Oil maintains its grip

Failure to diversify and a thirst for energy threatens oil producers like Saudi Arabia and Kuwait, a report says.

An official takes pictures of the Khurais oilfield in Saudi Arabia, an oil produce facing challenges.

Even as the Saudi Arabian and Kuwaiti economies glow amid high oil prices, a one-two punch of failing diversification programmes and a growing need for energy at home is threatening to dim their futures, a British thinktank warns. "The long-term challenge of depletion is masked by current high oil prices," a Chatham House report said. "The surge in revenues is increasing the dependence of the economies on the hydrocarbon sector, but at the same time it removes the sense of urgency over reform that is desperately needed to promote diversification."

Perhaps most significantly for the world economy, the report also suggests exports from Saudi Arabia may begin to decline as soon as 2014. Without discoveries of new reserves, or significantly more efficient use of energy resources at home, the world's largest oil producer could cease oil exports altogether by 2040. The study provided ammunition to pessimistic economists, who argue that oil producers are continuing to suffer from a "resource curse" that ties producer economies to the rise and fall of the oil price, despite efforts to build up infrastructure and industries independent of hydrocarbons.

The study compared the economies of 12 gas and oil producers, ranging from Saudi Arabia and Kuwait to countries with smaller reserves like Angola and East Timor. It found that in Kuwait and Saudi Arabia, official policies to promote economic diversification were being slowed by poor governance, cronyism and inadequate education systems. The two countries have both had trouble overcoming bureaucratic hurdles to implement reforms, especially in Kuwait, where the government has been largely divided, said Tarik Yousef, an economist and the dean of the Dubai School of Government.

"The debate in Kuwait, it doesn't really have to do with opening to the outside world," he said. "It's about ineptitude and a contentious relationship between the legislative and executive branches." Although the authors did not examine the UAE, there is ample research to suggest that the report's conclusions about the continued challenge of a "resource curse" can be applied here. Last month, the Gulf Investment Corporation released a report on productivity in the region, which found that high GDP growth rates were mostly the result of growth in the labour force, and not of growth in the economy's productivity.

But Dr Yousef emphasised that the UAE's well known ideological commitment to diversification would continue, in spite of high oil prices that could enervate the reform movement. "The fact that you have people in Abu Dhabi who have ambitions, that's a driver not to be underestimated," he said. @Email:[e-mail]