent developments in countries such as the UAE and Saudi Arabia with regards to solar and hydrogen projects, this is still small in relation to the extent of fossil fuel infrastructure. The investments in renewable energy in the region in 2025 will be less than 10 percent of the total energy spending. The lack of access to high-technology, as well as the bureaucracy, slows down the creation of strong renewable grids that will be able to substitute the petroleum revenue streams.
The change in energy also poses a threat of established systems of patronage. Fossil fuel companies keep millions of people employed in state-based businesses, especially in those nations where the government controls the workforce. Since the world will reduce its need for oil, redundancies in these industries will lead to the destabilization of societies that rely on state-owned oil firms. The displacement would lead to new social unrest without full labor reskilling programs.
Rising Inequality and Political Volatility
Diversification of the economy, meant to decrease reliance on oil, usually serves the elite circles first, increasing socioeconomic inequality. The high-income sectors like tourism, finance, and technology are common in the infrastructure megaprojects in Gulf states at the expense of the low-income populations. In countries such as Jordan or Egypt that are resource poor, the cost of imports of energy increases the fiscal strains further, restricting them in terms of playing a significant role in the green economy.
This inequality may be in the form of political dissatisfaction as witnessed in the recent protests in Tunisia as well as Iraq which demanded the creation of jobs and anti-corruption change. The post-petroleum transition is prone to strengthening the authoritarian propensity unless there are inclusive economic frameworks where the governments will use repression as a way of keeping dissent to a minimum.
Regional Security and Economic Outlook
The fall of oil dependency will not merely redefine the economies, it will redefine the balance of power in the region. The established energy partners are changing as the states realign themselves in the new energy economy, the green economy.
Internal Fragmentation and the Risk of State Failure
With a reduction in the state incomes, the ability to uphold security and other primary services reduces. The weakened countries that are already divided by sectarianism or political fragmentation like Libya and Yemen are at a greater risk of long-term instability. Analysts suggest that by the early 2030s, a number of post-petroleum states may be facing a comparable governance vacuum to the one the Syrian state had collapsed in the 2010s. These vacuities of power might again turn to be incubating extremist networks and transnational militias.
New Geopolitical Arenas and Resource Competition
New geopolitical battles are also beginning to emerge due to the energy transition. Competition has shifted away to rare Earth minerals necessary in renewable technologies, like lithium and cobalt, cross-border electricity grids between Asia, Africa and Europe instead of oil pipelines. The Middle East which is situated between these two regions is also aimed at establishing itself as an energy transit location of green power. However, overarching national interests and lack of regional co-ordination may spark new conflicts on who owns the infrastructure, reminiscent of the geo-political interests that had surrounded oil fields and shipping routes.
The possibility of new economic blocs like the GCC-led Hydrogen Cooperation Forum and the African-Arab Solar Alliance is an example of initial efforts to redefine the relevance of the regions. Nevertheless, their success in the long run will rely on stable administration, technology alliances and capability to draw in enduring foreign investment.
Toward a New Energy Order
The Middle East after petroleum is on the edge of the transformation, which has a global character. With a shrinking oil economy in traditional oil economies, the regional powers are forced to maneuver in an uncertain world of technological change, population pressures, and altered alliances. The success of this change in leading to sustainable stability or further volatility will mainly be determined by how well the governments will combine economic diversification with social inclusion and regionalism.
The coming decade will reveal whether the Middle East can transcend its historic dependence on hydrocarbons or whether the absence of oil wealth will dismantle the fragile equilibrium that has long underpinned its political order. In the evolving energy landscape of 2025 and beyond, the region’s choices will determine not only its own future but also the trajectory of global energy security and geopolitical stability.
