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Low Oil Prices: the End of Gulf-style Five-star-socialism?

Oil station in United Arab Emirates
A man fills up his car with petrol in Abu Dhabi, United Arab Emirates. Photo Rex Features

‘You are the ones who can’t live without oil. You know, we come from the desert, and our ancestors lived on dates and milk and we can easily go back and live like that again,’ said King Faisal to Henry Kissinger in 1973.

Faisal was wrong – when the going gets tough, most Gulf-Arabs would rather go for fish and chips at their apartment in cool and rainy London. Where he was right though, is that one cannot eat oil; it needs to be sold, preferably against a stable and high price.

And that, today, is a problem. With oil prices structurally below the break-even prices of all GCC-states, they face a less carefree (near) future than expected. State funds may still be huge, but so are the budget-deficits. So far, the response has been one of talk rather than action. But appearances may be deceiving: patience may be part of the plan, in the good tribal tradition.

Take OPEC. Rather than cutting production to halt the current over-supply, the Gulf-members of OPEC decided to keep flooding the market with cheap oil. Headed by Saudi Arabia, they dominate OPEC, so the others could do nothing but follow suit. But why are the Saudi’s doing this?

It’s the price they are willing to pay. Low prices not only take a toll on the GCC countries, but also on non-OPEC producers like Russia and the US, and not to forget: on co-OPEC member, but not friend, Iran. The idea behind the strategy: the GCC economies are resilient enough to sit this out and wait while the others are choking.

The strategy may actually work. Notably, OPEC is said to succeed in slowing down (though not stopping) the shale oil boom in the US, where drilling activity has decreased substantially.

Patience is even more important on the national level. The leaders know very well that they need to re-negotiate the social contract with their citizens, because they can no longer keep their part of the promise.

Here’s what that contract roughly looks like: the state collects the oil revenues and hands them out to the people in the form of subsidies on fuel, water, food, electricity, free education, free health care, a guaranteed job with the government etc. In return the people do not challenge or even question the leadership.

The difficulty lies not in what needs to be done – cutting subsidies, imposing taxes and diversifying the economy – but in whether the people still keep their part of the promise once this is done. Will they swallow whatever comes to them, or will they protest, demonstrate, revolutionize?

The more oppressive the state is, the easier it will be to impose measures. Saudi Arabia, for example, in December 2015 cut fuel-subsidies, following the UAE, which had already done so earlier in 2015. In both countries the measures so far led to a price-hike at the pump, but not to civil commotion.

Maybe the people understand it is time for reforms, or maybe they do not dare to speak out against them. According to IMF’s chief Christine Lagarde, the people understand:

Do they, really? Public opinion in Kuwait – the only GCC-country where people do speak out – suggests otherwise. Yes, the Kuwaiti’s understand that something needs to be done, but rather than putting the burden on them, the government should make ‘proper economic reforms,’ they say.

In a column called ‘Enough about subsidies cuts!’ the writer angrily addresses the IMF: ‘Before you lift subsidies, why all those who squandered public funds through bogus deals were not punished? Did your proposal look at some names that embezzled and stole public funds?’ . Similar sounds are heard in the Kuwaiti parliament.

So, people in Kuwait – and this may not be that different for other GCC-citizens, who are just less vocal – are not that ready to pay taxes or higher fuel prices at all. ‘First stop stealing and make an end to corruption, then we can talk,’ is what they say, backed by a powerful parliament.

Perhaps this is why many recent plans in Kuwait focus on the expat community, which makes out 2/3 of the population. Let’s tax the remittances they send home, let’s withdraw visa from those over 50 years old, let’s cut fuel subsidies for them only, let’s stop their free health care; to name just a few ideas.

However, this does not go down well with Kuwaiti’s either, who are acutely aware of their dependence on the expats. Plus, many say, this is not how we should treat guests who helped building and defending our country. Expats shrug: It’s probably just going to be 3-4 people who actually get deported, knowing that law-enforcement, if ever there is going to be a law, is not Kuwait’s strongest point.

Even more patience is needed for that one thing the region has been talking about for decades: diversification. The oil-kings have always been aware of the one-dimensionality of their economies. However, with the exception of Dubai, and to a lesser extent Saudi Arabia, diversification never took off. This is often blamed on the geographical, climatological and demographical position of the region.

There is some truth in that, but there is also some truth in the fact that the same oil-kings created a kind of Gulf-style five-star-socialism where people count on guaranteed – often unnecessary or even non-existing – government jobs, where connections are more important than merits and where entrepreneurial ambitions are smothered in bureaucracy and protectionist behaviour of the ruling merchant families.

So all in all, reforms will not come easy. But there seems to be no way back. Eventually, they will take place, even in Kuwait, although that may be the toughest nut to crack. On the short term, we will probably see reforms that are relatively easy to achieve, such as cutting subsidies. Introducing taxes and diversifying an economy will take longer: cutting subsidies on rice is one thing, growing it yourself another.