FacebookTwitterGoogle+RedditEmail

The Dark Side of Depending on Black Gold

by

shutterstock_115189144

The development of oil prices between 2014 and 2016 has seen a sharp decline from well over $100 in mid-2014 to under $30 in early 2016. While for most of us in the West, the impact of the dramatic dip in oil prices is limited to a pleasant reduction in the cost of filling up at the gas station, this article will examine the impact on countries whose entire economy depend on oil and gas as well as the consequences of this development for the citizens and residents of such countries.

While there are already developments that are occurring as a short-term reaction to the slump in oil prices there is little agreement among economists, analysts, and politicians on what that future development in the Gulf Corporation Council (GCC) may look like. Hence this article will specifically look at Qatar as an illustrative example, not because it is necessarily disproportionately affected by this issue relative to other countries, but because it is representative of a hydrocarbon-based economy, with over 90% of the country’s GDP attributed to oil & gas production and because of the country’s dependency on oil money to attain a number of goals, ranging from regional political influence to drawing global attention to itself through sports events like the FIFA World Cup 2022.

Dip in Oil Prices

The current situation is the result of a perfect storm, from the perspective of oil-producing countries: China, the world’s second largest oil consumer (after the United States), has experienced substantially slower economic growth, reducing the expected global demand for oil in the foreseeable future. The monetary response of the Chinese government to the country’s economic slowdown has been a depreciation of its currency, the yuan, making oil imports more expensive and therefore decreasing demand further. At the same time, since Iran resumed a normal relationship with the rest of the world following its nuclear arms agreement and the removal of embargoes and recommencing of trade, further increased the global supply of crude oil and gas. Adding to the situation, oil production in the United States has surged through the increased extraction of shale oil through fracking, doubling the country’s output during the last five years, surpassing Saudi Arabia as the world’s largest oil producing country. Overall, a number of contributing factors have aligned in such a way, that the price of oil has plummeted beneath $30.

Looking Beyond Oil and Gas

Qatar is a small peninsula, spanning only 11.5 thousand km² and jutting into the Persian Gulf. More than 90% of the country’s GDP, which is the highest per capita in the world, results from the production of oil and gas. 15 billion barrels of oil lie beneath its desert sands, but that pales in comparison to the country’s natural gas reserves, which amount to 13% of the world’s total supply and the world’s largest natural gas field, the North Dome, lying at its northern shores.

In recent years, Qatar has made substantial investments in order to diversify its economy and reduce the country’s dependence on hydrocarbons. The citizens and residents of the country also benefited from an expansive social welfare system and a range of subsidies which covered amenities such as electricity and water, health insurance, education as well as extremely generous financial provisions for its citizens. Petrol prices are also subsidized and were, until recently, set at around 25c (US) by the government. With the government budget slashed as a result of the decreasing oil and gas revenue, the price of petrol in the small Gulf state was increased by 30% on 15th January 2016. So while the price of petrol is decreasing around the world, ironically, it is increasing for the residents of Qatar. One of Qatar’s priorities in its vision for the year 2030 was to be a cultural hub for the region and beyond, prompting billions to be spent on the construction of museums and amassing a sizable collection of famous paintings. The Qatari royal family’s investment arms are responsible for the acquisition of many of the most prominent (and expensive) properties in London such as The Shard, Harrods, 10% of the London Stock Exchange and others. A whopping 15 museums were planned for construction in the country’s capital, Doha. Currently only 4 are planned to be executed. Just how much of that reduction can be attributed directly to the price development of hydrocarbons cannot be said, as there is certainly an element of correction from what were ambitions plans at best, delusions of grandeur at worst. However, it is common knowledge that when a governmental budget shrinks, cultural expenses are often among the first to be cut. It seems likely that the budget deficit played a strong role in this decision process, considering that in 2013, just before the slide of oil prices, the staff of the national museums were pegged to double from 1200 by 2015, when in fact the number of employees has been cut to only 800. While Qatar’s museums still boast sizable collections (and are far from crowded), if the government budget were to remain on a comparable level, it is certain that many of the investments and expenses, that could be considered non-core activities, i.e. not relevant to the country’s economy, security, or other vital areas, are likely to see substantial cutbacks. Frivolous expenses for glamour and prestige, with no prospect of purpose of making a return did not matter at oil prices over $100 per barrel –now they do.

The most well-known of Qatar’s prestige-projects is the 2022 FIFA World Cup. Though it is unlikely to be severely impacted due to the importance of the event to the country, it too will not go unscathed by tightening budgets. An intricate modern metro system that was introduced as part of the transportation plan for the World Cup will not be completed anywhere close to the scale in which it was envisioned. Instead of 4 metro lines, only 1 is still planned to be operational by 2022. Again, one cannot be certain that this is due to budget restraints, as large-scale construction projects in the Middle East more often than not have overly ambitious timelines with long delays in the actual execution being implicitly accepted as a fact of nature. However, the fact that even prestigious projects such as the World Cup are having fat trimmed indicates that Qatar is no longer able, or willing, to simply throw money at an issue until a problem is rectified.

Clearly, the government budget would show reduced spending in a number of areas, though the impact on the country’s population this would have is probably not too dramatic, seeing as the reductions would realistically be a categorical shift from opulent to still pretty extravagant. But would the impact of long-term low oil and gas prices be on the economy and how would that affect the country’s plans? This is certainly entering more speculative territory, as it is a scenario which was deemed impossible only a few years ago and would still be considered rather unlikely. In fact, I’d wager that the country itself doesn’t have detailed plans covering this eventuality. It is a difficult conundrum that would take place: Should investments be made to strengthen non-hydrocarbon related activities, or should the country try to garner as much hydrocarbon wealth as possible and live off a sovereign wealth fund for as long as possible?

It has been the government’s declared goal for a number of years to diversify the country’s economy and therefore reduce its dependency on oil and gas. Such projects include the construction of a number of satellite campuses on US universities and the construction of the Qatar Science and Technology Park, in an attempt to shift towards a knowledge-based society. The national airline, Qatar Airways, as well as the substantial funding and luxurious conditions offered to numerous international companies as an incentive to open subsidiaries or research centers also contribute to this strategy. While any investment in education is certainly worthy of praise and the societal benefit of learning goes beyond the mere material impact, it cannot be ignored that these are hugely expensive projects which have, as of yet, been unable to make a dent in the country’s dependency on hydrocarbons.

Anticipate Changes Ahead

With the size of the governmental resource pie shrinking, I believe that the government and citizens of the country will be more concerned with retaining as much of that pie in the future, rather than wagering on alternatives which may or may not slow down the shrinking of the pie. Realistically speaking, this may not be the worst strategy. Even the country’s most well-known enterprise, Qatar Airways, is economically not viable and relies for survival on cheap kerosene and subsidies. At the end of the day, the only comparative advantage in the global market is the presence of hydrocarbon resources and no endeavor to prove otherwise has proven successful.

In order to remain in control in a country in which citizens are outnumbered by migrants 8 to 1 and to ensure that the country’s resources aren’t siphoned off, the government, as in most of the other Gulf monarchies, has been tightening regulations which restrict access to high-level positions in government entities and government-owned companies to national citizens which is known as Qatarization. What is possibly an understandable move and sentiment could prove as catastrophic as Mugabe’s agrarian reforms in Zimbabwe. Due to a generational lag, with few Qataris enjoying a rigorous academic education prior up until a few years ago, many individuals in leadership positions are not the most competent people available for the job. As previously discussed, I expect efforts to expand the reach of these programs to intensify in the case of prolonged low oil prices.

The increased nationalization of the country would not only be a protective reflex, but would also be in line with the entire rational under which the country operates. The citizens of the country will be happy as long as their personal wealth and prestige renders them incapable of raising any qualms with the leadership of the country. The monarchy’s legitimacy lies in its ability to distribute wealth among its citizens. In case of a diminishing ability to distribute such wealth, the leadership may be vulnerable to challenges from within its citizenry. As the royal family is aware of this, it is unlikely that that the government handouts to citizens or rampant nepotism within government agencies would be reduced or cease to exist any time soon.

Finally, many of these potential consequences are unlikely to occur, both in the short term, or even at all. Personally, I believe a number of oil and gas producers would cut down production, leading to an end of the glut and a normalization of the hydrocarbon prices within a few years. Nevertheless, it highlights just how dependent Qatar, and other countries in the Middle East, are on the wealth supplied by hydrocarbons for their strategic investments, economic development, and internal stability.

 

Michelle Pinto is currently a graduate student in Germany. Her research interests include Middle Eastern politics, international communications and popular culture in the United States.  

More articles by:

CounterPunch Magazine

minimag-edit

August 23, 2016
Diana Johnstone
Hillary and the Glass Ceilings Illusion
Bill Quigley
Race and Class Gap Widening: Katrina Pain Index 2016 by the Numbers
Ted Rall
Trump vs. Clinton: It’s All About the Debates
Eoin Higgins
Will Progressive Democrats Ever Support a Third Party Candidate?
Kenneth J. Saltman
Wall Street’s Latest Public Sector Rip-Off: Five Myths About Pay for Success
Binoy Kampmark
Labouring Hours: Sweden’s Six-Hour Working Day
John Feffer
The Globalization of Trump
Gwendolyn Mink – Felicia Kornbluh
Time to End “Welfare as We Know It”
Medea Benjamin
Congress Must Take Action to Block Weapon Sales to Saudi Arabia
Halyna Mokrushyna
Political Writer, Daughter of Ukrainian Dissident, Detained and Charged in Ukraine
Manuel E. Yepe
Tourism and Religion Go Hand-in-Hand in the Caribbean
ED ADELMAN
Belted by Trump
Thomas Knapp
War: The Islamic State and Western Politicians Against the Rest of Us
Nauman Sadiq
Shifting Alliances: Turkey, Russia and the Kurds
Rivera Sun
Active Peace: Restoring Relationships While Making Change
August 22, 2016
Eric Draitser
Hillary Clinton: The Anti-Woman ‘Feminist’
Robert Hunziker
Arctic Death Rattle
Norman Solomon
Clinton’s Transition Team: a Corporate Presidency Foretold
Ralph Nader
Hillary’s Hubris: Only Tell the Rich for $5000 a Minute!
Russell Mokhiber
Save the Patients, Cut Off the Dick!
Steven M. Druker
The Deceptions of the GE Food Venture
Elliot Sperber
Clean, Green, Class War: Bill McKibben’s Shortsighted ‘War on Climate Change’
Binoy Kampmark
Claims of Exoneration: The Case of Slobodan Milošević
Walter Brasch
The Contradictions of Donald Trump
Michael Donnelly
Body Shaming Trump: Statue of Limitations
Weekend Edition
August 19, 2016
Friday - Sunday
Carl Boggs
Hillary and the War Party
Jeffrey St. Clair
Roaming Charges: Prime Time Green
Andrew Levine
Hillary Goes With the Flow
Dave Lindorff
New York Times Shames Itself by Attacking Wikileaks’ Assange
Gary Leupp
Could a Russian-Led Coalition Defeat Hillary’s War Plans?
Conn Hallinan
Dangerous Seas: China and the USA
Joshua Frank
Richard Holbrooke and the Obama Doctrine
Margaret Kimberley
Liberal Hate for the Green Party
John Davis
Lost Peoples of the Lake
Alex Richardson-Price
The Fight for a Six Hour Workday
John Wight
Why Palestine Matters, Even on the Pitch
Brian Cloughley
Hillary Clinton’s War Policy
Patrick Cockburn
A Battle to the Death in Syria
David Rosen
The Great Fear: Miscegenation, Race “Pollution” and the 2016 Election
Ben Debney
Worthy and Unworthy Victims of Child Abuse
David Barouh
Liberal Myths: Would Al Gore Have Invaded Iraq?
Graham Peebles
Democratic Revolution Sweeps Ethiopia
Ismael Hossein-Zadeh
How Parasitic Finance Capital Has Turned Iran’s Economy Into a Case of Casino Capitalism
David Swanson
The Unbearable Awesomeness of the U.S. Military
Robert Fantina
The Olympics: Nationalism at its Worst
FacebookTwitterGoogle+RedditEmail