Oil is one of the most important natural resources in the world. Few countries, with the majority in the Middle East, dominate their market. At first, these countries did not realize the magnitude of profits they could make by selling oil. But it changed once 5 of those countries formed a cartel called the Organization of the Petroleum Exporting Countries in 1960. They coordinated their operations and sold oil at a single price. It helped them make huge profits. Now, OPEC has expanded to include 13 member countries.
Up until the discovery of oil in the territories of Russia and the UK, everything was going according to plan for OPEC. As a result of the discovery, the supply of oil increased, which reduced prices. The profits for OPEC countries dwindled. However, the beginning of the 21st century saw countries like China grow exponentially, raising the oil demand. Oil prices shot up again and the profits increased manifold. From this moment, countries have gained considerable wealth from selling oil. But factors like the non-renewable nature of oil and the change in global supply chains due to Covid-19 call into question the sustainability of the OPEC model. This article analyses this question while discussing how oil-rich countries may diversify their economies.
Why the model is not sustainable
The Middle East is an unstable region geopolitically. This instability can lead to constant fluctuations in oil prices, affecting its sales. Countries like Yemen and Syria are under civil war, whereas Iran and Iraq face sanctions from the USA, affecting their international oil sale capacity. Qatar also decided to leave the OPEC cartel in 2018, which observers saw as a result of a schism between Qatar and some of its neighbors. Experts believe that with such erraticism in the region, short-term volatility of oil prices would be a common occurrence. Any major production disruption would have immediate effects on prices. The recent Russian-Ukraine war exemplifies this. Ever since the conflict started, crude oil prices have been climbing. Thus, the uncertainties riddling the Middle East have implications for oil prices, making the aforementioned model unsustainable.
History does not paint a good picture of the economies heavily dependent on oil. For instance, Venezuela, a South-American country, suffered hyperinflation that induced an economic collapse due to its dependence on oil. When the global price of oil dropped in 2014, foreign demand for Venezuelan oil crashed. The value of its currency, the bolivar, fell, causing the cost of imported goods to rise. The Venezuelan economy went into crisis. When additional factors, such as sanctions from the United States and the European Union, were added to the decline in currency value, the situation deteriorated further. This shows that for countries with substantial dependence on oil, finding an alternative source of income is crucial to avert economic crises in times of price volatility.
One of the most dramatic changes on the supply side in the sale of oil came in the USA. In 2011, the country based its oil production on new techniques- fracking and horizontal drilling. Due to their extreme flexibility, the USA was now able to react quickly to changes in price. Additionally, this coincided with a slowdown in growth rates in nations like China and the UK, reducing demand for oil. These demand-supply changes reduced the price of oil considerably, making it a less profitable economic activity. With new technologies coming up and factors like COVID-19 affecting the trade market, oil prices are prone to abrupt changes. In this scenario, it would be ideal for Middle Eastern countries to think of an alternate source of income that can ensure economic stability.
Tourism as an alternative
Many Arab countries have now started to see tourism as an alternative to oil sales. The move towards tourism began in Dubai, UAE. Dubai has invested in tourism and construction using the money it made from oil exports, and as a result, it is now well-known for its opulent hotels and other structures. The development of the oil industry has also attracted a foreign labor force, boosting the manufacturing sector in Dubai. The government of UAE has understood that oil reserves in Dubai may soon be exhausted and hence, they have focused on economic diversification, using tourism as the primary contributor.
Even Mohammad bin Salman, the crown prince of Saudi Arabia, has announced projects like Saudi Vision 2030 in response to the projected depletion of natural resources. This project is geared toward an overhaul of the financial sector of Saudi Arabia, making the country economically diversified. In addition, The Saudi regime is looking to expand tourism in Mecca and Medina to house more than 100 million tourists a year by 2030. As a result, more Muslims will travel to Saudi Arabia to perform the renowned annual Hajj pilgrimage.
The two aforementioned examples show that countries in the Middle East have recognized the fallibility of the oil sector. They have started to look to alternative revenue streams, with tourism being the primary one. There is great potential for further growth in the tourism industry, and all countries should exploit this opportunity to diversify their economies.
Countries with abundant natural oil reserves stand at crossroads. Either they develop their economy with heavy dependence on these resources or use them as stepstones and diversify their economies. While countries dependent on oil may snowball, that growth would not be sustainable. In the long run, they would have to choose other sources of economic growth. Countries like the UAE have begun transitioning their economies to other sectors. How other oil-rich nations plan their economic trajectories stands up in the air.
(Written by Raghav Bansal and Edited by Prakhar Singhania)