UNITED STATES (OBSERVATORY NEWS) — The universal desire to mitigate the effects of climate change and stimulate the use of renewable energy threatens the huge amount of resources that oil producers in the Persian Gulf have accumulated thanks to oil over the past decades.
In less than a decade and a half, six members of the Gulf Cooperation Council — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE — have faced $ 2 trillion in total wealth if they do not accelerate fiscal reforms and increase their non-oil revenues and non-oil share in their countries to be ready for a world that will peak oil demand.
In a report last week, the IMF said members of the Gulf’s Collaboration Council urgently needed deeper reforms in the economy, revenues, and ways of spending to maintain net financial wealth for the next 20 years when global oil demand peaked.
Middle East Oil Risks
According to the IMF, at the current rate of fiscal reform, revenue and spending, the fortune of six oil-producing countries of $ 2 trillion will be depleted by 2034.
Fundamental changes in oil markets with increased focus on climate issues and potential carbon taxes pose a huge challenge to GCC countries. Together, they produce more than one fifth of world oil supplies.
Some countries in the region have already begun reforms, including reducing subsidies for fuel and water, or setting market prices for gasoline for citizens of other countries compared to subsidized prices for citizens.
However, ongoing reforms at the GCC will not be enough, the IMF said. Simple economic diversification from oil is an elusive goal. It will not stop the decline in wealth of major oil producers in the Middle East. According to the fund, GCC countries need to significantly increase their non-oil revenues.
But then even higher non-oil revenues may not be enough – governments will be forced to cut staff to reduce government spending, the IMF said.
“Here it is possible to rationalize other categories of expenditures, including reforming a large public service in the region, reducing public spending on wages that are too high by international standards. In addition to strengthening public finances, these reforms will also reduce distortions in the labor market and will contribute to the development of the private sector, ”the fund noted.
But the Middle East is hard to get rid of its dependence on oil.
Oil states in the Middle East began to carry out some reforms after the fall in oil prices in 2014–2015, when most of the state budgets were in short supply, as oil revenues, the main source of income and government spending to support the economy, were halved.
The largest producer in the region and the world’s largest oil exporter, Saudi Arabia, is experiencing a huge shortage 5 years after the fall in oil prices. The kingdom has a Vision-2030 plan to diversify the economy from oil, including financing from the IPO Saudi Aramco, however, the kingdom seeks to attract foreign direct investment.
Thus, it continues to make big bets to block future demand for its oil through joint ventures in the key oil market in Asia. Aramco continues to process refineries in China and India, seeking to gain global leadership in refining and marketing.
According to OPEC, the oil and gas sector of Saudi Arabia accounts for about 50% of its GDP and about 70% of export earnings.
In other words, oil makes up half of the Saudi economy. And whether the Vision 2030 plan will be implemented or not, it will be difficult for the kingdom to get rid of its dependence on oil, even if it is trying to do it.
However, the Saudis have a problem: without oil, Saudi Arabia is losing a key lever of influence in regional and international politics. These are huge kingdom oil reserves that pay for the generous lifestyle of House of Saud, a family ruling an absolute monarchy, the only country in the world that bears the name of its rulers.
The UAE, along with Saudi Arabia and Kuwait, is not so dependent on oil. Only 30% of the UAE economy is directly based on oil and gas production. Abu Dhabi is the emirate that is most dependent on oil demand and oil prices, and Dubai is one of the best luxury travel destinations that does well without oil reserves.
According to the IMF, Kuwait has a huge sovereign wealth fund that will help cope with the complete depletion of wealth by 2052.
But Kuwait is highly dependent on oil. According to OPEC, the oil and gas sector accounts for about 40% of its GDP and a whopping 92% of export earnings.
“The economy’s withdrawal from oil is completely dependent on the emergence of a dynamic non-oil sector that will create jobs for a growing workforce,” the IMF report said last month.
Oman and Bahrain of the GCC (but not OPEC members) are the most vulnerable producers against the expected peak demand for oil. Qatar – thanks to its huge reserves of natural gas and the expected increase in global gas demand – can be relieved of the financial pressure that its neighbors will experience in the next 20 years.
Climate Change Dilemma
Climate change efforts have affected major oil companies in the Middle East – Saudi Aramco and Abu Dhabi National Oil Company (ADNOC). Now Aramco is openly talking about climate change, presenting research on emission reductions, and ADNOC is proud to be one of the five companies with the lowest greenhouse gas emissions in the oil and gas industry.
The irony is that, due to its geographic location, oil producers in the Middle East are more affected by climate change in the coming years than oil producers in the north.
Jim Crane, Wallace Wilson, staff at Rice University’s Baker Institute, noted that oil producers in the Gulf of Mexico “will benefit most from lower current carbon stocks in the atmosphere and associated adaptation costs.”
“The Gulf oil countries must perceive climate change with greater concern than northern oil producers such as Russia, Canada and Norway, who will suffer weaker short-term damage – or even benefit – from climate warming,” wrote Crane.
The IMF said last week that “oil-exporting countries may have to prepare for the post-oil future, rather than they thought.”
This article is written and prepared by our foreign editors writing for OBSERVATORY NEWS from different countries around the world – material edited and published by OBSERVATORY staff in our newsroom.
Contact us: firstname.lastname@example.org