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Articles - Middle East Oil Revenues
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Record oil prices are
providing key Middle Eastern oil producers with the
financial means to diversify their economies.
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Oil fuels Middle East
economic diversification |
The oil booms of the
late 1970s and early '80s left oil producing Middle Eastern
countries awash in money. Billions of petrodollars were
spent on unsustainable domestic projects, such as Saudi
Arabia's massive spending on agriculture to become the
world's sixth-largest producer of wheat. When oil prices
collapsed, the government ran out of money and the project
failed.
But the lessons of the past have
not been lost on Riyadh or other members of the Gulf
Cooperation Council, or G.C.C. Qatar, Bahrain, Oman, Kuwait
and the United Arab Emirates, or U.A.E., also belong to the
G.C.C. and, along with Saudi Arabia, possess 40 percent of
the world's oil reserves.
Lessons of the Past
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 Mohsin Khan, Director of the Middle
East and Central Asia Department at the International
Monetary Fund, or I.M.F. in Washington, says these nations
have curbed spending despite record oil revenues, projected
to rise from $200 billion in the last two years to more than
$350 billion for this year alone. He says, "They learned
their lessons from the 1970s and '80s and are being much
more cautious in terms of spending, much more cautious in
terms of what they're predicting for oil prices. In other
words, they're treating the oil price increase as temporary.
They don't want to get trapped into large-scale, major
government financed projects that, later on, if oil prices
were to fall, would [leave them] with projects that are not
economically viable."
In the 1970s and '80s, governments
in oil producing Middle Eastern nations spent up to 80
percent of their oil revenues on unsustainable development
projects. This year, G.C.C. governments drew up their
budgets based on oil selling for $30 per barrel. With an eye
toward the future, these nations now save two-thirds of
their oil revenues and spend the rest to diversify their
economies away from oil, according to the I.M.F.'s Mohsin
Khan.
"There are two big changes," says
Khan. "One is that they're not spending as much. And two,
what are they doing with their savings? In the 1970s, they
were basically saving it in the form of financial assets in
banks in the United States or in Europe. Now they're
diversifying quite a bit and a lot more of the money is
staying in the region."
Where the Money Goes
So where is the money going? Many
analysts say a new breed of investors from the region is on
the lookout for investment opportunities abroad. At the same
time, much of the money is being spent on education,
tourism, training and new economic sectors meant to enhance
privatization and create new jobs. Bahrain, for example, has
developed into a major financial center that employs more
Bahrainis than expatriates, who have a very strong presence
in the Persian Gulf region.
But Marcus Noland, Senior Fellow at
the Institute for International Economics in
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The Palm Jebel Ali
Islands in Dubai where tourism is booming. |
Washington says success has
been mixed, depending on each country's strengths and
resources. He says, "Some, such as Saudi Arabia, have
emphasized diversifying downstream by producing
petrochemicals, plastics and so on. And those industries are
expanding. Other [oil] producers, such as some of the
smaller states along the Gulf, like the U.A.E., have
emphasized moving into services - - whether financial
services or, in the case of Dubai, obviously transportation
services and, to a certain degree, tourism."
Saudi Arabia has also opened up
domestic trade and investment opportunities, which are
expected to be worth more than $600 billion during the next
few years. And the President of the National U.S.-Arab
Chamber of Commerce in Washington, David Hamod says many of
these projects are not in petrochemicals. He says, "You see
U.S. companies like Cisco,
Intel, I.B.M. and others now investing millions and millions
of dollars in some of the biggest markets, like Saudi
Arabia, where they see tremendous growth in the service
sector. And as people begin to diversify their economies in
the region, they recognize that services are an important
part of the future."
Qatar, meanwhile, has used its oil
revenues to expand its petrochemical industries and develop
new avenues for training and educational opportunities for
its people. In Oman, the government is overhauling the
country's financial institutions and privatizing more of its
economy.
More Jobs, Less Oil
But economist Herman Franssen of
the Maryland-based consulting group, International Energy
Associates, says that these countries will have to do more
to lessen their dependence on oil and create new jobs.
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Dubai Skyline |
"They will continue to invest
heavily in the petroleum and gas sector," says Franssen.
"But what they will have to do to follow that up is to
further downstream in those sectors and diversify as Dubai
has done successfully into regional services that are
outside of the oil and gas sector. And tourism for a number
of countries could be highly successful if they follow the
kind of policies that Dubai has followed."
The Dubai Model
For years, Dubai, the second
largest of the seven U.A.E. emirates, has been aggressively
expanding into non-petroleum sectors, such as the media and
communications, and attracting foreign investors. It is
considered by most observers to be an example of successful
diversification in the region.
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