FALLING OIL PRICES TO DIVERSIFY QATAR’S ECONOMY AND REDUCE ITS RELIANCE ON OIL

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Table of Contents

List of Tables……………………………………………………………………………………I

List of Figures………………………………………………………………………………….II

Table of Contents…….………………………………………………………………………...III

1. Introduction…………………………………………………………………………................1

2. Aims/Objectives……………………………………………………………………..…………4

3. Methodology…………………………………………………………………………………...5

3.1 Research Design ……………………………………………………………………………...5

4. Literature Review ……………………………………………………………………………...6

4.1 Falling prices of oil and its effects …………………………………………………………...7

4.2 Diversification………………………………………………………………………………...8

4.3 Diversification with the private sector………………………………………………………...9

4.4 Diversification vs. Industrialization …………………………………………………………..9

4.5 Diversification vs. Oil sector Development …………………………………………………10

5. Findings ………………………………………………………………………………………11

6. Conclusion ……………………………………………………………………………………12

7. Recommendations …………………………………………………………………………….13

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List of tables

Table 1

Qatar deposits in sovereign wealth funds (US $billions) ………………….………………… 11

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FALLING OIL PRICES TO DIVERSIFY QATAR’S ECONOMY AND

REDUCE ITS RELIANCE ON OIL

1. Introduction

There are numerous reasons why research is to be done on the economic diversification of

Middle East countries. Kubursi illustrates that both the oil supplies will be either forever or their

demand would be continuous and strong, is in that matter a fact economic diversification would

be pointless. So, the government has to supply their natural resources only to the region and

among the population only and keep their revenues at their selves (Kubursi, 1984). However, the

research has shown in the previous studies being carried out by many researchers around the

world that these natural resources like oil and gas are finite and they will deplete someday so

human race has to use it in such a way that it will be sustainable for the future generations as

well and their prices will be increase decrease in the considerable amount. The second greatest

factor included for the diversification of the economies of these oil rich countries will be that oil

revenues will be quickly multitude out any other economic activity. As Beblawi discusses that

these middle east countries will not go for the diversification in their economy because of the

domination of exports in their GDP and they will simply not add anything with these economic

activities that’s why it is the major drop back nowadays that when oil prices are falling down

they are facing extreme economic and financial crisis in their countries because they haven’t

diversify their sovereign wealth funds into with much more diversified assets, like the other

foreign countries have done it Netherlands, Canada, Australia, and the Scandinavian countries. In

the Gulf, the oil sector dominates the economy; it is almost the unique source of wealth.

(Beblawi, 2011)

There are three factors upon which economic diversification is an excellent option because oil

reserves are finite similarly their income or revenue generation is also finite and their revenue

generation will be fluctuated more often and it is considered to be the only source of wealth for

these countries since the oil was discovered and they started it for selling around the world.

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Political emphasis has been changed over time for the economic diversification because income

levels have been fluctuated over time with the revenues being generated from the selling of oil

and gas. Similarly the falling price of oil as a commodity has put greater emphasis on the

economies of these Middle East countries, because if these countries won’t welcome or being

interested in the diversification of their economies and they continue to rely on the exports from

Oil and gas their economies will soon hit a major crisis as of the falling oil prices around the

world. The early year of 2000- 2008 were the era when these countries put greater emphasis on

the economic diversification and this was the same time when oil prices kind of fluctuated more

often. Recently these Middle East countries give political priority on economic diversification in

same real terms and Qatar has taken it to seriously it is the second largest countries in the middle

east for the selling of oil and gas but it is one of the top most countries where economic

diversification has been done on a huge scale. These Middle East countries are now much more

interested in economic diversification as it is shown from their official statements being given by

their politicians, actual investments plans and projects, projects which are under implementation

by the Gulf Cooperation Council (GCC) that includes states of Bahrain, Kuwait, Oman, Qatar,

Saudi Arabia and the United Arab Emirates.

The recent economic diversification of these countries have involved or being motivated by a

number of possible problems from the developmental issues or give rises to the particular issues

related towards the oil and gas rich economies of the GCC states. Therefore an “allocation state’

model has come up which totally relies from the export of those hydrocarbons, it is being

operated by the state and it mainly emphasizes on the wealth distribution among the region and

according to the population of the region, which is not possible to be created at all times. It

emphasizes on the wealth distribution while makes a widespread use of immigrant labor around

the world, and which is being characterized by a significant underdeveloped many productive

assets. This model has been failed gradually from the developmental prospective of development

on these Middle East countries mainly due to two main factors. Firstly, it fails to generate a

stable and a smooth arena for the sufficient amount of income to be generated for the population;

and second reason why it fails because it doesn’t creates job opportunities for their young,

dynamic and well-educated local citizens (Hvidt, 2011).

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According to the literature, economic diversification is not at all new strategy among these

Middle East Countries. It is started form the early 2000s when somehow the prices of oil and gas

start to fluctuate increasingly, it became their political agenda from the start that there is a need

to diversify their economy by investing in other non oil sectors so as to maintain their economy

in a much more stable form otherwise the consequences would be devastated [(Henry and

Springborg 2001), ( Hvidt, 2007), (McBrierty and Al Zubair, 2004), (Niblock and Malik 2007),

(Rivlin, 2009), (Seznec and Kirk, 2011). As it is to be noted from the investment projects being

started in other Middle East countries that there are full fledge interested in the economic

diversification of their countries and not rather solely dependable on the export of oil and gas,

Qatar economic diversification is on up of all these states of GCC, they are even hosting the

football world cup in 2022, which has clearly shown their interest in investing in other sectors

rather than just investment in the oil sector. Similarly there are many other projects going on to

be implemented in other countries as well e.g. Aluminum smelting in Bahrain, the industrial

cities of Yanbu and Jubal in Saudi Arabia, and the ports in Dubai are quite famous for their

tourism and cultural investment other than investing in the oil sectors, which were established in

the early 1970s with the sole aim and objective of diversifying the economies by means of

investment being done from the oil money into some industrious assets.

Qatar has built its economy by having massive oil & gas reserves’ and they started selling oil and

gas as a commodity in the world during the early nineties till 2012, due to which Qatar has

greatly increased its per capita income within a short period of time. The uninterrupted increase

in the price of oil has provided Qatar with much increase in their financial rise and an increase its

revenues can be reported ever since, upon which different investments were planned and

executed. Qatar’s GDP comprise of 95% on its oil export, due to which their economy never

thought of led the growth to be done in any other sector like education, health and infrastructure,

but due to a gradual fall in the oil prices has created a scenario in which economic diversification

has become an important factor in the sustaining of their economy (Kubursi, 1984). Economic

diversification is, however, not a new strategy among the GCC states. It has been on the political

agenda since oil and gas became the main and almost sole source of income in these countries

some half a century ago [(Henry and Springborg 2001), (Hvidt, 2007), (McBrierty and Al Zubair

2004), (Niblock and Malik, 2007), (Rivlin, 2009), (Seznec and Kirk, 2011) (Hvidt, 2011). In the

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early years of 2000s Qatar had led must focus on the economic diversification and had focus on

the other sectors as well for the growth of their economy and not just rely on the oil exports. The

sectors includes education, health and infrastructure, this will not only diversify their funds

portfolio in a much more growth oriented way but it will help their economy in sustaining

sovereign fund portfolio of diversified assets internationally both in oil and non oil sectors. The

existence of this diversified portfolio of Qatar is now helping them in their income streams and

revenue generation other than from the oil exports. Since, in this all scenario of economic

diversification Qatar has even got a prestigious opportunity to host a football World cup in the

year 2022. This gives a chance for further investment boost in other pillars of the economy

comprising of roads, railways, waterways, hospitals schools and Universities. The oil & gas

revenues were provided that Qatar the necessary cushion to roll out a heavy duty infrastructure

program to prepare much ahead of the event.

2. Aims/ Objectives

To make Qatar’s economy, into a much more diversify economy so they don’t have to

just rely on the selling of oil as a commodity.

What are the barriers Qatar has to face in the growth plans for the further economic

diversification and how they will be able to overcome them?

Which of the non oil sectors are to be targeted for diversification in their wealth portfolio

of Qatar’s economy (e.g. industry, trade, finance, tourism, oil and gas, logistics,

knowledge )

Who will be determining the factors for the future economy of Qatar’s either who will be

determining it state or market??

How much diversification will be done with the public sector or with private sector??

What type of economic state is going to be envisioned in the future economy of Qatar

either it will be an allocation state or production state??

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3. Methodology 

3.1 Research Design

An empirical and comparative approach is to be taken in this research study, where it will

analyze the economic diversification programmes or investment undertaken in the Qatar’s

economy. Moreover, the aim of this research study is to provide a comparative assessment of the

most recent developmental plans, schemes and national visions initiated or published from 2011

to 2014 in Qatar for the Economic Diversification in their Economy. The approach would be

quantitative in nature and quantitative analysis would be done. How their future plans will relate

each other in similarities and even in the differences and how they will going to contribute

towards the broader prediction for diversification in their home country.

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4. Literature Review

The literature has invoked about the oil reliant countries that often suffer from “resource curse”

which is dually been discussed by many economists of all times. This is somehow inversely

proportion to each other, if a country is much more dependent on its natural resources its growth

will be affected inversely (Karl, 2007). This relationship is repetitively has been pragmatic

across the time and in the countries that show a discrepancy by their population size, their

average income level, and type of governmental structure a country have. It is so importunate

that it is called as a “constant motif” of financial record. It has been empirically proven from the

literature that countries which are resource poor grew four times with much speed than the

resource rich countries in between 1970 till 1993 (Karl, 2007).

Similar findings from several other literature have been simulated that the members of the

Organization of Petroleum Exporting Countries (OPEC), using a dissimilar and longer period of

time from 1965-1998. OPEC member countries have experienced an average decline in their per

capita income in GNP of about 1.3% per year, while minor and middle-income developing

countries grew by an average of 2.2% per year over the same time period. Moreover, empirical

studies have shown that countries’ giving much dependence on the natural resources their growth

has been decline eventually. So, countries reliant on the sole export of oil and gas performed

quite worse than their resource poor countries (Karl, 2007)

Several researches has been done before to cater about the falling oil prices of Qatar where they

have responded significantly by critically cutting their oil exports and they have started their

economy with much diversification with the start of higher value added products now

(Aggarwal, 2014). They had even started offering much of flexible contracts to Asia, where they

are selling up to 80% of its Liquefied Natural Gas to them (The Economist, 2015). The Qatar

government is also considering deferment the target dates of some of its infrastructure projects,

which are worth of US$660 billion and they are even related to the 2030 National Vision

development plan. They are completing their infrastructure projects for the football World Cup

in 2022.

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The previous research studies done on the comparison in between other Middle East countries

like Saudi Arab and United Arab Emirates, Qatar has a very good financial situation (Aggarwal,

2014). According to the latest Bloomberg edition, Qatar is best positioned among all OPEC

members who are coping with the gradual decease in the oil prices. They have an enormous

amount of fiscal capital to dealt or absorb with the oil crisis. According to the IMF, Qatar’s

sovereign capital fund and Qatar Investment Authority is worth of US$175bn. Most

significantly, Qatar‘s financial system is highly dependable on the heavy revenues generated by

their gas exports and not on their oil exports (Fasano, 2002). In one of the sessions of their

country’s advisory body, the Shura Council, announced that Qatar’s Economy will not be

pretentious affected by the turn down in oil prices. Their government even plans to augment to

increase in their spending by 3.7% to about US$60 billion in the coming facial year (Advisory

session, 2014-15). Recent developmental experiences and much literature illustrate that oil rich

countries’ having high and sustainable growth is entirely based on the structure of their

economy. These countries have economic diversification in other sectors then oil and gas with

brilliant good economic ascendancy and they have much vibrant manufacturing sectors [(Imbs

and Wacziarg, 2003), (Hausmann, Hwang & Rodrik, 2006), (UNIDO, 2009).

4.1 Falling Oil Prices and its Effects

However, the survey conducted by the famous research studies and by many empirical evidences

they stated that the abrupt disintegrate in the oil price from 2014 has led to compression of oil &

gas revenues which was the considered as a backbone sustaining the immense expenditure

program. Since, Qatar’s Government is faced with an exclusive quandary of running this

immense expenditure program because of natural depletion of the natural resources as well;

government has to take special care on the management of these natural resources. However,

Qatar’s GDP remains flexible amongst all this turmoil, where other countries are being suffered

from the fall in the price of oil as a commodity. The main cause of this growth factor in Qatar

and the flexibility of their economy is just because of the economic diversification been done by

the government and a large amount of investments are been done in the non oil sector. Whereas,

oil sector investments have been consciously being cut down and stagnated in comparison with

the non oil sector investments which gave the indispensable increase to their economy by just

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stabilizing the national growth and stability. Immense infrastructure has been needed substantial

investments which will result in a much more steady population growth to help the economy in

building the infrastructure (Global Economy Report, 2015)

4.2 Diversification

Diversification is defined into a variety of ways and they can be described accordingly

depending on the field of research study to be studied. In the financial term is to be said to be

when investment is being done in more than one sector, while in political economic literature it

is evidently proven from the previous research that the concept or the polices of a country

towards its exports and imports are not to be restricted only to the limited number of

commodities, especially when the limited number of commodities is price effected like their

prices are to be fluctuated more often. (Routledge Encyclopedia, 2001). However, it is

empirically evident that political economy can be diversified with the help of two types of

diversification, Horizontal diversification which can be done within the same line of business but

with some new opportunities to be created within the same line of business, for example, mining

and energy can be related to oil sector but it has been diversified. While the vertical

diversification deals with when much more addition is to be done in the exports and imports of

the items. These type of diversification provides connections in between the backward and the

forward lines of economy for example, one activity can lead towards the input of one activity

and it give rises to the output of another activity, which in the end will provide value addition in

their products or services being provided by the specific country.

4.3 Diversification and the Private Sector Investments

The increasing amount of population in Qatar has increased a lot of opportunities for the foreign

investors to come and help in the diversification of their economy. They need much more

demand for hospitals, houses and infrastructure. These demands will proposed much more

investment to be done in the construction, desalination plants, power plants, irrigation and other

related projects. As illustrates by the literature these types of investments are normally being

done by the private sector in the countries, how Qatar will fund these type of investments, they

will have to put a break or slowdown on the exports of their oil and gas with the help taken from

the private sector. Similarly, depending on the time period to be taken in these types of

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investment been done by the private sector, it would be either short term or they may be long

term. So, the short term measures that are to be taken are already in place and falling price in oil

may be a good chance for the investors to be invested their money in other sectors rather than

just invested on the oil sector. Qatar has been enjoying their budget surplus from quite a time and

due to sudden drop in the oil prices they are now facing extreme budget deficit. This is the high

time when companies have to come forward and start investing with the help of their private

sector to start the projects and they better be of non oil sector. It is to be advised for their

economy to somehow halt their oil investment where even prices are being fluctuated often and

they need to channelize their non oil sectors like health, education and on their infrastructure.

From the previous literature studies it has been stated that Qatar economy has to be sure that

investment are to be done from the private sector but their State own companies are also capable

of producing investments, if they are going to invest then tourism, manufacturing industries, and

even harbors will be able to contribute towards their diversification in their economy, producing

non oil revenues (Hertog, 2011). As illustrated by one of the scholar that the general analysis of

State Owned Enterprises are considered as appalling, old-fashioned, and financially venomous

entities while dealing with them. These state owned entities are triumphant in both the

manufacturing and service providing sectors, inefficient SOEs in more heavily populated oil rich

countries such as Venezuela, Iran, or Russia’ (Hertog, 2011). Furthermore, most studies

suggested that majority of the developmental plans and projects dealing with the diversification

in the Middle East region, they normally accept the view while dealing with the diversification

stated own companies are not given much importance with an increased demand for the private

sector contribution towards the economy.

4.3 Diversification vs. industrialization

In the literature on diversification and in the development plans being studied here, the concepts

of diversification and industrialization are often interchangeably; the vertical diversification is

often being known as diagonal diversification. This research study will be using the vertical

diversification to be used for the Qatar’s economy but with different meaning in terms. The

vertical diversification is being done within the same line of business but with more productive

and it is done with much of diversification, where it is to be done in the either of the productive

capability or in the manufacturing sector. As Seznec illustrated in his research work that it is due

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to the region’s geography or the location of Qatar since it is located in the Middle East region

initiated or private sector doesn’t invest into this sector because over there water is used a scare

resource so there won’t be any agricultural projects or schemes. Majority of the investment is to

be carried out in the vertical diversification as there are oil rich countries and they have a well

established business line in this so the most suitable business line to be started for the economic

diversification would be in the same line of business that is why most of the investment is to be

done in manufacturing industry by which a lot of job creation is being done and they can provide

much more as they can be provided or generate revenues from the service provider jobs. (Seznec,

2011). The Encyclopedia Britannica describes the industrialization within the country would be

the process through which socioeconomic order can bring about change in the industrial area.

Industry is defined group of firms and companies working in the same line of business for the

achievement of collected goals and objectives of both the firms and they help in the economic

condition of the country as well. They are the source of providing products and services to the

people of their country as well and to the foreign as well, they are somehow used as a source of

income and they are documented as source of income generation in the country as well.

Industrialization, if we are taken in to the boarder prospect then it might include a lot of sector

separately e.g. oil sector will have many industries similarly non oil sector industries would be

many as well. is a much broader process than merely establishing manufacturing industries.

These may include industries where they are also entailed to provide the services to the people

which may includes tourism, financial services, insurance, banking, real estate services,

transportation, restaurants, repair and maintenance services etc. In this way the concepts of

(vertical) diversification and industrialization become tantamount. The aim of diversification is

scattering risk with the help of many income sources where industrialization is the process

through these diverse income sources came together for the betterment of the economy of a

country.

4.5 Diversification vs. oil sector development

Diversification being down other then the oil based sector is one of a challenging art to be done

by the economy of the country and they have to generate revenues other then involvement of oil

sector (Beblawi, 2011) provides a useful peculiarity. The literature invokes and divides the

manufacturing sector into two categories, oil-based and import exchange industries. In addition

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to these extraction companies of oil and gas, the oil based industries includes refineries, the

petrochemical sector and energy-intensive industries such as aluminum, while evidences have

been given from the literature that these industries like oil based are of larger scale whereas

capital intensive projects are normally taken into the accounts of State owned entities.

Import substitution industries comprises of miscellaneous set of actions or operations, they

include mostly food processing and the manufacturing of construction materials. They also take

account of production of cement, steel, aluminum window frames, building and cladding etc.

These industries are usually diminutive, labor concentrated and often surreptitiously owned. It is

obvious that diversification by expanding the oil industry will not reduce dependence on oil and

gas, since these industry relies completely on the low price and sufficient supply of oil and gas in

each of the Gulf countries. This industry has little panorama of survival in the post oil era.

Therefore, processing of crude oil which is normally known as refining use gas as a main

ingredient in petrochemical plants to reduce the risk associated with fluctuations in international

oil market prices, they create jobs and accomplish a higher value-added product as long as oil is

present. Diversification within the oil sector, however, by expanding the oil based industries, has

been the most distinguished result of efforts in the Gulf States. It has been relatively easy for the

states to do, give the resources surplus situation and centralized governance structure, as has

been the case with state-owned cement factories etc. The most complicated type of

manufacturing industry to foster has been the private import substitution sector. This cannot be

created by pronouncement, but necessitates entrepreneurship and private risk taking.

5. Findings

Economic diversification can be measure change or its process, There is quite a series of

measurements for economic diversification through it can provide a complete picture of their

diversification process or plans in Qatar’s economy. However, most of the measurements can be

covered and documented if the availability of data is there; otherwise it would become difficult

for these countries to measure their economy’s diversification to apply and how effectively they

have overcome the situation where oil prices are falling gradually and there is now becoming

less reliant on oil exports. Thus, only the following few crude measures are usually applied:

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Table 1

Qatar deposits in sovereign wealth funds (US $billions) by the end of 2014

Qatar 2010 2011 2012 2013 2014

Years 80 85 90 100 150

The percentage calculation all the oil sector projects to that of non-oil sectors projects and

their contribution towards the GDP or GDI of Qatar’s economy which will further

provides an signal of the structural process in their society

The percentage calculation of oil revenues has contributed towards the proportion of total

government revenues or not, this will indicates whether or not the state is dependent able

on oil revenues is being reduced or not

The percentage contribution of non-oil export to total export earnings, since rising non-

oil exports are an indication of diversification;

The relative contribution of the public and private sector to GDP, which is an important

measurement of the success of diversification in so far as development of the private

sector implies or presupposes growth in the public sector;

The volatility or instability of GDP and its relation to oil price instability.

6. Conclusion

Lower oil prices mean lower foreign exchange earnings whereas increasing imports for

infrastructure projects is resulting in current account deficit.

To counter that Government is systemically targeting cash outflow. One of the biggest

foreign exchange outflows is because of labor expense relating to expats.

It is of strategic importance for Qatar to ensure that local work force is ready and

available to replace critical positions.

To ensure that Qatar is having a sustainable long term source of qualified workforce

Qatar needs to continuously invest on education of world class which is available locally

for the local population

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Success of Qatar will be on how it is able to sustains a long period of low oil prices

without cutting down on the on the ground infrastructure spending that it has already

undertaken

Much will depend on how budget deficits are controlled over the next few years without

reducing the speed of investments in non-oil sector. This means non-oil sector will have

to start generating revenues for the government after a certain period.

If Implementation is being done on the value added tax regime in close cooperation with

the GCC countries will open up in a longer term, sustainable revenue generation can be

done for the Government and making it less reliant on oil revenues.

By reducing extreme and massive financial assistance programs will also provide a

increase to State revenues which shall also help in the reduction and dependence on oil

revenues being generated by the exports of the oil.

Qatar’s investments exterior Qatar is likely to acquiesce results as the mature economies

like UK, France, Germany; USA stabilizes and starts generating revenues streams from

the investments made there.

In conclusion, there is a good case for Qatar to balance its oil sector and non oil revenues

streams in the longer period without any negative impact on their State finances. In the

short term there could be lots of surpluses and deficits which can be managed through

domestic and international borrowing without problem due to excellent sovereign wealth

funds being able with their government and of excellent financial rating for Qatar.

7. Recommendations

• It appears that Saudi Arabia is willing to continue to play the role of oil “hegemony” a

role it repeatedly played as the swing producer since the mid- 1970s till now. Yet

this role is been burdened with uncertainty and controlling volatile oil markets is not a

simple task in today’s world.

• While the cost of production including capital costs is well under $10 a barrel for

Saudi Arabia and a few others in the Middle East, the more important constraint oil

producers face is a budgetary one, with almost all countries likely to face a budget

16

deficit with current oil prices with a price range of $65 a barrel for Qatar and $140 for

Iran.

• Without budgetary restraint, OPEC producers will be increasingly weakened, forcing

them to tap into their financial reserves to avoid facing political and economic turmoil.

At this point, these countries need to exercise restraint and avoid excessive borrowing.

• If, the U.S Government stops efforts to preserve energy and promote alternative sources

of energy like renewable energies then U.S. will once again become reliant on OPEC

oil countries, even despite the current fall in oil prices around the world.

• While subsidizing alternative energy is often problematic, some support to

producers who are being whipsawed by volatile oil prices may be a reasonable

response to producers’ strategies to undermine the viability of the shale oil sector.

• Although the interests of the U.S. and Saudi Arabia are aligned politically with respect to

ISIS, Russia and Iran in terms of lower oil prices, their interests are likely to

diverge from an economic standpoint. Thus using the oil tool to further U.S. policy

goals is unlikely to be successful and somehow achievable.

17

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http://www.bloomberg.com/news/2014-11-06/qatar-shifts-export-strategy-as-u-s-light

oil-competes.html

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http://english.alarabiya.net/en/business/economy/2014/11/11/Qatar-s-economy-not-

affected-by-lower-oil-prices-emir.html

http://english.alarabiya.net/en/business/economy/2014/11/11/Qatar-s-economy-not-

affected-by-lower-oil-prices-emir.html

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