gas oil fuel drilling field
Becoming less dependent on oil revenues will do Middle East states a world of good. Image Credit: Pixabay

(Bloomberg): A new report from the International Monetary Fund warns that, by 2034, declining oil demand could gnaw away the $2 trillion in financial wealth amassed by the members of the Gulf Cooperation Council.

Unless they act quickly to reform their hydrocarbon-dependent economies, these countries, which collectively account for a fifth of the world’s crude production, will become net debtors.

Inevitably, the report has led to predictions that the evaporation of Arab oil wealth will bode ill for economic development and political stability in an already troubled region. Beyond the GCC, low oil prices would hamper the progress of populous, but still under-developed, oil-rich Iraq and Algeria, which must reorganize their economies and societies toward productive sectors without the cushion of wealth salted away during the boom years.

Not such a bad thing

But declining oil prices and the dwindling of cash reserves are not necessarily bad news for the political economy of the Arab region as a whole.

To start with, the overwhelming majority of the Arab people do not live in oil-rich countries. The most populous Arab countries are for the most part oil-poor.

Many are net energy importers, with relatively diversified economic structures and external sectors. These include Egypt, Morocco, Tunisia, Jordan, Lebanon and war-torn Syria. For these countries, lower oil prices would lower the costs of their production and improve their balance-of-payments positions.

The decline in oil wealth would reinforce the incentives to diversify away from GCC-dependency by countries like Egypt, Jordan and Lebanon, which have long relied on recycled oil rents - through workers’ remittances, aid and credit from the oil-rich member states. Lower oil prices may actually improve the longer-term prospects of redefining the position of the most populous Arab countries in the global division of labor.

Chance for others

Countries like Egypt, Morocco, Tunisia and Jordan already possess diversified export structures, with non-oil goods constituting the bulk of what they export. They have also developed strong trade, investment and tourism connections with powerful partners in the European Union and the US. For Morocco and Tunisia, lower oil prices would boost their position as energy importers and as exporters of manufactured goods.

Conversely, the outlook for Egypt is significantly tougher given its dense ties with the GCC. But, the overall share of oil-related rents in the country’s GDP, including remittances and foreign aid (predominantly from the GCC), has been constantly declining since the 1990s.

Less chance for misspending

There is near consensus in the literature on the Arab world that oil wealth has been associated with less democracy and more conflict and repression. This does not mean that all conflict can be traced back to oil wealth, but it has played a central role in deepening and prolonging hostilities.

Hydrocarbon wealth since the oil shock of 1973 has been associated with higher intensity of conflict around the Gulf, with ramifications for the wider Arab world. Three Gulf wars and the ongoing tensions between Iran and an alliance of the US and several Arab countries attest to this fact.

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Beyond the Gulf region, oil rents have often been often used to fuel arms races and civil conflict through the sponsorship of local militias along ethno-sectarian lines. Hence, lower oil prices in the long term may weaken the financial resource-base for fueling conflict in MENA, whether directly or by proxy.

Since 2011, oil riches have been used instrumentally to shape the outcomes of post-Arab Spring political processes across the region. In Syria, for instance, Iran threw its weight behind the regime of Bashar al-Assad.

Cutting off funds

Less access to easy money could curb ongoing conflicts, or at least make them less intense. It’s worth remembering that the end of the Iraq-Iran war in the 1980s was hastened by the oil glut of 1986 and the subsequent decline in revenues for the two belligerents and their regional sponsors.

Civil conflicts are more complicated than international ones, and will likely linger even with declining oil rents. Still, the availability of fewer resources may hasten the conclusion of these conflicts - or at least limit their scope and intensity.

For much of the Arab world, and especially in the counties where hydrocarbon revenues have long represented a curse, the decline in oil wealth described in the IMF report might yet be a blessing in disguise.