The Gulf’s diversification challenge

The region of the Cooperation Council for the Arab States of the Gulf (commonly known as the GCC) is heavily dependent on oil. This makes it vulnerable to decreases in the oil price, such as occurred from the mid-1980s until 2000. The big increase in oil prices over the last decade has boosted revenues, but it has also increased the share that oil contributes to the Gulf economies, from 33% of regional GDP in 2002 to 48% in 2012.

The GCC states have all developed longterm diversification strategies. But they have so far failed to coordinate their efforts.

This increase obscures the progress that has been made in diversification. But it also underlines the importance of oil and gas for both maintaining energy security and creating economic value. And this explains the continuous investment in the hydrocarbon and energy sector.

Read the full article for a more detailed analysis of how the region has attempted to diversify. A brief overview is provided here:

  • Gas’s rapid expansion: gas production is over 2,000% higher than it was in 1977, compared with an increase in oil output of 45%.
  • Vertical diversification: the majority of the Gulf’s hydrocarbons are still exported in an unprocessed form. So vertical diversification remains an area for significant potential expansion.
  • Moving into metal: access to cheap energy has encouraged diversification into metals production. For example, the Gulf already has 4 of the 10 largest aluminum smelters in the world – and will add a 5th if Qatar goes ahead with an expansion of Qatalum.
  • Rapid developments in infrastructure: regular visitors to the major Gulf cities are often struck by the rapid pace of development. Less immediately visible, but also significant, are improvements in telecommunications coverage and port capacity, which help these growing cities to function.
  • Aviation takes off: the three major GCC airlines – Emirates, Qatar Airways and Etihad – have all grown rapidly over the last decade.
  • Trade strengthens: sea trade has been important for some Gulf states since the pre-oil era. This sector benefits from the Gulf’s location on the route between Europe, Asia and Africa.
  • Tourism draws a bigger crowd: tourism is another important growth sector in the Gulf. Its success is closely linked to the growth in aviation. Direct and frequent flights to the Gulf hubs make visits more appealing.

The GCC states have all developed long-term diversification strategies, however, they have so far failed to coordinate their efforts. Such coordination would allow them to maximize the power and attractiveness of the economic bloc.

The complete article was written by:

  • Michael Hasbani
    Partner, Advisory Services, EY, United Arab Emirates

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