Approaching a Post-Oil Era

24 september 2011

Challenges of Transition in the Gulf Cooperation Council States

Dr Kristian Coates Ulrichsen is a Research Fellow and Deputy Director of the Kuwait Programme on Development, Governance and Globalisation in the Gulf States, London School of Economics and Political Science.

Resume: The participatory pressures generated by the Arab Spring are reshaping the political landscape in the Middle East and North Africa.

The participatory pressures generated by the Arab Spring are reshaping the political landscape in the Middle East and North Africa. After initial regime change in Tunisia and Egypt, escalating protests threatened to topple longstanding authoritarian governments in Yemen, Bahrain and Syria and did so in Libya. The trajectory and outcome of protest has differed in each country, reflecting diverging regime-types and levels of resource endowment that condition how regimes have absorbed and/or accommodated the calls for change. This article examines the challenges of transition in the six members of the Gulf Cooperation Council (GCC – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) which, Bahrain apart, have largely been bypassed by the worst of the unrest.

The contemporary period is one of great change both domestically within the GCC states and in their relationships with the rest of the world. Their emergence as the center of economic gravity in West Asia is realigning inter-regional relations and injecting new dynamics into the international system. Nevertheless, empirical evidence suggests that political systems are at their most vulnerable to contestation during periods of profound transition. This is especially the case in the Gulf if the reformulation of distributive mechanisms for co-opting support and spreading wealth begin to erode the traditional “ruling bargain” and, with it, regime legitimacy. There is thus a discrepancy between the GCC states’ growing global profile and the internal challenges framing their transition towards the eventual post-oil era.


At 2006 production rates, and barring unexpected new discoveries, Bahrain and Oman are projected to deplete their existing oil reserves by 2025 and consequently face imminent transitions to post-oil states. This contrasts sharply with the other GCC states, which do not face such imminent pressures, although unsustainable consumption patterns complicate their higher levels of reserves. The challenge of resource depletion is far from uniform even in the more well-endowed states. Qatar and Abu Dhabi (in the UAE) benefit from a fortuitous combination of small citizen populations and huge resource endowments. Kuwait possesses oil in abundance, but suffers from recurring political crises that undermine economic diversification and development plans. Similarly large reserves in Saudi Arabia and the UAE are somewhat undermined by the Kingdom’s much larger population of 26 million, and by the disparities between Abu Dhabi, which possesses 93 percent of UAE reserves, and the other six resource-poor emirates that make up the federation.

Oil (and more recently natural gas) rents have played a central role in constructing and maintaining the social contract and redistributive mechanisms that underpin the political systems in the GCC states. Revenues from the export of oil transformed their political economies, shaped state-society relations and distorted the economic development of the “rentier” states which emerged. However, the generous welfare states were built in the 1960s and 1970s during a period of comparatively low populations and high wealth per capita. Since then, demographic pressures and the market-distorting impact of distributive economic policies have embedded significant structural imbalances into Gulf polities. These will be very difficult to reformulate or dislodge, especially as they mostly affect a bulging youth generation lacking any experience of pre-oil hardships and taking for granted the provision of welfare and public goods.

Four decades of rapid demographic growth have produced a youth bulge that will work its way through the population structure for decades to come. The population of the Arabian Peninsula increased from 8 million in 1950 to 58 million in 2007 and is projected to reach 124 million in 2050. These figures place great strain on existing welfare mechanisms and rigid labor markets, and heighten the importance of the economic diversification programs underway in each Gulf state. Moreover, an estimated 70 percent of the citizen population in the GCC were below the age of 30 (in 2008), of which 30 percent were aged fourteen or under. This requires the Gulf States, in common with other states in the Middle East and North Africa, be provided with educational and job-creation opportunities for the large numbers of young people coming of age.

The combination of rapid population growth with inadequate employment opportunities represents a major long-term challenge to internal stability. As with the more populous, non-oil states of North Africa, even the comparatively richer GCC economies have struggled to generate sufficient jobs to absorb even the rates of natural increase without exacerbating already-high levels of existing unemployment. Its impact in the GCC states has been magnified by unproductive “rentier mentalities” that have created imbalanced and highly-stratified dual labor markets, whereby most nationals find work in bloated public sectors and the private sector is dominated by cheap expatriate laborers.

These trajectories have produced rising disparities of income and wealth and constitute a visible indicator of the growing inequalities within GCC societies. A case in point is Saudi Arabia, where the level of income per capita more than halved, from $16,650 in 1980 to $7,239 in 2000. Although this fall coincided with a prolonged slump in oil prices, and was followed by a period of enormous capital accumulation, even the 2003-2008 oil price boom failed to mask the disparities, which are creating a new underclass of “have-nots” in the region. These divergent indicators are destabilizing because in many cases they follow fissures within society. These may overlay sectarian tensions, as in Bahrain or Saudi Arabia where absolute and relative rates of poverty are interlinked with the politics of uneven development, or they may exist between citizens and expatriates, as in Kuwait and parts of the UAE.

In November 2007, a study conducted by the McKinsey consultancy group laid bare the scale of the regional challenge posed by mounting unemployment. The report estimated that, contrary to official claims of much lower rates, real unemployment in Bahrain, Oman and Saudi Arabia exceeded 15 percent, and that the figure rose to 35 percent for those aged between 16 and 24. It also found that the saturated public sector was no longer able to guarantee employment to citizens entering the job market. Furthermore, it identified severe deficiencies in local education systems that meant that most entrants into GCC labor markets lacked the requisite qualifications to enter the private sector. With such a large proportion of GCC populations about to enter the labor market, the issue of youth unemployment is both urgent and inseparable from the role and quality of educational attainment and the misalignment between local standards of education and labor market requirements.

Officials and policymakers are not unaware of this looming crunch. Their awareness of the potential problems formed the cornerstone of the ambitious projects of economic diversification launched in each GCC state during the 2000s. Beginning in the mid-1990s, a plethora of national “visions” and plans set out targets and objectives for diversifying GCC economies and expanding the productive base. Perhaps unsurprisingly, this occurred first in Oman and Bahrain, as it is in these countries that oil reserves will draw down earliest. Policymakers adopted reforms designed to broaden their economic and industrial base in order to lessen their reliance on hydrocarbon revenues and minimize the potential risks to internal security. Both Business Friendly Bahrain and Oman 2020: Vision for Oman’s Economy attempted to expand the non-oil, and productive value-added economic sectors, accelerate programs to raise the proportion of nationals in labor markets, and strengthen the private sector as an engine of economic growth.

These efforts have since been surpassed in order of magnitude by Qatar, Saudi Arabia, and the United Arab Emirates. Qatar’s ambitious 2008 Qatar National Vision 2030 outlined five major challenges facing Qatar, including meeting the needs both of current and future generations and aligning economic growth with social development. In Saudi Arabia, economic diversification followed a two-pronged approach. One dimension focused on creating economic cities as hubs of agglomeration and the creation and diffusion of knowledge, while the other emphasized the development of a sophisticated downstream petrochemicals industry. These large-expected projects will generate an estimated 10.8 million jobs between 2009 and 2014. However, a report compiled by the National Bank of Kuwait in 2009 estimated that suitably-qualified Saudi workers would only fill about half, or 5.45 million, of the positions, leaving the remainder to expatriate laborers. This illustrated how ongoing lags in indices of human development and human capital constrain the pace and extent of diversification plans.

In the UAE, policymakers in Dubai fast-tracked a grandiose, government-led development model repositioning the emirate as an international hub for the service and logistics industries. Their approach constituted the most radical attempt in the Gulf to move towards a post-oil economy, and initially it succeeded in reducing the oil sector’s contribution to GDP to 5.1 percent by 2006. This notwithstanding, the spectacular implosion of the Dubai business model in 2008-2009 carried a cautionary warning for proponents of economic diversification in the Gulf. Dubai’s failure to create a sustainable non-oil economic base epitomized the barriers to effective economic diversification. Ironically for an attempt to build a non-oil economy, it was saved from financial meltdown by a series of emergency injections of funds from neighboring oil-rich Abu Dhabi that came at a significant cost to Dubai’s autonomy within the UAE.


The outbreak of the Arab Spring in January 2011 breathed new life into demands for reform of the monarchical political systems in the GCC states. A series of petitions and calls for meaningful change initially rattled the ruling elites and tested the boundaries of permissible opposition in these authoritarian states. They met a repressive response as regimes clamped down hard when pro-democracy protests threatened to escalate into social movements for meaningful political change. The closing down of political spaces and avenues of oppositional dissent led to a polarization of opinion between advocates of reform and proponents of repression.

The political temperature in the Gulf was therefore rising even before the outbreak of widespread demonstrations throughout the Arab world. Parliamentary elections in Bahrain in October 2010 were marred by the arrest of human rights and opposition activists. In Kuwait, a series of incidents involving the security forces culminated in an attack on a public meeting in December 2010 during which four MPs were beaten and injured. Meanwhile, high-profile arrests of a lawyers and a writer openly critical of the ruling family threatened Kuwait’s reputation as the most open society in the GCC. Even before the Arab Spring, this confluence of opposition demands and repressive responses suggested a tinder box awaiting a spark.

Predictably in light of its history of socio-political tension between the ruling (Sunni) Al-Khalifa family and its majority-Shiite population, Bahrain was the first Gulf country to experience widespread protest. Pro-democracy protests in mid-February rapidly swelled into a cross-sectarian call for reforms whose numbers and social inclusiveness panicked the authorities into a brutally repressive response. After an initial attempt to end the protests using the Bahrain Defense Force failed to quell the demonstrators, the Bahraini government declared martial law and “invited in” Saudi and UAE forces in March under the pretence of the GCC-wide Peninsula Shield Force. The state of emergency was subsequently lifted on 1 June, but the Peninsula Shield troops remain in Bahrain, and a National Dialogue held in July 2011 failed to achieve consensus or make progress towards a settlement between the government and the opposition.

Smaller-scale (yet still significant) protests also occurred in Kuwait, Oman (where they were galvanized after state security forces opened fire and killed demonstrators in February) and Saudi Arabia’s oil-rich Eastern Province. The latter were notable for demonstrations of pan-Shiite support as some Saudi Shiites paraded Bahraini flags and chanted slogans in solidarity with their oppressed brethren across the water. For the Saudi authorities, this represented an alarming turn of events, especially as the kingdom’s Shiite communities have long complained of marginalization and religious oppression. In response, Saudi, Bahraini and other GCC states’ officials turned to an old tactic of blaming Iran for meddling in their internal affairs, thereby externalizing the roots of dissent and deflecting them from any possible domestic grievances.

Officials in Saudi Arabia also arrested five intellectuals who attempted to launch what would have been the Kingdom’s first-ever political party (the Umma Islamic Party) in March. This was part of a broader squeeze on political opposition that also hit hard in the UAE. There, a petition signed by 133 Emirati intellectuals called for the direct election of all members of the Federal National Council and constitutional amendments to vest it with full legislative and regulatory powers. However, the authorities reacted by arresting a number of signatories and asserting governmental control over three civil society organizations that also had declared their support for it. Shortly thereafter, on 19 April, 190 intellectuals from across the Gulf issued a statement expressing alarm at “the conduct of some GCC governments in stifling peaceful demands for freedom, justice and democracy.

Gulf States’ policy responses focused overwhelmingly on short-term measures such as handouts of cash (Kuwait, Bahrain and the UAE), creating jobs in already bloated public sectors (Saudi Arabia, Bahrain, Oman), and raising workers’ wages and benefits (Saudi Arabia, Oman). On the one hand, these represented “tried and tested” measures designed to pre-empt unrest and secure stability in the short-term by “throwing money at the problem.” In this they succeeded, as evidenced by relative calmness seen since the turbulent opening two months of the Arab Spring. However, the decisions to intensify still further the politics of patronage by increasing the flow of unproductive payoffs to key sectors of society directly contradicts the economic diversification programs that are designed to gradually strip away the layers of vested interests and create internationally competitive Gulf economies.

Instead of strengthening the private sector and weaning citizens off public sector employment, welfare packages such as Saudi Arabia’s intend to employ 60,000 additional Saudis (in the Ministry of Interior alone) and increase the minimum wage of public sector employees (but not private sector workers). These will do great damage in the longer-term both to competitiveness and – ultimately – to the fiscal sustainability of states that cannot continue to distribute wealth forever. They also create considerable hostages to fortune as it is much easier to give something than to take it away. Political sensitivities mean it is unlikely that GCC governments will be able easily to roll back the financial inducements at a later date. All Gulf states will have to face the challenges of resource depletion sooner or later, but their actions during the recent instability suggest that short-term strategies of (regime) survival ultimately take priority over longer-term visions for genuine reform. This is most evident in Bahrain, where years of investment in a regional tourism and financial hub based on the Business-Friendly Bahrain slogan were sacrificed as the regime fought violently for its political survival in the face of mass societal opposition.


What does this mean for the Gulf states’ position as major energy exporters? The GCC states account for about 19 percent of global crude oil production and 8 percent of the total output of natural gas. In addition, they hold about 37 percent of proven oil reserves and 25 percent of proven natural gas reserves globally. Saudi Arabia holds the world’s largest oil reserves and Qatar has the world’s third-largest natural gas holdings. The Gulf region’s share of global oil and natural gas production is projected to rise from 28 percent (including Iraqi and Iranian output) in 2000 to 33 percent in 2020. With most of that increase going to Asian markets, its strategic significance will grow further in coming decades. A symbolic milestone was reached in 2009, when the volume of oil exported from Saudi Arabia to China surpassed that to the United States for the first time.

Two trends nevertheless temper the optimistic picture based on levels of reserves alone. One is the steadily rising break-even price of oil that Gulf economies require to balance their budgets. During the past decade, the break-even oil price for Saudi Arabia has risen from $20 a barrel to around $90 per barrel today. This sharp escalation is expected to continue and even accelerate. By 2015, the Institute for International Finance forecasts a break-even price of $115, and a summer 2011 report by Riyadh-based Jadwa Investments estimated it could even reach $320 per barrel by 2030. Elsewhere in the GCC, Bahrain faces a break-even price that exceeds $100 per barrel and even oil-rich Kuwait is approaching $80, well up from previous years. Both the UAE and Oman require oil at more than $60 while Qatar is the most secure as its budget breaks even at just $41 per barrel.

In part, these high prices reflect the massive spending commitments made by Gulf governments to ward off unrest. Saudi Arabia alone announced emergency welfare packages worth $130 billion, larger than every annual government budget until 2007. Collectively, the GCC launched a $20 billion development fund for Bahrain and Oman, while in the UAE Abu Dhabi set up a $4.4 billion program targeting the poorer northern emirates. High global oil prices also increase regimes’ expenditure on subsidies that keep prices of food and fuel at politically acceptable (but artificially low) levels. As the previous section made clear, the decision to address political and social concerns in a fiscally unsustainable manner will have serious consequences in the medium- to longer-term. Indeed, the Jadwa report painted an exceptionally gloomy picture of Saudi Arabia in 2030, speculating that falling oil output would intersect with rapidly declining foreign assets and burgeoning levels of public and private debt.

Closely related to this looming fiscal crunch is unsustainable patterns of domestic energy consumption. This reflects the market-distorting pricing policies that deliver energy at greatly-subsidized prices as well as the energy-intensive nature of GCC states’ industrialization (and urbanization) projects. Both trends support a culture of almost unrestrained energy consumption. These range from wasteful electricity usage (free for all nationals in Qatar in the most extreme case) and consumer habits in domestic households to the provision of cheap power to desalination plants and as feedstock for the petrochemicals and aluminum industries that form the cornerstone of GCC states’ economic diversification. In turn, they are underpinned by the provision of crude oil to local markets at around $8-10 a barrel, far below the global rate upwards of $80-90. This imposes a double cost on regimes, who must continue to subsidize artificially low domestic prices of oil while incurring a significant opportunity cost as they cannot export and sell at international market prices.

Similar to the break-even price, unsustainable consumption presents a problem that will become more challenging the longer it is unresolved. Its scale became clear in an official report compiled by the Saudi Electricity Company in spring 2011. It pointed out that nearly one-third of current Saudi oil production (8.5 million barrels per day) is used to meet local demand, primarily for power generation, and that the revenues from the export of the remaining oil provide nearly 80 percent of government revenue. However, the report also warned that if present rates of local consumption continue, current production levels would be unable to meet local demand by 2030. Already, domestic oil consumption increased by 11 percent in the year to May 2011, and high population growth will also translate into increasing future demand for energy. A similar study in Kuwait suggested that it, too, could require 100 percent of oil production for domestic usage by 2027 if present trends in consumption remain unchecked.

The domestic misallocation of funds is an issue of critical importance to the GCC states. Subsidized energy and other commodity prices form an important component of the “ruling bargain” seeking to pre-empt societal dissent by transferring wealth from state to society. Decades of distributive policies have created powerful vested interests and encouraged perceptions of entitlement that will be very difficult to dislodge. Yet the regional responses to the Arab Spring do not indicate that regimes are willing or feel strong enough to embark on the task of transforming these unproductive patterns of rent-seeking behavior. Unsustainable patterns of energy consumption may thus be expected to continue into the future, accelerating both the rate of hydrocarbon depletion and the opportunity cost of diverting energy to domestic uses.


This has regional and international implications. On the regional level it will widen the gap between the energy-rich and poor areas of the Gulf. Relative resource poverty is already afflicting Bahrain, Oman and the six emirates other than Abu Dhabi in the UAE. In response, new dependencies are emerging and reshaping regional relations. Bahrain has long had an arrangement by which it shares Saudi Arabia’s Abu Saafa oilfield, and as its own reserves have declined these revenues have assumed ever greater importance. Kuwait tried to import liquefied natural gas (LNG) from Qatar to meet escalating domestic demands, but was prevented from doing so by Saudi Arabia’s refusal to sanction a pipeline across its territory. Instead, Kuwait began to import gas from Australia and other Pacific fields, as did Dubai. Meanwhile Abu Dhabi reached an ingenious agreement with Qatar by which it purchases Qatari LNG at very low rates while simultaneously allocates its own gas reserves for liquefaction and export to Asian markets at much higher prices. This has caused tensions in Qatar, which announced a moratorium on new gas exploration in its giant North Field until 2020, and is projected to divert more of its LNG to domestic infrastructural developments ahead of the 2022 World Cup.

The rapid internationalization of the Gulf carries further implications for the Gulf States’ positioning in the global economy. Macro-level shifts in global structures of production, trade and finance are reflected in the rise of key (non-Western) centers of influence. The GCC states have played a part in this broader rebalancing. Economic and political linkages with China, India and Russia have noticeably thickened in recent years and added a plethora of new actors with a strategic interest in regional developments. Although the security alliance with the United States and other Western powers continues to underpin GCC states’ external security, a disconnect is emerging between this reliance and their eastward economic and commercial orientation.

In 2008, Indian Prime Minister Manmohan Singh announced that India viewed the region as an intrinsic part of its broader neighborhood. In addition to signing defense cooperation agreements with Qatar and Oman covering maritime security, India signed the Riyadh Declaration with Saudi Arabia in February 2010. This upgraded the bilateral Indian-Saudi relationship into a Strategic Partnership, and it was motivated in part by a strategic reassessment of Saudi regional ties owing to the threat to stability emanating from Yemen, Afghanistan and Pakistan. However, Indian diplomats express growing unease at China’s rapid emergence as a major actor in the Gulf and portray it as an emerging challenge to India.

China’s interests were first reflected in its tenth Five-Year Plan (2001-2005), which referred specifically to energy security for the first time. China also constructed a major naval base at the Pakistani deep-water port of Gwadur. This opened in 2005 and became fully operational in 2008. It provides China with a transit terminal for crude oil imports from Iran and Africa en route to its Xinjiang region. Its broader significance is that it gives China a strategic base on the Arabian Sea, only 400 kilometers from the entrance to the Strait of Hormuz, from which it can protect its vital energy security interests and monitor maritime traffic. China’s emerging blue-water capabilities took another step forward in March 2010 when two Chinese warships docked in Abu Dhabi’s Port Zayed following their completion of a six-month mission combating maritime piracy in the Gulf of Aden.

Russia, too, started to expand its political and economic linkages with the Gulf in general, and thickened its ties to fellow gas producer Qatar, and Saudi Arabia, in particular. Then-President Vladimir Putin’s visit to the two countries in February 2007 was the first by a Soviet or post-Soviet leader since diplomatic relations were restored following the end of the Cold War. The trip was designed to boost joint investment opportunities and cooperation with fellow energy producing countries. On Saudi Arabia’s side it reflected an attempt by King Abdullah to strengthen ties with Russia as part of a general diversification to reduce dependence on the United States after September 11, 2001. Russian-Qatari ties also coalesced around cooperation in the Gas Exporting Countries’ Forum and bilateral agreements such as one reached with Qatar Petroleum International in 2010 to develop Arctic gas reserves in the Yamal Peninsula.

International reactions to the escalating incidents of maritime piracy in the Gulf of Aden and Indian Ocean point towards a future in which multiple actors have a stake in regional security structures. The European Union launched its first-ever naval mission (Operation Atalanta) in November 2008 with a mandate to protect deliveries of food aid by the World Food Program to Somalia, as well as vulnerable vessels transiting the Gulf of Aden. Significantly, many other countries, including China, India, Russia and Iran, also deployed their own warships to protect their regional energy security interests. The People’s Liberation Army Navy dispatched two destroyers and a supply ship in order to protect the 1200 Chinese ships that pass through the region each year. Similar to the EU, it marked a milestone, in this instance the first operational mission undertaken by Chinese naval forces outside of East Asia. 

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The Gulf Cooperation Council states urgently need to find sustainable balances – notably between short-term measures to ward off discontent without worsening the systemic problems that undermine long-term solutions, and between rising demands for, and falling supplies of, finite natural resources. Above all, they need to reformulate political and economic structures to prepare for the inevitable transition towards a post-oil era. The outcome of decisions taken in the years and decades to come will have worldwide ramifications owing to the GCC states’ commercial and strategic importance. Yet this essay has argued that stability is transient and fragile, and vulnerable to internal contradictions and pressures that will only intensify over time. With the Gulf States more internationally integrated and enjoying a higher global profile than ever before, developments in the region will be closely monitored as the GCC states continue on the challenging pathway of transition.

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