uae and oil
DESCRIPTION
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?TRANSCRIPT
Javed
1
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).
Javed
2
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
Javed
3
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
Javed
4
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
Javed
5
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.
Javed
6
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.