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Talha Javed

Professor Derlugyan

Paper 4

17th May 2016

U.A.E and Oil

The Arab states of the Gulf have been the scene over the past three decades of some

astonishingly large and rapid development—and nowhere more so than in the United Arab

Emirates. The U.A.E. did not even exist as a nation-state until as recently as 1971, and it was one

of the last two Gulf countries in which oil was found in sufficient quantities to make this

development possible. But the now the U.A.E comprise the third largest economy in the Middle

East, after Saudi Arabia and Iran. Its per capita GDP is second only to Qatar. UAE GDP growth

has averaged about 5% per annum, but has oscillated from negative to positive throughout the

years as dictated by oil prices. Thus the question arises that was all the development based on oil

and if yes, what does the future hold for U.A.E?

Before oil was discovered in the 1950s the UAE's economy was dependent on fishing and

a declining pearl industry. The First World War had a severe impact on the pearl fishery, but it

was the Great Depression of the late 1920s and early 1930s, coupled with the Japanese invention

of the cultured pearl, that all but destroyed it. The industry eventually faded away shortly after

the Second World War and the decline of pearling resulted in a very difficult era, with little

opportunity to build any infrastructure and widespread poverty. In his memoir, Rags to Riches,

Muhammed Al Fahim recounts his childhood, the hardships his family endured and his

experiences in the UAE from the 1950s onward. He sums up the desperate conditions of those

times by writing, "We lived in the eighteenth century while the rest of the world, even the rest of

our neighbors, had advanced into the twentieth" (Al-Fahim, 88).

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But this changed when oil exports began in 1962, leading to a transformation in the

fortunes of the Trucial States. This was the start of an extreme transformation of the society and

economy of the Trucial States. Frauke Heard-Bey, in her book acknowledges this change and

says that few nations have undergone so spectacular a change within the span of 100 years. "Few

individuals," she writes, "have experienced such a transformation in their lives as the older

generation of UAE citizens. (Heard-Bey, 54)" They moved from dire deprivation, relieved only

by the reliance on their tribal society's time-tested methods for survival in a physically

unforgiving hot and arid environment, to finding themselves amongst some of the world's richest

people. The first oil shipments from the sheikhdoms came in 1962. Recognizing that the

development and shipment of oil required a modem infrastructure and an educated citizenry, the

British began belatedly to press the ruling sheikh for public investment to achieve these

structural and societal goals. Sheikh Shakhbut, much to the consternation of Sheikh Zayed,

resisted them and it was not until Sheikh Zayed assumed power over Abu Dhabi in 1966 that

significant development efforts got underway. Sheikh Zayed united the seven Emirates to form

U.A.E and became the federation's President on its inception on December 2, 1971.

Foreign trade activity entered a new phase with the production and export of oil in the

emirates. The epoch of economic development in the UAE began in the early 1970s, the

federation’s formation on 2 December 1971, and the establishment of its formal economic,

social, and political institutions, coinciding with a massive increase in oil production and oil

exports, followed by the explosive rise in oil prices in 1973. The newly formed Government

utilized the revenues for strengthening and cementing the federation, improving and expanding

the social services to raise the standard of living and develop the non-oil productive base of the

economy. The size of the UAE economy, measured by the nominal GDP, grew by more than 26

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fold during the period 1972–1998: while the nominal GDP increased from US $1471 million to

US $46,340 million (Al-Sadik, 209). But the expansion of the economy had not been smooth. In

fact, it suffered violent instabilities as reflected in the large expansions and contractions during

the period 1972–1998. Using the sign of GDP growth rate as a criterion, the UAE economy

witnessed 15 positive and 11 negative growth rates during the period: the maximum growth rate

was 56.03 per cent in 1973 and the minimum was negative 18.8 per cent in 1986 with an average

growth rate of 6.5 per cent and 14.85 per cent standard deviation (Al-Sadik, 209).

So now the question arises: How well prepared is the United Arab Emirates economy to

survive the further lows of global oil prices, or prolonged periods when oil prices stay at the

current level? The United Arab Emirates Government has invested a great deal in diversifying its

economy when oil prices were high, therefore, a significant part of its economy is now related to

non-oil revenues and is much more resistant to oil price fluctuations. Oil revenues currently

account for only about 30% of the country‘s GDP, while in the 1970s the share was as high as

90%. Furthermore, the United Arab Emirates have accumulated considerable foreign currency

reserves in recent years, which it to sustain government spending. These assets, cumulatively

valued at over $600 billion (Shahzad, 2006), are worth several hundred thousand dollars per

citizen and generate a continuous stream of income. The foreign reserves have made the UAE a

major player in international capital markets.

Much of the UAE’s improved economic performance over the recent years is a result of

positive steps taken to diversify its economy. Generally, non-oil GDP has sustained positive

growth rates but without high volatility like the oil sector. The growth in goods and services

sectors is establishing a greater share in GDP, which has stabilized the aggregate GDP growth

rate. The Emirate of Dubai is the most striking example of this long-term push toward

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diversification. Billing itself as an ‘international city,’ Dubai has embarked on a project of

ambitious reform, moving away from the traditional rentier state model of reliance on the

mineral sector in favor of an economic strategy that it hopes will be more viable in the long term.

The first pillar of this model is Dubai’s rebranding as a regional and global finance hub. A major

part of this strategy was the completion of the Dubai International Financial Centre (DFIC) in

2004. Over 100 major international financial firms now have operations inside the DIFC, making

the Emirate a globally recognized finance hub on par with its competition in Hong Kong and

Singapore (Shahzad, 2006). Also central to Dubai’s diversification efforts is its historic role as a

regional and global trade entrepot (Michael, 2010). The Jebel Ali Free Zone has functioned since

1985 as the major trade nexus in the Gulf.

The third pillar of Dubai’s diversification efforts is its emphasis on real estate

development. Dubai’s real estate strategy relies both on private investment and state-led projects

to develop residential, industrial, and commercial real estate (Michael, 2005). These ambitious

real estate projects have all been financed with the unprecedented windfall oil profits of the past

decade. Faced with massive windfall profits between 2001 and 2008, and already committed to a

diversification agenda, the GCC states, with the UAE in the lead, turned to large-scale real estate

investment. Eventually $1.2 trillion of oil rents, 57% of the UAE’s total hydrocarbon revenues,

was turned into real estate, and especially housing. Similar to Dubai, the Emirate of Abu Dhabi

is also committed to economic diversification.

The UAE has taken steps in the right direction in recent years to diversify its economy

and the results have shown. The share of the country's revenue from export of oil has decreased

relative to the revenue from the non-oil sectors. In fact, the Institute of International Finance

(IIF) stated in its October 2013 report that it sees favorable prospects for the U.A.E. The IIF, in

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its reports, cited that continued robust growth in trade, tourism and transportation, coupled with

higher government capital spending led to strong growth drivers in 2013. A recent analysis in

2013 discovered that UAE non-oil exports hit a record high in 2012 to $125 billion, which is 5%

higher than the previous yearly record revenue (Garbis and Abed, 2013). According to the Abu

Dhabi Economic Vision 2030, the non-oil sector is expected to contribute 64 per cent of GDP by

2030. Since, the UAE economy is already the most diversified in the Arabian Gulf region, with

oil and gas contributing to less than 40 per cent of the economy, this target looks very achievable

in the coming times for U.A.E. Even though oil has underpinned the development of the UAE

thus far, there are growing signs that natural gas will be playing an increasingly big role for the

Emirates as a whole throughout the twenty-first century. Not only does the UAE own vast

reserves of its own, but it is also taking the initiative in developing the Emirates as a hub from

which to supply a network that will benefit the entire Gulf region.

To conclude, the United Arab Emirates has one of the strongest positions in terms of its

ability to sustain several years of declining oil revenues in the region, where crude oil production

is already defined by lower production costs compared to global competitors’. The Emirates

economy is less vulnerable to the volatile world oil market prices as non-oil sectors show signs

of growth (Fasano, 2002). While the UAE’s proven reserves and current production output mean

that its oil revenues will not diminish anytime in the next century, its ambitious diversification

efforts are nonetheless critical for long-term prosperity and political stability. Through targeted

investments in key sectors such as tourism and entertainment, finance and trade, and green

energy, the UAE has set itself on a trajectory of long-term growth, even when the oil does finally

run out.

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Work Cited

1. Gelvin, James L. The Modern Middle East: A History. New York: Oxford UP, 2005. Print.

2. Al-Fahim, Mohamed A.J. From Rags to Riches. New Ed. Makarem G Trading and Real

Estate LLC, 2013. Print.

3. Heard-Bey, Frauke. From Trucial States to United Arab Emirates. Motive Publishing. 2013.

Print.

4. Garbis, I. and G. T. Abed (2013), Arab Spring, Countries Struggle, GCC Prospects

Favorable, IIF Regional Overview on Middle East and North Africa report, Middle East and

Africa Department, Institute of International Finance (IIF), October, 1-42

5. Bhatti, Shahzad, et al. Dubai Final Services Cluster: Oasis or Mirage? Microeconomics of

Competitiveness (2006)

6. Pacione, Michael. City Profile: Dubai. Cities 22.3 (2005): 255-265. Print.

7. Herb, Michael. Kuwait and the United Arab Emirates, in Politics and Society of the

Contemporary Middle East. Boulder. 2010. Print.