GCC Scenarios
- 2. The GCC countries have benefited enormously from oil and gas reserves and assets that have generated significant financial liquidity in the six years between 2001 and 2007. The present wealth poses an interesting question for those interested in the future of the GCC countries, and one which these scenarios seek to address: How can this wealth be put to use to ensure that the GCC countries expand in affluence, while overcoming the internal and external pressures that could shift them from the path of sustainable prosperity? Key Questions for the Scenarios From amidst the many drivers identified by project participants, the scenario process identified two ‘focal questions’ that have the ability to alter the fortunes of the GCC countries in the next two decades: • Will leaders in the GCC countries be willing and able to implement the necessary economic and political reforms and enforce the rule of law, both in public and in private governance? • How can the GCC countries maintain internal order and stability, in particular vis-à-vis a complex and uncertain regional situation? As important as these questions are, more crucial are the insights that can be gleaned from considering what these questions imply. In positing three possible futures which address them in different ways, two key themes consistently emerged as being crucial to the future of the GCC countries: • Education and innovation: The GCC countries face the challenge that their collective oil reserves, while vast, will not last forever. Nor are oil and gas always a reliable source of wealth; there have been many times where GCC budgets were in deficit and public debt rose as a result of falling energy prices. However, in attempting to diversify away from oil, the GCC countries face a major problem in that their existing skill base for workers is low by world standards and relatively little research, development and innovation are occurring in the region. This creates an impediment to development and exacerbates other problems associated with importing both foreign workers and technologies. As a result, the way in which education policies are handled by GCC governments will be a significant determinant of the region’s ability to develop as innovation-based economies that do not wholly rely on natural resources. • Leadership and governance: The GCC countries are ruled by traditionally-organized family groups, with varying underlying executive, legislative and judicial models. Leadership and governance will therefore be instrumental in determining the path that the GCC countries will take over the next 20 years. Although much is being undertaken today in terms of reform to improve the efficiency and openness of these systems, the strategies chosen and the rates of change vary between GCC countries. In managing both internal stability and reforms, leadership plays a critical role at all levels of GCC government as well as in the private sector. 6 2 Section Section2:ExecutiveSummary Executive Summary TheGCCCountriesandtheWorld:Scenariosto2025
- 3. Scenario Paths Three different paths for the GCC countries through to 2025 are represented in figure 2.1, displayed as movements through a matrix defined by the focal questions above. Will the GCC countries successfully insulate themselves from ongoing regional instability in order to respond to internal pressures, firmly establishing the rule of law and achieving effective governance and institutional reforms? Oasis is a story where a focus on technocratic governance and top-down institutional reforms pays off in the form of a well-organized, cohesive and prosperous regional grouping. The region’s economic growth, however, remains partially constrained by over-regulation and less-inclusive globalization. Will GCC governments allow regional tensions to spill over and affect their internal security, resulting in a focus on short-term solutions at the expense of tough reforms? Sandstorm is a scenario in which dramatic regional events and domestic unrest contribute to the GCC countries failing to maintain their momentum of reforms, with negative consequences for the region’s economic and social development. Will GCC governments succeed in taking advantage of globalization in a more stable regional environment through bold reforms at the institutional and political levels? The Fertile Gulf is a future where GCC governments invest heavily in education and innovation in order to create a healthy private sector while encouraging reforms through a bottom-up process. This results in a more socially integrated and economically diversified region that occupies an increasingly relevant position in the international scene. 7 Section2:ExecutiveSummaryTheGCCCountriesandtheWorld:Scenariosto2025
- 4. 8 Section2:ExecutiveSummary Oasis describes a scenario where regional stability continues to be a challenge for the GCC countries, which are nevertheless able to achieve substantial institutional reforms. The GCC countries develop strong identities and work together to coordinate diplomatic and economic policies through technocratic governance and a strong internal market. Over-regulation slows the process of globalization, impacting the GCC countries; nonetheless, they are an oasis of stability and prosperity in an otherwise troubled region. The story is written as a press conference by a member of the Kuwaiti leadership and a Saudi technocrat delivered in Kazakhstan in December 2025. Sandstorm describes a future where regional instability is a defining factor, affecting the ability of GCC countries to effectively carry out much-needed institutional reforms. In a depressed global environment, reforms deflate or collapse due to a lack of attention to the root cause of internal issues and a tendency for governments to focus on short-term stability at the expense of long-term solutions. Caught in a shifting, violent environment, the GCC countries are blinded, unable to navigate their way out of the sandstorm and identify opportunities for prosperity for their populations. This scenario is written as a transcript of a televised debate on Arab satellite television, discussing the progress the GCC countries have made from the vantage point of 2025. The Fertile Gulf describes the rise of the GCC countries as innovation hubs in a global environment characterized by strong demand for energy and increasing globalization. Regional stability gives the GCC countries the opportunity to focus on enhancing their human capital at all levels, investing heavily in education while proceeding carefully with political and institutional reforms to support their growing economies and societies. In this way, a fertile garden of prosperity is established along the Persian Gulf. Written as a business magazine interview, The Fertile Gulf is an account of the experiences of a successful young entrepreneur from the GCC region, who has taken advantage of the changes between 2007 and 2025 to develop a range of global enterprises. Oasis Sandstorm The Fertile Gulf TheGCCCountriesandtheWorld:Scenariosto2025
- 5. 2007-2012: Growing tensions and insecurity spur a series of multilateral conferences involving the leadership of GCC countries; the problem of regional violence is addressed at political and cultural levels, resulting in increased regional stability. At the same time, recognizing the importance of education and innovation, a number of GCC governments decide to spend their built-up wealth on educating their people and jump-starting research and development in a radical and dramatic fashion. Encouraging entrepreneurship by creating more business-friendly regulatory and institutional environments and establishing funds for the development of new business ideas, the GCC countries effectively begin to emulate the ‘Silicon Valley’ model. 2013-2020: Less volatile, but still bullish, oil markets don’t distract GCC countries from private, non-energy sector development, the success of which reduces national unemployment while creating an array of sought-after, highly skilled jobs for those coming out of the newly reformed education system. A series of international bilateral agreements to financially support research projects in exchange for IP rights results in an innovation explosion in the GCC countries. Incremental improvements in institutions to manage the burgeoning entrepreneurship combined with a more influential business community further support regional development. 2021-2025: Political reforms, which have proceeded at different stages across the GCC countries, find balance; Western democratic ideals are not directly ‘transplanted’. Instead, governments generate their own models of participatory governance over a period of experimentation and increasing engagement with their populations. After a sea change in both attitudes to and the provision of tertiary education, Arab graduates are keenly sought after for positions in finance, engineering and medical sciences in Europe, Asia and North America. The GCC countries emerge as an innovation hub, where the constraint of demographics is turned into a world-class asset. 9 Section2:ExecutiveSummary 2007-2012: As tensions rise in the Gulf with regard to Iran and problems persist with sectarian and insurgent violence in Iraq, the GCC progressively develops a coordinated regional economic strategy to make the most of relatively high oil prices. There is a focus on building the private sector through targeted incentives for domestic and foreign investment. The skills shortage begins to be addressed by educational reform aimed at enhancing human capital in strategic sectors. 2013-2020: Nuclear proliferation causes regional concerns and increases the volatility of the oil price. Efforts to accelerate economic diversification continue with strategic R&D investments, capturing more of the energy value chain, and increasing the world market share of associated industries. Educational standards are established across the GCC countries to create a deeper, regional labour market. A particular focus is the creation of public affairs management colleges to educate a generation of technocrats in order to increase the effectiveness of the public sector. Political reforms progress slowly, with pressures from local populations managed through a combination of financial incentives and partial inclusion through (mostly symbolic) consultative bodies. 2021-2025: Governance structures in 2025 are profoundly different from those in 2007. A generation of talented, nationally educated technocrats ensures that, for the most part, GCC national institutions are efficient and effective. Ruling families primarily act as occasional advisors rather than executive leaders, and there is a strong meritocratic culture throughout the public and private sectors. Governments are focused on refining their industry policies, which occasionally fail, but which have been fairly successful in a global environment characterized by solid growth. Oil continues to be the primary source of budget revenue for the GCC countries due to the fact that oil prices are robust. 2007-2012: The Gulf region is thrown into chaos in 2009 when the US undertakes a military strike against Iranian nuclear sites, provoking Iranian missile attacks on US bases in GCC countries along the Gulf and helping to precipitate a global recession. In addition, populations in GCC countries react strongly, resulting in a period of internal instability. GCC governments scramble to head off internal and external threats to their authority. 2013-2020: In a depressed global environment, reforms deflate or collapse due to a lack of attention to the root cause of internal issues and a tendency for governments to focus on short-term stability at the expense of long-term solutions. What oil revenue exists is diverted, in attempts to ensure regional security through extensive arms purchases, investment in non-productive assets and capital leakage to Europe. A series of terrorist attacks causes Gulf populations to carefully consider their internal security. 2021-2025: The GCC countries are caught in a trap of needing to control their populations out of fear of further unrest, but being thereby unable effectively to create the conditions for renewed growth, despite rising oil revenues. Thanks to resilient populations making the most of the globalization of communication, a new sense of identity emerges although the broader humanitarian cost is considerable – and at least partly avoidable. Succeeding generations hope to make a better start in 2025, but they have far less to work with than they might have had. TheGCCCountriesandtheWorld:Scenariosto2025
- 6. 10 Section2:ExecutiveSummary Comparing the three scenarios This table provides a comparison of some of the most import aspects of the scenarios, with more analysis presented in section 6. Exploring the Future of the GCC countries and the World These storylines were developed by the project team in conjunction with approximately 80 thought leaders, workshop participants and experts. The scenarios are supported by detailed economic and energy modelling provided by our research partners. Boxes on selected topics have been included within the scenarios, and presented in creative formats to further illuminate the key drivers that will shape the GCC countries as well as provide depth to the stories. We now invite you to turn the pages, travel through time, and see for yourself what the future of the GCC countries and the world may be like over the next 20 years. TheGCCCountriesandtheWorld:Scenariosto2025 Oasis Globalization continues, tempered by security concerns. More coercive rules and regulations lead to less integration between different cultures and societies. Solid economic growth is supported by robust oil prices and a focus on diversification through industry policy. Income disparity widens. Unbalanced development. Social discontent managed by effective institutions and continuation of the welfare state. Effective relations with Asia and the West are driven by cohesiveness within the GCC countries. Regional instability remains a challenge. Strong institutional governance supports current rulers. Minimal democratic reforms, despite greater consultation. Sandstorm Security issues, domestic concerns and national focus dominate. Low oil prices due to a price crash in 2011 create budget and debt problems for GCC governments. Private and non-oil sectors languish in an unfavourable regional and global environment. Significant social tensions exacerbated by threat of terrorism, breakdown of the social welfare system and increasing income inequality. Continued reliance on the US for security, driven by regional insecurity and reactive external relations. Insecure leaders focus on short- term stability. Institutional effectiveness and long-term vision neglected. The Fertile Gulf Heightened globalization. More cohesive societies and integrated cultures. High oil prices, strong global demand, market mechanisms and significant investment in education and innovation produce rapid GDP growth and encourage economic diversification. Balanced social development, characterized by growth in civil society. More equitable distribution of income across classes, including foreign workers, through market mechanisms. Respected international player. Regional security agreements ensure stability throughout the Gulf. Proactive leadership empowers populations. Participatory governance encouraged. Global environment Economic performance Social development External relationships Leadership and governance
- 7. The following section allows a side-by-side comparison of the evolution of some key economic and social indicators as featured in each scenario. The various futures described in the scenarios have been quantified using macroeconomic and project-driven energy modelling to ensure plausibility and consistency. In Oasis, globalization continues despite regional conflict throughout the world, but friction in global markets caused by security concerns means that global growth averages around 3-3.5% throughout the period. In contrast, in Sandstorm, oil shocks and a lack of trust undermine international cooperation and trade integration, causing a global recession in 2010-2012, followed by slower growth thereafter. In The Fertile Gulf, the global economy benefits from increasing globalization and trade in a harmonious global environment and reaches growth rates of over 4%. Source: Oxford Economics Global GDP Growth 0 1 2 3 4 5 2006-2010 2011-2015 2016-2020 2021-20252001-2005 Actual Projected Oasis The Fertile GulfSandstorm Percentages 1. Global GDP growth Annex: Comparing the Three Scenarios Annex:ComparingTheThreeScenariosTheGCCCountriesandtheWorld:Scenariosto2025 7 70120_GCC_16pp:Mise en page 1 17.1.2007 15:54 Page 7 Figure A.1
- 8. 8 Section6:ComparingTheThreeScenarios In Oasis, a downward slide in oil prices occurs after 2006, thanks in part to a slowing of the world economy and increasing non- OPEC supply as large projects come online. OPEC successfully defends a floor of $45 per barrel, and by the end of 2016 a rising call on OPEC occurs, excess cap is being reduced and prices achieve a new range of approximately $100 by the end of the period. In Sandstorm, a global slowdown causes a fall in oil prices, which dramatically reverses itself due to the US bombing of Iran in 2009, when prices shoot to an average of $125 per barrel. The resulting regional instability and sudden oil price shock combines with economic weaknesses in the US market to precipitate a global slowdown and a reduction in oil demand over a four year period, dramatically pushing prices down as OPEC is unable to adjust quickly enough in a coordinated fashion. From 2016, recovery is slow due to festering problems in geopolitics; however, a reduction in non-OPEC supply due to delayed projects means that OPEC is able to defend a floor of $45 in real terms until 2025. In The Fertile Gulf, strong global demand for oil of almost 2% per annum (driven particularly by China and India), capacity constraints and delays affecting some large non-OPEC projects drive a rise in prices from 2009-2012. Saudi Arabia’s excess capacity falls under 2mbd as production rises above 12mbd, causing sustained price rises, tempered somewhat by increased output from Iraq. However prices are well over $110 in 2025. 2. Oil price TheGCCCountriesandtheWorld:Scenariosto2025 Source: PFC Energy Oil PriceFigure 6.2 0 20 40 60 80 100 120 140 160 Actual Projected 2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024 US$(nominal) Oasis The Fertile GulfSandstorm
- 9. 9 Section6:ComparingTheThreeScenarios Source: PFC Energy Call on OPECFigure 6.4 15 20 25 30 35 40 45 50 Actual Projected 2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024 MillionBpd Oasis The Fertile GulfSandstorm 3. Global Oil demand The call on OPEC remains very strong and rises to unprecedented levels in both The Fertile Gulf and Oasis scenarios. OPEC demand lowers in Sandstorm due to a combination of falling global demand and an increasing supply of non-OPEC capacity as new projects come online. However, following a global slowdown, increasing demand and non-OPEC capacity restraints mean the call is able to expand until the end of the period. In The Fertile Gulf and Oasis, global oil demand is driven by continued globalization and growing demand from China and India. In Sandstorm, the 2009 - 2011 global recession, due in part to geopolitical shocks in the Gulf region, results in a lower demand for oil. After this period of economic decline, the oil sector recovers. 4. Call on OPEC TheGCCCountriesandtheWorld:Scenariosto2025 Source: PFC Energy Oil demandFigure 6.3 60 65 70 75 80 85 90 95 Oasis The Fertile GulfSandstorm Actual Projected 2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024 MillionBpd
- 10. 10 Section6:ComparingTheThreeScenarios Source: PFC Energy GDP Growth RatesFigure 6.6 -15 -10 -5 0 5 10 Percentages 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Oasis The Fertile GulfSandstorm In all scenarios, Saudi Arabia remains the dominant producer of oil among the GCC countries. In Sandstorm, Saudi Arabia acts as the swing producer and lowers its output by 20 to 30% when the world economy experiences a slowdown. In all the scenarios, GDP growth rates are influenced by the oil price. In Sandstorm, the collapse in oil prices following the US-led bombing of Iran leads to a period of negative growth rates in GCC countries. Source: PFC Energy Oil production for GCC countries (million Bpd)Figure 6.5 SaudiaArabiaOthers 2006-2010 2011-2015 2016-2020 2021-20252000-2005 9.9 9.2 6.5 6.0 5.1 6.0 6.6 6.1 6.2 6.2 6.75.7 6.3 7.2 9.2 10.9 12.3 8.8 8.8 8.3 10.88.3 9.7 11.4 12.8 6.0 5. Production by country 6. GCC GDP growth TheGCCCountriesandtheWorld:Scenariosto2025
- 11. 11 Section6:ComparingTheThreeScenarios Source: PFC Energy Real GDP per CapitaFigure 6.7 Actual Projected 2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024 US$(2000dollars) 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Oasis The Fertile GulfSandstorm Source: PFC Energy Total GCC Budget BalanceFigure 6.8 -200 -100 0 100 200 300 400 500 600 700 Actual Projected 2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024 MillionUS$(nominal) Oasis The Fertile GulfSandstorm Real GDP per capita reflects economic output by keeping all commodity prices, including oil, at 2000 levels. This neutralizes the effect of the oil price and other price factors on GDP, providing a more comparable measure of output for the scenarios. Although there is strong GDP growth in both Oasis and The Fertile Gulf, this translates into modest real growth on a per capita basis due to population increases. Similarly, the recessionary environment in Sandstorm combined with a rising population means that real GDP per capita falls significantly over the period. The combined GCC government budgets remain highly correlated with the oil price in all three scenarios. In Oasis, declining oil revenues and a rising population creates a budget deficit by 2011, which is corrected in 2013 by a recovery in the oil price. In Sandstorm, following the oil price spike in 2009, a dramatic downslide in oil revenues combined with falling volumes creates significant deficit with a sluggish recovery from 2015 onwards. This general statement varies greatly across the individual GCC countries, with Qatar, the UAE and Oman remaining in surplus, while Bahrain, Kuwait and Saudi Arabia experience deficits. In The Fertile Gulf, the GCC countries as a whole benefit from large revenues from oil, keeping the combined budget in surplus. 7. GDP per capita 8. Budget performance TheGCCCountriesandtheWorld:Scenariosto2025
- 12. 12 Section6:ComparingTheThreeScenarios Source: Oxford Economics Number of foreign workersFigure 6.10 4 5 6 7 8 9 10 11 Actual Projected 2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024 Millions Oasis The Fertile GulfSandstorm In Oasis and The Fertile Gulf, the share of the non-oil sector increases smoothly, although there are slight variations between the two driven by different policies to spur diversification. In Sandstorm, the oil-price shock in 2009 and resultant global recession temporarily reduces the output of the non-oil sector, which remains static as a proportion of total output, hampered by a lack of institutional reform and weak global demand. Foreign workers remain important in all scenarios given the low national population levels in GCC countries. The overall levels, however, vary greatly with the scenario. In Oasis, their absolute numbers decrease as the need for construction workers lowers. In Sandstorm, the global recession, volatile oil prices and regional instability mean that demand for foreign workers is significantly lower. In The Fertile Gulf, having reached almost full employment, the demand for foreign workers remains strong as many of them are now highly skilled foreign workers. Source: PFC Energy Share of Non-oil Sector in Real GDPFigure 6.9 Percentages Actual Projected 2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024 50 55 60 65 70 75 80 85 90 95 100 Oasis The Fertile GulfSandstorm 9. Non-oil sector 10.Foreign worker employment TheGCCCountriesandtheWorld:Scenariosto2025
- 13. 13 Section6:ComparingTheThreeScenarios Source: Oxford Economics Unemployment RateFigure 6.11 0 5 10 15 20 25 Actual Projected 2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024 percentages Oasis The Fertile GulfSandstorm Unemployment rates vary largely among the three scenarios. In Oasis, unemployment levels hover around 10 – 12%, indicating that despite regional instability, strong demand for oil and institutional reforms have paid off. Starting from about 17% in 2005, the GCC countries are able to reduce unemployment to 5% in The Fertile Gulf as the benefits from diversification become apparent. Unemployment rates in Sandstorm are consistently high, and rising towards the end of the period. 11.Unemployment Using the data The data can be used for developing leading indicators to determine which of the three scenarios is likely to unfold at any point in time. Users should bear in mind that the scenarios and related analysis are descriptions of a set of possible futures as seen from the current perspective, and should not be seen as forecasts or predictions. The data provided therefore serves only as a guide to possible trends, and should be monitored, interpreted and applied with careful judgment. TheGCCCountriesandtheWorld:Scenariosto2025