Oct 24, 2021
Diversification from oil to other industries in the Middle East
Introduction
Middle East Region is bestowed with abundant oil and gas reserves, making it a prominent player in energy geopolitics. Findings of the Organization of Petroleum Exporting Countries (OPEC) report revealed OPEC Member states comprise 79.4% of the world’s oil reserves, with 64.5 % of OPEC oil reserves concentrated in the Middle East. The Middle Eastern nations including Saudi Arabia, United Arab Emirates, Kuwait, Iraq and Iran are renowned for being the biggest oil-producing economies of the region. The region faces a continued threat of depletion of petroleum reserves and the resultant decline in the global demand of oil and gas demand. The ongoing Covid-19 pandemic caused a sharp decline in global oil consumption necessitating the oil-rich Middle East nations to expedite the economic diversification.
It is projected that in the long run the global consumption of oil would decrease due to the availability of cost-effective substitutes and adopting of green business practices. Therefore, the countries of the Middle East are increasingly investing in the development of the non-oil industries for stable economic growth.
Background
The Middle Eastern region has witnessed conflicts over oil like the Iranian Revolution, Gulf War Oil Spill which resulted in a huge collapse in oil revenues. In the 21st Century, the need for diversification has become more pronounced to manage the volatility in the oil-dependent economies. The 2010–2014 oil crisis impacted the OPEC member-states global oil supply and has resulted in policy changes. Furthermore, Middle Eastern countries like Saudi Arabia decreased their investments in some of the oil and petroleum projects following the 2020 Aramco oil shock. In the wake of the Covid19 pandemic and worldwide lockdowns, oil consumption had declined by approximately 25 million barrels per day in the first quarter of 2020. The collapse of the oil prices had huge ramifications for Middle Eastern oil-producing nations. The crisis has pronounced the need for improving diversification and working towards sustainable economic growth.
Background
The Middle Eastern region has witnessed conflicts over oil like the Iranian Revolution, Gulf War Oil Spill which resulted in a huge collapse in oil revenues. In the 21st Century, the need for diversification has become more pronounced to manage the volatility in the oil-dependent economies. The 2010–2014 oil crisis impacted the OPEC member-states global oil supply and has resulted in policy changes. Furthermore, Middle Eastern countries like Saudi Arabia decreased their investments in some of the oil and petroleum projects following the 2020 Aramco oil shock. In the wake of the Covid19 pandemic and worldwide lockdowns, oil consumption had declined by approximately 25 million barrels per day in the first quarter of 2020. The collapse of the oil prices had huge ramifications for Middle Eastern oil-producing nations. The crisis has pronounced the need for improving diversification and working towards sustainable economic growth.
Current Situation: Diversification from oil to other industries
1.Renewable Energy Sector-
The Middle East nations including Saudi Arabia, UAE, Qatar have bolstered their investments in sustainable energy technologies. To reduce their dependence on the oil industries, the nations have outlined multi-billion-dollar plans to develop alternative energy sectors. UAE, for instance, has focused on developing Masdar City to tackle global warming and promote sustainable economic development.
Saudi Arabia has enhanced its investments in clean energy technologies to tackle climate change. The nation has prioritized harnessing the solar energy potential available across the country, thereby encouraging cooperation from the regional economies, like Jordan, Egypt and Morocco, to work towards improving clean energy programs. The countries of the Middle East are taking a lead in energy cooperation by engaging in bilateral partnerships with nations like the USA, and Japan in improving renewable energy technologies. A study by Mordor Intelligence revealed that the Middle-East renewable energy market is estimated to increase at a CAGR of over 8.2% by 2022.
2.Education Sector-
In Vision 2030 Saudi Arabia has outlined ambitious plans for diversification. The nation aspires to transition from an oil-based economy to a knowledge-based economy. The Saudi labour force is expected to reach 8.6 million by 2030. It is estimated that approximately 200,000 jobs would have to be created each year to accommodate the nation’s labour force. Saudi Arabia, therefore, has been investing in improving the education system and increase female participation in the labour market.
Similarly, nations such as UAE in its Education Strategy 2021, has endeavoured to promote equitable and quality education for Arabic speakers across the globe by improving the Madrasa E-learning Platform.
The Covid-19 pandemic has opened new avenues in the education markets of the Middle East region. A 2019 study by Kenneth Research showed that the Middle East online education sector was likely to expand at a CAGR of 9.8% during 2017–2023. The study said that the key factors for the growth would be increasing government investments and a rapid shift to online education and e-learning by educational institutes and companies.
3.Healthcare Industry-
In recent years, the Healthcare industry is gaining momentum in the Middle East nations. According to Collins International Healthcare Analysis, UAE’s healthcare expenditure increased at a compound annual growth rate of 8.8% between the years 2011–2019. The study forecasted growth in Saudi Arabia’s healthcare expenditure at a CAGR of 12% during 2011–2019 and is estimated to reach $3.6 billion by 2030. Since the outbreak of Covid, the nations like Saudi Arabia and UAE are improving the public-private partnerships in the healthcare sector to reduce the shortage of hospital beds and skilled workforce. Nations such as UAE, Turkey, and Iran are ranked amongst the top medical destinations in the Middle East, attracting worldwide medical tourists.
4. Space Sector-
The nations of the Middle East are considered as the new contenders in the commercial space race. The countries are aspiring to increase their share in the global space industry. The countries are formulating space policies to support private space companies and international collaborations in developing cost-efficient small satellites and earth observation systems. In Vision 2030 Saudi Arabia has affirmed its commitment to invest $2.1 billion to bolster the space program. The nation plans to collaborate with spacefaring nations such as the U.S., Russia, China, India to improve space research activities. UAE with the success of the Emirates Mars Mission has established itself as an emerging player in the global space sector. Turkey has ambitious plans to build a space-sport in international cooperation. Turkey has pledged to allocate $150 million to space research and exploration, and grants for astrophysics scholars.
5. Tourism
The Middle East region has emerged as one of the most sought after destinations for international tourists. The tourism industry is a significant contributor to the Middle East nation’s economic growth. The key reasons for prosperity include the region’s proximity to several European and Asian nations, mega tourism projects, and good transportation networks. In the Travel and Tourism Competitive Index disclosed by World Economic Forum, the region was secured the second position in the tourism sector with an annual growth rate of 5.3% in the year 2019. The Middle East tourism sector is expected to revive from the Covid-19 pandemic with its well-planned tourism strategies, easing of visa procedures and organizations of tourism events like Arabian Travel Market, and Qatar 2022 World Cup. Saudi Arabia, for instance, has planned to gain investments worth $ 58 billion by 2023.
Geopolitical Implications of diversification
The gradual transition of the Middle Eastern nations from oil to other industries would necessitate its top oil importing member-states to diversify their oil import destinations. Nations including United States, China, India, Japan, Canada and Germany are amongst the world largest oil consumers. Developing Asian economies like India have decreased their purchases from the OPEC member states. Findings of Reuters study show the drop in India’s total crude oil imports to 3.97 million barrels per day (BPD) in the 2021 fiscal year to March 31. India is diversifying its imports to the USA, Canada, Nigeria, Brazil amongst other nations. The USA under Biden Administration has taken lead to promote renewable fuel programs and initiatives.
Moreover, the nations that are hugely reliant on the Middle East for crude oil would eventually enhance their investments in clean and renewable energy including natural gas, wind, solar and hydro energy. Several nations have aimed to increase self-reliance in energy supply and invest in renewable energy infrastructure. Nations like India through its energy diplomacy are preparing for Global Energy Transitions. Towards this end, the nation has established International Solar Alliance. In response to Middle East oil diversification to other industries, several nations have prepared to be the post-oil economy.
Saudi Arabia has planned to join hands with member-states of the European Union, the USA and China in green hydrogen production. It plans to develop a $5 billion plant powered by sun and wind to leave a mark in the global renewable business.
Furthermore, Middle East nations shift to other sectors have opened various avenues for collaboration with the leading economies. Over the recent years, China has intensified its military cooperation with the Arab nations particularly in the domain of arms deals and weapons cooperation. Nations like Saudi Arabia, Bahrain, Qatar have strived to foster defence ties with the Indo-Pacific region players.
Similarly, under the umbrella of the Belt and Road initiative, China has collaborated with Telecommunication corporates in Egypt, Bahrain, Saudi Arabia and UAE to build 5G networks. In the arena of Space and Research, Saudi Arabia has shown its willingness to initiate space cooperation with many nations like India.
Business Implications
The Middle-East nations ambitions to diversify their economy would open new vistas for the non-oil sectors including the Healthcare sector, Renewable Energy Technology markets, Space Industry, Edtech startups, Defence cooperation and agriculture.
The economic diversification has enabled the Arab nations to invest in human capital and service-based industries, contributing to stable economic growth.
Moreover, the economic diversification has presented the Middle Eastern countries an opportunity to maintain their global influence through soft power and cultural diplomacy and be the prominent players in Green business development.
References
https://www.imf.org/external/np/pp/eng/2016/042916.pdf
