Gulf states need to diversify faster away from oil in energy transition era: S&P Global Ratings

Dubai — The six countries that make up the Gulf Cooperation Council need to diversify faster away from oil as the transition toward renewable energy picks up pace, putting pressure on the region's energy-dependent economies, according to S&P Global Ratings.

"As global investors get to grips with the implications of climate change for their portfolios, they are likely to re-appraise their appetite for investment in sectors and regions they perceive as most at risk from decarbonization initiatives," said Dhruv Roy, head of sovereign and financial institutions ratings for Middle East/Africa at S&P Global Platts said Monday in a report. "But Gulf Cooperation Council (GCC) economies still rely heavily on hydrocarbons, and we expect the pace of diversification to remain gradual." The GCC countries are Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain and Oman.

With oil accounting for more than 70% of Gulf revenue, the region still relies heavily on oil money to finance diversification initiatives at a time when countries globally are adopting more environmentally friendly sources of energy.

"The hydrocarbon-exporting economies of the Middle East will remain reliant on oil and gas as the primary source of economic activity well into the next decade," the agency said. "The gradual fall in oil prices affects fiscal flows first, but continues to erode the net stock of assets, pushing some sovereigns from a net creditor to a net debtor position."

$2 trillion

The International Monetary Fund warned in a recent report about the risk of the Gulf region relying heavily on oil income.

The Gulf region's $2 trillion of government financial wealth could be gone by 2034 if current fiscal measures persist and global oil demand peaks around 2041, the IMF said.

Gulf states are particularly vulnerable to the peak oil scenario because they rely on crude to finance their budgets and save money for future generations, according to the IMF. The slow pace of reforms means financial wealth could be exhausted in 15 years, the fund warned. Its peak oil scenario is based on an oil price of $55/b. Net financial wealth includes sovereign wealth fund assets, international reserves and government debt.

The Gulf region's relatively low cost of production could buy them time in implementing economic diversification measures, S&P Global Ratings said.

"GCC suppliers will continue to benefit from their low cost of production compared to other more expensive hydrocarbon producers," it said. "This will keep them in the hydrocarbon-producing and processing game long beyond others, and will help buy them time to diversify their economies away from it."