x Abu Dhabi, UAESunday 23 July 2017

Shale oil boom a ‘wake up call’ for Gulf nations

The world will need the energy of the oil-rich states of the Arabian Gulf for many years yet. But the time to diversify GCC economies is now

North America’s new-found bounty of shale oil is causing countries in the Gulf to assess how quickly they have been diversifying their economies.

One estimate by the Organisation of Petroleum Exporting Countries, which includes most of the GCC nations, is that the new sources will cost eight per cent of the group’s market share over the next five years.

But, as The National reported yesterday, Saudi assistant oil minister Prince Abdulaziz bin Salman bin Abdulaziz has welcomed this new competition, saying that the demand for energy is such that the market will remain stable.

However the main challenge identified by Prince Abdulaziz is that downstream petrochemical industries in North America are about to reap the rewards of the boom in cheap and plentiful shale oil supplies, traditionally a benefit exploited by Gulf nations.

He said the arrival of this direct competitor should “serve as a wake-up call” for the need for economic diversification.

This did not necessarily have to be outside the petrochemical industry, and one option was for GCC nations to hedge their positions by investing in some of these shale oil processing plants in North America.

So far the Gulf nations have tackled this challenge with varying degrees of success. In Kuwait, for example, the contribution of most non-oil economic sectors declined after the Iraqi invasion in 1990. Today, the nation needs oil prices to stay high to ensure its income continues to cover expenditure. Long-term, that poses a problem for the country’s economy – an issue that needs to be addressed early.

A parallel can be seen in the housing shortage in the country. An estimated 174,000 new homes will be needed by the end of this decade. But in the past 60 years, Kuwait’s public housing programme has only built just over 93,000. A rapid building programme is needed.

The situation in Kuwait demonstrates two things: firstly, the importance of diversifying the economy and building up the private sector (which could help speed up the provision of new housing). And, secondly, the importance of starting well before things come to a crunch.

The world’s need for oil and gas will remain high for decades, meaning that the oil-rich countries will always have revenues. But the time to prepare for adversity is when the weather is calm: that means building new sources of revenue as well as new homes.