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BUDAPESTI GAZDASÀGI FŐISKOLA
KÜLKERESKEDELMI FŐISKOLAI KAR
KÜLGAZDASÀGI SZAK
NAPPALI, ANGOL TAGOZAT
EXPORT-IMPORT SZAKIRÀNY
ATTEMPTS OF DIMINISHING THE DEPENDENCY ON OIL IN THE MIDDLE EAST
Kèszìtette: Cseke Sarolta Èva
Budapest, 2007
Table of content
Introduction
4.
1. The Gulf Cooperation Council
6.
2. The GCC countries’ characteristics
8.
2.1. Location
8.
2.2. History
9.
2.3. Population
12.
2.4. Language and religion
14.
2.5. Climate and topography
15.
2.6. Economy
17.
2.6.1. GDP, export revenues, growth
19.
2.6.2. Unemployment
21.
2.6.3. Inflation
23.
2.6.4. Diversification
24.
3. Oil
26.
3.1. History of oil
26.
3.2. Oil reserves
27.
3.3. Discovery of oil in the Gulf region
29.
3.4. Advantages of oil in the GCC
31.
4. Economic diversification in the GCC to reduce dependency on oil
33.
4.1. Reasons behind the attempts of reduce dependency on oil
33.
4.2. GCC countries' achievements to reduce dependency
34.
4.2.1. Kingdom of Saudi Arabia
35.
4.2.2. United Arab Emirates
37.
4.2.3. Kuwait
40.
4.2.4. Qatar
42.
4.2.5. Oman
45.
4.2.6. Kingdom of Bahrain
47.
Conclusion
51.
Bibliography
52.
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Generally the Gulf Cooperation Council (GCC) countries' income heavily depends on one
single non-renewable commodity, the oil. The majority of the world's oil fields are within the
territories of these countries, namely: the Kingdom of Saudi Arabia, the United Arab Emirates,
Kuwait, Qatar, Oman and Bahrain. Oil fields are concentrated on certain parts of the world
and oil is a non-renewable resource, so as a result the world is looking for new resources of
energy to satisfy the needs of the population after the oil reserves run out. If new resources are
found they may compete with oil for available markets.
Fluctuation in production, price, changes in markets and conditions can influence the earning
of these countries and income may vary one year by another.
Leaders of the GCC countries realized that economic diversification is needed to keep up with
the modern world and prepare for the post oil times.
The interest of the oil rich GCC countries is therefore to diversify their economies from
depending on oil and develop other non-oil sectors. More precisely diversification in the GCC
means finding a balance between the oil and other sectors as well as services and production.
Since the main income of these countries (even though diversification has already begun) is
still the oil and the development plans are based on income from the oil, any changes may
affect the development plans completely.
In this essay I try to find the answer of the question raised: how do the GCC countries
diversify their economies and prepare for the post-oil times? What kind of efforts has been
made and what plans do they have for the future to achieve the status of a wholly diversified
economy?
To understand why each GCC member chose certain sectors within their economy to start the
diversification we need to get a clear picture of the individual states and their historical,
cultural and economical background.
In this essay the individual states of the Gulf will be introduced in the first chapter followed by
the history of the oil in the region to get a clear view of the importance of this non-renewable
natural resource and the base of the GCC member's economy and wealth.
In the last part of the essay the biggest steps for diversification will be introduced in every
GCC member country individually. The main purpose is not to give a detailed picture of all
sectors where diversification started but to select the most important sectors within the
economies that nowadays play a significant role in the life of the GCC members.
4
The states in the Persian/Arabian Gulf have gun a long way since the oil was found and they
managed to build up highly successful and internationally admired economies within a short
period of time.
5
1. The Gulf Cooperation Council (GCC)
The Gulf Cooperation Council of the Gulf Arab states came into existence in 1981. The
Council was established by the Kingdom of Saudi Arabia, United Arab Emirates, Qatar,
Kuwait, the Sultanate of Oman and the State of Bahrain with the main aim of mobilizing the
political, economical and military capabilities and pushing for comprehensive Arab unity in
the region.
Factors, such as religious, civilisational, cultural fundamentals and geographical, historical and
linguistic extensions connects these countries together and the Council was established to
support the aim of creating deep links among them to achieve stability, the advancement of
unity, comfort and security.
Therefore the main goals of the Council are:
- achieving coordination, integration and connection between the member states in all fields
until they achieve their unity
- deepening and strengthening the links between their people
- scientific and technological development in the region in the fields of industry, mineralogy,
agriculture, water and animal resources
- encourage the private sector for the benefit of the people
- establishment of mutual project
- legislating identical laws in the economic, financial, information and tourist affairs, in the
commercial customs and transport matters as well as in educational, cultural, scientific, health
and legislative and administrative matters
- coordination between member states in the international assembles with respect to the
regional and international issues
To widen the horizons of mutual work, the member states signed the Common Economic
Agreement which gives the Gulf citizens the freedom of work, travel and live anywhere in the
territory of the member states and practice several economic and commercial activities in the
fields of industry, agriculture, construction of hotels, schools, hospitals, obtain loans from
banks and possess shares.
The member states agreed on a loose customs union at the GCC summit in December 1999
and it came into effect in 2003. The Council's stated goals included the adoption of a common
6
market by 2007. They also agreed on convergence criteria for key macroeconomic, fiscal and
monetary variables and their alignment in order to support the transition to the monetary union
and to form a common currency, the Khaleeji by 2010. However until then the further
integration will require all the member states to exert a greater effort, since the five major
criteria include inflation, debt, reserves, exchange rates and sustainable debt to GDP ratios
have to be harmonized.
All the currencies among the GCC members are pegged to the dollar since the oil market is
priced in dollars. All GCC did this as a first step towards a single currency that will open not
only the regional market but will also ease the flow of investment and capital within the
territory of the council.
The monetary union requires harmonization and the alignment of monetary and exchange rate
policies, monetary and financial legislation, common standards and codes, and the
establishment of related institutions that will enable and facilitate the monetary union and help
the establishment of the single currency for the GCC.
There are still continuous consultations taking place to identify the issues that need to be
addressed for the establishment of a central bank as well as other fields need to be identified
that would require further harmonization.
In 2005 the member states agreed to allow Foreign Trade Agreements between the Gulf
countries and the USA. Until this exception was made public, bilateral agreements were
banned in the GCC.
EU-GCC association agreement talks have been stalled since the 1980s, though recent
indications suggest that progress could be made soon.
The oil as natural resource and source of wealth is definitely the major area of cooperation
among the GCC members. In the Gas Cooperation Agreement the member states agreed on
coordinating prices at all stages of the oil industry, adopting unified oil policy and position in
international markets, avoiding harmful competition, achieve maximum return and secure
stability of these markets.
The states recognized that they need to develop together and they need to identify their areas
of strength to ensure that the entire region progresses towards greater integration with the
global economy; and they started invest into several project to diversify their economy.
7
2. The GCC countries’ characteristics
Many factors connect the countries of the GCC together. There are geographical, historical,
religious, cultural, economical connections between the Kingdom of Saudi Arabia, the United
Arab Emirates, Kuwait, Qatar, the Sultanate of Oman an the Kingdom of Bahrain.
2.1. Location:
The GCC member states are all located on the Arabian Peninsula, surrounded by the Persian/
Arabian Gulf.
The Kingdom of Saudi Arabia encompasses about four-fifth of the Arabian Peninsula,
approximately 2,240,000 kilometres of which more than half is desert. Among the GCC
members Saudi Arabia is the largest country. Its neighbouring countries are Jordan, Iraq,
Kuwait, Bahrain, Qatar, the United Arab Emirates, the Sultanate of Oman and Yemen.
The most well known country in the region is the United Arab Emirates (UAE) is located at
the south-eastern shore of the Gulf and occupies 83,600 square kilometers of the Peninsula. It
borders Saudi Arabia to the west and south and Oman to the east. Most of the country is
focused on the Persian/Arabia Gulf except Fujeirah and Sharjah, which lie on the Gulf of
Oman.
The troubled past Kuwait is located on the north-western corner of the Persian/Arabian Gulf.
The country is bordering the Persian/Arabian Gulf between Iraq and Saudi Arabia.
Its territory is about 17,820 square kilometers of which 20% is inhabited.
Qatar is a small peninsula in the Persian/Arabian Gulf. Saudi Arabia on the south is the only
country the small emirate shares a piece of land border with. The Kingdom of Bahrain lied to
the north-west, the United Arab Emirates on the south-east, but Qatar is surrounded by the
Gulf.
The second largest country in terms of territory is the Sultanate of Oman. The country is
located on the southeast coast of the Persian/Arabian Peninsula. It borders the United Arab
Emirates in the northwest, the Kingdom of Saudi Arabia in the west, Yemen in the southwest,
the Arabian Sea in the south and east and the Gulf of Oman in the northeast. The country also
8
contains two small part separated by the United Arab Emirates' territory: Madha and
Musandam. The total area the Sultanate occupies is 309,000 square kilometers.
Bahrain lies between Qatar peninsula and the east coast of Saudi Arabia. The Kingdom is and
archipelago of almost 40 islands. The largest of these gives the country its name and the word
Bahrain means 'two seas' in Arabic. The total surface area is approximately 680 square
kilometers. Bahrain is the only country among the GCC members that has no connection to the
main land.
2.2. History:
The GCC countries also share very similar history. Until the 1970s the region was occupied by
the Ottoman Empire, by local Bedouin tribes, by the Persians and some of the countries were
also British protectorates. Nowadays Saudi Arabia is a kingdom, the UAE is a federation of
seven independent emirates, Kuwait is constitutional hereditary emirate, Qatar is ruled by an
emir but recently constitution and parliamentary elections were introduced. Oman is a
sultanate and Bahrain is constitutional monarchy.
Generally speaking all the rulers of the GCC states are siblings of the ruler families that
established these countries in the mid or late 20th century.
The Kingdom of Saudi Arabia was established and formally recognized first by the majority of
the world powers in September 1932 after King Abdul Aziz Al Saud recaptured the city of
Riyadh (now the capital) and established his rule over that area. Ever since Saudi Arabia is a
monarchy ruled by the Al Saud family and members of the Royal Family hold positions in the
government at all levels.
King Abdul Aziz gave studious attention to the development of international relations and
strengthened the relationships with the USA.
During the ruling of King Abdul Aziz's son, King Faisal the Kingdom's industrial
development began its earnest. King Faisal brought economic stability to the country and
utilized the Kingdom's vast oil wealth to finance the development programs of the country. He
was followed by his brother, King Khalid who made great progress in the building of the
Kingdom's infrastructure and the policy of industrialization was pursued.
After the death of King Khalid, his brother, Fahad became king.
9
Both he and his brother, Abdullah (current king of the KSA) have shown strong commitment
to the educational, industrial and agricultural development of Saudi Arabia, providing great
opportunity for self fulfillment for Saudi nationals as well as expatriates within a stable
political, economical environment firmly based of Islamic precepts.
The United Arab Emirates is a federation of seven individual states: Abu Dhabi, Dubai,
Sharjah, Ajman, Al-Ain, Umm Al-Quwain and Ras Al Khaimah. These states were called as
Trucial States after they signed a defense pact with Great Britain in 1953. Following Britain's
withdrawal of the region the emirates drew together under one leadership. In 1971 the United
Arab Emirates was formed by six states and in 1972 Ras Al Khaimah joined the formation and
the United Arab Emirates completed whilst Qatar and Bahrain, which also were part of the
Trucial States remained independent.
Abu Dhabi became the capital and the Sheikh Zayed Al Nahyan was chosen as president.
Sheikh Zayed was a beloved ruler in the Arab world, and in November 2004 the population
mourned the his death. Sheikh Zayed was followed by his eldest son, Sheikh Khalifa bin
Zayed Al Nahyan.
The Supreme Council where each and every emirate is represented is the highest authority in
the country. The Council elects the president of the UAE, traditionally from Abu Dhabi.
The State of Kuwait is a constitutional hereditary emirate with the emir as the head of the
country. Since 2006 Emir Sabah Al Ahmad Al Jabir Al Sabah is the emir of Kuwait.
The Al-Sabah family became the ruler of Kuwaiti territory in 1756. After several attacks from
the Ottoman Empire the sheikhs of the region asked for and got help from Great Britain to
stop the Ottoman Empire.
In 1914 Britain recognized the independence of Kuwait, even though Iraq claimed that Kuwait
is part of its territory. After the oil was found in 1938, Iraq became more desperate to have
Kuwait considered as part of its area. This led to the Iraqi invasion to Kuwait in 1990 when
the emir escaped to the USA and next year the Iraqi army was withdrew from Kuwait and
borders were clearly clarified.
The war ruined Kuwait's infrastructure, oil fields were on fire and it took a while for the
country to wholly recover. At lease there was no fear of further attacks, since Kuwait enjoyed
the support of the USA after a 10 year security pact was signed.
10
Qatar was once under the authority of Bahrain. At the second half of the 19th century war
broke between the residents of Qatar and Bahrain. With British intervention Muhammad bin
Thani Al-Thani, the head of the leading family was made ruler. Ever since the Al-Thani
family is the ruler family of Qatar.
The country successfully fought against the Ottoman Empire and in 1916 it became British
protectorate.
In 1971 Qatar as part of the Trucial Coast was about to join the United Arab Emirates but the
merger did not take place and Qatar stayed independent.
In 1995 Hamad bin Khalifa Al-Thani became the emir of Qatar who instituted liberal reforms
and led the country to the 21st century.
Qatar introduced its first constitution on June 9, 2005. It guarantees freedom of expression,
assembly, and religion and calls for a 45-seat parliament. Thirty of the seats are filled in
democratic elections; the emir appoints the remaining seats.
Arab tribes moved into the territory of Oman probably from Yemen in the 7th century, ever
since the Arabs occupied the area which was ruled by the Portuguese and later on by the
Ottoman Empire. The Portugese were driven out in 1690, and Oman has been considered
independent ever since. In the 18th century the Ottomans were pushed out by a leader of a
Yemeni tribe who began the current line of ruling sultans.
The Omanis consolidated their position by developing trade with India and Africa to build a
mercantile economy. In the 19th century Oman further developed its relationships, building
them with Britain, France and as the first Arab nation with the USA.
In 1971 the British protectorate status was over and Qaboos bin Said Al Said became ruler, the
country declared its independence. Qaaboos generally improved the country both
economically and socially. In relatively short period of time the sultanate has been
transformed from an insular state into a peaceful, emerging economy with developing
infrastructure and industry with bright future.
The location of the islands of Bahrain has attracted the attention of many invaders throughout
the history. One of the invaders in the late 18th century was the Al-Khalifa family, today's
ruling family.
11
From the 16th century until the mid 18th century the country drifted between the Portuguese
and the Persians. In order to secure the islands, the Al-Khalifas entered into a treaty with the
United Kingdom and became British Protectorate.
After the World War II. the increasing anti-British sentiment led to riots in Bahrain and the
country became independent from the UK in 1971.
After King Hamad bin Isa Al-Khalifa succeeded his father, he introduced reforms in the
country. Nowadays Bahrain is a constitutional monarchy that was declared a kingdom in 2002.
2.3. Population:
The population of the GCC increased dramatically in the past decades. The population boom
was a result of declining death rate among newborns due improved medical circumstances,
better social and economic conditions and hence high birth rate as well as the mass of foreign
workforce entering the member states. Nowadays the local population is minority in all
member states but the Kingdom of Saudi Arabia.
The majority of the foreign workforce comes from Asian countries like India, Pakistan, the
Philippines, Indonesia and Malaysia. They are mainly employed in the construction industry
or as household helpers.
Life expectancy in the GCC area increased by almost 10 years to 74 years during 1980-2000,
and literacy rates increased by 20% to about 80% over the same period.
The majority of the local population in every country is under 25, Oman leading the list with
40% under 14 and 60% under 25. The big challenge is to find meaningful employment for this
population.
The population of the Saudi Arabia was just over 7 million in 1974 but ever since the
population has grown dramatically. According to more recent estimates the Kingdom gives
home for more than 26 million people including over 5 million foreign nationals. It has been
estimated that more than half of the population of Saudi Arabia is under the age of 20.
The UAE is a melting pot of different nationalities. The local population is considered as
minority nowadays, expatriates make up approximately 85% of the population. Labourers,
physical workers come mainly from the developing countries with worse economic conditions,
like India, Pakistan, Sri Lanka and Bangladesh. These immigrants work as household help,
12
drivers and construction workers. They send home a large portion of their income in the form
of remittances; therefore they tend to live in very modest conditions.
Year by year there are more Westerners coming to live and work in the UAE, particularly to
Dubai that is the second largest emirate in the country. The high wages, high standard of
living, the tax free environment and the excellent medical care attract professionals from all
over the world.
Exact population figures are not available since the last official census was taken in 1995 but
officials assume that the population might be around 4.3 million.
Local population is increasing, which is shown by figures indicating that 45% of the UAE
nationals are under the age of 15. Even so the growth of the local population cannot keep up
with the increasing expatriate population and the number of UAE nationals is expected to be
less than 1% by 2020.
Since 1950s the population has been increasing rapidly in Kuwait. The country’s population is
around 2.5 million among which the expatriate community counts an approximately 1.3
million members. The population is fast growing mostly because of the foreign working force
entering the country. The estimated growth in 2006 was 3.52%.
According to the last census in 2004 the total population of Qatar is 744,029. The census
shows an enormous growth with an annual increase of 5.3% since 1997. The rapid increase is
due to the country's economic performance that has made it one of the most desirable places
for foreign labour.
The population is divided, 25% is Qatari nationals, while 75% is foreign guest worker mostly
from South Asia, the Philippines, and other Arab countries. Further growth is highly expected
in Qatar which is the result of the country's increasingly diversified economy as well.
Oman’s population was estimated at 2,267,000 in 2005 of which 577,293 includes nonnationals. Among the local people 40% is under the age of 14 and 60% under the age of 25.
The population growth is around 2% per annum. Oman's birth rate is one of the highest of the
world. The majority of the population is Omanis, foreign workers from the Indian
subcontinent live here too as in all oil-rich countries in the region.
According to a survey in 2004 the total population in the Kingdom of Bahrain was estimated
at 707,000 of which almost 270,000 were non-Bahraini expatriate workers. Expatriates make
up more than 60% of the active population. Even though the Bahrainis are minority in their
13
own country, they are still better off in this regard than the neighbouring countries of the GCC,
where nationals make up less than 15% of the population.
The birth rate is high; more than 35% of the population is less than 20 years of age.
2.4. Language and religion:
Arabic is the official language in every GCC state. English is recognised as the language of
international negotiations, since for example in the UAE more than 80% of the population has
a first language other than Arabic. Hindi, Urdu, Farsi and Tagalong are also widely spoken
among the expatriates.
Throughout the history of the Arabian Peninsula the region has been largely determined by
Islam. The official religion in every country is Islam but different views and beliefs of Islam
are practiced: Sunni and Shia are the most common ones.
Particularly in Saudi Arabia the influence of Islam is enormous; the law is based on Islamic
law, the people's lives are highly influences by the teachings of Islam as nowhere else in the
world. In the territory of Saudi Arabia are the two holy cities: Mekkah and Madinah.
The one and only accepted religion in the Kingdom is Islam, therefore 100% of the Saudi
nationals are Muslims. No other religion is allowed to be practiced.
United Arab Emirates’ official religion is Islam but the country is the complete opposite of
Saudi in terms of religious tolerance. The UAE is open for expatriates, accepts cultural,
religious differences without giving up its own. It is a highly heterogeneous country so this
kind of tolerance is absolute.
Kuwait just like the other countries of the GCC is mainly Muslim, but not as strict as its
neighbour, Saudi Arabia. An estimated 85% of the population adheres to the Islamic faith, of
which 70% are Sunni.
Other religions can be freely practiced; around 15% of the population belongs to another
religion than Islam in the country. The freedom of religion is guaranteed by the constitution.
Qatar is a democratic country and its religion is Islam, with sharia, the Islamic law that forms
the basis of legislation. Other religions are accepted and can be practiced in the country.
Islam is the predominant religion in Oman as well but neither the Sunni, nor the Shia form of
it but the Ibadiyya unlike anywhere else in the GCC. One quarter of the Omanis are Sunni
14
Muslims, centered in Dhofar and Sur regions. There is a small Shia population living in and
around Muscat. All religions are welcome, the law prohibits persecution on religions ground.
The largest religious minority are the Hindus who account for 13% of the whole population.
The main religion in Bahrain is Islam. The royal family and the majority of the elite are Sunni
Muslims, but about 70% of the national population is Shia. The differences caused difficulties
in the past, but the Kingdom overcome these differences and now there are no problems based
on different beliefs. The religious tolerance is very high; the country even boasts an Anglican
Cathedral, St. Christopher's in Manama.
2.5. Climate and topography
The climate in the Peninsula is generally hot. The summers are unbearable, in most of the
places dry and hot with temperature increasing up to 55° Celsius. The winters are mild. Rain is
not well known in the region. The countries are mainly vast deserts without any natural
greenery.
Saudi Arabia’s climate differs within the country. The central region, where the capital,
Riyadh is located is hot and dry during the summer and cool in the winter. The western region
that hosts the seaport of Jeddah, a thriving commercial centre and contains the holiest cities of
Islam- Makkah and Madinah is very hot and humid throughout the whole year.
While Saudi Arabia’s more than half is desert, the southern region contains coastal mountains
that peak up to 3000 metres. The region has always been relatively densely populated with
similar climate to the western coast.
The eastern region is the country's wealthiest part, containing massive petroleum reserves. Ras
Tanura, well known as the world's largest petroleum port is located in the area as well as the
Kingdom's new industrial complexes and just like the UAE this region has a sub-tropical,
sunny climate. Rainfalls are only expected in the winter and are irregular and infrequent.
Temperature in the winter drops to 20-20 degree Celsius and rises to 45-50 degree Celsius in
the summer with high percentage of humidity.
At the southern part of the UAE lies Rub Al-Khali, the largest continuous sand desert in the
world stretching all the way to Saudi Arabia.
Even though the country is not only sand and desert, there are some mountainous parts in the
east where Jebel Hafeet rises to 1180 metres above sea level.
15
The capital of the Emirates is Abu Dhabi.
Kuwait is the least blessed country in the Gulf in terms of climate. The summer is hot and dry;
in fact it is the hottest in the region. Winters are milder with the least rainfall. The capital is
Kuwait City that is the biggest city in the country which is divided into six governorates,
namely: Al Ahmadi, Al Farwaniyah, Al Asimah, Al Jahra, Hawalli and Mubarak Al-Kabeer.
The second biggest city is Jahra, the main residential and business areas are Salmiya and
Hawalli and the main industrial area is Shuwaikh within the Al Asimah Governorate.
In Qatar the land is mostly low-lying with the highest point of Qurayn Abu al-Bawl reaching
103 metres above sea level. Large portion of Qatari territory is desert, dry and barren. Qatar
receives only limited rainfall, an average around 75mm annually. The summers are long, dry
and humid, the winters are mild. Qatar’s capital is Doha, the biggest city where 46% of the
population lives. The growing population has started to move to other cities too like AlWakrah, Umm Slal or Dukhan.
Most of Oman, just like all the other GCC members, is vast desert, particularly in the centre.
At the north and on the southeast coast there are the mountain areas where also the main cities
are located. The capital is Muscat, other major cities are Matrah and Sur in the north and
Salalah in the south.
The country is divided into four main governorates: Muscat, Musandam, Dhofar and Al
Buraymi.
The country is hot and dry in the centre and very humid along its coasts in the summer, and
cool in the winter months.
Bahrain is mainly desert with the highest peak called Jebel Al-Dukhan, just 122 metres above
sea level. The north part of the country contains a fertile strip of land that hosts the small and
limited agriculture sector. This area is where the majority of the population lives and the
capital, Manama is located at this part of the island too. Many of the islands are connected via
bridges and causeways to one another. The King Fahd Causeway, finished in 1986, links
Bahrain to the Saudi mainland.
The islands get little rainfall, the summer is hot and humid, and the winter is cool with
pleasant temperature around 25 ° C.
16
2.6. Economy:
Over the past decades the economies of the GCC countries have seen impressive development.
The economies doubled and even tripled in many states.
The main income of these countries is the oil. Altogether they account for about 45% of the
world’s proven oil reserves and 25% of crude exports and also possess at least 17% of the
proven global natural gas reserves. Qatar for example lies on the biggest non-associated gas
reserve of the world, with reserves expected to be lasting over 200 years.
Apart from Saudi Arabia the countries’ economy originally was base on pearl-diving and was
ruined by the end of the 1930s when cultured-pears production took over. In the 1930s the
discovery of the oil in the region marked a turn in the states’ fortunes and over time the
advantages of their natural resources made them to the fastest developing economies in the
world.
The major oil producer is Saudi Arabia. In 1933 a survey of the Kingdom's natural resources
confirmed the existence of the oil in the eastern region; by 1938 it was proven that this area
contains nearly 25% of the world's oil reserves and exploitation of these fields has begun.
Saudi Arabia is the largest oil producer of the OPEC, producing one-third of its output alone.
The kingdom’s main export partners are the USA, Europe and some Asian countries such as
China, India and Japan. The Kingdom supplies crude oil for these countries.
Sitting on 9% of the world's proven oil reserves and almost 5% of the world's natural gas the
UAE's hydrocarbon wealth gives it one of the highest GDP per capita in the world.
The capital, Abu Dhabi owns the majority of the resources; 95% of oil fields and 92% of gas
fields are found in its territory. Abu Dhabi's vast resources should keep the country heavily
dependent on oil and gas.
Kuwait's income heavily depends on the oil too. After Saudi Arabia, Kuwait is claimed to be
holding the second largest oil reserves. The first oil shipment took place in 1946 and ever
since oil accounts between 70-80% of Kuwait's exports. The country enjoys the low costs of
oil production which is a result of oil fields being in relatively shallow depth. New discoveries
in the northern part of the country are about to take place. These oil fields are difficult to
extract, and require more expensive and sophisticated techniques so foreign companies are
involved in the project.
17
Oil was first found in Qatari territory in the 1950s and oil export of the country steadily rose
until 1998. The country tries to maximize the production through new discoveries and
improved techniques of existing supplies.
Oil in Qatar is produced both on and offshore, the largest oil field in the country is found
onshore at Dukham. Here the production started in 1949. Offshore oil fields were discovered
in 1964. Most of the offshore oil is located east of the Peninsula; western waters are still in the
process of being explored.
In Qatar Production Sharing Agreements were signed with foreign oil and gas companies and
foreign investment started flowing into the country. Some of the oil fields are wholly operated
by the national oil producer and exporter, the Qatar Petroleum, while others are operated by
Qatar Petroleum and foreign partners.
After natural gas was found, onshore production started in 1963. That time the gas was only
used for power generation locally. Everything changed when in 1971 the largest single gas
reservoir in the world was found in the north-east of Qatar. The discovery of this nonassociated gas field made the country the thirst largest gas holder in the world. Development,
utilization and export has become national goal and contributed to Qatar's economic revenue.
Oil in Oman was discovered in the 1960s but was not a fully developed source of revenue
until Sultan Qaboos came into power in 1970.
Oman’s oil production peaked in 2000 ever since the production is declining annually. Experts
assume that Oman will run out of recoverable oil within 17 years at current production level.
While oil production in other GCC members is quite easy and inexpensive, Oman has always
been struggling to extract its oil because of its topographical issues.
Most of the country’s oil exports are destined for the markets of East Asia: China, Japan and
South Korea representing the largest importers. Recently India started becoming a significant
importer of Omani oil.
Conveniently right after the collapse of the world's pearl market in the 1930s, oil was found in
commercial quantities in Bahraini territory at the onshore Awali field first in the Gulf in 1932.
While prospectors first took an interest in Bahrain in 1904, exploration did not begin in earnest
until the 1920s. Bahrain was the Gulf's first state exporting oil in 1934. The 1963 discovery of
the vast offshore Abu Safa field cemented Bahrain's oil wealth for decades to come. Ever since
oil is the major income of Bahrain. The kingdom was the first oil producer in the region and
18
this has given it the advantage of a longer history as a developed economy, and an earlier start
as a regional business hub than its neighbours.
2.6.1. GDP, export revenues, growth:
Overall economic growth has averaged 4% a year during the past three decades in the GCC.
Oil export revenues are high and they are the main contributors in the member states’
earnings. Oil is exported mainly to Asia, which is the largest oil consumer in the world. As per
economists the non-hydrocarbon sector is about to grow more in the coming years as a result
of increased government expenditure and investments.
Per capita income is the lowest in Oman and the highest in Qatar in the region.
Oil export revenues make up around 90-95% of total Saudi export earnings and around 40% of
the Kingdom's GDP. The GDP in 2004 was $ 247.2 billion and the GDP shows around a 5%
annual growth.
The oil sector is the major component of the UAE's economy, contributing 31.9% of the GDP,
77.7% government revenues and 46.5% of exports in 2004. The importance of the oil sector
increased the following year to 39.1%. The UAE enjoyed an overall nominal GDP growth of
20.1% in 2004, which was one of the highest growth rates in the world. In 2005 the growth
rate was even higher, rocketing up to an unexpected 28.3%
Petroleum accounts nearly half of Kuwait's GDP (which was around $52 billion in 2006), 95%
of export revenues and 80% of government income. Kuwait's GDP grew some 8.5% in 2005.
Kuwait has one the highest per capita income in the world and also the strongest currency, the
Kuwaiti Dinar. GDP per head doubled in Kuwait between 2001 and 2006.
The majority of the GDP is generated by the oil and gas sector and their associated activities
in Qatar. Asia, particularly Japan is traditionally the major market for Qatar's oil and gas
exports but with the increasing demand for oil and particularly natural gas, Europe is a
growing market and so is the US.
The country has been enjoying a sharp GDP growth that is mostly the result of the rising oil
prices. The GDP growth has averaged more than 5% in recent years since 2000.
The GDP per capita reached $52,644 in 2005 making Qatar one of the richest countries in the
world. The per capita income increased by 14% in Qatar, which is one of the highest
internationally.
19
The real GDP growth is slower, but still considerable, showing a 6.1% growth in 2005.
Oman's economy is highly dependant on its oil that contributes some 40% of the GDP and it
provides about 80% of its export earnings. Taking the long view, the government hopes to see
the share of oil down to 19% by 2020.
In 2005 the government reported record nominal GDP growth of 21.7% in Oman and in the
past five years an average of 8.7% annual growth was present.
In 2005 hydrocarbons accounted for 11.5% of Bahrain’s economic activity. This figure is
closer to 20% when refining activity is included into the calculations. While oil reserves and
oil production have always been modest and oil reserves may run out in around two decades,
Bahrain has established a highly successful refining business. More than 83 million barrels of
petroleum products are produced annually and sold in the Middle East and Africa. The first oil
refinery was built in 1936 and ever since the country has always been able to refine all its
crude and export higher value added petroleum products.
Real GDP growth has been above 5% in the past years since 2000. The only year during this
period when the growth was slightly below 5% (being 4.6%) was in 2002.
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2.6.2. Unemployment:
Employment will be a major challenge for the Middle East in the 21st century. Some estimate
that 80 million jobs will be needed in the next 5 years, given that 60% of the regional
population is currently under 25 years of age and an increasing number of women are seeking
work.
Nationalization is a clearly sensitive issue; however it is equally apparent that it is essential for
the future stability and prosperity of the GCC members. Every government faces the same
problem in the region: very high unemployment among nationals.
The governments try to involve the local population in the public and even stronger to the
private sector. A very high percentage of the workforce in the public sector is national;
however the private sector prefers expatriates.
Employment in the public sector has always been preferred among nationals than in the
private sector. Working hours, benefits, relatively high wages were much favorable than the
competitive environment in the private sector. Employers in the private sector also prefer
expatriates to nationals, because they are cheaper and mostly are better educated or own the
skills required for the particular job. Local regulations also make it quite difficult to fire a
local once hired and it is hard for expatriates to switch employers within the countries, making
them more attractive.
The governments realized the increasing unemployment among the nationals and try to
involve the local population into the private sector by quotas and other regulations. For
example secretaries in the UAE have to be UAE nationals as per law introduced in 2005 and
in Oman vehicles heavier than 2 tons have to be driven my nationals too.
In terms of the ratio between nationals and expatriate workers Bahrain is in the best position.
In Bahrain the nationals are 62% of the total population.
Saudi Arabia faces high unemployment among Saudi nationals and the government makes
effort of reducing it by different programs and regulations. The inexpensive foreign labour
also makes it difficult for nationals to find jobs in the country.
Unfortunately the unemployment rate among nationals is very high in the United aran
Emirates too. According to the figures provided by the National Human Resource
Development and Employment Authority the unemployment rate is 8% for men and 20% for
women. With the Emiratisation program the government tries to involve nationals in the
21
economy but the private sector still tends to employ rather expatriates than local people. The
only sector where nationals find jobs easily is the banking sector that offers decent wages and
good working hours.
In the early 1970s Kuwait was fully dependent on foreign skilled labor. Ever since the country
made major efforts to educate its nationals creating skilled labor at all levels. Kuwait
University now is one of the most famous universities in the region with a reasonable number
of foreign students from all around the world.
Women are relatively well presented compared to other Gulf countries in the national working
force, with 25.6% of Kuwaiti women employed full time. Women gained ground in politics in
2006 by participating as both voters and candidates for the first time in Kuwait's history in the
June 29 parliamentary elections.
Qatar's economy tripled between 1998 and 2005 and is expected to grow in the coming years.
The country's enormous natural wealth combined with an increasingly skilled national
population, a robust domestic economy and a diverse productive base, will sustain expansion
far into the next decade. The rulers of Qatar realized that education may be the key to involve
locals in the economic activities. Nowadays the majority of the Qatari youth has the
opportunity to finish higher education within the country where education in all level is highly
subsidized by the government.
The high and rising unemployment is a very big issue in Oman. The unemployment is
estimated at up to 18% among nationals and hundreds of thousands enter the labour market
annually. Oman is not like its partner stated in the GCC in terms of oil. Its hydrocarbon
reserves are not sufficient enough to generate the revenues necessary to support the Omani
population. The government set plans not only to diversify the economy but to provide jobs
for the nationals. The goal is 95% Omanisation in the public sector by 2020 and 75% of the
private sector. This is to be achieved by incremental quotas. The nationalization seems to be
working the best in Oman among the GCC countries. The number of expatriates employed in
the private sector fell by over 100,000 from December 2004 and July 2005.
Bahrain, just as its neighbours and the GCC as a whole faces the problem of unemployment.
Some 15,000-20,000 Bahrainis are estimated to be currently out of work and further tens of
thousands jobseekers entering the market each year. The government works hard on reducing
22
the unemployment by imposing higher work permit fees for expatriates and using the revenues
to finance training for local workers.
The public sector absorbs the majority of Bahrainis entering the workforce. Nationals make up
94% of public sector employees but just 25% of the private sector. They are not preferred in
the private sector because they are more expensive than expatriates and in some instances do
not have required skills. The labour regulations also make it hard to fire Bahrainis once they
are hired.
Bahrain has one of the highest literacy rates in the Gulf- above 85% of the adult population is
literate. In 1919 the first public educational system in the Gulf was established in Bahrain, in
which women were included from the start. Bahrain is generally recognized as the most liberal
state among the GCC members.
2.6.3. Inflation:
Since 2000 the currencies of the GCC countries are pegged to the US dollar. This was the first
step towards the common currency, which will be introduced in 2010 to ease the difficulties
provided by exchange rates, loans and other financial means among the member states.
The steady fall of the value of the dollar has led to a consequent drop in the value of the
currencies in the GCC. This has led to some inflationary pressures, notably with goods bought
from the EU countries priced in Euros. Imports from the EU have become significantly more
expensive in US dollar, and therefore in local currencies.
Inflationary pressures have come from other areas too: the fast rate of growth of the economy,
as well as the boosting national wealth, has also led to higher prices.
The boom in oil prices has led to increased income and wealth, and greater competition for
scarce resources such as housing, and skilled employees.
The central bank estimated the inflation at 5-6% in 2004 for the UAE as a whole, which was
considered the highest in the region until Qatar reported a 7.2% in 2006. Inflation emerged as
a problem serious enough for the government to interfere. The issue has been in the housing
sector, with rents rising as much as 100% over the past years. In November 2005 a new
housing law came into existence that does not allow more than 15% annual rent increase.
23
The inflation is second highest in Kuwait, where the cost of living increases rapidly too and
the in Qatar, where the economic boom resulted in higher prices in the past few years. The
inflation is Kuwait was 3.5% in 2006, less than in 2005 but still troublingly high according to
analysts.
Experts expect that Qatar’s strong economic diversification and development will lead to high
rents and the country will face the same problem in terms of inflation as the UAE.
The inflation is generally low in Oman, where the inflation was around 1% throughout 2005
and strong growth was achieved without an accompanying rise in inflation.
Inflation in Bahrain and Saudi Arabia is also irrelevant.
All GCC members have to pay attention to rising inflation because economic boom could feed
its way into higher inflation, which would undermine future growth. The growing inflation in
the above mentioned countries is the product of the countries' fast rate of economic growth,
which has led to competition for some resources, such as housing and skilled labour, as well as
imported inflation blamed on weakening value of the US dollar, and hence the GCC member's
currencies.
2.6.4. Diversification
In the framework of economic diversification the countries realized the importance of the nonoil economic activities that have grown steadily.
The economic reforms in Saudi Arabia started during the ruling of Kind Fahd but the process
is very slow. Foreign direct investment is not welcome but accepted by having taxes on it
reduced, and a slow privatization process has been started too. The progress of diversification
and economic reforms in Saudi Arabia and in Kuwait remains excruciatingly slow, largely
because the countries enjoy enormous income from the oil sector, and leading politicians feel
that it is unnecessary to change the current structure of the economy.
Efforts to diversify the economy in the UAE show its results well, considering that the non-oil
sectors grew by 14.7% in 2005. The diversification is mostly recognizable in Dubai, where
the oil fields may run out of oil in the near future.
Even though Qatar has some of the planet's largest hydrocarbon stocks its leaders do not see
the country's future exclusively as an oil and gas exporter, and has long viewed diversification
24
as key to its economic sustainability. Nowadays Qatar is routinely listed as one of the most
competitive economy in the region.
Due to diversification efforts the non-hydrocarbon sector also increased by 18.8%.
Qatar's open policy is clearly shown by allowing the US to set its main military base of the
Gulf in Qatari territory in 2002 and involving women in the economy. In 2003 Qatar was the
first among the GCC members appointing a female cabinet minister. The ruler's wife, Sheikha
Mozah takes a big part of the country's life and encourages Qatari women to follow her
footsteps.
In recent years' high oil prices have influenced the earnings of the government positively,
enabling to achieve a substantial budget surplus and the possibility to find financial resources
to push diversification and infrastructural development further ahead. The growth in the nonoil sector has been notably strong at an average increase of 9.2% annually and non-oil exports
rose steadily too at an average annual rate of 15.3%.
As part of its development and diversification plan Oman was one of the GCC member states
that signed Free Trade Agreements with the USA with the hope that the agreement will not
only open the US markets for its exports but also will encourage US investor interest.
Bahrain's non-hydrocarbon sector provides 84% of the country's GDP of which the financial
services have the biggest share of 25%.
Trading activity has grown more as oil prices grew in the past years and oil exports increased
while non-oil exports showed virtually no growth. Even though there is a noticeable
development in the non-oil sector, Bahrain still heavily depends on the oil revenues that
contain over 70% of its income.
The GCC area has become an important centre for regional economic growth and the GCC
itself is now the world’s 17th largest economy.
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3. Oil
3.1. History of oil
Coal has a long history as the main energy source until oil was found and started being used.
Nowadays the oil is considered as major source of energy, but being a non-renewable
commodity the world has already started looking for another energy source. Natural gas
reserves seem to last longer than the existing oil reserves and have started being used as source
of energy.
Oil was found first in the United States of America in 1859. At the beginning of the 20th
century oil has not played a significant role in any fields, it supplied only 4% of the world's
energy. The coal was still considered the main energy source that time.
Nowadays the significance of the oil is phenomenal. It supplies over 40% of the world's
energy, leaving the coal behind. Oil is a non-renewable source of energy though and oil fields
are concentrated on certain parts of the world. With the increasing consumption oil reserves
are running dry and wells get old. The discovery of new reserves has already begun and so has
technological development to make the inaccessible fields recoverable in the near future.
The major consumer of oil is the transportation sector and the major consumer countries are
India and China. As their population grows, they demand more and more oil and it is expected
that demand will grow by 5-7 % in the next two decades in these countries. The number is
horrendous if we compare it with the industrialized countries where the growth in the same
timeframe is expected to be around 1%.
By 2020 the world's oil consumption is expected to grow by 60% while the world's oil
reserves are dramatically decreasing.
Demand for oil is growing worldwide at an average of 2% and for gas at 6-7% annually. It
seems that the main source of energy in the future will be divided differently as natural gas
will take the second place after oil and before coal as source of energy in the market.
Due to its significant environmental benefits and low costs, natural gas has become the fuel of
choice for power plants, industrial applications and homes around the world. Therefore global
gas demand is expected to increase by 50% over the next 25 years, especially in the US, Asia
and Europe.
The Middle East represents one of the richest regions in the world in terms of natural gas,
which is seen as a clean and relatively inexpensive energy alternative to oil. Natural gas
26
holders, such as Qatar and Oman have great opportunities for export and they have already
begun investing in the sector.
3.2. Oil reserves
The oil reserves are categorized; there are three major categories to mention.
Proven reserves are defined as "the estimated quantities of oil which geological and
engineering data demonstrate with reasonable certainty to be recoverable in future years from
known
reservoirs
under
current
economic
and
operating
conditions".
(http://planetforlife.com/oilcrisis/oilreserves.html)
The second category is called Estimated Ultimately Recoverable oil. In this category belong
oil that is either economically or technically is infeasible to recover and also the not yet found
oil.
The third category is the Non Conventional Oil. This includes oil from coal, sand, bitumen,
heavy oil, deep water oil etc.
All that data and statistical numbers here are based on the proven oil reserves only.
Unfortunately there are no reliable data about the world's oil reserves. The reason is simple:
every country provides data of its reserves on its own and this data is not completely reliable.
Of the data provided by oil producing countries 6% of the oil reserves are in North America,
9% in Central and Latin America, 2% in Europe, 4% in Asia Pacific, 7% in Africa, 6% in the
former Soviet Union and 66% in the Middle East of which 25% in the Kingdom of Saudi
Arabia, 11% in Iraq, 8% in Iran, 9% in the United Arab Emirates, 9% in Kuwait, and 2% in
Libya.
According to British Petroleum that publishes the Annual Statistical Review of World Energy
based on the The Oil & Gas Journal publication the oil producing areas of the UAE, Saudi
Arabia, Kuwait, Iraq and Iran by forming a triangle contain 75% of the world's oil.
Taking different data from different sources, it can be summed up that the world's major oil
reserves are in the hand of the Middle East, particularly in the GCC.
This fact is not an advantage for most of the countries outside the GCC in the world. The fear
of loosing the oil supplies as well as the fear of being completely dependent on the Gulf in
terms of oil in the future started after the 9/11 attack against the United States. Countries
realized that the dependency on the oil from the Middle East has to be reduced.
27
As a result non-OPEC countries in Africa and in the territory of the former Soviet Union
started increasing their oil production considerably.
Russia itself increased its production in such an extent that it became the second largest oil
exporter following Saudi Arabia.
Some countries in Africa such as Angola, Nigeria, Guinea and Chad also increased their oil
production.
In the long run neither these states nor Russia can keep up. Russia's prospects of keep being
key player in the oil market in the long run are unrealistic. Its reserves hold only 5% of the
world's oil reserves and they are declining since the end of the last century. If Russia continues
its production at current rate it will be running out of oil by 2020.
The expectations of the above mentioned African countries are no better either: Africa will run
out of oil by 2025.
Based on projection of 2002 by the British Petroleum's Statistical Review of World Energy, by
2020 the share of global reserves is going to decline everywhere in the world but in the Middle
East. This will result in a monopoly situation where the Middle Eastern oil producers can
effectively influence the price of the oil and the dependency on them is going to get bigger and
bigger.
The Gulf countries are not only rich in oil, but in natural gas as well. Three of them: Qatar,
Oman and Kuwait have reasonable reserves of natural gas. Extraction has started and the
world's largest non-associated natural gas field was found in Qatari territory making the
country the third largest natural gas owner in the world.
Unlike oil, natural gas reserves are about to last for some 200 years and natural gas being the
second most important source of energy puts the region in an even bigger monopoly situation
in terms of energy.
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3.3. Discovery of oil in the Gulf region
The wealth of the Gulf is the oil. The oil laid down over a hundred millions of years ago under
the warm sea of the region.
Marine animals and plants lived and died in the water and a reef was formed from the remains
of these creatures underwater. As the sea level fell the reef spread into what had been the
depth of the sea, covering the area with a layer of rock. Trapped beneath was the oil.
With the continuous rise and fall of the sea level over an approximately hundred million years
the limestone was deposited on top of the organic remains.
All this time a bacteria was working underneath and with the generated pressure and heat, as
newer rocks were laid down above; the remains were converted into hydrocarbons. The rocks
and the shifting of earth worked together as gigantic cookers producing oil from organic
remains of plants and animals.
Offshore in the Persian/Arabian Gulf several islands show that the same process has been
going on under the sea. The oil was trapped in the spaces of porous sediment of rock. The
bigger and the better connected these pores are the more oil will be stored in them and the
easier it will be to pump it out to the surface.
In the Gulf the oil bearing rocks might be over 2500 meters below the surface but they are
found in significant quantities.
The discovery of the oil in the region was the task of the men of the 20th century. Oil was first
discovered in Iran and by 1911 oil production was set up hand in hand with Britain.
Among the GCC countries oil was first found in Bahrain in 1932 just in time for the sake of
the region. The need for looking for more resources of oil came when in 1932 new
government came into power in Iran. The threat of loosing the oil convinced the British that
new sources of oil have to be found. The small states of the Gulf were a natural place to look
since these states had similar geological conditions.
The recession of the West and the development of cultured pearls of the East had conspired to
destroy the pearling fleets of the Gulf within a short period of time. The first exploration of oil
and the further great expectations of oil production and oil trade rescued the region from
poverty.
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His Highness Sheikh Rashid bin Saeed Al Maktoom (late ruler of the emirate of Dubai)
himself named the first oil field Fateh that means 'golden opportunity'. Not only Fateh but
several other oil fields in the regions turned out to be.
Oil exploration did not bring immediate wealth to the region. Locating commercial quantities
took years. Historical reasons like the World War II. delayed the development and until 1970
foreign companies owned and operated the oil industry in the Gulf. Qatar was the only
exception, where the oil and gas resources were owned and operated by the state-owned Qatar
Petroleum only with partnership with international energy companies. The country's largest
fields moreover are operated solely by Qatar Petroleum.
Until the 1950s there was no mass oil production in the region. Kuwait developed the fastest;
by 1953 it became the Gulf's largest oil producer and exporter. Commercial quantities were
found in 1938 in Saudi Arabia, in the 1950s in Qatar, Abu Dhabi (now the capital of the UAE)
started its oil export in 1962 and Dubai (now second largest emirate of the UAE) only in the
late 1960s.
The foreign companies that owned and managed the oil production in the Gulf paid fees to the
local rulers who were in weak bargaining position because they had only few sources of
income and the oil companies offered decent revenues in a short period of time. Moreover in
the 1930s no one really knew the size of the oil reserves of the region.
As production increased and as more and more oil fields were discovered local rulers
improved their terms and by the 1970 they were independent of British control with major
shares bought in the subsidiary companies. By the 1990s most of the subsidiaries became
state-owned concerns still employing Western experts but having full responsibility and
profits over the oil production.
In Kuwait until 1974 the oil reserves were under the control of British Petroleum. The
concerns of the country's national heritage being under foreign control led to nationalization
and ever since constitutional provisions have prevented Kuwait's hydrocarbon reserves from
being owned by foreigners.
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3.4. Advantages of the oil in the GCC
After the oil was found, the economical development of the countries started and peeked
recently.
In the past three years according to World Bank reports the GDP in the region grew by 74% to
around $610 billion. That makes it the world's 17th-largest economy.
The GDP per capita rose to over $17000 in 2005.
The countries accounted for 20% of the world's oil production, around 40 % of exports.
According to the International Energy Agency, production capacity in the four OPEC
members will rise by 6% from the current level by the end of 2007.
The GCC's annual revenues from oil and gas has been nearly tripled from 2002 and 2006,
government spending increased by 74% and foreign direct investment started its rise in the
GCC to help its economies integrate into the world economy.
Oil fields in the region not only contain huge amount of oil but the oil is relatively easy to be
pumped out to the surface keeping the cost of production low. The only exception is Oman,
where oil fields are in the northern and central regions of the country and are neither
substantial nor easy to extract. With today’s technology most of the reserves cannot be
extracted. Oman is poor in terms of oil wealth compared to other Gulf countries. Its
hydrocarbon reserves are not sufficient to generate the revenues necessary to support the
Omani population.
Beside Oman Bahrain is the other GCC member whose oil reserves are just about to run out.
Even though these countries may run out of oil in the foreseeable future, high oil prices in
recent years made their impact on the region. New and more developed technologies were
introduced to maximize production in favor of gaining more profits.
This resulted in state budget surpluses. Governments started spending on not only the oil
sector but on social welfare and industrial development particularly on improved
infrastructure. Free education, free healthcare is provided for nationals as well as free land to
build properties. The housing expenses such as electricity and water are either discounted or
totally free, just like in Qatar. The governments support young professionals with different
educational programs, and give financial support for enterprises established by locals.
High oil prices boost the income of the GCC and enable the governments to push the income
gained from the oil sector into different sectors of the economies to achieve diversification as
31
well as in the oil sector itself to achieve maximum productivity and maximum profits. There
has been fear that the current high oil prices could give freedom from budget pressures and
boost the economy so strongly that it might distract the government from its diversification
plans. This could lead to an extent reliance on oil and to the temptation to spend more on
social welfare.
Oil has been the major source of wealth in the GCC countries that lead to diversified
economies throughout the region. The oil being a non-renewable resource should only be
considered as a kick start in the economical development but not as an ever lasting source of
wealth. In the long run the main aim of the GCC members is preferably to achieve
independence from the oil sector and build sustainable post oil economies.
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4. Economic diversification in the GCC to reduce dependency on oil
4.1. Reasons behind the attempts of reduce dependency on oil
To a greater of a lesser extent, every Arab country in the Gulf wrestles with the same question:
how to convert non-renewable oil wealth into sustainable, long-term social asset.
Oil as the source of wealth in the region helped the governments to build their economies, but
oil cannot be considered as the never ending source of wealth. Oil is a non-renewable
commodity and the oil reserves, while being huge in the region will not last forever. Therefore
oil resources cannot provide the basis for sustainable growth over the long term. Oman and
Bahrain is estimated to run out of oil in the next 20 years. Saudi Arabia and Kuwait are in
better circumstances, their oil reserves will last some 100 years and they work on discoveries
of new oil fields and development on extraction techniques as well.
Not only the reserves of the Middle East but the reserves of other parts of the world are also
declining. Countries have already pointed out their fears of being totally dependent on the oil
provided by Middle Eastern regimes, creating monopoly situation. As a result the world is
looking for alternative sources of energy by using solar power and other advanced
technologies to provide energy.
Revenue from the oil export spent on developing different sectors of the economy is the way
to prepare for the post-oil period. The non-oil sector is a great opportunity to provide jobs for
nationals too. One of the major problems could be solved this way, namely rising
unemployment among the local population. With effectively combined educational program
for nationals and further regulations in the private sector the unemployment could be reduced
and nationals would fit into the new, competitive environment and countries to the global
economy.
33
4.2. GCC countries` achievements to reduce dependency
In the early years of oil exports the income from oil was spent to improve social welfare and
infrastructure. The governments spent huge amount of money on health and education as well
as on improved road system throughout the GCC.
In most areas of the economy the governments have shown little interest in hiring private
firms and have tended to take the lead in developing major projects themselves. Hence the
public sector experienced an enormous growth.
In recent year's huge income earned from high oil prices though enabled and encouraged the
governments to diversify their economies by investing also in the private sector, encourage
privatization in certain areas to boost competition and investing abroad. If the countries could
reduce the dependency on their oil production, it would lead to a reduction in economic
dependence on the government sector, which would increase private capital investment and
industrial exports. Industrialization is a must for the GCC countries since their income comes
from one single non-renewable commodity. Industrialization is important on the way of
preparing for the post-oil times and to create jobs for the increasing amount of job seekers
among nationals.
High oil prices have made it possible and high unemployment made it essential for the
governments to realize that economic reforms are needed in the labor market, in financial and
educational systems as well as in the industrial sector.
Nowadays the governments of most GCC members are intended to make the private sector the
engine of growth and change the role of the governments in the economy from operator to a
regulator.
While countries' like the Kingdom of Saudi Arabia or Kuwait do not need to face with the fear
of running out of oil in the near future, other GCC members, like Bahrain and Oman have
already seen the end of the oil wealth and started to prepare their economies for the post-oil
times.
Each and every GCC member has begun the diversification of their economies. In the UAE,
particularly in Dubai emirate the diversification is completed and the emirate main income is
not based on the oil revenues anymore.
Not only the level of diversification but the areas as well differ in the individual GCC member
states.
34
Every GCC member state found its strong point and focus to diversify the economy. The
Kingdom of Saudi Arabia improved its agriculture, the UAE focused on tourism and
construction and transportation, while Kuwait has invested part of its income abroad. Qatar
made progress in improving industries around its huge natural gas reserves and invested in
education, Oman sees its future as LNG producer and shipping giant while Bahrain in keen on
being regional and international banking hub and aluminum producer.
4.2.1. Kingdom of Saudi Arabia
The Kingdom of Saudi Arabia is heavily dependent on its hydrocarbon resources. The country
owns 25% of the world's proven oil reserves and is the biggest oil producer.
The country does not face the fear of the post-oil period, as Oman, Bahrain and Dubai emirate,
since its oil reserves will last for decades according to present surveys. Yet Saudi Arabia's
rulers recognized the importance of economic diversification and the importance of
participation in the global economy.
Generally the GCC region is not suitable for agriculture, but Saudi Arabia is an exception. The
kingdom's agricultural sector has grown at around 8% a year driven by population growth and
rising demand for food and food-related products.
According to the World Bank data, the GCC countries import more than $12 billion of food
products a year. Saudi Arabia, as the GCC's largest country with a big and growing population
is the main importer of foodstuff in the region, accounting for about 60% of the total. Reduce
the imports has always been an aim and remains a pillar of economic planning. The region has
always been heavily dependent on imported food products, but the import can be significantly
reduced by making the best of its limited natural resources by raising the productivity of the
land and water resources, new technologies and careful use of plant varieties and intensive
farm management.
The government of Saudi Arabia poured billions of dollars of subsidy and investment into the
agriculture, particularly in wheat production and in the dairy industry and nowadays the
kingdom is the 6th largest wheat exporter and produces over half million tones of milk
annually.
The Saudi diary industry has grown rapidly in the past 25 years from couple of small farms to
world-class facilities equipped with the latest diary processing plants. There are more than 60
35
dairy operations today in the Kingdom of Saudi Arabia. These include integrated dairy
companies that own farms and produce fresh milk and other processed diary products such as
Al-Marai, and Al-Safi.
The largest integrated dairy farm of the world is found in Saudi Arabia and it is operated by
Al-Safi Danone. The company is located about 100 km south-east of Riyadh with 24,000 head
of livestock producing 135 million liters of milk annually. France's Danone took a 50.1%
interest in Al-Safi in 2000 with the Al Faisaliah Group taking the remainder.
The agriculture expanded by an average of 13.8% a year between 1985 and 1990 in Saudi
Arabia. The development is also a result of the development of associated industries
particularly the food processing industry. The agriculture remained strongly subsidized in
order to increase the productivity, develop new farming areas, and improve quality and
marketability of the products. Saudi Arabia is seen to have areas where the country is able to
compete in the global market.
Export markets for Saudi agricultural products are the Middle East and Asia that develop
steadily. Particularly the dairy industry has developed a healthy export market for its products
in the Gulf region with sales valued at around $270 million a year.
The biggest challenge of the Saudi Arabian agriculture is the cutting off of subsidies. The
country recently joined the WTO and agreed to eliminate subsidies over a period of time in
order to meet international trade rules. The domestic support to farmers needs to be reduced by
13.3% over a ten year period in equal annual steps.
The second challenge is to establish and maintain the agriculture related logistics in the region.
Distributing perishable goods over the kingdom's huge distances turned out to be very difficult
without the required infrastructure. The planned $8 billion development of Prince Abdulaziz
bin Mousaed Economic City intends to create the Gulf's largest agriculture and processing hub
with a dry port to a new international airport able to provide warehousing, handling and
transport service linking road and air freight services to a new railway system.
After hydrocarbons the project of creating an agricultural hub aims to utilize the country's
second competitive advantage; its strategic location as a link between east and west. It will be
the largest project of its kind in the Middle East.
The Saudi Ministry of Agriculture recently announced that it intends to set up four regional
administrative centers to develop investment in venture around Tabruk, Jazan, the Eastern
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province and Madinah. The Saudi agriculture continues to develop and expand as the
kingdom's economy becomes more globally integrated.
Saudi Arabia in general is a much closed country, where economic development is relatively
slow.
4.2.2. United Arab Emirates
The United Arab Emirates as a whole is highly dependant on its oil and gas resources.
Diversification is highly noticeable in the second largest emirate, Dubai, where it was an early
realization that its oil resources were minimal and therefore could not provide the basis of
sustainable growth in the long term.
In the 1970s economic diversification started as late ruler, Sheikh Rashid bin Saeed Al
Maktoum recognized that an oil base economy will not be able to lead the country into the 21st
century. In the 1980s preparation started for the future when oil revenue would no longer
underpin the economy.
Sheikh Rashid launched the emirate's modern economic development plan and diversification
started with the infrastructure; ports, airports were built based on Dubai's long history and
experience as a trading centre.
After Jebel Ali Port, the largest man-made port was built in 1970; Jebel Ali Free Zone, a trade
free zone was set up in 1980.
Dubai International Airport was built with Dubai Duty Free to help the emirate's ambitions of
establishing itself as regional aviation hub. This was followed by Emirates Airlines, which is
one of the most profitable airlines in the world nowadays. Both the airport and the airline
supported Dubai's ambitions not only to remain a trade center but to become a well-known
tourist destination.
Based on the history of being a trade centre in the region the government began to see the city
as potential tourist destination, where traders and travelers might stop to spend some time.
This thought led the city to start building hotels and shopping malls and other tourist
destinations.
In 2005 around 6 million visitors came to Dubai and the government set a target of 15 million
visitors entering the country in 2010. This target is set not only for tourists who want to spend
37
their holiday in the emirate but business people attending exhibitions, conferences and
seminars and shoppers.
To support the shopping activities Dubai boasts some 50 shopping malls and investors see
room for more. Just to mention some of the largest ones: the Mall of the Emirates occupies
400,000 square meters of retail space, Mall of Arabia occupies 600,000 square meters, and the
Dubai Mall that will open next year is a 1.2 million square meter property.
The Department of Tourism and Commerce Marketing set two major events aimed at
capitalizing on the emirate's reputation as the region's shopping capital. One is the Dubai
Shopping Festival (DSF) where local retailers in conjunction with DSF organizers have
introduced a series of promotions and discounts, the other one is the Dubai Summer Surprises
for family entertainment. Since the announcements of these events (1996 and 1998) the
number of festival goers doubled.
The number of visitors arriving to Dubai boosts the hotel sector as well. It was recently
announced that Dubai has the highest occupancy rates in the world. In 2005 the average
occupancy rate of 86% made Dubai the leader in hotel industry leaving New York (83%) and
Singapore (80%) behind. Forty percent of the hotels are five-star and in a few years, following
the increasing demands this will grow to 60-70%.
The government, with Sheikh Rashid realized that even though the developments achieved in
the trade and tourism are enormous but alone they cannot serve as a basis of sustainable nonoil economy.
Started in 1980 with Jebel Ali Free Zone the new phase of development aimed to attract
knowledge-based sectors and the establishment of other free zones started. Dubai Media City
was formed for information and communication Dubai Internet City for technology, Dubai
Health Care City for advanced health care, and Dubai International Financial Centre for
institutional finance. These free zones are based on 100% foreign ownership, supported by
log-term tax and duty-free privileges, quality infrastructure and minimal bureaucracy. The
above mentioned 'cities' are just a fracture of the free zones in the emirate; other ventures
cover almost every economic sector.
By 1990 construction and the real estate sector started booming and the freehold law
introduced just recently encourage expatriates to own their houses or apartments in the city.
The government realized that giving the expatriates, that are majority in the whole country, a
38
financial as well as emotional stake would encourage them to make local investments rather
than see Dubai as a place to make money to send it back home.
The freehold law led to a spectacular boom in residential development; making the
construction sector a major contributor to the GDP growth recently.
However the construction and the country building started in the early 70s with the World
Trade Centre, the magnificent changes are noticeable from the 90s on. The rulers of Dubai
invited foreign architects and constructors to develop the emirate and ever since the
development is unstoppable. Since 2000 the construction in Dubai and in the UAE in general
is a much faster process than anywhere else in the world. The intention of the government was
to diversify the economy and not to be dependent on the oil resources. Tourism was getting
promoted, that needs hotel resorts, entertainment parks, malls and various tourist attractions.
The desert was converted to a magnificent 21st century city. Year by year new residential areas
and districts are built and it seems to be a never ending process. The city goes to the extremes
as well by building inland islands, man-made islands in the sea, building the world’s tallest
building, rotating towers, underwater hotel etc. The list of examples is eternal.
Sheikh Rashid started planning ahead for the post-oil period and his son, the current ruler,
Sheikh Mohammed bin Rashid Al Maktoum added imagination and energy to his father's
foresight.
Diversification became so successful that Dubai's GDP grew at a rate of 17% in 2004 mostly
in the non-oil sector. Oil is becoming increasingly irrelevant in the economy and Dubai's oil
production and oil export dropped steadily in the last couple of years.
The economy is fully diversified and moreover Dubai and actually the UAE as a whole
attracts more and more foreign direct investment, which grew at an annual rate o 11% in
recent years. Non-oil GDP has increased 242% over the past decade, while non-oil activity as
a percentage of the GDP has surpassed 90%.
39
4.2.3 Kuwait
The Kuwaiti government is committed to economical reforms and diversification to a certain
extent, but the efforts to diversify the economy is far behind the fellow GCC members such as
Oman, Bahrain, Qatar or the UAE.
Kuwait owns nearly 10% of the world's oil reserves. The oil sector is continuously growing in
the country and recent high oil prices ensure high government income in the future. Even
without any reforms the country has strong and secure future in the medium and long term.
Analysts say that the oil prices remain high, given that there is an increasing demand for oil
worldwide and as a result, the structure of the Kuwaiti economy will not experience radical
changes. Even if the current boom in the price of oil is not sustained, the Kuwaiti economy
can be assured of progressively greater stability.
As oil prices stay high, the interest of the country will be kept on maximizing oil production.
The government currently invests in developing oil fields, notably in the north region. Now
the country is embarking on a major program of upgrade and expansion, with plans to boost
recovery and refinery capacity.
Some local analysts argue that continued technological
progress in extraction methods could further increase the lifespan of existing wells beyond
what is currently seen as feasible.
Kuwait's northern oil fields contain 'difficult' oil which requires more expensive and
sophisticated extraction techniques those other Kuwaiti fields, such as Burgan. For technical
assistance the country contracted international companies for specific projects. Since 1974
constitutional provisions have prohibited Kuwait's hydrocarbon reserves from being owned by
foreign interests.
Generally the areas of diversification are either the agricultural sector, the industrial sectors of
services. Kuwait is generally unsuitable for agriculture because of its dry and hot weather and
lack of natural water resources, so diversification in agriculture has been eliminated.
Manufacturing used to have its limits too due the lack of skilled labor force and mainly
because of the lack of metallic and non-metallic minerals. The lack of water hindered the
industry too, since it is crucial part of industrial activities.
After the oil was discovered and oil related industries started to be developed in the country,
this field of the industry became a highly paid area that attracted labor but kept on hindering
other industries. First developments were achieved in oil related industries such as water,
40
electricity and petroleum products. Undoubtedly it was the oil sector that started the
industrialization in Kuwait but only some fields were created since oil industry does not
require many industries to operate.
The income gained from the oil sector allowed the government to invest in other fields of
operation, and commerce was an obvious choice. Commercial traditions lead to invest in trade
rather than in any other industrial development in the early years. Hence the industry in
Kuwait expanded very slowly. The government started to invest the income generated by the
oil industry in different areas too to conduce to industrial development.
In 1964 an industrial zone was established and comprised electricity plants, water distillation
plants, metal works and other plants manufacturing asphalt, cement etc.
Roads and sewerage facilities, rented or leased industrial sites were provided by the
government. Not only infrastructural but financial support was also provided such as loans and
the requirement of 51% Kuwaiti ownership in businesses to encourage nationals in taking part
in the development. In 1974 the Investment Bank of Kuwait was established that offered low
interest rates for medium and long term financing.
Nonetheless industry in Kuwait has never enjoyed as much governmental support as other
countries in the GCC, because the government invested and invests rather abroad or locally in
education and healthcare than in the industry.
From the very beginning of its oil revolution, Kuwait has steadily put money away for the
future to ensure that the country's future generations have something to fall back on when the
oil finally runs out. From the 1950s the government has been putting aside a percentage of the
oil revenues. With few local investment opportunities, funds were initially placed overseas,
notably in property and businesses in the UK. In recent years the strategy has been changed to
include a range of foreign, regional and local investments. The centerpiece of the investment
fund policy is the Kuwait Fund for Future Generations (KKFG). By law 10% of Kuwait's
income from hydrocarbon exports is put into the fund. Much of the KKFG funding is placed in
very secure, and often liquid, investments in the UK, Germany, the US, France and Japan.
Details of the specific structures are not published, but are generally seen as including state
and corporate fixed-income bonds, blue chip equities, real estate and direct investments in
industrial enterprises.
41
The investment strategy adopted by Kuwait has long been championed by the IMF and other
international bodies as an example of how countries with vast but non-renewable natural
resources should manage their wealth.
4.2.4. Qatar
Qatar is one of the fastest growing economies in the world. Not only the fortunate situation of
sitting on the world's largest non-associated gas fields and its oil reserves led to the enormous
growth but the recognition of the advantages of a diversified economy by the rulers.
The oil and gas sector is still the most important sector of the economy accounting for over
60% of total output but there is significant growth in other areas as well. The manufacturing
sector remained the second-most important contributor with 8.4% of GDP in 2005, followed
by services such as education, real estate, finance and insurance.
The manufacturing sector has been growing sharply over the last few years with the state
investment poured into the sector. This field of the economy is closely tied to hydrocarbons- a
large portion of manufacturing is the production of petrochemical products such as ethylene,
polypropylene, styrene and polystyrene.
Qatar's offshore North field is the largest non-associated natural gas field in the world. Due to
its significant environmental benefits and low cost, natural gas has become the fuel of choice
for power plants, industrial applications, and homes around the world. Therefore global
demand is expected to increase by 50% over the next 25 years, especially in the US, Europe
and Asia. To meet the additional opportunities for export Qatar is increasing its
LNG(=liquefied natural gas) production capacity.
The country has invested billions of dollars into developing the gas sector, which started to
pay off in 2006, driving the growth higher and is set to make Qatar the largest LNG supplier
of the world by 2008. By far the largest project in the country is the expansion of the LNG
sector where the demand for funding is so great that the government is looking for
international financial sources. There are two major projects underway: Qatargas and Rasgas.
Japan, the world's number one importer of LNG took around two-thirds of Qatar's total LNG
exports in 2005 followed by Spain in the same year. Restructuring started of the country's gas
and LNG markets, targeting the US and Europe and by the end of the decade Qatar will be
supplying the US with about 30m tones of LNG per year, nearly half of its LNG demand. The
42
country intends to do so without reducing the supply to Japan and other counties where the
demand for Qatari gas is high.
With the projects of expanding the LNG sector completed by 2011, the facilities would reach
the peak of their production and Qatar would export some 77milion tons of LNG annually, at
which point Qatar will be the world's leading LNG exporter.
Education is another area of focus, with investment facilities drawing in students from around
the region.
Formal education started in 1951 in Qatar with the establishment of a primary school for boys
only and free public education has been available for Qatari nationals since 1952. The
country’s new constitution that took legal effect in 2005 enshrines the importance of education
and calls on the state to make general education compulsory and free of charge. Today
education is compulsory between ages six and sixteen and 89% of the population is literate.
Revolution starts at primary school level in Qatar with the first step of transformation of
public schools into independent schools that can select their own curricula from various
international systems. Qatar University, the liberal arts and sciences institution was the first
higher education unit established in 1973 and offers a wide range of faculties nowadays
including an MBA program.
In recent years the Emir and Sheikha Mozah recognized the importance of education at every
level and significant investment the educational started. Arab counties spend approximately
0.24% of their GDP on research and development, while highest rated countries spend 3.1%
according to recent figures. Sheikh Hamad said that associated educational opportunities
would become “the pillar that will secure the success of any other future project”. As part of
its diversification plans, Qatar has decided to make itself the centre of higher education both
in the Gulf and also in the wider Arab world and education has become a priority in Qatar as it
has in no other GCC state.
The College of the North Atlantic-Qatar opened in 2002. The state-funded school has the
capacity of 3000 students and maintains the relatively high ratio of Qatari nationals: 50%. The
school provides a range of technical diplomas such as electrical and mechanical engineering,
accounting, programming etc.
Since 2000 CHN University Qatar has been providing bachelor’s degrees in hospitality and
tourism management. This international university hosts students from more than 50 countries
43
world wide and 40% of its students are Qatari nationals. The university enjoys high reputation;
over 70% of its graduates have jobs guaranteed by Qatari business and industry.
More recently the Educational City opened its doors, a centre of learning unique in the Gulf
region. The campus was established by the Qatar Foundation and lays on a 7 million square
meter area outside Doha. By completion in 2008 the Educational City will house more than 30
buildings, including a museum, a conference facility, an exhibition centre, sports facilities and
a mosque as well as residential and recreation facilities both for students and stuff.
The Educational City project brought a number of campuses of foreign universities to the
country and is highly supported by the ruler family as both Sheikh Hamad and the Sheikha
shares the vision of a developed and highly diversified educational sector. Currently there are
five universities from the US that offer bachelor’s degree programs.
The schools in the Educational City offer their own curricula, leading to their own fully
accredited diplomas. The Qatar-based programs are particularly for Middle Eastern students
seeking Western higher education but reluctant to travel to the US or Europe.
Besides the primary, secondary and university programs at Educational City, the Qatar
Foundation also sponsors a year-long program that prepares secondary school graduates to
achieve US university skills in computers and English for entry to one of the universities in
Educational City or abroad.
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4.2.5. Oman
Whilst Oman is working on finding new technologies to be able to access the inaccessible oil
resources, it is also focusing on alternative source of income for the future. The government
works on reducing the dependency on oil from the now existing 40% to 19% over the next 15
years.
In the Vision 2020 program the government is planning to diversify the economy from oil,
principally with the development of other sectors. It has been leading the diversification drive
with strong public investment in key sectors, such as hydrocarbons, shipping and
infrastructure. The diversification plan has already been started with some big projects. Some
of the most advanced are based on gas reserves, for which the country has reasonable reserves
that was found in the late 1980s. The gas reserves exceed local demand and Oman produces
liquefied natural gas (LNG) for export. Sur, 335 km south from Muscat has been earmarked
for industrial development. It is already home to a liquefied natural gas project and a new urea
fertilizer plant will be operational soon.
Based on Qatar’s success with LNG in the Far East, Oman’s perspectives are also bright and
LNG is set to become a major asset in the picture of a diversified economy in the country. So
far the LNG project is the single biggest for economic diversification.
In the wake of intensive exploration in recent years, estimates of the country's natural gas
reserves have risen dramatically. Since its inception, gas has grown to become one of Oman's
most lucrative industries after oil. Gas revenues grew by 70% in 2005 and the government
sees natural gas as one of the major contributors of the Omani economy in the near future.
This resulted in the establishment of the Oman Liquefied Natural Gas, which was set up to
handle gas operations including liquefaction, transportation and sales of LNG.
Infrastructure appears to keep up with the production; pipelines link the natural gas deposits
with the coastal cities and hosts of ports of Sohar and Salalah.
Oman’s geographical location and trade history gives the country great advantage to improve
its shipping facilities. The country is located at the tip of the Peninsula with shipping lines and
cost-effective market access to the Indian subcontinent and East Africa, besides the GCC
market. Oman has also strong connections with Iran and Yemen, two growing markets
boasting a population of 80 million people.
45
Oman’s 1,800km coast is key factor in the development with three major ports in the country:
Salalah, Sohar and Sur. Oman's modern port development program started in 1974 with the
establishment of the Port Sultan Qaboos in Muscat.
Salalah was the first area to emerge as a new hub of economic development. The container
port began its operation in 1998 that takes advantage of Salalah's strategic location just 150
km from one of the world's major shipping lanes linking the Mediterranean and the Red Sea to
Asia and East Africa. The port is currently under an expansion program that is expected to
boost its capacity.
The ports at Muscat and Salalah are world-class commercial ports, capable of handling bulk
and containerized cargo. On the other hand the Sohar Port project is designed to serve as a hub
for mega-industrial projects. It is nothing less than the industrialization of Oman. The port is
located 250km north-west from Muscat occupying an area of 2000 ha. The site has appropriate
depth- only little dredging was required- and is situated in a region where skilled labor is
already available. The project started in 2002 and the maritime section of construction is
nearly completed.
As cargo ships increase in size, Sohar is becoming an increasingly attractive destination,
because as deep port it is going to be able to accommodate extremely large ships. The
terminal for general cargo has been operational since April 2004 and the traffic at this terminal
rose from 42 vessels in 2004 to 171 in 2005. The Sohar project is not only about creating a
port though, it is about industrial development. When completed, the port will include an oil
refinery, aluminum smelter, steel and petrochemical plants, polypropylene, polyethylene,
methanol, ethylene dichloride production and much more.
The Sohar industrial port is focused on creating a manufacturing hub in line with the
government strategy of diversifying away from oil revenues by adding value and developing
new industries. It fulfils the plan of social and economic criteria: job creation, diversification
from oil, the promotion of private investment and the development of Omani industrial base.
46
4.2.6. Kingdom of Bahrain
Bahrain was the first oil producer in the Gulf and this has given the country the advantage of a
longer history of developed economy. Nowadays its neighbours took over and for example
Dubai is far ahead of Bahrain's developed economy in terms of economic position in the
region.
While it is quite unlikely to regain its economic position of the 1970s when the other GCC
countries were less developed, Bahrain has the opportunity to take a new place for itself in the
rapidly expanding Gulf region.
Bahrain's oil resources are limited and moreover the country relies largely on the output from
the field jointly owned with Saudi Arabia. The lack of the natural resources that are the base of
wealth in the region made Bahrain's leaders recognize earlier than others the need for
diversification and the country has turned to a more sustainable base, such as financial
services and aluminum production. The efforts being made by the government include
maintaining and improving Bahrain's position as a regional financial centre and developing
one of the world's largest and most modern aluminum shelters.
The Economic Board of Development tries to identify new areas of diversification such as
tourism, logistics, retail and business services. The most important challenge for the country
is to explore which areas and sectors of the economy to invest to get the highest return. Other
challenge is to ensure the economic environment is stable and competitive to maintain
Bahrain's status as a service centre in the region.
Bahrain's financial centre position started in the 1970s at the beginning of the oil boom and the
decline of Beirut as a result of the civil war in Lebanon.
High international oil prices have generated new wealth in the Gulf region, which has
provided enormous new business for banks operating in the kingdom. There are more than 360
banks and bank sector institutions in the country and the figure of total assets was nearly ten
times the size of Bahrain's economy in 2006, pointing out that the banking sector is considered
as most important in the country. It contributes an estimated 25% of national income and was
the largest employer. Bahrain is one of the world's top banking centers as well as a global hub
for Islamic finance.
Bahrain's banking sector emerges as the Middle East's centre for Islamic banking and
insurance leaving the private baking to Dubai and project finance to Qatar. The financial
47
sector today is more important than oil in the GDP, which is a major achievement in
diversification for the country.
Over the past two decades Bahrain has established itself as the Gulf region's foremost financial
centre. The country's geographical location, economically liberal attitude yet regulatory
framework and legal system, low costs and educated labor force altogether highly contributed
to the growth of the sector.
The sector is divided into two main areas: onshore banks that cater the needs of local
population and offshore banks, which do international business only using the country as a
base.
The onshore sector is much smaller than the offshore and it operates like domestic banks in a
similarly sized countries. There are 25 banks operating of which 10 operates under Islamic
principles. These banks take deposits, make loans and serve the local population with basic
financial services. The sector enjoyed strong growth and activity in 2005, as a result of the rise
in price of crude oil.
By size, Bahrain's offshore banking is ranked as the fifth largest in the world after the Cayman
Islands, Hong Kong, Singapore and the Bahamas. The sector is highly diversified including
institutions specializing in corporate banking, banks that focus on managing assets and funds
and also to those that manage the finances of high-net worth individuals.
The offshore banking has grown to serve the banking needs of wealthy Gulf citizens such as
Saudi Arabians at the time when there was an enormous growth in wealth based on the oil
boom in the region and the countries lack of own banking sectors.
Recently as other GCC members have also developed their own banking sectors Bahrain has
faced high competition and needed to refine its strategy. By working to keep up to date with
the latest changes in the banking trends and markets by ensuring that it can keep on providing
a first class regulatory framework and operating environment was the Bahrain Financial
Harbour born. Bahrain managed to stay ahead of its new competitors and to diversify and
strengthen its role in the region.
Behind onshore and offshore divisions there are investment banks and Islamic banks operating
both on- and offshore. Bahrain has gained the position of the most important country of
Islamic banking and financial market with banks generally well capitalized.
48
The country was not the first one to establish an Islamic bank; in 1963 the first Islamic bank
opened in Egypt but the kingdom was the forerunner of the first large-scale Islamic finance
operations in the 70s. Ever since it has traditionally been a global centre of Islamic banking
and in 2005 the local Islamic banking sector enjoyed huge growth with assets up 46% the
market is easily outgrowing all other banking in the kingdom. At the beginning of 2006 there
were 26 Islamic finance institutions licensed in the country including six full commercial
banks, 17 investment banks and three offshore banks. Their total assets were 63.2% of the
country's GDP. The lending included areas like real estate, construction, trade and consumer
sector.
The key to Islamic banking is the Quranic prohibition of riba or interest. Banks operating on
Islamic principles do not use interest as a form of gaining profit; they form risk-sharing or
profit-sharing partnerships with the borrower instead or receive a fee for financing services
offered. Islamic banking analysts argue that the system is superior to interest-based regular
banking because the banks must study the long-term outlook of the company/person, rather
than just its present creditworthiness, when preparing to lend.
In the improvement of the Islamic banking in general Bahrain plays a key role. The form of
business conducted according to Islamic principles differs, since there is no single
interpretation as to how Islamic banks should operate or what kind of services and product are
permissible. Each Islamic bank has its own board of scholars, and so different banks offer
different range of products and services. In 1991 the Accounting and Auditing Organization
for Islamic Financial Institutions was established in the country that was set to issue standards
for international Islamic banking and financial services. This non-profit body prepares
accounting, auditing, governance, ethics and sharia standards. Today the organization set
detailed standards in more than 60 areas of finance and its standards have been adopted across
the Islamic world creating an international framework of Islamic banking.
Bahrain has developed one of the world's largest and most modern aluminum smelters that
was made possible by low-cost domestic energy and was the first step toward today's diverse
industrial environment.
Aluminum Bahrain (Alba) was established in 1971 and the 77% government-owned smelter is
the world's third largest. When the company was established, the government had only an 18%
stake in it. Today, Bahrain's aluminum industry is Bahrain's most important industry after
49
hydrocarbons and makes up some 7-8% of the country's GDP and about 54% of non-oil
exports consist of aluminum products.
Alba was the first non-oil industry venture in Bahrain and in turn it helped to establish a
healthy and diverse cross-section of industries, such as aluminum sheets, cables, and
aluminum powder pellets etc.
Alba is one of the biggest employers on the island with over 3000 employers now working on
the plant and another 2000 working at Alba-related industries. The company boasts an 85%
Bahraini-national workforce and offers training programs to employees, facilitating promotion
of Bahraini nationals to middle and top management.
Alba is looking forward to the free trade agreement between Bahrain and the USA for better
sales to the States and possibly for new investment activities to add to the facilities that are
already in operation. It also hopes that the free trade talks between the GCC and the EU will
lead to a stronger export market.
50
Conclusion
The GCC with its member states, namely Saudi Arabia, the United Arab Emirates, Kuwait,
Qatar, the Sultanate of Oman and the Kingdom of Bahrain is the 17th largest economy in the
world.
These countries once vast desert were transformed into large, wealthy and influential
economies based on today's main source of energy, the oil.
The main source of wealth in the region comes from one single non-renewable resource, the
oil. However, the Gulf States represent nearly 75% of the world's oil reserves and the majority
of the world's oil production, oil reserves are declining and some of the countries, like Oman
and Bahrain will run out of oil in the foreseeable future.
Economic diversification though is not only essential because of the declining oil reserves.
The region's biggest problem is the high unemployment among the national population. The
governmental sector cannot absorb the amount of people entering the labour force per year and
the private sector prefers expatriates instead of nationals. Among the many reasons some:
expatriates often have better skills and education than nationals, they are less expensive, and it
is difficult to fire a local once hired.
Recent years high oil prices resulted in huge income for the GCC members and increased
government spending. As a first step the infrastructure and social welfare systems, such as
health and education were improved, then governments turned to the private sector.
Economic diversification has been very successful in the United Arab Emirates, in Qatar and
in Bahrain. The diversification in Saudi Arabia and Kuwait is slower since these countries
enjoy the enormous income from the oil sector and leading politicians feel that it is
unnecessary to change the current structure of the economy, since these two countries have the
most oil reserves in the world.
The diversification in every member state took place in different sectors: in Saudi Arabia the
agriculture was the main sector to develop, in the UAE tourism and construction, in Kuwait
the investments abroad. Qatar invested in its natural gas reserves and production and in
education; Oman sees itself as shipping giant in the future and Bahrain as financial hub.
51
Bibliography
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Elizabeth Collas and Andrew Taylor: Gulf landscapes
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Fatimah H. Y. Al-Abdul-Razzak: Marine resources of Kuwait
Their role in the development of non-oil resources
KPI, London, Boston, Melbourne and Henley
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John Duke Anthony: Arab states of the lower Gulf
People, Politics, Petroleum
Published by The Middle East Instirute, 1975.
Xavier Beguin Billecocq: The Emirates
The fabulous history of the pearl coast
Published by Hawk
Studies:
Oxford Business Group: Emerging series, 2006
Published by Oxford Business Group, 2006
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Gulf Business, Vol.11. Issue 11. March 2007, pg. 54-58
Amelia Shepherd-Smith: Best for business
Gulf Business, Vol.11, Issue 12, April 2007, pg 60-62
Robert Bailey: Ploughing profits
52
Internet:
http://www.iags.org/futureofoil.html
http://sheikhmohammed.ae/english/history/history_arabia.asp
http://www.gcc-sg.org/Foundations.html
http://www.imf.org/external/pubs/ft/med/2003/eng/fasano/index.htm
http://www.questia.com/PM.qst?a=o&d=94297715
http://www.meepas.com/Omanemergingeconomy.htm
http://en.wikipedia.org/wiki/Oman
http://www.nationsencyclopedia.com/Asia-and-Oceania/Oman-ECONOMICDEVELOPMENT.html
http://business.maktoob.com/News-20061207004848-.aspx.aspx.aspx
http://www.eia.doe.gov/emeu/cabs/saudi.html
http://www.energybulletin.net/2431.html
http://planetforlife.com/oilcrisis/oilreserves.html
http://www.infoplease.com/ipa/A0107901.html
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