What happens when we no longer need oil from the middle east?

Hello readers, welcome back. In my last post I discussed how Tesla could be superseded by German car manufacturers and how Tesla needs more than Elon Musk to prevent others catching up or even overtaking them. I also discussed some wider issues having been inspired by the things discussed in the article by the economist-“The death of the internal combustion engine”, such as whether people could sleep while they commute to work or if Chile could become the new Saudi Arabia. I would be interested to hear your thoughts about Tesla and the future for electric cars so if you have anything to share please email me at: rajveersira@gmail.com.

It only follows that if we are headed to a new world in which the petrol engine has finally become obsolete and that technology such as lithium-ion batteries, or hydrogen fuel cells that are currently being researched take off, then we must consider what could happen to heavily oil dependent countries, especially Saudi Arabia and the UAE. Such countries are now starting to realise that their oil dependency could become an issue when either oil runs out or we develop technologies that means we no longer require it, whichever comes first, its clear that unless these counties change their setup they could be in for sharp economic decline. One obvious rebuttal is that states like Dubai have invested heavily in infrastructure and tourism and is home to some of the most famous and luxurious hotels in the world built exclusively for the elite and superrich. With little tax and a generally safe environment it attracts billionaires from all over the world. However it could be argued that this transformation is happening too late and what should have been done is what Denmark adopted. Denmark was previously an oil rich nation; however instead of using it to fund its economy and reduce taxes for its citizens it placed the money in a sovereign bond and used it to invest in the infrastructure of the economy. Also places countries in the middle east are extremely hot and especially with the increase in global warming they could face extreme temperatures such as 45-50 degrees celsius, thus forcing the tourism economy to contract.

Whilst at the Institute of Economics Affairs (IEA), and the debate chamber in London we looked into some of these issues and one alarming statistic that caught my eye was that without oil Saudi Arabia’s GDP could be below levels seen in 1950. (GDP-gross domestic product-a measure of the total value of goods and services produced in an economy over time). In this post I will outline and develop the implications for countries like Saudi Arabia. Unlike some of my other recent posts, there won’t be too much economics jargon which should hopefully make the most easier to understand and relate to.

The key point about oil is that it grants countries power. It enables them to build mile high sky scrapers in the dessert, construct some of the most impressive hotels in the world, abolish the idea of taxation and live a life of luxury and style. The problems start to occur when this magical substance starts to run out, or worse still if we no longer need it. As it stands the oil industry is divided about when to expect peak demand; Royal Dutch Shell says that it could be little more than a decade away. However prices are likely to be affected before then. Since nobody wants to be left with useless oil in the ground, there will be a lack of new investment, especially in high-cost areas such as the Arctic. By contrast, producers such as Saudi Arabia, with vast reserves that can be tapped cheaply, will be under pressure to get pumping before it is too late: the Middle East will still matter, but a lot less than it did.

Despite the fact that there will still be a market for natural gas to generate electricity for electric cars, the volatile nature of oil prices will strain countries that depend on hydrocarbon revenues to sustain their GDP. Saudi Arabia derives more than 80% of its total revenues from the sale of “black gold”, according to official government figures.

Now is the time for the Kingdom to adopt change. Saudi Arabia already has a good start by having the lowest debt to GDP ratio of any G20 country. The country should really be thinking about diversify its economy, creating more jobs, embarking on a programme of privatisation and tackling the high level of domestic energy consumption.

I will now discuss a concept known as ‘rentierism’ that I was introduced to at the debate chamber:

In oil states people don’t pay tax/income tax is incredibly low. The large state almost communist like control provides most public services such as healthcare and education as well as paying its citizens a monthly income. This is essentially like buying people’s silence and the name is derived from the fact that the state are renting people’s consent with money, food and services. Economic Growth in the middle east on paper is very good. However this is unsustainable. This is because they are depreciating their capital and when oil runs out they will run into problems. At the moment it could be termed by an economist that middle eastern countries are just liquidating their assets.

However the gulf states as discussed above are investing in other industries. The question is, it it too late and will it be too hot for tourism. Its almost ironic that burning fossil fuels like oil which has partly been supplied by the middle east, has accelerated global warming and the enhanced greenhouse effect, leading to the rise in global temperatures. Gulf states who are desperately developing tourism may need to reconsider and start diversifying in other sectors if it becomes too hot.

In conclusion we could say that the middle east is experiencing an economic time bomb or a ‘Resource Curse”:

  1. Their Balance of Payments is very good at the moment; however, their farming is very poor due to the climate and poor soils. As the population increases, the balance of payments will become a deficit. (Refer back to the post on trade if you can’t remember these terms).
  2. Number of jobs in the economy of these countries is inflated. In the long term the state sector will decline meaning jobs will decline, unless they undergo a programme of privatisation.

 

Sources Used:

https://www.economist.com/news/leaders/21726071-it-had-good-run-end-sight-machine-changed-world-death

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/12012347/Saudi-Arabias-pockets-are-deep-enough-to-weather-oil-price-slump.html

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