After the Oil Boom: The Holiday Ends in the Gulf

Vahan Zanoyan

From Foreign Affairs, November/December 1995

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Summary:  With the collapse of oil prices in 1986, the holiday ended for America's Mideast allies, who must now face up to political accountability and economic responsibility.

Vahan Zanoyan is Senior Director of the Petroleum Finance Company.

The most unmanageable risk facing American interests in the Persian Gulf is neither Saddam Hussein nor Iranian expansionism. Rather, it is the slow but sure decay of the economic and political structures of the United States' key regional allies. They are the Gulf Cooperation Council (GCC) states: Saudi Arabia, Kuwait, Bahrain, Qatar, Oman, and the United Arab Emirates (UAE). Washington's obsession with external threats to friendly governments and direct risks to the continued flow of oil has blinded it to the end of these countries' 20-year holiday from politics and economics.

The holiday from economics was characterized by, among other syndromes, the lack of binding budgetary constraints, which reduced and sometimes even eliminated the need to set spending priorities and allocate scarce economic resources. Furthermore, the financial pie was so large that even with a highly skewed income distribution all sectors of society saw some measure of improvement in their standard of living. Unemployment was unimaginable as governments showed a seemingly infinite capacity to hire both citizens and foreigners in public jobs.

These economic circumstances led the way to a parallel escape from politics, in which the ruling elites rarely faced the need to share power, renew their legitimacy and credibility, or tolerate any meaningful public debate over major economic, social, or political issues such as oil and budgetary policy. The resulting system had neither taxation nor representation. These symptoms were mild in Oman, more serious in Qatar and Bahrain, and severe in Saudi Arabia, Kuwait, and the UAE.

The oil boom of the 1970s made the holiday possible. As the average price of crude oil rose from less than $2.80 a barrel in 1972 to more than $34 in 1981, the aggregate annual merchandise export earnings of the GCC states soared from less than $10 billion to more than $163 billion. Although imports rose dramatically as well--from about $3.5 billion in 1972 to more than $52 billion in 1982--the group managed to record a sizable current account surplus exceeding $66 billion in 1982. However, neither the oil prices nor the export earnings were sustainable for long, and by 1986 both had come tumbling down. The price of crude oil averaged less than $14 a barrel, and the aggregate merchandise export earnings of the GCC were down to about $45 billion. Although both oil prices and the region's financial conditions improved somewhat from their 1986 trough, the carefree era technically came to an end that year.

But governments in the region prolonged the holiday with chronic deficit spending. During the last ten years government deficits in the GCC have averaged well in excess of 5 percent of GDP, reaching 15 percent in Saudi Arabia. Budget shortfalls were almost entirely reflected in the external accounts, leading to large current account deficits. External and domestic deficits were initially financed by drawing down the substantial foreign assets accumulated during the 1970s and early 1980s. With the exception of the UAE, most gulf countries depleted their assets and turned to borrowing, which for ...

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