The UAE and Global Oil Supply - Research Paper Example

PRESENT AND FUTURE STRATEGIC POSITION OF THE UAE IN THE INTERNATIONAL MARKET Introduction The United Arab Emirates is situated in the sandy region of the Middle East. It is strategically situated in the Middle East region and very ideal for business between the Far East and Europe and other parts of the world like Soviet Union and Africa. It is one of the most developed regions in the Middle East and actually a hub of the growing trade environment in the Arabian Gulf. It has been observed that in the recent past, there has been increasing trade in the UAE. This has been fuelled by adoption of free economy policy based on the market system and liberal economy rules which places the private sector in a position to be a major player in entrepreneurship. Less government interference in trade has fuelled the growth of the economy due to the contribution made by the private sector. At the same time the government has played its role in ensuring that there is free movement of capital, goods and services which has enabled the private sector to play a major role in the business sector. (Business Times, 2006) The sudden growth of the UAE has stunned many people in the world. In the last 40 years, the UAE has moved from underdeveloped world to become one of the most developed countries in the Middle East region. The country has been able to attract international investors driven to the region by prospects of oil and gas coupled with the enabling trade environment. In that short time period it has become one of the leading worlds economic and a hub of various trade activities in the region. However the growth of the UAE has been fuelled by fortunes from oil reserves. The country has been heavily reliant on the revenues from oil and gas reserves. But the secret of growth has been the determination of the government through economic strategies which has given the UAE an edge over other countries in the region with the same reserves of oil and gas. (Emirates Business, 2007) With the argument that the oil reserves in the UAE may last for only the next 100 years to come, we are left with a question about the future of the UAE when the oil reserves will be gone. The important position that is played by the UAE in the global market will have to be foregone in the future if the country does not position itself well in terms of reinvention from reliance on oil reserves to another economic activity. This research paper looks into details the prospects of the UAE in coping with the post oil period. It looks into details the current position of the UAE in the global market and what will happen to the country in the future if in deed the oil reserves will have gone. Research questions In order to understand the current and the future position of the UAE in the global market, this research proposal will look in collecting data in order to answer the following questions. a. Will UAE continue with its economic success story in the future? b. If the UAE will continue with its current economic success, will it be relying on oil or doe it mean that it will have to reinvent itself in terms of economical, industry and social structures? c. What is the strategic position of the UAE for now and in the future? Research objectives The main objectives of this research paper include the following: a. Understand the success story of the UAE and what has fuelled the economic growth. b. Understand the market position of the UAE in the global market through a SWOT analyses. c. Understand the future position of the UAE in the global market. Literature review A SWOT analysis is a useful business tool that helps us to understand the position of an organization in the market. This is achieved through looking in deep details various factors that make up the business and how interact in the market. It looks into the strengths of the business, the weakness of the business, the opportunities and threats that the business is facing. The following is a SWOT analysis of the UAE. The united Arab Emirates commonly known as the Al Emarat Al Arabiyal Al Mutahidah in Arabic traces its existence in 1971 when the seven federation came together to form it. It is a federation of seven emirates including Abu Dhabe, Dubai, Sharjah, Ras Al Khaimah, Umm Al Quwain, Ajman, and Fujairah. Since 1850 up to the time the emirates came together in 1971, the British colonial administration maintained influence in the region where it made treaties with each emirates. By the then they were known as the Trucial States or Sheikhdons. In administration of the emirates, each was led by a Sheikh who came from a particular tribe which was presumably the most influential tribe in the Ares. The administration was tribal based as smaller tribes chose their leaders who worked with the Shikh on all political and economical maters. For example, the Al Bu Falah tribe which produces the current president of the UAE HH Sheikh Khalifa Bin Zayed Al Nahyan descends from the Bani Yas tribe which is made up of more than 12 tribes. The formation of this federation helped in bringing administration and planning matters under one authority which has helped the UAE excel to be on the leading strong economies in the Middle East. The fortunes the federation have been further boosted by the formation of the AGCC which has been negotiating on behalf of the region in the world trade circles. With the interest in the region growing day by day, the UAE which is considered to be a bit neutral in the Middle East conflict has been considered as the centre for negotiating international trade deals between the world and the AGCC members. Dubai in particular has risen to occupy an important position in the world business matters. What are the main strong economic sectors of the federation? (Emirates Business, 2007) One of the leading catalysts of growth for the UAE economy has been revenues collected from oil and gases business. The IMF reckons that the economy of the UAE has progressed well but the government is seen as heavily reliant on oil and gases revenues. The UAE is able to produce approximately 2.4 million barrel of crude oil per day. This places it at the fourth position in the list of OPEC Group after Kingdom of Saudi Arabia, Iran and Venezuela. It has been confirmed that the region holds more than 100 billion barrels of crude oil 90% of which are in Abu Dhabi emirate. This is approximately 10% of the world reserves and 15% of the shares within the OPEC Groups’ region. This reserve is expected to last for the next 100 years. The UAE is also the 4th largest gas reserve in the world with approximately a share of 4%. With the discovery of the oil, the industrial age was ushered in the UAE and the process grew more with the formation of the federation. By 1999, there were more than 1695 factories in the federation employing more than 145,000 people and investing more than Dh 14 billions. Cement manure is the oldest industry in the region which produces at commercial level. There has also been re-emergence of chemical and non-metallic industries and at the same time food and beverages have also grown to export levels. There is also small industry sector dealing in textiles in Ajman. The revenue from foreign investment in the UAE has reached US$ 500-600 billion according to the German Chamber of Commerce (2006). The economy of the federation is taking another turn and has seen the emergence of agriculture sector. Although the region receives little rainfall, the wave of desertification has been arrested and some forests, grass and wheat are starting to replace desert sands and winds. Since the federation was formed, there has been massive investment in the agriculture which aims at changing the agriculture sector from a small scale activity to large scale economic activity. The formation of the Ministry of Agriculture and Fisheries has been a big boost to the industry and currently the production contribute about Dh 2 billion per year producing about 600,000 tons of crops like tomatoes, cucumbers, aubergines, lettuce, cabbage and animal feeds. The government has decided to subsidize the local farmers by drilling wells, land preparation at no cost, provision of seeds, machines and advice on the control of pests. The government has also embarked on research activities on agriculture. (Emirates Business, 2007) But there are still some weaknesses and threats to the economic stability of the region. The IMF stress that although the economy of the federation is expected to expand by 16% this year, the economy has been rocked by high inflation due to the rapidly expanding economy. Currently the inflation is estimated to be at 7-25%.This has been ceased by housing constraints which has pushed the inflation level to higher level. According to Emirates Business (2007), “record high oil prices have generated increasing current account and fiscal surpluses and facilitated the build up of official foreign assets, but the fiscal policy has remained prudent as evidenced in the decline in expenditures to the GDP and the non-oil fiscal to the GDP.” But the federation is sure of a GDP growth of about 16.6% due to emergence of non-oil sectors like tourism, trade and construction. This diversification of the economy has been witness by the fact that in 2008 the oil sector is expected to contribute around 25% of the GDP. The recovery of the stock markets has been indicated as one of the factors that have led to investors’ confidence in the federation. One of the main factors that are attraction foreign investment in Dubai and Abu Dhabi is clear shift of some international funds into the UAE after the sub-prime crisis. The other factor is the maturity of investors’ and the increase in institutional investment which adds value to the UAE market. The economy is faced by some threats including the competition with other states in the region to be the regional financial centre. It is facing competition from Bahrain, Kuwait and Qatar which are following the same path with similar projects. The other thereat is the demographics asymmetries. In the federation the UAE nations are only 20% of the population and the others are immigrants. Lately the flow of expatriates has slowed due to the rising inflation. Most of the nationals are not employed. The manufacturing sector is faced with lack of human capital base with innovative attitudes, legal and physical access to the markets, and lack of favourable exchange rates which are threatening its viability. (Dubai Times, 2007) There are also political and security threats facing the federation. One of the boiling political issue is the rivalries between the emirates due to the autonomy each retains and the presumable favouring of economically well up emirates. For example Dubai does not acknowledge the fact that it is within the UAE’s OPEC quota. In the conflicts facing the Middle East, there have been divisions in the emirates with some taking different sides in the conflict. Border conflicts are also evident in the federation. The federation also faces a challenge in terms of defending itself since it lacks enough military personnel. This may induce fear among investors with the ranging conflict in the region. (Foley, 1999; Baranausaks, 2007) Research Methodology This research used the secondary sources of materials. It looked into literatures that concern the Middle East. It looked closely into the data from organizations like IMF, Word Bank, United Nations Organization (UN), World Trade Organization (WTO), World Economic Forum, Dubai Chamber of Commerce, German Chamber of Commerce, News paper and Business magazines, Ministry of Economy, and other sources. Data analyses The study settled on using a SWOT analyses to get the present and future situation of the UAE. This is because through UAE the studies will explorer the strengths and threats that the federation is facing and be able to come with solutions. Results of the study The study generated short term and long term needs for the position of the federation in the global market. The results act as the way forward for the UAE in the future. In short term needs the UAE should trey to tackle the problems that are being viewed as the immediate which are threatening the economic situation of the federation. One of the needs that the federation has to address is to arrest the rising inflation rate. This means that it has to come up with new measure in the housing sector in order to arrest the inflation. Inflation remains the single most threat that it is facing which has to be addressed urgently In terms of long term strategic position that it has to capitalize on, there a number of issues that has to be addressed. The UAE has to move fast and address the issue of human capital. This as expressed in the demographic threat that it is facing, may be a future issue leading to instability of the federation. The UAE must address the issue of dominance by expatriates which means it has to promote the spirit of Emiritisation and offer affordable education to all its citizens. It must come up with clear labour laws which benefit the nationals. The UAE should promote long term commitment of these expatriates so that they don’t appear like parasites to the nationals. It has to promote the spirit of togetherness. Still on the issue of human capital, the UAE has to seek new ways of attracting qualified professional. The level of completion is rising with new industrial hubs coming up in Brazil, Russia, India, China and others. In the Middle East there are also a number of growing hubs which are competition to the UAE. The federation must also resolve some political and security issues that it is facing. Political stability is one of the most important factors that fuels economic growth of a nation. UAE has a good investment atmosphere which can easily be overturned by political and security instability. It must move fast and address these two issues in order to ensure that there is investor’s confidence is restored. Conclusion Although the oil and gas industry is expected to be the major player in the development of the UAE, there has been considerable diversification of the economy in the recent past. Contribution by non oil sector is evident and is expected to grow in the future. However the UAE must address the above said issues in order to achieve this diversification. Appendices (i) Population Statistics Population 2,445,989 1,576,472 non nationals Ethnic Groups Emirati: 19% Other Arab and Iranian: 23% South Asian: 50% Expatriates (westerners, East Asians): 8% (Less than 20% of populations are UAE citizens) (ii) Economy GDP: $71 billion GDP per Capita: $29 000 GDP Composition Agriculture: 3% Industry: 46% Services: 51% GDP of Individual Emirates a) Abu Dhabi: $41bn b) Dubai: $18.8bn c) Sharjah: $6.68bn d) Ras Al Khaimah: $1.80bn e) Ajman: $1.20bn f) Fujairah: $1.07bn g) Umm Al Quwain: $409m Oil sector breakdown Crude Oil: 2000: Dh63.4bn 2001: Dh69.6bn Non Oil: 2000: Dh147bn 2001: Dh178.7bn Adapted from: CIA year book, UAE Ministry of planning, UAE Department of Economic Development, EUI World Prospects 2003 (ii) FDIs The following graphs represent the FDI of UAE Adapted from: Dubai Chamber of Commerce, 2004 Reference Baranausaks, T. (2007). UAE military and the new strategic partnership with Western Defence contractors, NewTown Conn. Press Release, June 2007 Challenges confronting the economy of the UAE. Dubai Times, January 2007 Foley, S. (1999). The UAE: Political and Security Issues. Middle East Review of International Affairs, Vol. 3(1) UAE economy sees 16% growth this year. Emirates Business, December 2007 UAE FDI, Dubai Chamber of Commerce, 2004 UAE Vital Statistics: Population and Economic Statistics, UAE Ministry of planning, UAE Department of Economic Development, EUI World Prospects 2003 Read More