DD209A - Economic Crisis in Arab Gulf Countries: Causes and Impacts

This essay analyzes the economic crisis in Gulf countries caused by falling oil prices, referencing the DD209A course material. It examines factors contributing to the price decline, including decreased demand from major economies like China and increased oil production in countries like the US and Canada. The essay discusses the impact on Gulf countries' GDP, highlighting diversification efforts in sectors like tourism and manufacturing. It concludes that while Gulf countries face challenges, diversification and potential cuts in oil production could lead to future growth, but countries heavily reliant on oil need to reduce their dependency. The essay uses graphs and data to support its analysis of the shift from oil-based economies to other sectors, referencing the Arab Open University course and Rubina Vohra's paper on the impact of oil prices on GCC economies.

DD209A (Economics and Economic Change I)

Introduction
This essay brings out an analysis on the economic crisis caused due to falling of the oil prices
in Gulf countries. This essay has a detailed analysis of factors that contributes to falling of the
prices. Economic crisis is a situation of the country that experiences falling GDP, dried
liquidity and rising inflation. Economic crisis considers decline in the prices of financial
assets whether consumers are not able to pay off their debts, crashing stock prices, currency
crisis. For example- during the shrinkage of world`s economy in 2008, it is observed that oil
prices have been collapsing from July 2008 at $ 147 to $32 in December 2008. It has claimed
that law of supply and demand of oil are responsible for 80% drop in the oil prices. Another
example of economic crisis can be increasing demand in the economies such as India and
china, it is seen that the production had cut down by the (OPEC) Organization of Petroleum
Exporting Countries. Apart from this, various other factors affected the oil prices in 2014.
The discussion will also analysis socio-economic factors that has affected the economic
growth and economic development due to boom in oil sector as well as bullish condition in
the sector.
The global financial crisis identified mitigation strategies failing at every level. 2008 global
crisis has negative impact on oil sector as it declined the oil price. The tight credit conditions
resulted in producers paying high rate of interest when increasing capital. Price of oil fell
from high $147 in 2008 to $33 during February. This decrease is due to felling and
diminishing demand. Other recession faced by the oil industry was the rapid increase in the
demand of oil products. The economy recovered from the oil backs and the price again
reached $100 and hovered from $100 to $125 in 2014 (Alsayegh, Saker, and Alqattan, 2018).
Again, in 2014, various factors contributed to drop in the oil prices. As china is a major
contributor to the global economy as china is the largest country in terms of population,
whereas when huge demanding population lowered the oil demand, the sector suffered from

price ramification. Other huge economies such as India, Brazil, and Russia has faced the
same economic trajectories in 21 century, as their demand too decreased in 2014.
Other negative effect caused by high prices, countries named Canada and US increased its
efforts to produce their own oil. In US, private companies started extracting oil by using a
process called as fracking. Canada started extracting from oil sands of Alberta, which is the
third largest crude oil reserve of the world (Hemoud et al., 2017). In result of which, two
American countries cut down its oil imports that further created downward pressures on
global prices. Due to above consequences, gulf countries started suffering from low demand
as other countries who were dependent on them for oil supply. Middle Eastern countries kept
their production stable, as they have realised that low prices offered more long-term benefits
rather than just giving up better market share. Saudi Arabia`s contributed to falling of the oil
prices in 2014. Apart from this, extracting methods are more expensive and are not profitable
too when oil price falls too low. By supporting the low price of oil, Saudi Arabia anticipates
that country such as US and Canada might abandon the costly affair of production method
(Vohra, 2017).
Economic condition of gulf countries

(Source: Augustine, 2018)
From the above graph, it can be seen that oil sector contributes a huge number to GGDP of
the economy. In 2006, 2008 and 2011, oil sector was the major contributor to the GDP of the
country. Whereas, there was a shift in 2012, 2013, 2014, and 2015 from its relying only on oil
sector to non-oil (Vohra, 2017). It is good that the country has been diversifying its growth to
other sector also because as when the country was totally relying on oil sector, there is a
greater risk of development of oil extraction methods by other countries as it would affect the
UAE`s economy. In 2016, 2018 and 2019, the countries have reduced its whole dependency
on the oil sector (Augustine, 2018).

(Source: Trading economies, 2018)
The above graph is the total positive impact of oil sector on economy of UAE. It contributes
almost 1.6% in 2010, 4.5% in 2012, 4.4% in 2014, 3% in 2016, and 0.8 in 2018 (Trading
economies, 2018). The reason of reducing the contribution of oil sector is that the country has
diversified its other sectors so that it can contribute to high GDP (The conversation, 2015).
(Source: Toole, 2017)

From the above graph, it can be seen that oil and its manufacturing sector has contributed
nearly 60% of total GDP in 2011, in 2012, the sector contributes 59% to total GDP, in 2013,
oil sector contributes 56% and so on till 2015, it reduced to 39% (Toole, 2017). This signifies
that the country has started diversifying its economy dependencies and created an ambitious
plan to increase its revenue streams focusing on other sectors such as tourism and
manufacturing. As in long term, it is aiming to shift from oil-based economy to other critical
sectors such as manufacturing, tourism, fishing, mining, and logistics. The reason is quite
clear that in the era of low prices, Oman has the lowest GDP among all the gulf countries
with an unemployment rate of greater of 17%. The reflection is that non-oil sector such as
fisheries and tourism has resulted in decline of contribution of oil to country`s GGDP form
44% in 2011 and 2015 to 30% by 2020 (Toole, 2017).
Conclusion
From the above discussion, it can be concluded that gulf countries are set in order to attain a
slow growth that has been expected in the future. The group of experts has been saying that
cuts in oil prices has resulted to cut in production and also weakening of the global growth
especially these gulf countries as it puts pressure on these regions. The GDP of the Saudi
Arabia who is the largest oil exporter in the world has the expectation that it would grow by
2.1% next year after 2019. The cutting of Russia’s supply, which have been decided by
(OPEC countries), could help to minimise the prices of oil (Abdulrazzaq, Morales, and
Coughlan, 2019). As policy of price, cuts will end by having repercussions on GDP growth.
After suffering from the global crisis and price cuts, Saudi Arabia have decided to eliminate it
from the state deficit by 2023. The current accounts of two gulf countries “Oman” and
“Bahrain” is weakening (Asianews.it, 2019). These countries, which are highly dependent on
oil sector, should reduce their dependency as other many sectors have been growing in this
globalised economy. Although, many countries have adopted diversification such Oman, but

it will take huge time to recover and settle the other sectors as it is already prone to natural
disasters.

References
Toole, M. (2017) Oman moves closer to a post-oil economy. Available on:
https://www.aljazeera.com/news/2017/12/oman-moves-closer-post-oil-economy-
171208124924210.html [Accessed on 11/04/19]
Augustine, B. (2018) Non-oil sector to lead UAE’s economic growth this year. Available on:
https://gulfnews.com/business/non-oil-sector-to-lead-uaes-economic-growth-this-year-
1.60621912 [Accessed on 11/04/19]
The conversation, (2015) Oil prices: eventually the Gulf states will run out of power.
Available on: https://theconversation.com/oil-prices-eventually-the-gulf-states-will-run-out-
of-power-35867 [Accessed on 11/04/19]
Trading economies, (2018) United Arab Emirates GDP Growth Rate. Available on:
https://tradingeconomics.com/united-arab-emirates/gdp-growth [Accessed on 11/04/19]
Asianews.it, (2019) Global crisis and oil cuts slow down the Gulf countries growth. Available
on: http://www.asianews.it/news-en/Global-crisis-and-oil-cuts-slow-down-the-Gulf-
countries-growth--46044.html [Accessed on 11/04/19]
Vohra, R. (2017) The Impact of Oil Prices on GCC Economies. International Journal of
Business and Social Science, 8(2), pp. 7-13
Abdulrazzaq, Y.M., Morales, L. and Coughlan, J., 2019. Oil Sector Spillover Effects to the
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Al-Hemoud, A., Al-Awadi, L., Al-Rashidi, M., Rahman, K.A., Al-Khayat, A. and Behbehani,
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