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Transition time in the Gulf

Fearful of American shale and electric cars, GCC states want to lessen their oil-revenue dependence

Kuwait has become the latest Gulf state to launch an ambitious plan to diversify its economy away from dependence on oil. "New Kuwait", a development strategy up to 2035, comes hard on the heels of Saudi Arabia's Vision 2030, launched in 2016.

Among the aims of New Kuwait is to boost foreign-direct investment and expand the role of the private sector. Planned mega-projects in the coming decades aim to more than triple the country's revenue, from KD13bn ($42bn) to KD35bn, in 2035.

That Gulf Cooperation Council (GCC) states need to move away from a reliance on income from hydrocarbons has been obvious for years, and the collapse of oil prices after 2014 has only reinforced that. Kuwait's latest budget, based on an oil price of $45 a barrel, projects a deficit of KD7.9bn.

The whole issue of Gulf countries having to adjust to new fiscal circumstances was one of the main themes during Petroleum Economist's GCC Strategy Forum in Kuwait in late January. For too long, delegates were told, the Gulf states believed that oil prices would remain high for ever. "I believe there's now an understanding that the joy of having $100-110/b prices is not going to come back anytime soon," said Meshal Alsamhan, of the Kuwait Institute for Scientific Research. "We have to reform our economy. We've taken a few steps—it's not enough, but at least we've started."

Last September, the Kuwaiti government raised gasoline prices, with subsidies on water and electricity to be lifted next. The measures have been bitterly criticised by members of the National Assembly and attempts are still being made to overturn them. Elsewhere in the Gulf the raising of subsidies on basic services, after many decades of artificially low tariffs, has been widely denounced by the public via social media.

Mustafa Ansari, an energy economist at Apricorp, said the GCC authorities had not done enough to convince people of the necessity of raising prices: "Energy reform is needed and is healthy. But a communications strategy is lacking. Governments should communicate with the public to explain the need to make savings and re-invest the money in the economy."

Several speakers highlighted another pressure on Gulf oil exporters: the expansion of US tight oil. "We can't live in denial anymore," Alsamhan said. "Shale is part of the energy mix. The energy mix is larger than oil, and oil is no longer dominant."

In the view of Naji Abi Aad, chief operating officer at Petroleb, an upstream firm, "the production costs of shale have decreased and there's now political will in Washington to push for more US production. Shale is backed by banks and financial institutions. They're pushing for shale."

Abi Aad went on to say that Mena oil producers should also take the development of electric vehicles seriously: "Electric cars are not a threat to oil today. But what's important is that we're seeing the first challenge to oil's niche role as the main transport fuel."

In the coming five-to-10 years, Dawood Nassif, a board director of the Bahrain Petroleum Company, told delegates, dramatic breakthroughs were likely in the cost of electric vehicles, the charging time of batteries and the distances covered. "Gasoline," he continued, "is under pressure," with refiners concluding that "diesel and jet fuel are the future."

Abi Aad said that while demand for oil was not about to disappear he was certain that the oil era had started its decline. "This is a transition period," he told the conference. "We need to be reshaping our scenarios for the future, working out how to maintain a role for oil and gas in the energy mix for as long as possible for the sake of our region."

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