In the same week that the Paris Agreement on climate change was signed, Saudi Arabia unveiled its Vision 2030 strategy. While the timing is probably coincidental, the two events are linked. Saudi Arabia’s unveiling of its strategy to diversify its economy is the most recent and high profile in a series of reform announcements by governments in the region. The UAE is dismantling its energy subsidy regime and Qatar also has its Vision 2030. Are these and other responses to low oil prices likely to be more effective than past reform efforts? The Gulf Co-operation Council (GCC) economies appear to be on the verge of a period of far-reaching reforms in response to low oil prices. On the basis of past reform efforts, the outlook is not promising but there are some new dynamics this time round which could lead to a different outcome.
Past reform efforts in the region have included initiatives to encourage employment of nationals, particularly in the private sector and open the economy to foreign investment. On both fronts, the results have been a lukewarm success at best. All of the GCC economies rely on expatriate works, especially in the private sector. In Saudi Arabia, nationals make up less than one quarter of the private sector workforce. Foreign investment enthuse economies has also been confined to select sectors such as the oil and gas sector and therefore made little impact on diversifying the economy. True, many foreign companies are represented in the region and their products are readily available. However, much of this business in conducted through franchise operations and therefore actual FDI is limited. Across the GCC, the private sector remains in the hands of a small group of family-owned conglomerates with strong political connections.
So why should this round of reforms be more successful and lead to structural change in the GCC economies? The answer lies in the long term threat that the GCC economies are facing and in those promoting reform. The long term threat is not oil prices staying lower for longer. Rather, the threat is the long term constraint on demand growth for oil caused by governments around the world implementing policies to limit the use of oil to meet their climate change commitments under the Paris Agreement. The International Energy Agency in recent years has reduced its forecast for oil demand in 2030 by at least 16 million barrels per day. They are not alone. A range of other government and industry bodies are also forecasting slower demand growth for oil.
The world’s reduced appetite for oil is an existential threat to the oil dependent economies of GCC and the wider region. Past periods of low prices that have prompted reform effort have not posed the same level of threat. This is a threat that faces future generations. So, it should not a surprise that it is the next generation of leaders, personified by Prince Muhammad bin Salman in Saudi Arabia, who are driving the current reform efforts. They are the leaders who have to overcome the threat. Failure to place their economies on a more sustainable basis will pace the survival of their countries at risk. Other countries in the region should also take inspiration from the GCC’s efforts. even if their economies are not oil dependent, they face structural economic issues that threaten the underlying stability of the country.