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24 October 2019, Gateway House

Energy Kingdoms: Oil and Political Survival in the Gulf

This book examines concisely and readably how the discovery of oil and natural gas transformed the six oil kingdoms of the Gulf, but profligate energy consumption at home challenged the basis of this very prosperity. It goes on to look at how these countries dealt with the economic crises that struck them

Fellow, Energy & Environment Studies Programme

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This book looks at one of the most pressing issues facing the six oil kingdoms of the Gulf, Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain: the challenge to their prosperity, stability and way of life because of unrestricted energy consumption. The discovery of oil and natural gas transformed these six monarchies from the poorest backwaters of the world in the 1930s to some of the richest societies by the 1980s. The book traces this transformation, and then examines the pressures and challenges that this new lifestyle created, and how the six countries dealt with them.

Energy Kingdoms is a concise book which stays close to its subject matter of energy policies and demand distortions. Jim Krane, a former journalist and currently the Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute for Public Policy, cites extensive data to support his arguments. He also steers clear of geopolitics, a common trap into which books dealing with this region fall.

Despite the transformation in living standards, the ruling structure of these countries has remained largely unchanged. They are still monarchies, with the king exercising supreme power, and, as the author points out, unique even in West Asia, because all around them, revolutionary regimes and dictatorships have replaced kings, such as in Yemen, Iraq, Iran, Egypt and Libya, often with disastrous results.

Krane explains in 172 compact pages how oil wealth has been one of the factors that enabled the Gulf Cooperation Council (GCC) monarchies to survive: they have been regarded as Rentier States. According to the Rentier State theory, because of oil wealth, the rulers didn’t require taxes from citizens. Rather, these were ‘allocative economies’, distributing the oil wealth that flowed in from overseas in the form of welfare and subsidies. Popular wisdom suggests that this has been the unwritten contract in the Gulf states: that as long as the population received a generous share of the oil wealth, ruling would be left to the rulers.

However, this contract started to fray due to a manifold increase in population and consumption of resources. By the 1980s, these countries were consuming large amounts of the same resource, oil, on whose export their prosperity rested. As the government subsidised energy consumption heavily, there was no incentive to use it efficiently. This translated into large mansions which required air-conditioning (subsidised) and fresh water (produced at a high cost via desalination, which was also subsidised), locking in high-energy consumption. People’s habits also tended towards wastefulness – air-conditioning left switched on in houses even when the owner was on vacation, cars left with engines running while parked to keep them cool, as the author found during his own stay in the Gulf. Such habits are unheard of anywhere else in the world.

The distortions in prices were so large that diesel fuel sold in Saudi Arabia was being smuggled from Turkey to other countries in the region for resale at a profit, Krane writes. For Saudi Arabia, this translated to almost 3 million barrels, or 30% of its oil production, being consumed domestically.

In the 1980s, when the price of oil collapsed, these countries faced a problem. A lower income from exports and a large subsidy burden were not financially sustainable. But the governments were not able to cut down the subsidies – and break the ‘unwritten compact’. They were eventually rescued by the high oil prices of the 2000s, which eventually crossed $100 per barrel. Crisis struck oil exporters again in 2014 when prices collapsed over 70% to almost $30 per barrel.

This downturn came just after the Arab Spring, which saw widespread unrest in several countries of the region (and the GCC as well). Cutting down on subsidies then may have been an especially risky move. In 2014, the fiscal response of these six Arab monarchies was different. The first regimes to cut back on energy subsidies were Iran and Dubai. Iran is not a part of the GCC, but is very energy-rich and had extensive subsidies on energy. Iran’s problems were aggravated by wide-ranging economic sanctions by the international community, forcing it to act.

Dubai is not oil-rich and relies on energy imports. The 2008 economic crisis hit Dubai particularly hard, forcing the government to act on energy subsidies. Iran replaced many of the subsidies with direct cash transfers.

While these moves led to some domestic dissatisfaction, they showed that it was possible to reduce energy subsidies. Saudi Arabia had tried to cut down subsidies in 1999 but had backed off in the face of public outcry. In 2016, with a new King, and Crown Prince, Muhammad bin Salman, (MBS) at the helm, the Saudi Kingdom acted again on fuel, electricity and water subsidies – fuel prices went up over 100% while water charges increased by over 400%. There were some cash benefits for the poorer citizens. This was like the Iranian programme.  Saudi Arabia was followed by the other GCC monarchies. Apart from reducing the subsidy burden, higher prices also of electricity, fuel and water started to bring down consumption, encouraging their more efficient use.

Krane examines in detail how the various GCC governments were able to create a consensus for cutting back energy and water subsidies, without this leading to large-scale unrest while flying in the face of the Rentier Theory. The descent of the Arab Spring into chaos allowed the six Gulf monarchies to start financial reforms without endangering stability. The monarchies, which were regarded as fragile institutions, have shown resilience, which is also reassuring for the world’s energy markets.

Finally, this book also holds an important lesson for other economies, including India. If energy-rich nations with small populations, such as Saudi Arabia and Kuwait, cannot afford to subsidise energy consumption, then is it viable for poorer economies such as India to provide substantial, across-the-board subsidies for large segments of its population?

Energy Kingdoms: Oil and Political Survival in the Gulf by Jim Krane (Columbia University Press, 2019)

Amit Bhandari is Fellow, Energy and Environment Studies Programme, Gateway House.

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