The Middle East in a post oil era

By: Editor In Chief
Thu 11 February,2016

How will the low price of oil hit the GCC economies

Filed Under: Oil & Gas

As oil prices continue to wallow at lows not seen for more than decade, petroleum exporting countries in the Middle East are looking to reform their economies so that they can weather the shock of far lower oil revenues – and prepare for a future after fossil fuels.

Saudi Arabia, the de facto leader of oil producing group OPEC, has been largely blamed for the continued fall in prices given the group's decision not to cut production amid a glut in supply as part of a strategy to pressure non-OPEC rivals who have higher production costs.


The policy has hurt producers closer to home though. Six Gulf oil-producing countries (Saudi Arabia, Kuwait, Bahrain, Oman, Qatar and the United Arab Emirates) are planning on introducing a sales tax for the first time amid the drop in prices and as they see budget surpluses turn into deficits as oil revenues drop. In addition, countries like the UAE have removed long-standing fuel subsidies.

While the lower oil price has undoubtedly brought pain to the Middle East's economic powerhouses, others see the new era of low oil prices as an opportunity.

Generational change, with 60 per crnt of the population under the age of 30, is placing strain on traditional political structures.

The revenues from energy resources are not sufficient to sustain the current political-economic bargain in the medium to long term - three of the six GCC countries need oil at $100 per barrel in order to balance their budgets, and, crucially, these 'break-even' prices are rising as population growth adds to public-sector wage and subsidy bills.

 Addressing the growing expectations of Gulf populations- - both citizens and non-indigenous residents - and providing greater opportunities for them to take part in designing their future should be "core elements of the region's security.

Curbing fiscal spending will be a pressing concern in the next five to ten years, and the need to diversify away from oil will require long-term transformations of the economy and education system.

Kuwait wants to diversify its economy away from oil, attract more investment, speed up the sale of state firms and ease land ownership rules to prepare for the post-oil era, a top government body said.

The major Opec oil producer wants to control spending amid rising inflation in the next five years, the country's top planning council said in a 2009-2014 policy strategy plan, according to a copy obtained by Reuters.

oil and gas

The Gulf state wants to emulate the success of neighbours Dubai and Bahrain, which have become regional financial centres and popular tourist destinations, but setting up a non-oil economy is still in the early stages.

Speaking at a panel discussing economic reforms in the Middle East at WEF last January, fellow Gulf Cooperation Council (GCC) minister Anas Khalid Al Saleh, who is deputy prime minister, finance minister and acting oil minister of Kuwait, said reforms were needed with or without a backdrop of lower oil prices.

"We must not tie reforms with the oil prices," he cautioned. "Everybody agrees that there is no choice but to take the necessary steps for the sustainability of growth. It's not something we can wait for anymore, not just because oil prices have dropped but for many reasons."

On the same panel, which was hosted by Al Arabiya news network, the chief executive of Bahrain's Economic Development Board laid out the challenges facing the Middle East but said they could present an opportunity for transformation.

"The region is facing numerous challenges, oil prices declined by 70 percent and there's pressure on the fiscal budgets of all the regional economies. You layer on top of that the demographic challenge and the youth unemployment that we see – which is north of 30 percent – and lastly, the security challenge," Khalid Al Rumaihi said.

He said Bahrain and its neighbors could, and were, embracing fiscal and economic diversity and investing in more infrastructures in their countries. "We need innovation in our economies…and we have to look at how we allow innovation in our economy," he said.

Preparing for the "post-oil era" is an absolute must for all GCC states, the report warns, especially as many natural resources that the region has relied on for the past half century are predicted to run dry within the lifetime of children born today.

All GCC states have long-term plans envisaging a transition to a post-oil economy, developing a mix of energy-intensive and knowledge-based industries, employing more nationals in the private sector, and considering the introduction of taxation.