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The Slippery Slopes of Oil

Anecdotal evidence on the opulent lifestyle of the oil-owning Middle-Eastern Sheikhs is endless—the private jets, leashed tigers, and gold-crafted palaces— nothing is beyond their means. However, one might want to reconsider their envy given that oil-richness comes with its own set of costs, quite literally. In fact, many scholars consider it to be nothing more than a charmingly veiled curse, often referred to as ‘the resource curse’ in academia. The lifetime research of Michael Ross, a renowned political scientist, has empirically demonstrated oil-abundance to be linked with the persistence of autocratic regimes and blockages in democratic transitions. Economically, abnormal oil revenues have been shown to distort economies with an overdependence on hydrocarbons and underperformance in other sectors. Fortunately, due to the increasingly frequent price fluctuations in oil, Arab states have had to come to terms with the drawbacks of the resource, and are now focussed on economic diversification. However, this new chapter for the Middle-East is a competitive one; down the slippery slopes of oil lies a serious possibility of regional conflict. 

In 2020, economic diversification for oil-dependent countries picked up newfound traction. Given the COVID-19 pandemic and the Saudi-Russia oil price war, prices plummeted to their lowest in twenty years. They fell from $64 a barrel in January to less than $23 a barrel in April of the same year. Moreover, they are expected to remain below $50 a barrel throughout the course of 2022 as well. While this disastrous price-slump may have reinstated the urgency to diversify, the need for it has been a long-standing one. To begin with, oil and gas reserves are exhaustible resources which are expected to run out in the long term. In fact, Bahrain and Oman are looking at a decade and two decades respectively to meet this fate. Given the growing efforts to implement renewable resources, the global demand for hydrocarbons is also expected to deplete within the next two decades. According to the IMF, the GCC (Gulf Cooperation Council) countries have till 2034 before they exhaust a majority of their reserves lest they introduce major fiscal and economic reforms immediately. However, this was a pre-pandemic estimate, and the said time period is only expected to shrink now. 

In response to this price volatility and an urgency to diversify, the GCG countries individually introduced a brand of ‘vision policies’ to tackle the matter. For instance, in wake of the oil-price slumps of 2014, Saudi Arabia launched an ambitious economic and social reform plan called ‘Saudi Vision 2030’ in 2016 to combat oil price volatility. The crown prince famous for his notoriety, Mohammed Bin Salman, was the primary architect behind this scheme that was meant to reduce the country’s dependence on oil by developing a robust private sector through attracting large sums in foreign and private investment. It focused on raising non-oil revenue from 163.5 billion riyals (or $43.6 billion) to 600 billion riyals (or $160 billion) by 2020, and 1 trillion riyals (or $267 billion) by 2030. It also proposed to privatize less than 5% of Saudi Aramco, the state-owned Saudi Arabian Oil Company responsible for almost 12% of the global oil production, to raise as much as $2 trillion for a new sovereign fund. To scale foreign and private investment efforts, the country also announced plans to fund large-scale infrastructure projects in healthcare, construction, transportation, renewable energy, tourism, wastewater, desalination and education. 

Kuwait, another GCG nation, is the sufferer of a similar disproportionate dependency on oil with 90% of the government’s revenue and 50% of the country’s GDP coming from the hydrocarbons sector. To address this, the country’s 2010 Prime Minister Nasser Al-Sabah commissioned a policy-plan similar to Saudi Arabia’s strategy called ‘Vision 2035’. The scheme aimed at diversifying the economy by reducing its dependency on hydrocarbons and improving the productivity of different socio-economic sectors. It sought to deeply integrate Kuwait with the global economy by increasing foreign direct investments by 300% and raising more than 400 million KWD from multinational companies. The strategically handpicked sectors for such investments were information technology, renewable energy, electricity, water, tourism, health and education.

Other Gulf countries such as Bahrain, Qatar and Oman also launched similar policies to promote economic and social diversification to reduce dependency on oil via foreign investments around the same time as Saudi Arabia and Kuwait. However, this widespread adoption of similar strategies is where the complication arises. Since the ‘vision’ policies of all these countries are more or less identical, and the time-frames to execute them overlap closely—the competition to grab the same opportunities is intense. Not only is this a concern for economic and political rifts in the region, but also threatens the successful implementation of these plans in any of the countries in question. The ongoing rifts between two otherwise friendly nations, the UAE and Saudi Arabia, are a testament to this. 

The close alliance between Saudi’s Mohammed Bin Salman and Abu Dhabi’s Mohammed Bin Zayed is perhaps the most important relationship in the Middle-East. It permits them a unique advantage which can be leveraged over all other states in the region. However, since both countries wish to pursue foreign direct investments in the same sectors—tourism, financial services, logistics, petrochemicals and technology—common economic goals have left them in an extremely awkward position to say the least. Aware of UAE’s first mover advantage as the popular regional hub of many multinational companies, competitive insecurities took grip in Riyadh. In response, Saudi Arabia made some bold moves to tip the scales in its favour; the boldest of the lot being a proclamation that required all companies to shift their regional headquarters to the Kingdom by a deadline of 2024 if they wished to pursue any business with the Saudi government. To avoid this wrath, many companies like Deloitte, Bechtel and PepsiCo already announced plans to shift their headquarters to Saudi Arabia sometime in the near future.

However, Saudi Arabia’s true seriousness towards liberalization can be gauged by Mohammed Bin-Salman’s new $500 billion capital backed ‘carbon-free megacity of the future’ called NEOM. The Red Sea bordered city is a big signal of commitment to the international community as it is a strategically located and specially earmarked zone for leading future research and conducting trade and business activities open to the world. To aid these liberalization efforts, the country has also made notable strides in the social sector by loosening some long-enforced lifestyle restrictions such as the female driving ban and public-theatre ban to make the country more palpable for expats. 

Undoubtedly, UAE’s arsenal of counter-offers was also loaded to offset Saudi’s provocative moves. The regional super-power allowed expatriates to have a greater stake in the economy by permitting full-ownership of companies, and also introduced some accommodations for future citizenship as well. Nevertheless, the rift between the two countries is in its infancy in the current form, and only time can tell if there is a true threat of regional conflict in the Middle East. However, it’s important to monitor these events closely as they will they will set a precedent for other smaller economies in the region to follow. 

Given the large number of stakeholders involved, the problem of economic-diversification for the Middle-East is one that could potentially lead to a breakdown in important relationships and ties between countries. Nevertheless, one can count on the ‘vision policies’ to make the Middle-East more economically accessible for multinational companies who seem to be the unlikely winners of the oil-dependency crisis in the area. Indeed, the oil that once united the Middle-East has left the region on a slippery footing with little recourse. 

Atisha Mahajan is a second year Economics and Political Science Major at Ashoka University. Her twitter can be found at @MahajanAtisha.

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