Oil Price and Future of Persian Gulf Arabs
By Shuaib Bahman
The Iraqi invasion of Iran in 1980 and its destructive aftermaths persuaded leaders of Persian Gulf Arab countries to work out mechanisms for guaranteeing their own security and survival in light of their fear of the spread of Iran’s 1979 Islamic Revolution.
In 1981, the leaders of six littoral states of Persian Gulf (Saudi Arabia, Oman, Kuwait, Qatar, United Arab Emirates and Bahrain) established the Gulf Cooperation Council (GCC).
Regardless of political and security issues, one of the most important objectives behind the establishment of this council was to guarantee the access of consumer countries to oil and safeguarding shipping lines by Persian Gulf Arab states. This objective has largely been realized thanks to lucrative arms deals between Arab states and the United States. However, the fact is that the GCC has failed to arrange oil policies of its member states. For this reason, although these countries pursue similar energy policies they are at loggerheads over major issues.
Oil price has witnessed a sharp decline in the past one year. The impact of this price fall on GCC member states has come to the limelight. Speculation is rife that GCC member states have been following Saudi Arabia with regard to oil price. They contributed altogether to cutting oil prices. However, it seems that oil price fall will have undesired political and economic consequences for these countries in the long term to the extent that they would be forced to separate their way from the Saudi government.
This article analyzes the effects of oil price fall on the Arab states of Persian Gulf and future perspective of oil market.
Optimistic and Pessimistic Views
Persian Gulf Arab states sit atop a lion’s share of world oil deposits. These countries hold more than 30% of the world’s proven oil reserves. In 2013, they produced around 24% of the world’s total output.
Saudi Arabia is the leading state among them in terms of oil reserves and production. Saudi Arabia is producing 11.5 mb/d of oil. It is the largest producer of oil across the globe. Kuwait is estimated to hold 6% of the world’s total oil reserves, UAE holds 5.8%, Qatar holds 1.5% and Oman holds 0.3% of world’s oil reserves.
The slump in oil prices since June 2014 would definitely affect the economy of Bahrain, Kuwait, Oman, Qatar, UAE and Saudi Arabia. On the one hand, these countries depend on energy sales for the bulk of their revenues while the oil price fall is forecast to continue for three to four more years. To that effect, there are optimistic and pessimistic views about the impact of oil price fall on the Persian Gulf Arab states.
From an optimistic standpoint, some estimates indicate that the Persian Gulf Arab states would see 3.4% economic growth this year despite the sharp price fall. Based on this, the Persian Gulf states are expected to be immune to oil price fall for the following reasons:
First, most Persian Gulf Arab states gained big revenues from selling oil when its price was high.
Second, the economic growth of some member states like Qatar and UAE has been mainly due to their investment in other sectors than hydrocarbon.
Third, the member states’ liabilities stand low; therefore, they can get loans to make up for their short-term budget deficit.
But from a pessimistic viewpoint, the World Bank announced in its February 2015 report that the Persian Gulf Arab states would experience a $215 billion loss due to oil price fall. Based on this forecast, the Arab states are expected to face numerous economic challenges.
First, the oil price fall from $110 to $60 a barrel means that the Persian Gulf Arab states would see a loss equivalent to 14% of their gross domestic product (GDP) due to the oil price decline.
Second, the shock of oil price fall could lead to more budgetary shortfall in the Persian Gulf oil producers.
Third, oil price decline could threaten some oil producers with regard to their obligations to account for their spending. That will have undesired consequences on the economy of these countries.
Challenges
The population growth rate stands high in the Persian Gulf Arab states. The population of these countries is forecast to increase by one-third to 53 million by 2020. This issue would give rise to the following challenges for these Arab governments:
- The majority of population in these countries will be aged below 25 and will need a job. Therefore, the Persian Gulf Arab governments will have to invest in different sectors in order to create jobs for youths. The unemployment rate is already high in some of these countries and their governments have failed to generate jobs. Therefore, if the current trend of low oil price continues these countries will become unable in creating jobs for their people and they should brace for social unrest in the future.
- The Persian Gulf Arab governments are set to face problems for meeting the growing expectations of their population in the future because their demands will involve housing subsidies for themselves and their children. While subsidies play a fundamental role in increasing domestic demand, oil price fall would mean a decline in the government subsidies. That could exacerbate social unrest in these countries. In case oil prices keep falling, all GCC member states, except for gas-rich Qatar, are forecast to be obliged to slash subsidies and public spending or dip into their sovereign wealth funds to meet their social obligations. That would cause certain problems for countries like Bahrain, Kuwait and Saudi Arabia because they have already raised the costs of their social plans in the wake of Arab Spring. For instance, the International Monetary Fund (IMF) has predicted that Kuwait will have spent all its reserves by 2017 should it go ahead with its current trend of spending.
- Failure of Persian Gulf Arab states in meeting the needs of their citizens will force them to increase their energy production in order to make up for their shortcomings. That means that these countries will have to explore and produce oil at a higher pace and their energy resources are likely to fail to meet domestic demand in the future. Meantime, the dependence of these countries on petrodollars for investment in social and economic sectors has increased and therefore oil price fall will leave these Arab states nothing to save. That would mean that oil production would not be profitable enough for these Arab countries. Under such circumstances, there would be no motivation for investment in new oil fields in these countries and their production will be affected seriously.
Tough Future
The issue of oil price fall is not merely an economic one for the GCC member states and it could have political consequences for the Arab governments.
On the one hand, the Arab world has faced numerous uprisings and revolts in recent years while on the other, there has been social and political unrest as well as economic gasp in all GCC member states. Therefore, these countries are likely to face popular uprisings against their rulers in the future. That is why the issue of oil price fall has become a vital one for the Arab governments of Persian Gulf region. The Arab governments are likely to distance themselves from Saudi Arabia in the future and no longer follow Riyadh in oil price setting.
Moreover, given the challenges of low oil price fall and its negative impact on the social and economic atmosphere of the GCC member states, these countries will have to switch from politics and security to economy in their convergence. In fact, they should understand that oil resources will not remain forever and they will have to diversify their sources of income in the long term in order to preserve their economic growth.
The Persian Gulf Arab states will also have to cut their spending like energy subsidies. Each of these measures may pose challenges to the GCC member states, but they will have no option but to cut dependence on oil revenues, reduce energy subsidies and diversify their economy.