ECONOMY-GULF: Oil Fuels Record Growth – and Risks

By IPS Correspondents Reprint | | Print |

Peyman Pejman

DUBAI, Feb 16 2004 (IPS) - Buoyed by the highest oil prices in years, the six countries comprising the Gulf Cooperation Council (GCC) are reaching some of the world’s highest growth records – but it is also an achievement they might not be able to sustain.

The average growth estimate for 2003 in the GCC countries was 4.5 percent, much higher than the average in Europe or the United States of about 2.8 percent, according to figures released by the various Arab and international sources.

The figures were released before 2004 and actual figures, to be released in the coming months, may differ from the estimates.

Of the six countries -United Arab Emirates, Qatar, Oman, Bahrain, Kuwait and Saudi Arabia – Qatar showed a whopping growth rate of 8.4 percent because of massive natural gas exploration projects. Without Qatar, average growth for the remaining five countries would have been 3.8 percent.

Much of the increase in the GCC growth is due to spiking oil prices. With an average barrel of crude oil costing about 28 U.S. dollars on the world market, the GCC countries have rarely been this rich.

According to figures released by the Centre for Global Energy Studies, the six GCC countries were expected to have earned 134 billion dollars in oil revenue last year, an increase of 30 percent just compared to the previous year.

The biggest earner among the GCC countries has traditionally been Saudi Arabia, with the UAE and Kuwait running distant second and third.

But higher oil prices are hard to sustain. Even Saudi officials have said they believe that the Oil Petroleum Exporting Countries (OPEC) should bring down its oil prices to at least 25 dollars a barrel. Non-OPEC exporters will likely follow suit.

Aside from declining oil revenue, the GCC countries have other problems that, unless addressed, could have adverse effects on their economies.

One is the continued overspending in defence.

In 2002, the last year for which official figures were readily available, GCC countries spent 37 billion dollars on arms purchases and other military expenditures. For the past two years, the six countries have on average spent 30 percent of their annual budget on defence, the highest percentage in the world.

Some countries like the United Arab Emirates have ordered airplanes, such as F-16 fighter jets, that are more sophisticated than the ones U.S. pilots use.

”Both through our efforts to beef up security in the Middle East and through their own love for military gadgets, the Middle East countries in general, and GCC countries in particular, have been a massive market for military and defence equipment,” says a U.S. military official who could not be named in accordance with Pentagon rules.

”A lot of them still remember Iraq well, and they also know that in the Middle East, the safest thing is to always look behind your shoulders,” he added.

Combined with expected decline in the oil revenue and sustaining defence spending, some GCC countries – most notably Saudi Arabia – are finding it hard to cope with high rates of population growth.

While most of the Middle East enjoys a relatively safe rate of 2.2 percent population growth per year, Saudi Arabia, a conservative Muslim country that does not advocate population control, has been having a population growth rate of about 3.4 percent a year.

Perhaps most relevant to whether the GCC countries can maintain their economic growth is whether they can forego the changes needed to diversify their economic infrastructure from one solely based on oil.

Many economists argue that a couple of the GCC countries that have tried are shaping up to be the model for the rest.

Although the UAE’s 2003 economic growth is expected to have been around 4.5 percent, the non-oil sector’s growth for last year is estimated at 11 percent. Much of the UAE’s non-oil sector growth is due to construction and tourism.

Mohammed Ali al-Abbar, chairman of the Dubai Department of Economic Development, says the UAE’s most prosperous emirate plans to invest over 50 billion dollars on real estate development by 2010.

The country has built the world’s only seven-star hotel and is building an island that will house multi-million dollar mansions for the world’s richest. It has organised various international conferences, all to attract what the country’s leaders call ”first-class tourism”.

For the first time, the UAE last year earned more from tourism -about 20 percent of its overall revenue – than it did from oil exports.

Qatar and Bahrain have undertaken large-scale natural gas exploration projects that have suddenly added billions of dollars to their proven wealth, and as a result have allowed their governments to increase public spending that in turn has contributed to economic growth.

”Diversification of economy is the hardest thing for many of the countries and it is a question of priorities and whether they want to go through that road or not,” says Peter Mitias, associate professor of economics at the American University in Sharjah. ”For many of these countries, economic reform is not just an economic issue, but involves many social and political considerations that have to do with the way they want to do business with the rest of the world,” says Mitias.

To reform their economic infrastructure, GCC countries must change a gamut of legal, foreign investment, and financial laws, which very few have chosen to do. For example, while the UAE has recently opened its doors to foreign ownership, Saudi Arabia and Kuwait are lagging behind. Several of the GCC countries still ban or limit foreign investment.

The six nations have also started a series of regionwide agreements on monetary unity and customs that they hope will ease their entry into the European Union and World Trade Organisation, a measure they anticipate would allow them to import the technology they need to upgrade their economic infrastructure.