After Oil—Transition to Oil-Less Economies

Abstract

Economic management in its current form is not sustainable in many, if not all, of the oil-exporting countries of the Persian Gulf. Government expenditures will in time outpace oil revenues as expenditures increase and oil revenues fall. Oil and gas are depletable, or wasting, assets. They should not be depleted to finance consumption. Saudi Arabia, perhaps, provides the best example. The country went from what was up to that time a record budget surplus in 1980, to a deficit in 1983, and it had continuous deficits for 17 years before returning to a surplus in 2000. And in 2008 it went from the largest budget surplus in its entire history to a deficit in 2009 before returning to a surplus in 2010.¹ When, not if, oil revenues begin to decline irreversibly, Saudi Arabia will experience continuous deficits if it stays on its present course. Iran’s and Iraq’s predicament could be even worse. Even the richer, smaller countries of the region—Kuwait, Qatar, and the UAE—may not be immune, because they may face external dangers if their three more powerful neighbors are confronted by economic failure and hardship. These problems will only be exacerbated and the opportunity for adopting reforms will become more limited as the demand for oil increases more slowly in the future, oil prices decline with increasing production of nonconventional crudes (from shale and tar sands), shale gas, and renewables, and the latter three become increasingly more competitive with hydrocarbons.