Advantages of GCC States after the Discovery of Oil Fields - Coursework Example

 The oil-rich countries faced acute hardships and struggles including famine before the discovery of oil (Embassy of State of Qatar, 2010). This forced the people from the Arabian countries to flee to neighboring nations. These Gulf States were very weak after the World War I. The economies were faltering the local rulers maintained only with British assistance. Their focus was on some port cities and some of the hinter land. However, the discovery of oil changed the situation. Oil was first discovered in Iran and after World War I, the British found oil in Iraq. In 1932, it was discovered in commercial quantities in Bahrain (Author unknown, 1993). After that there was much activity in oil exploration and discovery all over the gulf region. However, this did not give the region immediate wealth. It took some years before sufficient oil could be discovered to find commercial use. All the countries were however were dependent on Britain till they could reap the benefits from the oil discovery. The fastest to develop were the oil fields of Kuwait and by 1953 Kuwait was the largest producer of oil in the region. Oil exploration took place in 1935 in Qatar as well as in Kuwait. Oil was finally discovered in 1940 in Qatar and it was the fourth nation after Bahrain, Saudi Arabia and Kuwait to begin production (Embassy of State of Qatar, 2010). Qatar started producing 5000 barrels a day and it also started exporting oil in 1949. It was discovered in Kuwait in 1938 and the oil was under such pressure and the quantity being huge, it became difficult to control as it blasted through the valve (KPC, 2009). The first exports of crude oil from Kuwait took place in 1946 which marked celebrations for the nation. It marked the end of the torturous conditions and in 1975, yet another historic occasion was the nationalization of Kuwait’s oil industry. Kuwait signed an agreement with two oil companies - British Petroleum and Gulf – which gave it total control over its oil resources. Among the UAE, oil was first discovered in Abu Dhabi in 1958 and then further discoveries took place in Dubai and Sharjah. In 1962, UAE commenced offshore exports of oil and onshore exports a year later. Abu Dhabi, within forty years has become one of the wealthiest cities in the world. There are a large number of expatriate workers in Abu Dhabi which creates an imbalance. Nationals make up for only 20.1% of the population. Since education is compulsory, the literacy rate is high in Abu Dhabi compared to other GCC states. UAE has about 9% of the world’s oil reserves and about 5% of the world’s natural gas and the bulk of it are owned by Abu Dhabi - 95% of the oil and 92% of gas (Oxford Business Group 2008). Oil discovery transformed all these nations as it improved the living conditions. It also provided some form of employment which encouraged the people to return home from the neighbouring countries. After the initial discovery, further investments were made on the oil sector. Qatar signed an agreement with Dutch Corporation Shell for the exploration of oil in the Qatar regional waters. Offshore production started in 1966 and by 1965, the nation was producing 233,000 barrels per day (Embassy of State of Qatar, 2010). In 1977, Qatar nationalized the oil companies and handed over the petrol investment to two companies – Qatar Shell Ltd and Qatar Oil Ltd. in various stages they incurred production, laid pipe lines to pump gas to other countries. The growth and economy developed under the Finance and Petroleum Ministry established in 1974. Up to 1970s, the foreign countries managed the gulf oil industry. The foreign firms formed subsidiaries and they paid the fees to the local rulers to carry out oil exploration and then also to export from the region. The gulf countries were very weak at that time and could not bargain efficiently. Gradually, the different nations became aware of the wealth of oil reserves they possessed and by 1950 they started demanding an equal share of the oil revenues from the foreigners (Author unknown, 1993). The six Arab countries then formed the Gulf Cooperation Council (GCC) and these include the Saudi Arabia, Oman, Kuwait, Bahrain, Qatar and the United Arab Emirates. In 1981, all these six nations reached a cooperative framework to join together for better coordination, integration and interconnection among members (GCC, n.d.). These six states have a deep religious and cultural links in addition to strong kin relations among the people of the six nations. The formation of GCC became the practical answer to face the challenges of security and economic development of the region together. This also fulfilled some of the aspirations of the Arabs to have some sort of Arab regional unity. As soon as oil was discovered, resource-wars were envisaged. The Western countries became interested in the oil wealth and the nations faced military interference and destabilization efforts by the British intelligence and the Central Intelligence Agency (CIA). The Gulf nations also feared losing oil wealth to the Soviet Bloc (Le Billon & Khatib, 2004). Oil affected the balance of power within and between the regional states. Inequalities in wealth and power increased and this led to internal dissent and instability. The states started collecting arms, financial aid and remittances and fighting against each other. Boundaries between the states became more clearly defined and territorial disputes justified arms purchases. In fact oil has turned out to be a curse for many people. The decision makers have the secrecy and discretionary powers which increases corruption. Since there were no welfare-oriented fiscal policies, inequality only increased. The oil dependent states started spending more on defense. When the oil boom started in the 1970s and early 1908s, the oil revenues were distributed through welfare state policies (Le Billon & Khatib, 2004). Many countries fail to utilize this wealth to diversify and jeopardized their political systems. In Saudi Arabia the inequalities increased as the country could not keep pace of the economic growth with growing population and their aspirations. Iraq and Kuwait engaged in cross border wars leading to economic sanctions, domestic rebellion and internal repression. They must have well targeted economic policies and the public and the private sector need to rethink of their investment plans. Kuwait and SA are trying to have a parallel economy which would help them to get rid of their rigid structure and the burdensome regulations (Saif, 2009). In the UAE, Bahrain and Qatar – they are trying to gain competitive position in tourism, finance and education. All the nations have embarked on the process of economic reforms. The GCC countries have never been so rich before. In 2004, their combined revenue from oil had increased by 40% from 2003 to reach $190bn (Seale, 2005). The Gulf countries were relieved of the financial pressures. Kuwait enjoyed a surplus of $10bn and freely distributed $700mn to its fortunate citizens. This means that the wealth had increased which should lead to progress but the GCC countries face several challenges. The high oil prices between 2002 and 2008 provided these nations with huge current account and trade surpluses. The GCC countries face several challenges as a consequence of the oil wealth. Increased wealth led to discipline being affected in the Gulf countries. There are four main features of the labour market that characterize the GCC countries. There is a very high rate of unemployment which has been compounded by the high rate of population growth (Saif, 2009). The non-oil sector has no contribution in generating employment. Foreign workers form the majority of the workforce. There is low female participation in the GCC labour markets. The oil boom has led to high youth unemployment as the dependence on foreign workers has increased. The dependence on foreign workers as because of the low labour cost compared to the GNN nationals (Saif, 2009). As oil boom started in the 1970s, and the oil prices stared soaring, the Gulf nations announced ambitious plans for expansion. The government realized that they could strengthen their en based on the oil wealth. They also realized that the objective was to mobilize capital and not provide jobs. Hence, they chose capital-intensive industries rather than labour-intensive industries for expansion (Fargues & Shah, 2010). Infra-structure itself demanded short-term jobs and the foreign companies that had the contracts for constructions preferred to get their own trained personnel from overseas. The government brought in Asian labour as they were cheap and it also suited the region’s political requirement. This gave rise to dual societies – the locals and the foreigners. This added to the problem of migrant labour in the GCC countries. While labour in the 1970s was meant to transform the oil income into welfare and wealth for the nationals, the actual work was carried out by the non-nationals. By 1990-1991 the problem of unemployment had become aggressive and a process of political reappraisal started. There was agitation that the oil revenues should be invested to create jobs for the local people. There is too little diversification out of oil and in addition the Gulf countries are worried about the US-Iraq war that has had a long-term impact on these Gulf nations (Seale, 2005). There is no investment in the non-oil sectors which can create jobs for the youth. It would also ensure that the countries do not face the challenges as before oil was discovered. They would have something to fall back upon. Investments so far have been in real estate and into stock market speculations. The industrial based has not been expanded. SA has been trying to focus on non-oil sectors and there is only a marginal difference between its oil and non-oil sectors (Saif, 2009). The oil sector in Bahrain and Oman registered negative growth and they duffer from a decline in their oil reserves. Abu Dhabi has a strong non-oil sector as it has made substantial investments in industry, real estate, tourism and retail (Oxford Business Group 2008). It has an active diversification and liberalization programme which has helped to reduce its reliance on the hydrocarbon sector. Banks in Abu Dhabi enjoy a healthy growth and they are also making efforts to support the government’s diversification programme. The Gulf countries have a very high rate of foreign workers who remit home funds which affects the balance of payments. These remittances create a drain on the financial resources of the country. In UAE almost 80% of the workers are foreigners and in Saudi Arabia, out of 22m workers, almost 9m are foreigners (Seale, 2005). With this foreign workers dominating the work place, it is also feared that de-Arabization of the labour market may take place. Job oppurtunities in the public sector is not available as there is saturation while in the private sector, oppurtunities are limited. Because of the dire situation, people are even accepting low prestige jobs. Improving the capacity of administrative and public sector institutions is another major challenge confronting the oil-rich countries. The challenges faced by these nations are common but in varying degrees. Bahrain and Oman have limited oil resources and hence cannot sustain the past levels of public spending (Saif, 2009). SA faces structural problems as it could not keep pace of the growth with the aspirations of its people. They are under pressure to reform their current social and economic model. The UAE and Qatar have low unemployment rates and hence are able to carry on despite suboptimal policies. Inflation has also been disturbing the GCC countries although this could be temporary phenomenon (Saif, 2009). There was a strong domestic demand along with a growth in the money supply and credit. Moreover the depreciation of the US dollar and the rising food world prices also added to the inflation. However, the global financial crisis brought down the world food prices and this also brought down the inflation in the GCC countries. At the same time, these countries should take note that the same situation could rise again. The Gulf exporters are emerging as the major players in the global financial market. The expected windfall in the oil promises risks for economies as well as the capital markets in the Gulf. The oil revenue is expected to go up to $6.2 trillion in profits over the next 14 years if crude prices are $70 per barrel (Farrell, 2008). This amount is three times the amount they have earned in the last 14 years. This amount is four times of the total profits of the Global Fortune 500 combined. The challenge before the GCC countries is how well the wealth is utilized. The interest rates, the liquidity and the financial markets would depend on the choice of foreign investment that these firms make. Equally important is their domestic investments because this would decide the industries they are interested in. This would determine whether they are willing to invest in the challenges posed now – high unemployment among their own youth. The Gulf leaders have decided to invest in their own economies. The GCC states are now investing in industries, infra structure, healthcare and education. The surplus funds after the domestic market would go into the global capital flows. There are private individual and companies that are interested in investing in the Gulf. With liberalization, the GCC states too have drawn up plans to attract investments and they have decided to have direct investment strategies in the future. To keep up with the growing population, the GCC states would have to create more than 4 million new jobs for their people (Farrell, 2008). So far the government has been the primary employer but now the private sector would have to be active as well. Another challenge that could affect the economies of these GCC states is to meet the daily export targets. The current export from these nations is 51 million barrels per day (McKillop, 2008). If this global demand or the global export supply is reduced for any reason, it could lead to a chain of effects. It will not only aggravate the existing global and regional tensions. Thus it can be seen that the Gulf States were in dire condition prior to the discovery of oil. As they gained experience and expertise, they freed themselves of foreign assistance for survival but the literacy rate being low, these states do not have the kind of skills needed to conduct the oil exploration and exports. They have to depend on migrant labour which affects the local labour market. The major challenge hence that lies ahead of the GCC countries is a very discriminatory investment in non-oil, sectors that could boost the local economy, create jobs for the nationals and add to the existing growth of the economy. The private sector has to be active so that private funds could increase the job oppurtunities thereby reducing the levels of unemployment. As locals are taken in, it would reduce the number of immigrant workers and also reduce the repatriation of funds back home. References Author unknown. (1993). Kuwait DISCOVERY OF OIL. Retrieved online 31 May 2010 from http://www.country-data.com/cgi-bin/query/r-7572.html British Petroleum and Gulf. (2010). HISTORY OF OIL DISCOVERY. Retrieved online 31 May 2010 from http://www.qatarembassy.net/oil_history.asp Seale, P. (2005). The Challenges Facing Arab Gulf States - I. retrieved online 31 May 2010 from http://www.agenceglobal.com/article.asp?id=378 Embassy of State of Qatar. (2010). History of Oil Discovery. Retrieved online 31 May 2010 from http://www.qatarembassy.net/oil_history.asp Fargues, P., & Shah, N. (2010). The Impact of Migration on Gulf Development and Stability. Retrieved online 31 May 2010 from http://www.grcevent.net/cambridge/index.php?page=workshop&wname=12 Farrell, D. (2008). Gulf states must use oil wealth wisely. Retrieved online 31 May 2010 from http://www.mckinsey.com/mgi/mginews/Gulf_states_wealth_wisely.asp GCC. (n.d.). Foundations and Objectives. Retrieved online 31 May 2010 from http://www.gccsg.org/eng/index.php?action=Sec-Show&ID=3. KPC. (2009). Kuwait Oil History. Retrieved online 31 May 2010 from http://www.kpc.com.kw/AboutKPC/KuwaitOilHistory/default.aspx Le Billon, P., & Khatib, F. (2004). From Free Oil to 'Freedom Oil': Terrorism, War and US Geopolitics in the Persian Gulf. Geopolitics; Winter2004, 9 (1), 109-137, McKillop, A. (2008). Get ready for the last oil war. Retrieved online 31 May 2010 from http://www.energybulletin.net/node/45944 OXFORD BUSINESS GROUP. (2008). EMIRATES: ABU DHABI - COUNTRY PROFILE. Retrieved online 31 May 2010 from http://www.oxfordbusinessgroup.com/country.asp?country=36 Saif, I. (2009). The Oil Boom in the GCC Countries, 2002–2008: Old Challenges, Changing Dynamics. Carnegie Middle East Center. Number 15. March 2009 Read More