With the sky no longer the limit for Middle Eastern oil prices, Gulf Co-operation Council states must adapt and find new markets, or face the consequences.
Decades of oil dependence in the Gulf Co-operation Council (GCC) have imprinted on the region in profound ways. High average oil prices helped to nurture an environment of economic isolation and self-reliance in which local populations were shielded from the worst effects of globalisation. But new technologies introduced in the shale oil fields of Texas and North Dakota have changed all that.
An effective oil price ceiling now exists, and markets across the GCC are having to recalibrate their social and economic models. Some progress has been achieved; technical reforms to capital markets in Saudi Arabia are a case in point. But as one international banker based in the region puts it, this represents the "low-hanging fruit". Much tougher reforms lie ahead.
This new reality is driving the constituent markets of the GCC towards the common goal of non-oil, private sector-led growth. To get there, these countries are (nominally, at least) embracing foreign investment and privatisation. Expensively sourced reports highlighting the region’s non-oil economic potential litter the internet, while Western consultants prowl the hotels of Gulf capitals. But four years after global oil prices first crashed, progress has been slow. The privatisation drive has failed to materialise; the shelving of the Saudi Aramco initial public offering stands as a totem to this failure.
In the coming years, the region’s fortunes will increasingly hinge on foreign investment. Greater interdependence with the global economy is likely to drive much-needed, if painful, social and economic change. Over the long term this could include the disruption of cherished national industries and higher levels of foreign ownership of onshore companies.
As these trends play out, far-reaching cultural changes will be required. GCC nationals will need to be better equipped to deal with a more uncertain future through improved educational and training structures. Regional administrations will also need to modify their behaviour as new reputational risks emerge – most will have to recalculate the ways in which they treat academics, journalists and other freethinkers, for instance, as recent examples have made clear.
The Gulf states now have an opportunity – and an urgent need – to address these challenges. Those that can reform have much to gain, while those that fail may pay a heavy price.
