A recently signed security- and economy-focused pact marks the latest development in the United States’ close, long-standing partnership with Bahrain.
AGSIW's publications are also available in Arabic. Help AGSIW expand its Arabic-language analysis.Donate
The 26th United Nations Climate Change Conference, COP26, has reminded the world that the end of fossil fuel production has to come sooner rather than later. And for decades now, the countries of the Gulf Cooperation Council have all publicly recognized the unsustainability of their oil rent economies and committed to weaning their economies off their hydrocarbon income. Regardless of public announcements, however, fossil fuel production in the Gulf has actually increased by about one-third since 2000. The largest increase was in Qatar, doubling production until 2013 and shrinking slowly in recent years. Saudi Arabia’s output grew by 31% until 2016 and has also been declining slightly since, while the UAE’s production grew by about 60% and sees no sign of abating. Production dipped in 2020 due to the coronavirus pandemic but is already rebounding.
Thus, the current development continues the region’s fossil fuel dependence, especially when compared to the rest of OPEC and the rest of the world. This precarious trend puts the Gulf states at odds with the global net-zero plans to reduce carbon dioxide emissions radically and with the resulting impending collapse of fossil fuel demand.
Fossil Fuel Production in the GCC and World
GCC Oil Rents
Meanwhile, oil rents still play a dominant role for Gulf states’ gross domestic products, signaling that they have yet to diversify their economies. There are large fluctuations due to demand-side volatility, notably the Great Recession from 2007-09 and the oil price crash in 2014. On average, all GCC states now generate a lower percentage of their GDP through fossil fuel production than in 2000, according to estimates from the World Bank. But not all countries have been equally successful in reducing their dependency: While Qatar and Bahrain have reduced the share of their oil rents in their total GDP by 56% and 50%, respectively, Oman’s oil rents have decreased by 46%, Saudi Arabia’s by 41%, the UAE’s by 24%, and Kuwait’s by 18%. Nevertheless, fossil fuel income remains the region’s key economic driver as rents are still growing in absolute monetary terms.
The Road to a Knowledge-Based Economy is Rocky
Citations of Scientific Research
Patent Filings per Million Inhabitants
The plan to build a productive, oil-independent local economy through knowledge and innovation has had mixed results in both research and education. While student numbers have increased, the quality of university research, on average, has not. None of the Gulf-based universities placed in the top 100 of the 2022 Times Higher Education ranking. Saudi Arabia’s King Abdulaziz University ranked the best among the Gulf institutions at 190th. The other GCC countries, however, did not field any universities in the top 300. Correspondingly, measures of scientific impact remain low. For example, among the Gulf states, Saudi Arabia has the highest h-index, which measures the productivity and citation impact of publications, but globally, it only ranks 39th compared to countries like Australia (9th), Israel (16th), South Korea (17th), Norway (20th), and Singapore (24th). The UAE ranks 63rd and Qatar ranks 75th. However, scientific production has markedly accelerated in Saudi Arabia since 2010 and, to a much lesser degree, in the UAE. Consequently, innovation is also lagging. For instance, patent filings per population in the GCC states are far behind innovation leaders like South Korea; and patenting procedures in the Gulf states are complex and legally uncertain, as highlighted by the GCC Patent Office’s sudden announcement in January that it was no longer accepting new patent applications.
The national higher education system is also facing problems in making nationals fit for the private job market, and while the government has announced substantial subsidies for private companies who employ locals, they are still largely confined to public sector jobs. This dependence is becoming even more problematic for nationals because another source of their income, the sponsoring of foreign ventures, is rapidly drying up as Gulf governments are starting to naturalize foreigners and drop restrictions on foreign business ownership.
The problems of higher education have different root causes, including a K-12 education sector that leaves students unprepared for college, a revolving door of university administrators and policy initiatives, problems with attracting and retaining high-quality international faculty, and, perhaps most importantly, insufficient funding. For example, federal funding for higher education in the UAE has not kept up with inflation since 2010. And all of this is added to even larger-scale problems in developing the local economy, such as the overwhelming reliance on low-wage migrant labor, a large public sector, and the devastating effects of climate change on the Gulf region.
20 Largest Sovereign Wealth Funds
Can Sovereign Wealth Funds Fill the Gap?
In short, the Gulf countries are falling short in their efforts to transition from oil- to knowledge-based economies. Only courageous structural reforms can solve the education sector problems, combined with a massive increase in funding for both K-12 and university education and research. But even if Gulf governments implement such a dramatic policy change, and even if it succeeds in increasing local labor productivity, the resulting economic and societal change may take decades, as historical examples like the U.S. Rust Belt, English North, and German Ruhrgebiet, or Ruhr, suggest. In the meantime, the Gulf countries are already facing high native unemployment levels, which have recently led to protests in Oman.
There might, however, be a contingency plan that would circumvent the necessity of increasing productivity and transitioning nationals from the public to the private sector altogether but would instead recruit the immense resources of the Gulf sovereign wealth funds to substitute for oil rents.
Some Gulf countries feature a high sovereign wealth fund capitalization per capita. For example, the Qatar Investment Authority has $354 billion in assets under management for 317,000 Qataris (excluding non-citizens), or four times as much per citizen as Norway. The four largest Emirati sovereign wealth funds combine approximately $1.3 trillion, about as much as the largest sovereign wealth fund, Norway’s Oil Fund, for up to 1.4 million Emirati nationals. This raises the question whether sovereign wealth funds can close the gap left by fossil fuel resources, transforming the rentier state into a state of rentiers (in the original meaning of the term – someone who can live off of the returns from their investment portfolio). In essence, this approach substitutes investment in local productivity (knowledge-based economy) with investment in a portfolio of foreign productivity.
It is exceedingly difficult to calculate the necessary size of sovereign wealth funds to replace oil rent, but a few crude back-of-the-envelope calculations are intriguing. For example, the UAE and Qatar currently generate an oil rent of about $70 billion and $25 billion, respectively. Assuming an approximate average real return on investment of about 5%, this means that these two countries need an additional $1.4 trillion and $500 billion in assets under management to replace current oil income, or, very roughly, double the current values.
The question is, do the funds grow at a rate that allows them to substitute fossil fuel income appreciably? While the funds are nontransparent, estimates indicate that they are not growing consistently. The Abu Dhabi Investment Authority, for instance, currently has an estimated $649 billion in assets under management, about as much as 10 years ago. This lack of growth suggests a combination of significant fluctuations of returns, large withdrawals, frequent restructuring, and lower returns as governments use sovereign wealth fund portfolios for strategic and soft-power purposes.
The sovereign wealth funds may thus grow too slowly to absorb the relative reduction of oil income and insufficient development of a productive local economy. Public finances are already under pressure at a time of increasing demands on public expenditure, such as escalating defense spending. Consequently, Gulf governments are increasingly taking on public debt and are working on introducing taxes, currently largely confined to value-added taxes, with plans for income and corporate taxes. But even if sovereign wealth funds were able to attenuate the situation, this option would still hinge on Gulf governments’ political will and institutional security to manage sovereign wealth funds as fiduciaries for their citizens over many decades (like Norway’s Oil Fund), a still foreign set of institutional practices in the Gulf to date. But while oil wealth is tied to the very soil of the country, the sovereign wealth funds’ bank accounts and diversified portfolios, although derived from oil, are borderless and fungible.
is an economist and consultant on labor and human capital issues regarding Gulf countries’ transition to a post-oil economy.
A substantial drawdown on global oil stocks is forecast for the fourth quarter amid record oil demand, accelerating the rise in oil prices to the $100 per barrel threshold.
The regime’s failure to create an open and prosperous society for Iranians is leading Iran’s richest and brightest to reconsider their future in their country.
Through its careful examination of the forces shaping the evolution of Gulf societies and the new generation of emerging leaders, AGSIW facilitates a richer understanding of the role the countries in this key geostrategic region can be expected to play in the 21st century.Learn More