By Prashansa Srivastava
The economy of the Middle East is very diverse and it currently faces unique challenges. Collectively, the region is best known for producing and exporting oil. The oil industry greatly impacts the entire region, both through the wealth that it generates and through the movement of labour.
Abundance of oil in the Middle East
Historically, oil-exporting Arab economies have been heavily dependent on oil. In all of these countries, economic activity, fiscal revenue, export earnings, and foreign exchange are directly and indirectly dependent on oil production to a large extent. Most of the world’s hydrocarbons are concentrated in this geographical location leading to a heavy oil dependence and creation of ‘petro-economies’. The heavy reliance on the supply of oil and natural gas means that the Middle East has played an important role in global politics and the international economy. However, with the slowly changing attitudes in favour of renewable sources of energy, the world and the Middle Eastern economies are facing a changing economic landscape.
The growth cycle of the Middle East economies
The Middle East experienced tremendous economic growth from 1965 to 1985. This growth was due to the dramatic rise in oil prices, which in turn were related to the 1973 Arab-Israeli War and the 1979 Iranian Revolution.
As oil prices rose to new highs, most states in the Middle East benefited from heightened revenues in the form of high export earnings. This led to the creation of many job opportunities due to the booming economies of the Gulf. The rapid economic growth was accompanied by dramatic gains in a number of social indicators. For example, infant mortality was halved and life expectancy increased by more than ten years.
The economic growth of the 1970s and early 1980s came to a decline in 1986 when the price of oil fell from $28 per barrel in December 1985 to $10 per barrel in July 1986. This sharp drop in price was a result of the overproduction of oil. Suddenly, the foreign export earnings that had led the growth of the last two decades fell, which affected all the states in the Middle East.
Challenges facing the economies
The economies of the Middle East face challenges of creating enough jobs in tandem with the rapidly growing population. There is a need to shelter their economies from the volatility of oil prices and ensuring sustainable growth once oil resources are depleted. Oil price volatility continues to threaten the economic stability of major oil-exporting countries. Furthermore, unrest created by wars, regional crises, and long-standing religious and political tensions has led to uneven economic growth and destabilization.
The ever-rising rate of population growth and steep fluctuations in the price of oil have forced economies to diversify their sources of income. Removal of fuel subsidies globally and steps towards cleaner fuels have also led to substantial drops in oil-generated revenues. Elevated oil price volatility could undermine government spending and fiscal paths. Spillovers from existing conflicts in several countries, as well as a heightened incidence of terrorism, are risks to regional economic activity. Rising conflict-related risks would likely increase economic uncertainty and slow down investment. Fiscal and structural reforms could trigger public discontent, with negative effects on confidence, foreign investment, and growth.
The energy revolution
The global energy system is currently witnessing profound changes. The shift in demand away from oil and towards renewable sources of energy means that the economies must undertake drastic economic reforms. Oil is still the world’s leading fuel but has steadily been losing market share over the years. Global oil consumption has been facing weaker global growth rates as compared to fossil fuels. The implications of these trends in energy supply and demand for prices are that those for fossil fuels are likely to stagnate and possibly even fall in real terms for the foreseeable future.
A combination of economic necessity and a need for energy independence has led to many countries moving strongly towards alternate sources of energy. In the oil exporting countries, the large growth in population has translated into a staggering increase in the demand for power. Several countries have struggled to keep up, resulting in severe blackouts and shortages. This, along with depleting oil reserves, has led to a growing interest in renewable energy in the Middle East. The Middle East is harnessing its immense solar power with diverse and innovative projects. Wind power also holds strong potential for wind farms.
The post-petroleum era
Saudi Arabia has said it wants to end its “addiction to oil” with economic reforms and is now restructuring government departments to drive through plans for a post-petroleum era. The above signs are encouraging; however, to fully decrease their dependence on oil and gas sectors, they must set up compatible environments to increase future and long-term domestic and foreign investments. These countries must also open up their electricity sector to private power companies, which can bring the expertise and the needed finance to produce affordable renewable energy on a commercial scale. They must also ensure transparency and tackle rampant corruption. Furthermore, the governments must gradually do away with market distortions, such as subsidies on fossil fuels and allow the market to react freely. Otherwise, the Arab world stands to face a grim economic and political future. However, the track records of authoritarian resistance to both political and economic change suggest that they may fail to meet the challenges posed to them by the energy revolution. If the economies cannot adapt sufficiently to the shift away from oil, an existential crisis of these economies looms large. However, if they can successfully clear these hurdles, they can usher in a carbon-free future with a thriving renewable energy industry.
Featured Image Source: Pexels
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