Gulf states facing social and economic crisis as oil revenues crash

Declining oil revenues and young populations could land Middle East leaders with growing headache, says study

(Pic: Hamza82/Flickr)

Riyadh – the capital and largest city of Saudi Arabia (Pic: Hamza82/Flickr)

By Ed King

Gulf states must stop relying on fossil fuels as their main source of income or face a social and economic crisis in the future, says a report released today by Chatham House.

Increasingly youthful populations demanding more freedom, coupled with the recent collapse in global oil prices, is placing governments in the region under intense pressure, it warns.

“Expenditure commitments are growing sharply but revenues are capped by oil production and prices, while the capacity to raise taxes is weak, with political consequences,” says the report.

“Bahrain, with its limited reserves, serves as a warning of what is yet to come: escalating political pressure and heavy borrowing to finance social spending.”

The study focuses on the six countries in the Gulf Cooperation Council (GCC): Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE).

Of these, Oman and Bahrain’s oil production are expected to last for 10-15 years. Kuwait, Qatar and Saudi Arabia are in a better position, with projected oil reserves of 80-100 years based on current estimates.

Financial crunch

The authors say these countries are “chronically dependent on high oil prices”, with Saudi Arabia needing US$97 a barrel to balance its budget.

The price of oil is hovering just over $50 and experts are divided on how long that might last.

Bob Dudley, chief executive of BP, predicts it could be up to three years before prices rise. Other analysts say they could fall as low as $10-20.

Finances of the GCC states have been stretched by $150 billion of spending commitments made in 2011, creating thousands of new public sector jobs.

Huge sovereign wealth funds amassed in Abu Dhabi, Saudi Arabia and Kuwait can cover low prices for a few years, says the report, but the longer term outlook is not so certain.

“The situation is more pressing than many observers realize, even for these wealthy countries, because their public spending is rising so fast,” write the authors.

“And [it] will be even more critical if oil prices remain at lower levels than those to which the Gulf countries have become accustomed in recent years.”

Public anger in Bahrain and Oman in recent years is linked to “pressure on their limited oil resources” and ability to distribute wealth, the authors add, which could be repeated across neighbouring states.

“Across the region, a combination of population growth and dwindling resources will place pressure on the implicit economic bargain between rulers and societies.”

Climate impacts

The study does not address what the possible consequences of a global climate change deal – due to be signed off later this year – could be on GCC countries.

Talks are well advanced on a deal that could see all governments accept varying greenhouse gas emission reduction goals from 2020.

One of the ideas for that pact is a long term zero emissions target for the second half of this century, which would force all countries to accelerate their decarbonisation plans.

This would rule out the use of fossil fuels unless they were burnt using carbon capture technologies, which are expensive and have only been deployed on a few power plants.

Last month Saudi Arabia’s climate envoy Khalid Abuleif told RTCC oil and gas should be part of any future climate deal, and rejected the idea of a zero emissions goal.

UN-backed scientists say the world has around 30 years of emissions at current levels before dangerous levels of warming are locked into the Earth’s climate, causing more floods, droughts and rising sea levels.

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