The developments which hit the global oil markets in
mid-2014 raised questions about the impacts of the significant slump in oil
prices on the economic conditions of major oil exporting countries, including
the UAE. These questions include whether persistent low prices would cause
financial problems, affect plans for economic development and the creation of
employment opportunities for the youth, among other economic and social issues
in affected states. The UAE seeks to transform into a model state that succeeds
in shifting its economy from dependence on natural resources to dependence on
advanced industries and scientific research, based on the minds and skills of
its citizens.
This vision was stressed by Crown Prince of Abu Dhabi and
Deputy Supreme Commander of the Armed Forces, His Highness Sheikh Mohamed Bin
Zayed Al-Nahyan, during his participation in the Cabinet Retreat on the Post
Oil Phase in late January. Because it is at the forefront of acquiring
innovative solutions and creative ideas to counter various challenges, the UAE
took measures to allow for a smooth shift to the post-oil era.
What is the Reason for the Drop in Global Oil Prices?
Several factors and variables have significantly impacted the global supply and demand in the
past one and a half years, driving prices to plunge from US$105 a barrel in
2014 to as low as the current US$30 a barrel, a
decline of approximately 75 percent. As far as supply is concerned,
major oil producing countries increased their production significantly, driven
by technological advances which made the production of shale oil in the United
States and shale sands in Canada economically feasible due to the high oil
prices. This in turn, for instance, led to the increase in the United States'
oil production by one million barrels a day during the past three years of the
oil price collapse.
In addition, several non-OPEC producing countries, like
Russia, which produce oil at high prices, were scrambling to compete with OPEC
members, including the members of the Gulf Cooperation Council (GCC), which
enjoy very low production costs. This led to an oversupply in global markets
and weakened coordination between OPEC members and several major non-OPEC
producers.
It should be noted that OPEC, whose influence on the market
receded significantly because its share of world output fell to a third today,
is witnessing increasingly sharp differences between its members. This made it
difficult for them to reach an agreement to cut production in order to stop the
collapse of crude oil prices. Finally, expected outputs of major oil exporters
like Iran and Iraq, which suffered from problems in production and export,
would soon return to normal levels. These expectations have led to predictions
of a significant increase in future supplies and consequently have held global
oil prices under continuous pressure in the recent period.
On the demand side, the persistent global economic slowdown,
which followed the 2008 global financial crisis, has weakened demand for oil.
Similarly, declining growth rates and recent weak outlooks for emerging
economies, China, in particular, led to increased pressure on its crude oil
prices. However, one could not ignore the impacts of technological advances,
which helped increase energy efficiency and increased use of sustainable and
new energies for environmental reasons. That is, even if these two factors do
not contribute to a significant fall in oil demand, they, at least, helped
prevent demand growth from keeping pace with an already lagging global economy.
Given the aforementioned factors, global oil prices are projected to continue
to maintain significantly lower prices than those prior to mid-2014, at least
in the medium term, with prices not exceeding US$60 a barrel.
The UAE: Two Pillars to Counter Oil Price Fluctuations
The UAE took early preemptive measures to counter the
potential consequences of fluctuating oil revenues, including the recent deep
slide in global oil prices, and the expected depletion of oil in the distant
future. These measures revolve around two major pivots: economic
diversification and increased fiscal efficiency. The country is working on
developing its economy and educational systems, qualifying workers for the
labor market. The approach takes into consideration the potential impacts of
oil price fluctuations and even transforms them from sources of concern to
sources of economic progress based on diversification, modernization, and
technological advancement.
Within this context, the UAE adopted a number of strategies
for economic diversification to reduce the share of the oil sector in its
economic activity and expand the role of competitive sectors like tourism,
travel and financial services, foreign trade, IT, and aircraft components
manufacturing. The Emirates also worked to provide a favorable investment
environment to attract more investments from the private sector, other Gulf
countries as well as countries beyond the region through eased and modernized
legislation, adoption of smart government, and constructing transportation and
communications networks, airports, seaports and free zones.
The UAE also used financial surpluses generated from the oil
sector to avoid the impacts of falling oil prices and achieve just distribution
of revenues between the generations through sovereign wealth funds, that are
among the world’s biggest, to diversify sources of income, safeguard the
country against oil price fluctuations, and preserve and grow the wealth for
the benefit of future generations. The UAE also made substantial and pioneering
efforts towards developing alternative energy sources for domestic use so as to
prevent facing a shortage of supplies driven by the country's growing economy.
At the same time, the efforts would take the country to the forefront of
environmental protection. In addition, the UAE is pursuing a strategy for
peaceful use of nuclear energy based on the world's highest safety standards,
and is investing in the development of renewable and clean energy resources
through "Masdar City", and "Shams 1", one of the world's
biggest solar power plants.
As for public finance, the UAE has made significant efforts,
both federally and at the level of individual emirates, to increase the
efficiency of revenues and expenditure. It also deregulated fuel to shift to a
system of adjusting prices monthly in response to global trends to increase
fuel efficiency, reduce environmental impact and road traffic congestion.
Within the same context, the UAE is working towards a better
pricing system for water and electricity so as to reduce waste, rationalize
consumption and reduce pressures on the energy sector heavily used by the
desalination sector. The UAE also enhanced sources of government revenues,
provided sufficient resources for the development and maintenance of
infrastructure through modern systems. This is in order to levy fees for basic
government services, such as toll gates and parking lots, in addition to developing
a distinct public transportation and railway network.
Future Outlook
The UAE is expected to continue to stay in the lead of the
race to diversify its economy away from the oil sector and work towards
encouraging and attracting local, Gulf and foreign private investments. Within
this context, the UAE is expected to work on enhancing competitive advantages
that attract these investments by using the best ICT technologies and improving
the country's road network, airports, seaports and railways to sustain its
growth and pioneering efforts. The UAE is also expected to enhance its
financial markets to transform itself into a global financial center and
provide advanced financial tools like Islamic finance for example.It is also
likely that the leading private sector would be supported in the future, even
in the government services' sector, through increased reliance on the principle
of "public-private partnerships" to construct large-scale projects.
Additionally, the government would also intensify its efforts
to develop small and medium-sized enterprises (SMEs). As they are a major
source of new economic opportunities for the innovative youth, so as to assist
them in finding new jobs and provide the youth with constructive economic
opportunities. This vision goes in line with the current trend of developing
the education system using modern technologies and developing technical and
vocational education and training to meet future demands for labor in the
post-oil era.
In the area of public finance, the UAE can seek to introduce
more development to diversify sources of revenue to support its efforts in
providing basic services for nationals and expats. This would be carried out by
introducing modern tax systems, perhaps starting with the value added tax, which
can be enforced in coordination between all members of the Gulf Cooperation
Council.
The UAE is also expected to develop its government
securities market and provide favorable financial tools to curb risks in
financial investment portfolios and provide effective low-cost means to fund
government policies and manage the state's economic policies. Furthermore, the
UAE is expected to work with other members of the Gulf Cooperation Council to
develop a common Gulf market to achieve goals like free movement of people,
capitals, and goods and achieve further intra-Gulf coordination and cooperation
to form newly aligned strategies for the region in the post-oil era.
In conclusion, in light of the expected continuous efforts
to develop and modernize basic services provided by the UAE, the ongoing work
to introduce ambitious and advanced thoughts through giving more responsibilities to the national youth,
dealing with economic challenges as a source of inspiration for developing the
UAE economy and taking it to the lead, the current stage of fluctuating oil
prices is expected to be a major source of support for the economic vision
embraced by the country before the recent collapse of oil prices. This would
positively impact the UAE economy over the medium and long terms.