A not so happy new year for the Gulf

A not so happy new year for the Gulf
4 min read
31 December, 2015
Analysis: Gulf states have enjoyed a decade-long economic boom, but continued inequality and economies reliant on petrodollars means there could be a bitter sting to continued low oil prices.
Gulf states have seen huge deficits in 2015 as low oil prices hit hard [AFP]

For many in the Gulf, summer meant San Tropez while winter was spent at the Alps.

A decade of rising oil prices had given governments and businesses plenty of cash to spare, and this was used - among other things - to create new jobs for Gulf nationals, often with handsome salaries.

The dream seemed likely to endure when the Arab Spring turned violent and a nuclear-minded Iran preyed on the minds of prospectors.

It was thought by many analysts that the ensuing instability in the region would ensure high oil prices for years to come.

However, the North Dakota oil boom in part has meant the black gold has become more plentiful on the markets and thus cheaper.

The US became the world's biggest oil producer for the first time in decades and shifted some of the might away from Saudi Arabia, which had enjoyed the role as swing producer.

But if 2015 was bad, 2016 looks like a worse year for Gulf states, with analysts predicting that oil prices could tank further.

After months of neglect and spiralling deficits, Gulf states seem to be finally taking the issue seriously, but is it too late?


Bahrain has the Gulf's highest breakeven point for a barrel of oil - which this year needed to be as high as $125 to meet government spending.

Manama has said it will introduce strict austerity measures to cut government spending by 30 percent, which could reduce debt.

But lower government spending will likely mean job cuts and salaries being slashed, which will likely sink more Bahrainis into poverty.

Although Bahrain managed to crush a revolt in 2011, the island state still retains tense sectarian and economic divides. 

There remains the potential for new unrest, and so Manama will have to be cautious about the impact of its cuts.

However, despite being shackled with enormous debts, the royals are unlikely to give up on a costly and huge security apparatus

This mean that the cuts being made will likely be made in subsidies and jobs, possibly leading to enormous repercussions for ordinary Bahrainis.

Saudi Arabia

High oil prices coincided with the growing clout of Saudi Arabia as a regional giant, and although Riyadh is no longer the swing producer of oil it was, it remains by far the wealthiest Arab state.

Saudi Arabia's fingerprints can be found across the region - particularly in Syria, Iraq and Egypt - and its latest exhibition of military might in the Yemen has given the country a shot of jingoism.

Riyadh is essentially leading the fight against Houthi rebels, but the war is effectively costing it around $600-700 million a month.

Although this cost is perfectly manageable for Riyadh, it has forced it to eat into vital foreign reserves and any future escalation with the Houthis' backer Iran would mean much higher military spending.

Riyadh has also cut fuel subsidies and will likely take other similar measures which will have an impact on the country's poorest citizens.

Saudi Arabia is already one of the world's biggest arms importers and if it wants to retain its domination in the Arab world, it will cost it dearly.


For decades, the sultanate followed a fairly frugal economic spending, but as citizens in neighbouring Gulf countries became seemingly exponentially wealthier, it put pressure on the government to increase living standards for Omanis.

Oman has seen probably the most remarkable transformation of any Gulf state in the past 40 years.

No longer the poor man of the GCC, Oman has been pumping out its last remaining oil reserves while prices have been high and embarked on massive job creation programmes and infrastructure projects.

Chief among Muscat's initiatives has been diversification of the economy - through industry, agriculture, logistics and tourism - and creating jobs for locals with a policy of Omanisation.

However, many fear that now Oman has lost its cash cow, it might very seriously feel the impact of not implementing industry and infrastructure projects earlier.

The skills and education of Omanis are still not entirely suited to the needs of a "diversified economy". The public sector employs the vast majority of Omanis.

With nearly 80 percent of government revenues coming from oil and gas, this will inevitably have to change.

The country is battling with two sets of ideals. On one side is the parliament with limited powers. Elected by the people, the Shura council appears determined to limit government spending cuts and make business shoulder the burden of low oil prices. 

On the other are the ministers and Sultan Qaboos bin Said with the real power, who understand that serious changes to the economy need to be implemented to avert disaster.

It is hoped that its latest budget or tax rises and budget cuts will help weather the storm.

Follow Paul McLoughlin on Twitter: @pmcloughlin9