Since the 19th century, oil has been one of the world’s major energy resources. Oil meets 33% of global energy demand, but oil demand may begin to decline sooner than expected due to renewable resources trends around the world and technological advancements. Arab countries in the Gulf region are beginning to take precautions through diversification as they need to transform their oil-dependent economies. The issue of economic diversification has taken on new urgency in the Persian Gulf countries. The global economic slowdown induced by the coronavirus pandemic has pushed the price of Brent crude oil from $64 a barrel in early 2020 to $23 a barrel in April 2020.
For decades, GCC countries have been concerned about the long-term viability of their hydrocarbon revenues. In the long run, oil and gas reserves will deplete. Bahrain and Oman are the most vulnerable, with reserves expected to run out within the next decade for Bahrain and within the next 25 years for Oman. In the short term, GCC countries have already begun to tap into $2 trillion in financial assets amassed over decades and invested in sovereign wealth funds for future generations. The International Monetary Fund (IMF) predicted that unless GCC countries implemented significant fiscal and economic reforms, their conserved wealth would be depleted by 2034.
DIVINE SANCTION AND A CHALLENGE
Natural resources abound in the Gulf Cooperation Council (GCC) countries. They have been using this wealth to improve the lives of their citizens, developed infrastructure, constructed modern cities and plan for a future without oil, they have made significant progress in their objectives.All have Human Development Index scores above 0.8, putting them ahead of all other Middle East and North African (MENA) countries and on par with some European Union countries (EU).
The GCC countries, on the other hand, have struggled to make progress on the third goal: diversifying their economies. Despite their good intentions, mirrored in their national visions and economic development plans, the GCC economies remain pig-headedly keen about hydrocarbons.Thus,for economic diversification to be sustainable, other essential ingredients must be present, such as moderate government spending, increased non-oil exports, and even more foreign direct investment (FDI).
While GCC members have made significant headway over the last decade, oil and gas production continues to account for more than 40% of gross domestic product (GDP) in most countries, excluding the United Arab Emirates (UAE) and Bahrain. Nonetheless, oil and gas royalties directly fund a large portion of the region’s other economic activities, such as construction and infrastructure development. For Bahrain, oil accounts for a minor share of GDP because the region’s oil reserves have been depleted; yet, oil continues to underpin economic activity indirectly through transfers and expenditure from neighbouring nations. Consequently, though efforts have been made to diversify government finances, hydrocarbons account for 70% or more of overall revenue in all countries except Saudi Arabia (68%) and the United Arab Emirates (UAE) (36%). Nonetheless, many of the diverse revenue streams in those two countries are supported by petroleum economic activities.
The Gulf countries do manufacture goods and services within their borders, principally for domestic usage. These embody Agricultural products, manufactured items, and business services are examples of them. However, domestically produced goods and services would not be able to replace the massive volumes of imported goods and services required to support the region’s 27 million natives and 29 million expats.
OIL IN INTERNAL POLITICS
Generally, advanced democracies and the presence of inclusive institutions boost economic growth. Yet, in some instances, economic growth can impede democratisation. “Rentierism” is one of the most well-known theories on the subject.Rentier states generate money by collecting rent from foreign governments, businesses or individuals. They do not require tax revenues because their primary job is to disperse incoming foreign resources.
Furthermore, rentier nations are financially independent and autonomous from society, contributing a little portion of external rent earnings to domestic spending while retaining the majority of the wealth. Despite considerable criticism, the link between authoritarian Arab regimes that sell oil and their citizens lends validity to the notion. However, as the post-oil era approaches, Arab states are attempting to escape the trap of rentierism.
THE SAUDI PARAGON
The oil sector contributes 28.7 percent of Saudi Arabia’s GDP and accounts for 80 percent of its exports. These figures demonstrate the significance of economic diversification in Saudi Arabia.
Saudi Arabia’s audacious economic makeover might be successful. To prepare for a Post Oil future, the Kingdom announced its “Vision 2030” with economic diversification as its primary economic goal.
Saudi Arabia has tried to enhance its private sector, unleash the potential of non-oil industries, and expand non-oil exports with this goal in mind.
It will not be easy to attain this target quickly, which is why the kingdom has tightened its laws and begun forcing foreign corporations to relocate their Middle East operations to Saudi Arabia.To attract new investment and generate new employment, the Saudi government and government-backed institutions will no longer sign contracts with multinational firms that do not have a regional centre in Saudi Arabia in early 2024.This decision heightened tensions with rival countries such as the United Arab Emirates (UAE). Some UAE-based investors described the decision as “obviously geared” .
The UAE, like Saudi Arabia, has increased attempts to attract overseas companies in order to restructure their economy and reduce their reliance on oil.
This appears to be one of several competitors in the region as many Arab oil-exporting countries attempt to modernise their economies as conflicts of interest appear to be inescapable.
SAUDI AS A MOVER AND SHAKER
Saudi Arabia as predicted would never be a mover and shaker again. The decline is irreversible, because “oil-rich” is a word that will become as obsolete as “carbon copy.” Arab producers’ oil revenue has dropped by more than two-thirds, and it will never recoup. So far, the decline has been mostly driven by a sharp drop in oil prices; demand has steadily increased, but oil production has consistently increased faster; nonetheless, an outright collapse in demand is also on the horizon.
As the climate situation worsens, motor vehicles (which account for half of all oil consumption worldwide) are shifting to electricity. The United Kingdom and France have officially pledged to cease all new automobile sales with internal combustion engines by 2030, which means that no one will buy a new petroleum-fueled car after 2025. Many other countries are debating similar measures.
The unprecedented stability of these nations without a single regime change among the six “oil-rich” monarchs of the Arabian peninsula in the last 50 years – has been solely predicated on the traditional rulers’ ability to buy the consent of their subjects. When wealth disappears, so does stability. Even Saudi Arabia’s unity, established by force less than a century ago, may not survive the shift.
THE ROAD AHEAD
In terms of preparing for a post-oil future, GCC governments will need to curtail public services, benefits, and jobs even further, while also curbing opportunities for rent-seeking in the private sector. Economic diversification policies must take genuine rent-seeking behaviour into account. GCC governments will need to have an open dialogue with their citizens about the financial restrictions they confront and the options available to them in the future, and then redraw the parameters of the governing social compact in a way that is perceived as equitable and fair. This renegotiation will require both political elites and regular individuals to give up some of their rights and privileges in light of diminished hydrocarbon reserves and lower prices that are predicted to persist and sink further in the long run. GCC countries have established free zones, innovation parks, and entrepreneurial centres outside the boundaries of their rentier-based private sectors over the last two decades. Nonetheless, all of these things are primitive.
The coronavirus outbreak, combined with reduced global oil prices, has intensified pressure on Gulf governments to accelerate economic diversification initiatives. GCC policymakers must look beyond the urgent need to slash expenditures and instead focus on laying the groundwork for a thriving and sustainable post-hydrocarbon economy. Economic and political pressures have already compelled Saudi Arabia, the United Arab Emirates, and Bahrain to lift their three-and-a-half-year embargo on Qatar, paving the way for further regional economic integration.
WILL REFORMS BE ENOUGH?
Firstly, economic modifications are required since the economies of the Gulf Cooperation Council (GCC) members are heavily reliant on oil, and resources will need to be reallocated among other sectors.
Secondly, the transition will be political, because oil is used to bolster authoritarian governments and quiet democratic demands in many oil-exporting Arab states.
Petroleum countries would be impacted and pushed to undergo economic and political reforms. Oil has long been a key element in Middle Eastern politics, and the world’s post-oil futures may have significant ramifications in the region and global politics as a whole.
As rentier regimes make strides in preparation for a post-oil future, ultimately time will tell whether they are strong enough to protect authoritarian regimes. Oil-exporting Arab regimes may face a fresh and more robust ‘Arab Spring’ in the twenty-first century if they continue to focus primarily on the economic side of things and fail to implement institutional reforms promptly.