Home/Essays Examples/Politics/Gas and Oil Role in the GCC Region Economy

Gas and Oil Role in the GCC Region Economy

Abstract

The paper discusses what oil and gas are, their formation, elementary composition and its constituent products after final refining is done. It discusses also the nature of states forming the GCC bloc; their objectives and plans for the bloc. GCC stands for Cooperation Council for the Arab states in the Gulf, it is sometimes referred to as the Gulf Cooperative Council. It brings together six major oil-producing states in the Arabian world. These states include Saudi Arabia, Qatar, Kuwait, Iran, Bahrain and Oman. This paper also discusses the economic background of the GCC states and how the subsequent discoveries of oil and gas have improved their economies. The relationship between these countries and other nations is another subject discussed in the paper. The paper details how the oil in GCC region has benefited other nations and the position it plays in the world market. The paper briefly discusses different types of crude oil in terms of density and viscosity paying attention to their distinct references. The resultant different products and their uses are also included in the paper. The discussion of the role of oil and gas in GCC member countries is the core of the paper. The Gulf Cooperation Council was formed by the member states after an agreement which was concluded in May 1981 in Saudi Arabia at a place called Riyadh. Its formation was based on a shared political system, same religion, common objectives, and joint destiny. The GCC states have also cooperated in terms of the military in order to defend one another in case of any external aggression against either of them. This means they are ready to confront security challenges on a collective basis. The paper analyses the possibilities that befall the energy industry in relation to GCC in the near future. Several techniques are used giving priority to studying landforms and also doing seismic analysis.

Introduction

Exploration of oil and gas is done mainly by geological experts; oil and gas are mainly found in the desert regions of the Gulf. The member states of GCC generally led almost similar lifestyles and depended on varied economic activities. Before the oil and gas discoveries, these nations’ economies never performed well and the lifestyles of the people were simple. To give an overview of the nature of the early lives and economies of these nations, it is important to discuss specific cases.

The archeological evidence shows that the activities of man in Kuwait can be traced back to about 8000BCE. Kuwait was inhabited by utub, a federation of tribes, Bani Khalid and the tribe of the Arabian Peninsula amongst others. The people of Kuwait were originally nomadic and at some times depended on pearling and fishing as their main economic activities. Since the introduction of pearling at the beginning of 1900, the industry became overwhelmed and pearling activities were close to total destruction; this subsequently had a negative impact on Kuwait’s economy and its neighboring nations. However, these economies were salvaged by the discovery of oil in 1936 after two years of exploration by the British-America company. The development of the oil fields only began after World War ll. In 1946, the export of oil began thereby changing the economy of Kuwait. This led to the construction of modern health facilities, roads, schools, roads, offices, houses and mosques. By 1960 Kuwait’s income per capita was among the highest in the whole world.

In Saudi Arabia, before the discovery of oil, the natives depended so much on agriculture in which dates and cash crops were grown and long-distance trade was practiced. The absence of natural resources to be exploited incapacitated the natives economically. Oil was discovered in Saudi Arabia in the year 1938; after the discovery and development of the oil field, the economy of Saudi Arabia started to grow tremendously. The lifestyle of Saudi people greatly improved, infrastructural development started and the exportation of oil brought large amounts of revenues. This led to an overhaul of the traditional system of the economy (The Economy, 2010, para17).

Oil Sector Overview

The supply of oil to the world market is greatly influenced by the GCC oil-producing nations. The GCC region is the area with the largest number of the world’s oil and reserves. However, the region has been experiencing constant conflicts which have a great negative impact on oil export to the world market. It is important to note that oil supply to the market may dwindle due to reducing reserves. Nonetheless, there is no cause for alarm because the reserve of oil and gas are still large and can supply the world market for the next many years (Lynch, 2010, para17).

The demand for oil is on the increase, this means the GCC region is naturally expected to increase oil and gas production to meet the growing demand. But there is a great possibility of an imbalance between supply and demand for oil and gas. The world’s economic activities have become greatly dependent on oil and gas as the main source of energy. Even though oil and gas may be enough even for the next many generations, the concern should strongly arise from now to explore other sources of energy. The demand for energy, in general, has surpassed the supply.

Oil and GCC Economy

The countries of GCC are generally dry and hilly; the weather conditions in the regions do not support the large-scale practice of agriculture. The economy is largely based on non-agricultural products, dominated by the production and export of oil and gases. The GCC is one of the most important players in the world oil market. The countries’ economies mainly depend on the export of crude oil and oil products. They have designed ways through which they are involved in Foreign Direct Investment. They are open to foreign capital and resources.

The sizes of economies of GCC states largely depend on their production of oil and its products, diversification success, and the nature of their human resources (Economic Prospects, 2010, p2). Before 1952 when oil exploitation was not yet done on a widened commercial basis the economies of GCC states were relatively small and underdeveloped. Immediately oil exploitation began and when prices of oil started to sky-rocket in the 1970s the living standards of their citizens improved, this was followed by rapid urbanization and the countries quickly rose to first world-class (Economic Prospects, 2010, p3). According to 1999 statistics, Saudi Arabia is the largest economy in the GCC region. Their nominal gross products (NGP) are ordered as Saudi Arabia (140), Iran (60), UAE (50), Kuwait (35), Oman (29) Qatar (19) and Bahrain (11). The approximations as can be noticed are arranged from the largest to the Saudi Arabian economy to the smallest Qatar economy (Economic Prospects, 2010, 4).

With the largest economy in the GCC region, Saudi Arabia should have the largest purchasing power in the region, however, the United Arab Emirates and the smallest economy of Qatar have the highest purchasing powers. The trend of growth rate in GCC is not inconsistent with the size of their economy. In this case, according to statistics recorded for the period running from 1990 to 1999, Kuwait has the largest growth rate at approximately 5.4 percent followed by UAE and Qatar both at around 3.9 percent and finally Saudi Arabia at approximately 1.5 percent (Economic Prospects, 2010, p6). When it comes to exchange rates the GCC member states have ensured longstanding fixed rates in relation to the U.S dollar, the fixed rates are supported by noteworthy official and unofficial foreign exchange reserves produced from oil exports. The GCC has started focusing on exploring alternative economic activities to reduce high dependence on oil products.

The contribution of oil to the GDPs of these member states varies from Iran’s 17 percent to Qatar’s 38 percent. In terms of export, oil accounts for 23 percent, the smallest, in Bahrain to 90 percent, the highest, in Saudi Arabia. It also accounts for 41 percent, the lowest, in Iran’s government expenditure and 89 percent, the highest, in Kuwait’s government expenditure (Economic Prospects, 2010, p14). The potential challenge posed by the energy sector in GCC states is the reduced amount of revenue earnings during severe fluctuations in oil prices. The economic performances of the states are likely to dwindle in a situation where global oil and gas prices fall drastically thereby limiting their foreign exchange earnings.

Over a long period of time, GCC has proven to have very low rates of inflation. This has been due to sensible management of monetary policies, fiscal policies and sufficient goods and services in the market (GCC Economic Overview, 2010, para5).

All the GCC states had an agreement in 2001 to come up with a common currency, the currency was pegged to the American dollar. They also established a common tariff rated at 5 percent. In 2002 the region had a collective GDP of around $339 billion. However, the sufficiency of fiscal policy and preliminary fiscal positions are varied across the member states. Before establishing a common currency the nations should first harmonize their fiscal policies to enhance fair competition amongst them (Fasano, 2003, para6).

The production of oil in the GCC states is mainly meant for export since the economies depend also solely on oil and gas export. However, the nations also use the products locally in fueling their cars, machines and also to generate energy. The nations also use the substances to manufacture other products like weapons and paints. The citizens of these nations are also employed in the energy industry hence improving their lives.

The role of oil in turning GCC countries into developed

The Gulf Cooperation Council is constituted by six countries namely Kuwait, Saudi Arabia, Qatar, Bahrain, UAE, and Oman. These countries came together on a platform of common interests.

In the year 2007, the high prices of oil and the stable levels of production stimulated economic growth in the GCC region. Despite the fact that the member states have tried to diversify their economies the energy sector remains the dominant source of revenues. The states are now encouraging foreign companies to invest in their energy sector so that they are able to maximize revenues from the current favorable oil prices (Global Investment House, 2008, p1). The rich energy sectors of these nations have attracted foreign investors who are willing to inject huge capital into the sector.

The energy prices of gas and oil have made the governments of GCC consider incorporating women into mainstream economic activities. The countries are considering reducing the number of foreign workers. Before the discovery of oil, women had some social barriers that prevented them from participating in certain public activities. With the discovery and increased commercialized production of oil and gas, the barriers have been gradually collapsed to allow women to participate in economic activities (Kwach, 2010, para1-3).

The revenues accrued from oil exports have been used to improve and modernize infrastructure in the economies. This makes economic diversification less costly, however with reserves of oil deposits that are still in terms of hundreds of billions of barrels of oil the rate of diversification is still low (Saif, 2000-2008, p4). The high prices and stock turnover of oil have attracted attention away from the development of the private sector and concentrated it on the public sector whose major concern is oil production. The slow growth rate of the private sector can be attributed to the dominant contribution of oil and gas revenue in the GCC governments’ expenditures.

The discovery of oil in the GCC countries has enabled their economies to be integrated into the world economy. The countries are the major producers of oil in the world; the supply of oil into the world market greatly depends on their productions capacity (Al-moneef, 2006, para1 and 2). The GCC nation-states have experienced massive economic, political and social transformation for the past 30 years. This can be attributed to the gas and oil sector coupled with the politics of oil in the world (Al-moneef, 2006, p12).

The booming oil industries in the GCC states attracted both skilled and unskilled workers from foreign nations. The foreign workers always remit their earnings back to their countries. It can then be safely argued that the discovery of oil in the GCC region does not only benefit the member states but also has contributed to the economic growth of other nations which may not be producing oil and gas. In other words, the countries not producing oil are said to be exporting labor to GCC regional countries and therefore earn foreign exchange in terms of remittances from GCC (Al-moneef, 2006, p21 and 22). It also helps to ease unemployment in countries from which the foreign laborers emigrate.

In terms of demography, the oil discovery has also witnessed the influx of the population of foreign workers. There is grand immigration of people to the GCC region from non-oil-producing states. This has the impact of diversifying the population of the countries. Immigration can only be changed by review on the policies regarding the immigration of foreign workers to GCC. The main incentives to this immigration include improved living standards and a lack of sufficient supply of labor. The improved living standards have also seen reproduction rates increase amongst the native citizens of GCC.

Countries with well-developed tourism sectors have benefited from the conveyance of oil from the GCC region. The movements of tourists from the GCC region to these countries have heightened their foreign exchange earnings. According to recorded statistics tourism seems to have flourished in 1974 and the period between 1980 and 2004. Tourists from within the GCC region increased from 22 percent in the year 1999 to 45 percent in the year 2004 (Al-moneef, 2006, p23)

The oil-producing countries have also used the oil and gas money to create bilateral and multilateral aid, especially to other Arab nations. They use bilateral and multilateral channels to transmit revenues from oil to non-oil producing and or exporting countries. The GCC can provide aid directly by use of financial institutions set up for the purpose by the individual oil-producing nations and can alternatively use collective way through small groups (Al-moneef, 2006, p24).

GCC has greater control of oil prices in the world market. Since the bloc is constituted by the countries with the largest oil deposits they are able to determine the oil prices by deliberately cutting down their oil and gas productions. This will create a short supply and hence keep the prices high. Nonetheless, it is important to note that this strategy of keeping oil prices high can only work effectively when demands for oil in the world market remain high. In the case of global recessions, these countries may be forced to lower the prices since other countries may cut down demand for oil in a bid to cut on foreign spending.

Oil politics has been a source of war in the GCC member states which further has led to the degradation of the environment. The wars have involved member states conflicting with one another and also non-member states. It is argued that Saddam Hussein of Iraq invaded Kuwait in 1990 due politics of oil. The Iraq-Iran war in the 1980s has also drained the financial power of Iraq. Saddam Hussein then wanted the oil-producing states, most of which were members of GCC, to start producing oil on a quota system. The quota system was to stabilize oil prices so Iraq could generate more revenues. The system did not work due to the failure of some states to adhere to their assigned quotas; countries like the United Arab Emirates and Kuwait were overproducing, as a result, oil prices dropped (Krupa, 1997, para2). The intention of Kuwait in overproducing oil, contrary to its quota, was to undermine Iraq. Iraq realized Kuwait’s intention and later launched an attack against it. Thereafter, the environment in Kuwait was devastated by the war and the people started experiencing health complications.

The invasion of Kuwait by Iraq caused the spilling and burning of oil on a large scale. The smoke that went into the atmosphere caused respiratory problems among the citizens of Kuwait. During the same period of war between Iraq and Kuwait, several ships carrying oil and ammunition were sunk leading to the leaking of oil into the sea. The result was the death of aquatic plants and animals.

This war was brought about by the fact GCC and other oil-producing states mainly depend on oil for funding their expenses. Iraq is one of such countries that felt that it could only generate revenue through oil exports in order to pay its debts. It is worth noting that the wars of Iraq and Iran and Kuwait were motivated by oil politics (Krupa, 1997, para5).

The oil in GCC has attracted the attention of many countries to member states and other oil producers. Giving a specific example, it has been argued that the main reason the United States of America has bases in Kuwait, Bahrain, Qatar, and Saudi Arabia and still looks forward to establishing the same in Iraq is the need for constant and excess supply of oil and gas (Askari, 2008, para1).

The account is also given for the political failure of some GCC member states due to oil and gas politics. For instance, with a combined force between the U.S and Britain, the Iran government, then under the control of Mohammad Mossadeq, was ousted in order to protect oil and gas interests. Generally, due to their oil deposits, any GCC member country with good relations with the west can easily get military and financial support against its enemies; whether perceived or real. The GCC has wealth of oil deposits and the U.S has probably the most powerful military might. The readiness of the U.S to offer military support in exchange for oil and gas has made the GCC region to be so much dependent on the U.S in terms of military assistance (Askari, 2008, para6).

The exploration, discovery and drilling of oil have had severe negative impacts on the environment of the GCC member states. There have been crop destruction due to acidic rains which come about as a result of releasing toxic gases of oil into the atmosphere during oil processing.

The current and future of oil and gas in GCC

In the past and present oil has remained one major source of energy in the whole world. Statistics show that oil and gas account for approximately thirty-five percent of the world’s energy sources. This position held by oil and gas will remain since it is expected that energy demand in the world is set to increase in the future.

With the depletion of deposits, the cost of oil is set to go up in the future, this will be attributed to the cost of exploration and subsequent mining and high consumption. In fact, with the current slow-down of the world economy, the oil prices have been forced down. Most countries hit by credit crunch have cut on their expenses and some businesses using oil have slowed down; some have even been closed. This has a major implication in the economies of GCC oil-producing states. If the world economy is not steered back to stability the prices of oil and gas are likely to sink further leading to the inability of GCC to cater for its massive expenditures.

The recent insurgent of Somali pirates has posed a bigger threat to the oil vessels moving to the African and other world markets, especially the ships passing through the Somali coastline. A number of ships carrying millions of liters of oil have been captured and detained for many months by the pirates who only release them after payment of ransoms. This has delayed the oil product from reaching the market on time scheduled.

Then continuous activities of the pirates at the Somali coastline will raise transport costs and insurance premiums paid to insurance companies, these costs, in turn, leads to high prices of oil at the retail levels.

The dominance of the bloc in supplying the world market with oil is likely to dwindle. This owes to the fact that there are many countries involved in exploring and striking their own oil deposits, in fact, some like Uganda have already discovered their own oil deposit. The countries which have struck their own oil deposit are likely to stop or reduce their oil import. The effect this has is reduced demand for oil in the world market and increased production. Chances are high that oil prices will generally reduce with time, if not diversified the economies of these member states will suffer; since oil and gas will no longer bring sufficient revenue for government spending.

The safety of these nations lies in the use of current revenue to develop the private sector and venture into other economic activities that will lead to diversification of their economic participation (Davis and Hayashi, 2010, para5).

Conclusion

For the past forty years, the economies of GCC member countries have undergone rapid transformation due to the discovery of oil and gas. It can be argued that the politics of the oil and gas industry have played a major role in transforming the political, economic and social history of these nations. The countries of the GCC region have the largest oil deposit reserves as compared to other oil-producing nations. These have made them the dominant oil-producing bloc in the world and therefore have a good share of the world’s oil market. In other words, the economies of GCC are integrated into the world market economy. The world nations are highly dependent on oil to fuel motor vehicles and therefore, consume hundreds of millions of barrels of oil in a day. These consumptions are used in economic development. It is right to argue that the economies of other nations are intertwined with those of the GCC.

The oil in the GCC region attracted foreign laborers hence helping to ease high levels of unemployment. The main incentives are improved living standards and a lack of enough labor in the oil and gas industry. Apart from the foreign laborers, the discovery of oil in the GCC region helped to create jobs for the citizens of the member states. Economically, increasing government spending is one way through which unemployment can be reduced. With the oil boom in the GCC region, government spending in these countries greatly helped to reduce unemployment. This can explain why the states are full of foreign workers.

The energy sector generates revenues to GCC through forwarding, backward, fiscal, socio-political and consumption links. These links enable the countries’ public sector to spend and invest without the option of taxation. The GCC region has contributed to the development of non-oil-producing states especially the Arab countries. The contributions have been ensured through tourism, bilateral and multilateral aid, worker’s remittance, and investment flows.

To be able to face future challenges, the GCC states must place emphasis on diversifying their economies. They should pursue other economic activities that are far removed from the energy sector. Their main focus should be directed towards strengthening the private sector. The encouraging of women to participate in the economic activities of the GCC member states has only seen them join the public sector. The economies should also ensure that women get into the private sector development (Askari, 2008, para10).

It can be reasoned out that the formation of GCC was actually based on oil and gas production. This is why it is instituted by only oil-producing states within the Gulf region. They saw the need to join their economic, social and political forces to secure themselves from dangers emanating externally. However, there have been internal conflicts within the GCC bloc due to political differences among the member states. The differences are based on the interpretation of Islamic laws.

The current world economic world slow-down almost threatened the economies of the GCC since this had the potential of creating a deficit in the economies. However, the high oil prices saved the situation even though certain nations cut their spending on oil. The current and futures oil prices are affected and determined by the rate of production and the illegal piracy activities taking place along the Somali coastline besides demand in the world market.

The challenge likely to be faced by GCC nations in the diversification of their economies is the lack of a workforce that is skilled. The countries should prioritize investing in research and innovations. Researches that have been conducted in the world have shown the region is still slow in education and inventions.

The countries are also faced with problems of governance. They are still ruled and governed by families based on traditions. This cannot encourage proper accountability of the government to the citizens (Davis and Hayashi, 2010, para5). It is projected that this form of governance and the willingness of these nations to pay attention to the private sector will establish the countries’ future development in the next twenty years.

In summary, the oil boom in the GCC states has ensured the increased living standard of citizens of the country, has also integrated their economies with that of the world and attracted many foreign companies. Oil and gas have contributed to the supply of energy to various parts of the world. Again we can argue that because of oil the nations have made several enemies with other powerful nations like the U.S and Britain. They have won the attention of the whole world as they are the main suppliers of oil in the world market. The economies of these nations have not witnessed major inflations in the recent past. This is due to the large number of revenues that accrue due to oil and gas exports to the world market.

Works Cited

Al-moneef, Majid. “The Contribution of Oil Sector to the To Arab Economic Development.” Vienna, Australia. 2006. Web.

Anderson, Roger. “Why Is Oil Usually Found In Deserts And Arctic Areas?” Scientific American, 2006. Web.

Askari, Hossein. “U.S Is In The Persian Gulf To Stay No Matter Who Is Elected.” Foreign Policy Forum. 2010. Web.

Davis, Nicholas and Hayashi, Chiemi. “The Gulf Cooperation Council (GCC) Countries and The World: Scenarios To 2025-Implication for Competitiveness.” World Economic Forum, 2010. Web.

Economic Prospects. “Accessing the Middle East.” 2010. Web.

Global Investment House. “GCC Oil Sector – Major Projects Underway.” Global Research, 2008. Web.

Joaquin, San. “What is oil?” San Joaquin Geological Society, 2009. Web.

Krupa, Melissa. “Environmental and Economic Repercussions of the Persian Gulf War on Kuwait.” ICE Case Studies. 1997. Web.

Kwach, Nadin. “GCC women to get an enhanced role in the economy.” ABQ Zawya Ltd. 2010. Web.

Saif, Ibrahim. “The oil boom in the GCC countries, 2002-2008.” Carnegie Papers. 2009. Web.

“The Economy”. “The Development of the Saudi Arabian Economy.” 2010. Web.

Fasano, Ugo. “Monetary Union Among Member Countries of the Gulf Cooperation Council.” 2003. Web.

Lynch, Michael. “Warnings about oil supply.” CRYING WOLF. 2010. Web.