The shifting energy landscape and the Gulf economies’ diversification challenge

Samantha Gross and Adel Abdel Ghafar

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The hydrocarbon-dependent countries of the Gulf Cooperation Council (GCC) face challenges in adjusting to the new reality in energy markets. Growing oil and gas production in the United States and growing concern about climate change mean that their hydrocarbon revenues are likely to decline over the long run. At the same time, growing populations and a rentier social contract make declining revenues a challenge for governance and stability. Governments in the region share oil wealth with their citizens through a large and well-paid public sector and through very low prices for energy.

Each of the GCC countries is working to diversify its economy away from oil dependence and to increase the private sector’s share of the economy. However, the high capital productivity of the energy sector makes diversification difficult and government investments often crowd out the private sector investment they are trying to encourage.

The urgency of reform is not consistent across the GCC. Kuwait, Qatar, and the United Arab Emirates have the strongest economies in the region. They have large resources and small populations, leading to very high levels of hydrocarbon exports and reserves per capita. With less of an existential threat, reform is focused on continuing growth and providing a diverse and vibrant economy for their citizens. Saudi Arabia, Bahrain, and Oman face deeper challenges. Saudi Arabia has vast petroleum reserves, but its large and diverse population means that its reserves and revenues are relatively small on a per capita basis. Saudi Arabia also faces the challenge of providing meaningful employment for a significant youth bulge – 40% of its population is under 25. Bahrain and Oman have much smaller reserves and revenues and face declining production. They also both face political challenges in enacting reform, although of a different nature in the two countries.

Across the GCC, continuing investments in education and human capital, and increasing the role of women in the economy, could pay dividends. Additionally, increasing the role of the private sector in these public-sector dominated economies is crucial. Establishing public private partnerships and privatizing some public assets are good places to begin.