Cheap Oil Is Existential Danger to the Gulf States

They need crude to stay sky-high in order to keep spending, including to keep their populations quiescent.

Kuwaiti Airways employees went on a three-day strike in April. A month earlier, customs employees went on a one-week strike demanding a pay raise. Other branches of the Kuwaiti public sector – which employs 90 percent of the Kuwaiti workforce (not including foreign workers) – are tough negotiatorswhen it comes to pay: recently the state agreed to raise salaries by 25 percent.

On the face of it, this rich oil state – which was spared the rumblings of the Arab Spring almost entirely – can afford to pay its citizens in exchange for calm. With foreign currency and gold reserves estimated at $28 billion, GDP running at $150 billion a year and GDP per capita of $41,000, Kuwait should have no problem to continue splashing money around.

Yet earlier this month the World Bank warned Kuwait that if it doesn't reduce government expenditure and diversify its income sources, in five years it could be in financial crisis. Why? Because its savings from oil exports could run out.

Key to this concern is the fact that oil prices fell to their lowest level in six months. With that, and an embargo of Iranian oil looming, the Gulf states face a loss of income that threatens to destabilize their welfare systems. 

Kuwait is not the only wealthy Gulf state concerned about the drop in oil prices. The United Arab Emirates, for example, needs oil to remain above $92 per barrel to keep its budget balanced. Bahrain, still unsettled by last year's protests against its regime - and the Saudi invasion solicited to quell them - needs oil to stay above $114 per barrel to balance its budget, given the losses in its tourism industry and in the capital market last year.

These statistics could affect more than just the Gulf States' national economies. Oil prices could have implications for negotiations with Iran over its uranium enrichment program. Soon enough the embargo on Iran's oil export is due to begin. Saudi Arabia has said it will make up the supply shortfall by increasing production.

The aim is to preserve normal oil prices in the world market, so that sanctions on Iran don't shatter the European economy and hurt the U.S. 

But here's the rub: The Gulf States' policy on Iran and their national needs don't line up. Saudi Arabia, with reserves of gold and foreign currency reaching $500 million, is the only state capable of getting Egypt back on its feet while at the same time undermining Iran by stabilizing oil prices.

However, Saudi Arabia's support of sanctions on Iran, combined with its offer to compensate for European oil shortages, is part of the reason for the drop in oil prices. By extension, Saudi Arabia  shares responsibility for the ensuing damage to its neighbors' economies (and to the Gulf States' abilities to continue functioning as welfare states).

For example, Kuwaiti workers retire at 55 (provided they worked for 20 years). In addition to pension contributions made by the employee (5 percent), and the employer (10 percent), the state puts in another 10 percent to cover pensions. 

The recent and future Kuwaiti salary raises will have far-reaching implications for future payments and for national savings. There is a danger that sanctions on Iran will be determined not only in the U.S. Congress or the halls of the United Nations, but also in the pension funds and tourist resorts of the Gulf States.

If Kuwaiti pensioners, Dubai bon vivants and the Qatari education system suffer, oil barrels will come with a new price tag – one that will no doubt make the Iranians very happy.

Protest in Bahrain