Petrodollars: opportunities and risks for the Gulf monarchies
Last update: 2022-04-22 10:04:59
Jim Krane, Energy Kingdoms: Oil and Political Survival in the Persian Gulf, Columbia University Press, New York 2019
In his Energy Kingdoms: Oil and Political Survival in the Persian Gulf Jim Krane analyses the economic and political impact that the discovery of gas and oil has had on the Gulf States in allowing their development, modernization and economic boom. One of the most striking examples illustrating the rapidity and reach of the transformations occurring in these countries is Oman, where as late as 1970 education (excluding religious education) was provided by only three schools for a population of 700,000. Even more striking is the story of Mohammed Alabbar, the Emirati real estate tycoon. In just a few decades he has gone from a childhood passed under a roof of plaited palm leaves to the building of Dubai’s Burj Khalifa, currently the world’s tallest skyscraper and so imposing that it requires its own electrical generating station on the one hundred and fiftieth floor. The problem highlighted by the author and announced in the book’s subtitle is that the very policies that took a great number of the region’s inhabitants out of poverty are now threatening the oil monarchies’ survival.
It is at this point that Krane—now a researcher at the Baker Institute at Rice University in Houston after having covered the Gulf as a journalist for years—begins his political reflection: According to modernization theories, the rapid transition from extreme poverty to extreme wealth ought to have put an end to the sheikhs’ despotism. However (and with the possible exception of Kuwait), economic development has actually made the Gulf monarchies “more autocratic, not less” (p. 56). This unexpected result has been explained by the “rentier state” theory formulated by Luciani and Beblawi: after oil prices peaked in 1973, rulers have bought their citizens’ loyalty by eliminating every form of taxation and distributing benefits to the population by way of subsidies. According to Luciani and Beblawi, the oil monarchies are “allocative economies”: the State offers its citizens services not by virtue of the taxes that it collects but thanks to the revenue generated by hydrocarbons. Thus the established social contract envisages the provision of welfare in exchange for political support whilst eliminating the fiscal burden, which would create (for the state) a dangerous accountability link.
Thirty years on from this theory’s formulation, Krane has decided to test whether it still holds. If, on the one hand, it still has a great explanatory power, on the other, it has a fundamental flaw: subsidies in the energy area are bringing the domestic energy demand to such an exaggerated level that it is jeopardizing the very ability to export oil and thus to benefit from the revenue. In fact, as Krane demonstrates, a process quite unique to the Gulf States has occurred: price signals have been neutralized by subsidies and, failing to grasp the economic value of the commodity, domestic demand has continued to grow. A few figures are enough to understand this trend: the portion of energy production absorbed by the Gulf States’ domestic markets has skyrocketed from 4% in 1973 to 25% today, whilst a Kuwaiti family consumes, on average, 36 times the energy used by a German family. The subject is a particularly delicate one for Saudi Arabia, which spends 9.5% of its GDP on subsidies. Moreover, should Riyadh lose its spare capacity, the Unites States’ willingness to guarantee its ally’s security would come to an end. To that is added the environmental concern: more hydrocarbon consumption means more greenhouse-gas emissions, with the result that one of the Gulf States’ domestic policies becomes a global problem.
Although such a high domestic consumption is putting the producing countries’ export capacity at risk, such fact went unnoticed until 2008, when the International Energy Agency signalled the danger inherent in such a mechanism. But the unknown quantities are not just economic, Krane emphasises. Indeed, the vicious circle triggered by the subsidies has ended up also eroding the rulers’ authority by decreasing the oil revenue and thus their ability to provide services.
So both the harmful effects of subsidies and the course of action to be followed are crystal clear: to eliminate them or, at least, to drastically reform them. The problem is that the “rentier” theory considers them an essential element of the social contract: were they to be abolished, the arrangement regulating relations between State and subjects would fail, thereby causing instability. Taking examples such as Dubai, Iran and Saudi Arabia, Krane nevertheless demonstrates that the subsidies system can be reformed without destroying the social contract or leading to demands for participatory democracy. Must one therefore conclude that the “rentier state” theory is mistaken? No. According to Krane, the point is that a new understanding of energy pricing has developed over time. Nowadays, “subsidies’ harmful effects on demand overshadow their beneficial effects on political legitimacy. At the same time, intervening circumstances [have] provided political cover for reforms” (p. 150). The side effects of domestic energy consumption, the fiscal problems generated by the drop in oil prices, the international pressure to reduce greenhouse-gas emissions, the generational change in leadership in the Gulf and the regimes’ increased repressive capabilities are all factors making a reform of subsidies more feasible. Above all, however, it is the threat of instability posed by ISIS and the Islamist movements that is reinforcing the bonds between ruling families and their subjects, creating—Krane argues—a political space in which to carry out reforms. The updating of the “rentier” theory lies in the fact that the benefits are not perceived by their recipients as acquired rights but, rather, as “customary privileges” (p. 154) that can be ceded in exchange not for participatory democracy but a particularly precious collective good: security. The road is a long one but not impracticable, according to Krane. Two uncertain factors are hanging over it, however, which are covered in the book’s final remarks: the consequences that decarbonisation policies will have for the global oil demand and climate change, which could claim its first victims right in the Gulf.
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To cite this article
Claudio Fontana, “Side Effects of the Oil Bonanza”, Oasis, year 16, no. 31, pp. 150-152.
Claudio Fontana, “Side Effects of the Oil Bonanza”, Oasis [online], published on December 2020, URL: /en/side-effects-of-the-oil-bonanza