Introduction
Shale oil production is not “new, but nobody believed in it as a source of potential reserves before” (Backus and Crucini 187). Historically, no one thought of exploiting shale oil reserves because they were considered as seal rocks. Obtaining oil from shale rocks was deemed to be economically unviable. Presently, after its success, economists argue that shale oil is bound to become a “game changer” in the oil industry. The economists believe that shale oil will cause the price of petroleum to go down significantly, particularly after the invention of the drilling technique that increases the production volume. Economists claim that it is imperative to note that the introduction of shale oil in the United States has led to other countries prospecting the possibility of venturing into the same. Currently, China has been declared to have the capability to produce shale oil. Production of shale oil in China would have a tremendous impact on the Gulf Cooperation Council countries. China imports its oil from the Gulf Cooperation Council states.
Today, shale oil and gas has become “extremely significant for the global energy industry and is beginning to influence the redrawing of energy reserves and distribution map” (Backus and Crucini 191). Countries that have been importing oil for a long time are now becoming major exporters of oil and gas. Indeed, apart from the United States, others states like Brazil, India and China are looking forward to producing shale oil. There are speculations that numerous countries will embark on shale oil production even though financial and technical challenges may limit some states. The GCC countries also look forward to producing shale oil. For instance, Saudi Arabia has expressed its interest in the production of shale oil to meet the increased demand in the majority of the Asian countries. Most GCC countries like Oman, United Arab Emirates, and Saudi Arabia have huge reserves of shale oil and gas. Thus, the countries are in a better position to produce shale oil as they have the necessary technology. Decision-makers, experts, and high-level authorities have conflicting views on the impacts of shale oil on the Gulf Cooperation Council (GCC) countries. Some policymakers believe that shale oil will have no serious effects on the GCC countries. However, experts claim that the introduction of shale oil will adversely affect the economies of the GCC states. This thesis intends to analyze the effects of the introduction of shale oil on the GCC countries.
Thesis Statement
The production of shale oil poses a significant threat to the future economy of the GCC countries.
Shale Oil Industry
The shale oil industry is one of the fastest growing types of natural oil industries. Other industries include the coalbed methane industry and the tight oil industry. The shale oil industry is touted to play a great role in the future of North American petroleum production. There is a likelihood that the production rate of the unconventional oil will increase from 42% to 64% by 2020. Currently, the United States is witnessing a historic revolution in energy generation. The shale oil industry has overturned “many long-held assumptions about the future of global energy markets” (Bentley 191). The industry has resulted in the United States producing at least three million barrels of oil on daily basis. Indeed, the United States is ahead of the United Arab Emirates regarding oil production. Besides, the United States outshines Russia as the global leader in the production of natural liquid gas and oil. Presently, the shale oil industry provides 84% of the domestic energy requirements in the United States.
The United States is likely to be a key exporter of oil shortly (Bentley 197). Currently, many companies have expressed their interest in joining the shale oil industry in the United States. Apart from the United States, other countries have also invested in the shale oil industry. The demand for oil has led to countries like Saudi Arabia, Argentina, Poland, China, and Russia venturing into the shale oil industry. Poland has already drilled 43 wells and leased out its shale reserves. The shale oil industry is expected to grow exponentially as more countries invest in the sector.
Current Situation of the Oil Market
Production of shale oil and gas in North America has led to significant changes in the oil market. The introduction of shale oil has resulted in decoupling from oil prices as well as a substantial reduction of natural oil prices (Bentley 201). Before the introduction of shale oil, changes in the prices of oil depended on catastrophes and world demand shocks. The figure below shows how the price of natural gas has decoupled from oil prices.
Even though the production of shale oil is currently concentrated in the United States, it has had adverse effects on the global oil market. The production of shale oil has intensified uncertainties in the oil market. Besides, it has added “a new dimension to the already complex and fluctuating global flows of natural gas and oil” (Bodenstein, Erceg, and Guerrieri 169). Experts claim that it is hard for countries to predict the changes in the oil market. Additionally, oil producing countries are unable to strike a balance between the demand and supply of petroleum in every regional market. The prices for crude oil in Asia and Europe remain fairly undisturbed compared to the United States. However, there are possible signs of decoupling in the European market as indicated in the figure below. There are two kinds of market balancers in the global oil market (Bodenstein, Erceg, and Guerrieri 170). They are the marginal producer and swing suppliers. The swing suppliers leverage on the spare capacity to enhance production in times of disaster or manage reduction in production in the event of oversupply. Swing suppliers exist in a monopolistic or oligopolistic market structure. On the other hand, marginal producers balance the market by providing oil until they cease to make a profit. Marginal producers stop producing oil when they learn that the prices are below the break-even costs (Bodenstein, Erceg, and Guerrieri 174). Marginal producers balance the global oil market involuntarily. They operate based on the price signals and their luck is inherently attached to the oil price. Today, shale oil helps to balance the global oil market. The production of shale oil goes up when oil prices are high and goes down when oil prices are low. At this time, the global oil market is significantly moving down the monopoly ladder, thanks to shale oil. Competition in the global oil market is beginning to increase. Oil processing and selling cartels have dominated the global oil market for a long time due to policies that promoted conventional oil production. Shale oil is processed under unconventional petroleum policies (Borenstein and Kellogg 17). There are limited barriers to drilling and processing of shale oil. Thus, the price of shale oil is low compared to other forms of oil. Indeed, the introduction of shale oil has intensified competition in the global oil market.
The impacts of shale oil on the Gulf Cooperation Council states have been rather insignificant so far. Nevertheless, shale oil could have both positive and negative implications for the GCC countries. Qatar is the most affected GCC state. In the past, Qatar has managed to balance the oil markets between Pacific Basins and Atlantic (Borenstein and Kellogg 19). The country has been selling a lot of its oil in the European market particularly when the oil prices are low in the Asian countries. In other words, Qatar has been able to sell its oil between “a high priced, low price elasticity market (Asia) and a lower priced, higher price elasticity market (Europe)” (Borenstein and Kellogg 21). The introduction of shale oil into the Asian and European markets has significantly hampered Qatar’s ability to continue to dominate these regions.
Qatar has been among the global leaders in the exportation of natural oil. Additionally, it has benefited from long-term oil agreements with varied countries in Asia and Europe. However, Qatar is under pressure to review its oil contracts. The introduction of shale oil has resulted in many customers wanting to terminate the indexation of oil prices (Feiler 699). The customers want shorter and quite elastic oil contracts. For instance, the majority of the Asian countries are looking for alternative oil suppliers from North America. The Asian countries purchase almost half of Qatar’s natural oil. Qatar is encountering challenges in the European market where the oil prices are reasonably competitive, and supply quite diversified. For instance, the United Kingdom declined to sign a long-term contract with Qatar. The emergence of unconventional gas and oil developments has resulted in a drop in the oil prices in major markets. Currently, Qatar is suffering from overcapacity in a majority of the oil markets in Europe.
The GCC countries like United Arab Emirates (UAE), Oman and Saudi Arabia are gradually experiencing a threat due to the introduction of shale oil (Feiler 703). The domestic consumption of oil is high in these countries. Indeed, countries like the United Arab Emirates and Saudi Arabia sell a big share of their oil in the local market. Even though Saudi Arabia continues to sell its oil in the local market, the introduction of shale oil has had some impacts on the country’s global oil market (Ipsen 63). As a measure to curb the influence of shale oil, Saudi Arabia has opted to stop drilling new wells. The approach has not yielded fruits. Instead, it has denied Saudi Arabia the opportunity to venture into the Gulf of Mexico and Russian Arctic markets. Currently, Saudi Arabia faces a lasting headwind. The increase in oil prices will result in a rise in the production of shale oil. Thus, Saudi Arabia is unlikely to continue benefiting from the current foreign markets due to competition from shale oil produced in the United States.
Competition for market share between shale oil and the United Arab Emirates’ oil companies has resulted in a span of constant instability for oil prices. It has become hard for the United Arab Emirates to venture into new markets. Production of petroleum is premised on price fluctuations. Currently, the United Arab Emirates does not exploit its full potential regarding oil production. The country pumps 2.7 million barrel while it is capable of producing 3 million barrels per day (bpd). In short, the introduction of shale oil has not only slowed the United Arab Emirates’ goal of reaching a wider foreign market but also its production capacity (Ipsen 66).
Oman has suffered significantly from the ongoing instability in the oil market. The oil producing and exporting countries (OPEC) came up with production policies aimed at curbing the popularity of shale oil. The introduction of shale oil led to decrease in oil prices across the globe (Ipsen 71). However, the OPEC countries decided not to reduce their production rate. The move aimed at safeguarding the market share. Oman does not have vast oil reserves. Besides, the country is weak financially compared to other GCC countries. Saudi Arabia, Qatar, and the United Arab Emirates have maintained that they are not about to relax their production policies (Jim 45). The introduction of shale oil has denied Oman the opportunity to benefit from the global oil market. Instability in the oil market has made it hard for Oman to uphold its production capacity. If the trend continues, there are high chances that Oman will be forced out of the global oil market (Jim 53). Oman’s oil minister agrees that the introduction of shale oil has put the country in a terrible position. The introduction of shale oil has led to the Gulf Cooperation Council countries losing a significant market, particularly in the G3 countries.
The Measure Taken by the Four GCC States
The GCC countries appreciate that they do not have the power to control the production of shale oil in the United States. Besides, production of shale oil follows unconventional procedures. Therefore, the United States has the freedom to produce as much oil as it wishes and sell in any region globally. It has dawned on the countries that the era that few states controlled the oil industry is long gone (Kilian 137). The GCC countries have taken different measures to remain afloat. Saudi Arabia has opted to use unorthodox methods to drive shale oil out of its markets. In spite of the oil prices going down, Saudi Arabia has decided not to reduce its production level. Instead, it has increased its production rate and lowered the oil prices further with the hope that shale oil will pull out of the market. The measures have been seen to yield results as the United States’ output has begun to decline as indicated in the figure below.
On the other hand, Qatar has opted to diversify and change its exports policies rather than increase production level. The country has decided to reduce the production of condensate and focus on the manufacture of naphtha and other petroleum products that are in high demand in the Asian market. Qatar intends to increase the volume of naphtha output by 42% (Kilian 143). It would be hard for Qatar to compete with the United States in the oil market due to financial constraints. Thus, the only option that the country has is to look for alternative petroleum products that are in high demand. Oman has come up with vision 2020 strategy as a measure to cushion itself from the increasing competition in the oil market. The strategy will help Omar to stop overreliance on oil and gas production. The country has decided to focus on financial, industrial and services sectors. Additionally, Oman has embarked on a program to develop its downstream oil capabilities (Kilian 148). The country has invested heavily in the petrochemicals industry.
The United Arab Emirates has taken measures akin to those of the Kingdom of Saudi Arabia. The UAE has decided to stay put on oil production despite the prices going down. Additionally, the United Arab Emirates has continued to increase its production rate. The country’s objective is to flood the market with cheap oil and drive out shale from its territories (Maugeri 112). The UAE government believes that the only way to mitigate oversupply that has come as a result of the introduction of shale oil is to continue with its production rate.
Analysis of the Strategy Implemented
The strategies that the GCC countries have implemented to curb competition in the oil market will to some extent help to tame shale oil. The companies responsible for processing shale oil cannot sustain the oil production for a long time with the current prices. A majority of the GCC countries are currently running on foreign currency reserves (Mcgregor 17). The objective is to ensure that the American companies do not make a significant profit, therefore driving them out of the market. Even though Saudi Arabia does not make a great profit from the sales of oil, it benefits from the drastic measures that the GCC countries took. There is no doubt that price wars are expensive. The victory in war prices does not always result in destruction of the trailing parties. What the GCC countries are seeking is a submission from the American companies (Mcgregor 22). The reduction in oil prices has resulted in an increase in demand for oil in the developed countries. Saudi Arabia is currently benefiting from the increased demand since it still produces its oil at near record levels. Indeed, Saudi Arabia is still exporting its oil to the United States and other developed states.
Most GCC countries have adequate oil reserves. Besides, they know how to replenish their oil fields to ensure that they remain in the petroleum industry. On the other hand, even though the United States has enormous reserves of shale oil, its processing rate is quite high (Mcgregor 31). Thus, it might not remain in the petroleum industry for long unless it reduces the production rate. The Qatar’s move aims to help it avoid confrontation with the United States. It does not mean that Qatar has opted out of the oil market. The country continues to produce and export oil. The diversification plan is aimed to mitigate the loss that might arise due to stiff competition and reduced market share. Despite Oman falling under the GCC countries, it is not a member of the OPEC (Nakov 1338). Therefore, Oman does not have control over the decisions that the OPEC members make. It underlines the reason Oman has decided to come up with an economic diversification plan rather than using a unique formula to compete in the oil market. Focusing on downstream oil capabilities will go a long way towards helping Oman continue benefiting from its oil reserves. Reducing the production rate may lead to the United Arab Emirates losing part of its global market. Doing so would give shale oil companies from the United States an opportunity to exploit the created market. Therefore, UAE upholds the world market by maintaining its production rate (Nakov 1347). The country might not maintain the current production level for a long time. However, there is no doubt that it will curb oversupply as the American companies cannot continue to sell oil at the current market price.
Consequences of the Implementation
The course of action that the GCC states have taken will have diverse implications for their oil industries as well as the economies. Even though oil shipment in Saudi Arabia is not expensive due to its strategic position, the country has already begun to face economic challenges due to its stern actions. The country’s national budget has suffered due to a decrease in annual revenue. The country’s budget deficit is projected to rise by 20% in the year 2015. Indeed, the Saudi government has been forced to source for the fund through bonds. The government of Saudi Arabia has amended its financial policies to manage the current deficit. Apart from incurring the budget deficit, the Saudi Arabian government has been forced to dig into the foreign currency reserves. The government has already spent over $60 billion from foreign currency reserves (Ramady 29). Qatar has lost a significant market due to its decision to focus on the production of naphtha. Nevertheless, it has compensated the loss through the establishment of new markets for naphtha and an assortment of high-value products in the Asian countries. Currently, Qatar can hardly finance a majority of the long-term and short-term economic goals. The country’s development plan is based on oil prices (Ramady 33). Hence, it is difficult for the country to sustain development projects due to low oil prices.
Oman’s decision to diversify its economy has saved it from the current instability in the global oil market. The country no longer relies on the oil industry. Oman is currently investing in financial and services sectors. In an exceptional move in the “entire Gulf region, Oman is planning to explore shale oil in concession areas of Petroleum Development Oman (PDO)” (Ramady 37). The exploration of shale oil is in line with the country’s strategy to diversify its economy. The government of Oman has realized that the only way to beat the American companies is to offer similar products at comparable prices. Lower oil prices and failure to cut down on production rate have weakened the financial and external stability of the UAE government. The United Arab Emirates have been sustaining oil production through foreign currency reserves. Failure to lower production rate has made the country erode its reserves. The United Arab Emirates has experienced a significant loss in its annual revenue.
Possible Alternatives
The GCC countries can try several alternatives to counter competition in the oil market. A majority of the GCC countries have vast reserves of shale oil. Besides, they have the necessary machines for processing shale oil as they have been in the industry for a long time. The GCC countries cannot continue to control oil prices through uncertain means. The present method of controlling the oil market is not sustainable (Rivlin 123). Saudi Arabia, Oman, Qatar and the United Arab Emirates should drill their shale oil reserves. This way, they will manage to drive American companies out of the markets that the GCC states once dominated. The American companies enjoy the current success because they do not have competitors. If the GCC countries produce shale oil, they will wage competition against the American businesses and force them to cut down on production rate.
Apart from investing in shale production, the GCC countries can opt to diversify their economies as some have already done. The United Arab Emirates and Saudi Arabia can invest in other economic sectors like tourism and finance. Rather than depending on the oil industry, the GCC countries should encourage their firms to invest in non-oil sectors (Rivlin 127). The oil prices are not expected to go down soon. Both the GCC countries and the American companies are not willing to negotiate and come up with a lasting solution. The GCC countries are waiting for the American companies to succumb to pressure and vice versa. It may take long for this to happen. The GCC countries can convert their oil to other high-value products and sell them in Asian, European and African countries. It will help the countries to support their economies.
Saudi Arabia has a great potential in the automotive industry. Many manufacturers of genuine automotive equipment are opening branches in Saudi Arabia. The demand for cars is expected to rise by 3.6% in the year 2015. Thus, Saudi Arabia should focus on developing its automotive industry rather than spending a lot of money on the unstable oil industry (Smith 147). On the other hand, the United Arab Emirates is doing well in the food and beverage sector (Smith 149). The sector is projected to grow by 36% by 2019. Hence, the UAE government should invest in this sector as a way to diversify the economy.
Suggested Solutions
The best alternative for the GCC countries is economic diversification. The countries need to have alternative sources of revenue. Oman’s government has on several occasions thought of embarking on economic diversification. However, the government has been reluctant due to overreliance on oil revenue (Sultan 14). The current state of the oil market calls for Oman to think of investing in agriculture and manufacturing. The country should also think of investing in transport and tourism. Oman has the potential of becoming a logistics center for the Gulf region. Hence, the government of Oman should exploit the Straits of Hormuz by constructing a state-of-the-art port at Duqm. On the other hand, United Arab Emirates should diversify its economy by investing in both the food and beverage industry and tourism. Dubai has become an important tourist destination globally. As a result, the UAE government should ensure that they improve transport and hospitality infrastructure in the region to attract tourists.
The Saudi government has embarked on economic diversification program. The country has invested in a car manufacturing plant. The country expects to be manufacturing at least 150,000 cars yearly by 2018. The country should also invest in real estate and transport. The Saudi Arabia has at least “40 promising investment opportunities in the healthcare sector worth $71 billion” (Sultan 17). The country should invest in these opportunities to cushion itself from the declining oil prices. Qatar has already embarked on economic diversification. The country has established a financial center that aims to attract foreign multinational companies. The government of Qatar should continue to invest in other potential sectors like technology and tourism.
Conclusion
The production of shale oil poses a significant threat to the future of the Gulf Cooperation Council states. Economists believe that shale oil will be a game change in the future of the oil market. Shale petroleum industry is growing at a rapid pace. Shale oil has led to the United States becoming a critical player in the global oil market. The introduction of shale oil by American companies has destabilized the global oil market. The price of natural oil has gone down tremendously, thus affecting the economies of the Gulf Cooperation Council states. It has become hard for the GCC countries to control the oil prices. The move by the GCC countries to increase their production rate continues to destabilize the oil prices. The countries are unwilling to reduce their production level as it would amount to losing a significant market share. There are no signs that the oil prices will stabilize shortly. The future of the GCC countries hangs in a balance. The countries need to diversify their economies to ensure that they can finance development projects. A majority of the GCC countries have shale oil reserves. Therefore, they should invest in the production of shale oil as this would help them compete with the American companies. Saudi Arabia and the United Arab Emirates should invest in automobile industry and tourism sector respectively. On the other hand, Oman should invest in transport infrastructure. Qatar should invest in technology and finance industry. The future of the economies of the GCC states lies in the ability to diversify their economies.
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