The next big oil shock will be for the Middle East

For decades now, many of the countries in the Middle East have been enjoying extremely cheap energy, thanks to the abundance of oil deposits, and economic clout. But, the gravy train will soon come to a halt! Oil exporting countries will have to reinvent themselves or face economic oblivion- because the next shock is coming!

There was a time when Middle Eastern countries could threaten the world by cutting production, essentially chocking the oil greased economy of the world. Even the world’s only Super Power- United States came to a grinding halt when the oil flows stopped. But, things have changed. First, there have been new oil discoveries in other countries, and the “drill baby, drill” policy of the United States has flooded the market with excess oil. This has led to prices plummeting.

Some countries are already facing the heat, and are finding ways to deal with the eventuality. But is there enough time? Technological changes are taking place at a hectic pace! The one innovation that should worry oil exporters is the use of electric vehicles. Major oil importers like China and India are moving away from oil. While this move will be for the passenger vehicles initially, in due course of time even busses and trucks will go the electric route. 

Electric buses are already being tested in the southern city of Mysore in India. China is already a world leader in manufacturing electric vehicles. So, when legislation in Europe and US changes, bowing to pressure from environmental groups or by the weight of climate change on the lawmakers’ conscious; China is ready to move in and supply the world.

All this means there are drastic changes afoot, and at a pace that may have the Middle Eastern countries ill prepared to adapt to the changes. Years of oil dominance have led to obscene accumulation of wealth, and wasteful consumption in these countries. Hardened mindsets and slow decision making process make these countries susceptible to the next big oil shock, and this time again the oil exporters will be at the receiving end!

Consider this- the concept of personal income tax is still alien to countries like Saudi Arabia. The dilemma the country now faces is that a sudden tax would make it difficult for it to attract expats to live in the country. But, difficult decisions like this are unavoidable, if the country wants to diversify its sources of income.

With oil exports drying up, countries that are heavily reliant on oil exports will have to find new ways to generate income. Richer countries like Saudi Arabia can use their capital, which they have accumulated over the years, to make investments in resource rich Africa. But, they are heavily invested in the United States, which is also struggling economically.  Any significant move of capital away from United States may prompt a reaction. 

To add to this, there is lawlessness and turmoil across the Middle East, which means a lot of resources will be spent on defense. But, if oil exporting countries don’t pay urgent attention to diversifying their respective economies; the amount of social, economic and political changes they face will be unprecedented.

If you enjoyed this post, please like the India Strategic Affairs Facebook page.