Opinion |

Arab Oil Money Is Running Out, and Chaos Will Likely Follow

Cash from the Gulf states has been smoothing over the roughest edges of the region’s failed economies. But the oil that paid for it won't last much longer

David Rosenberg
David Rosenberg
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Flying high for now in Doha.
Flying high for now in Doha.Credit: Corinna Kern/Reuters
David Rosenberg
David Rosenberg

Around the world, they are known as the GCC, for Gulf Cooperation Council. But in the Middle East, a more apt acronym for these rich petro-states might be ATM. Since at least the 1970s, Saudi Arabia & Company have spread their wealth around the region, buying friends and influence, and putting out fires.

Oil wealth is such a given that Donald Trump’s Peace to Prosperity Plan unveiled last month, nonchalantly assumes that the Gulf Arab states will foot much of the $50 billion in aid to get the State of Palestine on a firm economic footing. Indeed, keeping the GCC’s wallets open is probably the main reason why the White House thwarted Netanyahu’s annexation plans.

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Trump isn’t the only one counting on Gulf money. Hamas and Israel are relying on Qatar to deliver suitcase loads full of cash to keep Gaza one step removed from humanitarian disaster and all-out war with Israel. It was $23 billion in Gulf money that kept the Egyptian economy from collapsing in the wake of Abdel Fattah al-Sissi’s coup. Lebanon has long counted on Gulf aid and until recently hoped to get some bailout money to avoid default.

These are just a few examples of how oil wealth from the Gulf has become so critical to the Middle East. But, as the International Monetary Fund revealed last week, the Arab world’s giant ATM is running out of cash.

How to spend $2 trillion in 15 years

How quickly depends on the price of oil going forward. If prices stay at about their current levels, the estimated $2 trillion in financial wealth they have accumulated could be down to zero in 15 years. Even $100-a-barrel oil would only delay the inevitable until 2051; if oil falls to an average of $20, the day will arrive as soon as 2027.

What’s happening is that the fundamentals of the global oil market are changing rapidly. On the one hand, new technology has created new sources of fossil fuel, most notably from American shale; on the other, climate change is accelerating the transition away from fossil fuels to renewables. Meanwhile, economic growth hinges less on consuming more petroleum than in the past.

The result will be that global demand for oil is expected to peak in about the year 2041. Even before that, demand will grow much more slowly than in the past and prices are unlikely to reach their previous peaks of $100 a barrel and more.

Being a financial institution, the IMF is interested in the fiscal impact of the new oil era on the GCC countries. In short, it says life is going to be tougher for the residents of the Gulf, who have enjoyed an easy life free of taxes (until recently), guaranteed jobs in bloated civil services, and superb infrastructure.

Oil profits can no longer pay the bills. The GCC states know this and have begun to wean themselves off oil. Most notable is Crown Prince Mohammad Bin-Salman’s Vision 2030 plan to diversify the Saudi economy into high-tech, tourism and other industries.

Yet, even if he succeeds (which I doubt he will), the new Saudi economy won’t be able to finance the lifestyle Saudis have become accustomed to. As the IMF points out, GCC governments now get 80 cents for every $1 of hydrocarbon GDP they generate, while the rest of their economies generate just 10 cents to the dollar. To make up the difference, they will have to raise taxes to prohibitive levels and/or cut back spending sharply.

The process has already begun but, as the IMF warns, most GCC countries have to do a lot more cutting to avoid running down their accumulated savings.

The IMF only makes a passing reference (“a difficult intergenerational choice”) to the social and political impact of this process, but it’s obvious that it’s going to be enormous.

Genteel but shabby

At home, it’s not at all certain that the Gulf regimes will be able to easily weather the transition from being among the world’s wealthiest countries to life as genteel, shabby middle income states.

The political stability of the Gulf is partly grounded in the regimes’ royal pedigree, but it’s also grounded on their ability to spread the wealth. Exhibit A: When the Arab Spring exploded, the GCC countries spent heavily on pay raises and other goodies to ensure political quiet. Next time around, that won’t be a realistic option.

That is worrying enough, but the impact of a poorer Gulf will stretch across the Middle East. It’s Gulf money, far more than its dubious military prowess, that is playing a critical role in the fight against Iran’s regional ambitions. Likewise, its Gulf money that keeps afloat economically struggling countries, like Jordan and Tunisia.

The Gulf is not only a gargantuan ATM but a giant employment agency for the Arab world, too, providing jobs for some 25 million Egyptians, Lebanese and Palestinians who can’t find work at home. Expats make an important contribution to their home economies and tamp down the political risk steming from masses of unemployed. But as the finances of the GCC countries get harder and they push more and more of their locals to join the workforce, these expats’ jobs are under a growing threat.

If the Middle East seems perpetually chaotic now, wait another 10 years when there are less money and fewer jobs to buy a modicum of peace and stability. The worst has yet to come.

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