Oil Exporters Adjust to Price Decline
Oil’s history in Arab states goes back to 1911 in Iran. Discoveries of commercial quantities occurred much later, in 1932 in Bahrain, 1938 in Saudi Arabia, and then following World War II in Oman, Kuwait, Qatar, and Abu Dhabi. Until the 1970s, exploration and exporting were under the direction of western companies, which paid fees to the local rulers. As oil-producing countries became independent, their rulers gained more control over production and, by the early 1990s, the states owned the enterprises and their profits in many cases.
For the Gulf States, oil wealth provided the majority of government revenues and a lavish lifestyle for all their citizens. The price of a barrel of oil had reached an all-time high in 2008 before the financial crisis, and then sank by 70%. Price fluctuation was relatively minimal until mid-2014, when the price again dropped by over 50% in six months. Oil export revenues of Arab oil exporting states fell by $340 billion in 2015, according to the International Monetary Fund. The decreases in export value from 2014 to 2015 for the six Gulf Cooperation Council States (GCC) appear in the table below. (Dollar figures are estimates from the CIA World Factbook, accessed online May 2016.)
|
GCC State |
2014 Exports (Billions) | 2015 Exports (Billions) | Petroleum Sector % of Gov Revenues | Petroleum Sector % of Exports |
| Saudi Arabia | $342.3 | $222.6 | 87 | 90 |
| United Arab Emirates | $370.6 | $323.8 | 45 | |
| Kuwait | $103.4 | $57.1 | 90 | 94 |
| Qatar | $131.6 | $77.7 | 56 | 92 |
| Oman | $53.2 | $39.1 | 84 | |
| Bahrain | $20.8 | $14.1 | 86 |
With oil having historically provided over 80% of oil exporters’ government revenue, major changes in lifestyle are on the horizon. Public largesse has supported citizens, who may or may not have productive work. Now, subsidies for food, fuel, and utilities are being reduced. Taxes will replace some oil revenue. Some states have prepared for this future better than others. The CIA World Factbook provides insights into each country’s economy.
The United Arab Emirates has reduced its portion of Gross Domestic Product (GDP) based upon oil and gas to 25% through economic diversification. Sovereign investment funds are available for further diversification through improved education and creation of private sector employment.
Oman looks forward to tourism, industrialization, and privatization aimed at reducing oil’s portion of GDP from 46% to 9% by 2020. Stiff public resistance to cuts in spending for social entitlements has hindered the government’s ability to balance its budget, which recorded a $6.5 billion deficit in 2015, nearly 11% of GDP.
Bahrain’s 2015 budget deficit was 13% of GDP. After oil, revenues come from production of aluminum, finance, and construction. A 2006 free trade agreement with the U. S. was implemented as part of Bahrain’s diversification plans. A sovereign debt rating just above junk status constrains borrowing ability.
Kuwait holds more than 6% of world oil reserves, and plans to more than double production to 4 million barrels by 2020. Ten percent of government revenue is saved in the Fund for Future Generations. However, efforts to diversify its economy have failed to enlarge private sector employment.
Qatar was the only GCC state that did not record a budget deficit in 2015, but a deficit of 6% of GDP is projected for 2016. Manufacturing, construction, and financial services account for just over half of GDP, and economic policy is focused on increasing private and foreign investment in non-energy sectors.
Saudi Arabia’s 30-year-old deputy crown prince, Muhammad bin Salman, has promoted a high-profile plan to reduce dependence on oil revenue within four years. The plan prominently features the sale of shares in the state-owned Aramco petroleum company. The government is seeking private sector investors in healthcare, education, and tourism. Education for the large youth population in skills for private sector jobs is a particular concern.
The decline in oil prices is necessitating adjustments for countries other than those in the GCC. Some of those with high dependencies on oil exports are listed in the table below. All have a substantial dependence on exports and all are making efforts to diversify their economies. Some are also hindered by corruption, inflation, poverty, international sanctions, and political unrest.
| Country | 2014 Exports (Billions) | 2015 Exports (Billions) | Petroleum Sector % of Exports |
| Russia | $497.8 | $337.8 | |
| Nigeria | $82.6 | $50.7 | 95 |
| Angola | $60.0 | $37.4 | “over 90%” |
| Venezuela | $74.9 | $47.5 | “almost all” |
| Iran | $86.5 | $79.0 | 80 |
| Brazil | $225.1 | $189.1 |
The scope of the challenge to oil exporters is emphasized in a recent report by the International Monetary Fund (http://www.imf.org/external/pubs/ft/reo/2015/mcd/eng/pdf/mreo1015.pdf ): “Because the oil price drop is likely to be large and persistent, oil exporters will need to adjust their spending and revenue policies to secure fiscal sustainability, attain intergenerational equity, and gradually rebuild space for policy maneuvering.”