It’s the summer of 2014 and the barrel price of oil is roughly $100. Within a year, the price drops to half that, teetering at $50 per barrel. As of this morning, the new low is $28.94. In a region where economic health hinges on oil prices, how is the low price, not just low but ultra low price, impacting the UAE economy? And how is this affecting opportunity for US companies operating here, and those looking for new export prospects in the country? Good question, and the most common question discussed at every business and social event I have attended since September.
Any savvy Econ student can explain supply and demand, and the natural market adjustments that are made; as predictable as water seeking its own level. Low oil prices trigger economic growth as consumers consume more, right? Producers with high costs cut back. OPEC cooperates and adjusts output to level the price. But that’s just not happening; not so predictable anymore. Saudi keeps pumping and refuses to curtail production. Iran is pumping happily against the backdrop of lifted sanctions. The US is pumping and priding itself on energy self-sufficiency and gas prices below $2.00. Russia is pumping hard, and Iraq is joining in the chorus. And the price keeps falling. Oil is down, the markets turn down with it. Add to the equation the fragility of the world economy and the regional outlook remains bleak. Or does it?
One of the biggest lessons learned by UAE from the 2008 global economic downturn was that it does not exist in a bubble. This was a particularly hard lesson learned in Dubai, specifically because it was so over leveraged in the property development market; it’s neck was stretched way out and took a painful and very public hit. But one of the best things about UAE, and Dubai in particular again, is that they are very fast learners. They take a hit, pivot, adjust, and swing again like a skilled prize fighter. I would suggest that this humble agility is the reason that the country bounced back quickly, and continues to set regional development benchmark. But before you start wondering how I got so far off topic, let me just say that I mention the economic downturn’s effect in Dubai to setup my explanation of where opportunity exists despite the low oil prices.
UAE is the 3rd largest OPEC producer and home to 6% of the world’s oil reserve. What one would expect with shrinking oil revenue, producers including UAE must adjust their spending and revenue policies. A major move signaling this shift occurred last summer when UAE deregulated gasoline, indicating its desire to strengthen its economy, moving away from government subsidies. Oddly, despite low oil prices, the cost of gasoline per liter increased, but remained well below the average price per gallon in the U.S.
General spending cuts have been made and the UAE’s federal budget, although not public, has contracted. Anecdotal evidence of this is obvious across the board. But where you won’t see cuts is in the areas of social and military spending.
10 years ago, UAE was the land of good and plenty; virtual opportunity in every sector existed. As the country has matured, as the global economy tipped, and now as oil prices plummet, opportunities are more refined. UAE has pivoted and adjusted once again. Dubai has never had the oil reserve wealth of the capital Abu Dhabi, economic diversification began out of necessity here decades ago. One might say they are experts at this. To prove this point, ask yourself how many Americans know exactly where Dubai is, but may be fuzzy about the United Arab Emirates. UAE will just keep doing what it was already doing. They are not being reactive as has been posited. The drop in oil prices has merely cast a light on a pre-existing strategy and reinforced that they were already moving in the right direction. While UAE, like Kuwait and Qatar can persevere based on built up cash reserves, economic diversification is the smart move.
How could it possibly make sense for a major oil producer to make heavy investment in alternative energy innovation? When oil is cheap, what is motivating UAE to take a deep dive into clean energy? They are playing the long game. While Henny Penny is not running around exclaiming, “The oil’s run out! The oil’s run out!” just yet, the time when this will be the case is certainly on the horizon. Alternative energy development starts to make sense and also aligns well with its diversification plan.
American companies looking to UAE as an export market should familiarize themselves with the strategic industries that have been identified for continued investment: healthcare, education, alternative energy, aerospace, security & defense. Certainly there are great opportunities to engage as UAE gears up to host Expo 2020 in Dubai. To be really clever, consider the country’s biggest motivators – creating a manufacturing base and collaboration involving knowledge sharing, ultimately developing the national workforce. Tech transfer may be the two sweetest words to their ears.