Are plummeting oil prices good for Arab economies?

Who could have predicted that the price of oil would drop so severely, from the heyday of over $100 barrel not so long ago to under $30 today. While plummeting oil prices are a worry to many, it may be time to pause and put Winston Churchill’s adage, “Never let a good crisis go to waste”, to good use, especially for oil-producing countries in the Middle East.

Oil has long been the centre of economic development in the Arab world, with many economies relying almost exclusively on the “black gold” to support their generous welfare programmes and energy subsidies. Something is going to have to give as revenue streams are significantly reduced.

“Under the current oil prices, we need to rethink major reform that makes our budget independent of oil,” said Suhail Bin Mohammed Al Mazrouei, Energy Minister of the United Arab Emirates. “We need to take advantage of the reduction in oil prices and build an economy that is vibrant.”

He boasted that the UAE was the first Gulf Cooperation Council (GCC) country to remove energy subsidies so that consumers start paying for the real cost of energy. This has been complimented by diversifying the economy through investment in other sectors, particularly financial services.

Kuwait’s Finance Minister, Anas Khalid Al Saleh, also supports subsidy reform and a shift away from oil dependency, especially as the country relies on oil for 90% of its budget revenues. “Everyone agrees that sustainability of growth is not something we can wait for, not only because of oil but also for the structure of our budgets,” he said.

Why did GCC countries wait until now? Because with lower oil prices it is easier, he remarked. “Even if prices go back, now is the right time.”

Bahrain is another country is the midst of a reform process that is looking to reduce subsidies in fuel, electricity and water to help stabilize the budget deficit. However, according to Khalid Al Rumaihi, Chief Executive of Bahrain Economic Development Board, getting rid of subsidies won’t solve all the problems.

What Bahrain needs, as well as all Arab economies, is fiscal and economic diversity; diversification is the key.

For Al Rumaihi, the lower oil prices are a blessing in disguise as they force energy to be priced correctly and nudge the government to focus on diversification. In Bahrain, he said 80% of GDP is not from oil but from ICT, financial services and other sectors. “We need dynamism in our economies,” he said. This includes innovation and engaging in the Fourth Industrial Revolution, not being bogged down in oil and old ways of thinking.

Getting rid of subsidies, however, is easier said than done, especially as it is usually ordinary citizens who bear the brunt. Al Saleh said shifting the mindset will be difficult, but Kuwait has a convincing story that the people will understand. “We reuse this money from subsidies and put it into the economy like infrastructure, schools and hospitals,” he said.

While it appears that uncertainty and concern over oil prices will continue in the foreseeable future, Arab countries are making sure that the crisis – and their economies – do not go to waste.