In the 1970s, economists and scientists developed and distributed the theory of “peak-oil,” meaning the point in which oil extraction reaches its highest point followed by a fatal decline in the amount of extractable oil. They predicted the world would reach “peak-oil” in 1995. Until only quite recently, we have been bombarded by ominous warnings that oil will soon “run out” and the world will be completely unprepared and descend into chaos.
It turns out to be a total farce; a gross miscalculation, or a conspiracy theory of some sort, whichever you choose to believe. Once-large Middle East oil producers, such as Bahrain and Oman, have witnessed a significant decrease in oil production. Their reserves have not dried up, but portions of the remaining oil are not currently cost worthy to extract.
Saudi Arabia, Kuwait, Qatar, and the UAE, however, have energy reserves that have the potential to sustain these countries for well over a hundred years, and as natural gas becomes a popular, and “cleaner,” energy source, these countries will soon reap benefits from their vast natural gas reserves, especially Qatar. There is absolutely no “peak-oil” in sight and large sums of oil revenue are being reinvested in the oil and gas sector for exploration and technology that will reduce the cost of extraction, both of which will extend the life of the Gulf’s oil and gas reserves.
After the devastating drop in oil prices in the 1990s and the looming “peak oil” prediction, the Gulf countries urgently sought to diversify their oil-dependent economies. And so they did. The Gulf economies developed at a break-neck speed, investing in, among other industries, the booming real estate and financial sectors. But as those once-booming sectors collapsed, resulting in massive debts and unfinished projects, the Gulf countries directed its investments, once again, to the extremely lucrative and increasingly stable oil and gas sector. Since oil reached a staggering price of $145 per barrel in 2008, Saudi Arabia and its oil-rich neighbors have been pumping an unprecedented amount of oil into the global market and raking in the profits.
So considering that oil and natural gas are abundant, cheap to extract, and produce extraordinary profits that, more or less, sustain the lavish lifestyles of Gulf natives, why invest in economic diversification?
Because oil abundance is not just a phenomenon in the Middle East, but the entire world.
Harvard’s Belfer Center for Science and International Affairs published a discussion paper in June on “The Next Revolution,” an upsurge in oil production with the potential to surpass demand. The study points to the “technological revolution” in the US where, with the help of horizontal drilling and hydraulic fracturing, production has permeated all corners of the wilderness. There is a shale gas and unconventional oil boom in the US, and the US is quickly becoming a beacon of efficient, low-cost energy production. The International Energy Agency predicted (though, as mentioned, predictions are not to be wholly depended upon) that US oil production will surpass Saudi Arabia’s production by 2017 and reach complete energy independence by 2035.
In addition, Israel may soon be an energy-independent exporter of natural gas thanks to large reserves recently discovered in the Eastern Mediterranean. New, notable gas and oil reserves have also been discovered all over the world in places like Cyprus, French Guiana, Kenya, Somalia, and Argentina and traditional exporters like Canada, Mexico, and Venezuela have recently increased production.
Therefore, the worries that should spark a far more urgent call for further economic diversification in the Gulf countries are not finite reserves but rather infinite reserves, and a subsequent collapse in demand. The volatility of oil prices and revenue in a world of energy abundance is a looming danger for the Gulf countries. As energy-hungry countries like the US need less of the Middle East’s expensive oil (transportation from the Gulf to the US, alone, is extremely costly), demand for Gulf petroleum and natural gas will plummet, leaving the Gulf countries with significantly fewer customers and a lot less political and economic power.
Yet Gulf countries are still investing an extraordinary amount of oil revenue back into its oil and gas sector to either expand their technological capacity or expand upstream production capabilities. Saudi Arabia has invested $9 billion in the modernization of its oil refinery at Rabigh in Western Saudi Arabia and $14 billion for a production capacity expansion at Saudi Aramco. The Kuwait Oil Company is investing something like $7 billion to increase production capacity to 4 million barrels a day by 2020. Gulf countries have embarked on renewed deepwater exploration efforts, are venturing into the shallow waters of the Red Sea, and have jumped on the global shale gas bandwagon.
All with the hope that new technology will provide them with some sort of comparative advantage or maybe curb the global demand for US oil. However, the wealth invested in an increasingly crowded global industry is no insurance for a future of oil abundance. The only way to really prepare for a period of peak demand for Gulf oil is renewed efforts at economic diversification.