Complex Made Simple

Non-oil diversification is a must, but let’s not forget about UAE’s oil economy, shall we?

For the UAE, it all started with oil and it will continue with oil, despite diversification into- non-oil economies

About 90% of UAE central government revenue comes from the hydrocarbon sector There is a growing consensus that growth in world oil demand will slow to near zero sometime in the first half of this century The UAE is a responsible partner in protecting global energy supplies

Google the words UAE and oil, and the first top results would immediately take you to “non-oil”.

In the non-oil diversification drive the region and especially the UAE are intent on showcasing, and for good reasons, oil seems to be losing its grip on the scale of importance.

About 90% of central government revenue comes from the hydrocarbon sector and constitutes up to 46% of total GDP and oil exports now account for about 25% of the GDP in 2018.

Non-oil has a long way to go.

Oil is here to stay.

The UAE remains a largely oil-based economy

Research firms Oxford Economics and the ICAEW said the UAE’s economy is expected to grow 2.2-2.3% compared to 1.7% in 2018, driven by 2.5% growth in real oil gross domestic product, and boosted by higher levels of government spending and increased oil production.

The World Bank forecast a level of GDP growth at 3% by 2020.

The economy is forecast to grow by 3.5% in 2019, the Central Bank of the UAE said for his part.

Abu Dhabi National Oil Company (ADNOC) will boost oil output capacity to 4 million bpd by 2020, Reuters reports, while boosting it to 5 million bpd by 2030 after new oil and gas finds, Reuters reports.

UAE Minister of State Ahmed al-Sayegh and chairman of Abu Dhabi Global Market said that the oil and gas sector in Abu Dhabi is one of the most attractive sectors for foreign direct investment (FDI), attracting more than $21bn through land and sea concessions.

Courtesy of Government.ae

The UAE is the second-biggest economy in the Arabian Gulf, attracting $15 billion in 2018, accounting for more than 22% of the total FDI inflows into the MENA, driven by investments in the country’s oil and gas sector, according to Sayegh.

“The oil economy has grown due to rising production,” Mohamed Bardastani, senior Middle East economist at Oxford Economics told UAE media The National.

The UAE is increasing production to alleviate challenges posed by tightening of global oil markets as a result of sanctions, disruptions, security conflicts and scheduled rig maintenance.

Brent oil hit a 2019 high above $72 a barrel recently.

Below are the 15 countries that exported the highest dollar value worth of crude oil during 2018, according to worldstopexports.com.

1- Saudi Arabia: $182.5 billion (15.9% of total crude oil exports)

2- Russia: $129 billion (11.3%)

3- Iraq: $91.1 billion (7.9%)

4- Canada: $66.9 billion (5.8%)

5- United Arab Emirates: $66.8 billion (5.8%)

6- Kuwait: $49.8 billion (4.3%)

7- United States: $47.2 billion (4.1%)

8- Iran: $45.7 billion (4%)

9- Nigeria: $43.6 billion (3.8%)

10- Angola: $38.4 billion (3.4%)

11- Kazakhstan: $37.8 billion (3.3%)

12- Norway: $33.3 billion (2.9%)

13- Libya: $26.7 billion (2.3%)

14- Mexico: $26.5 billion (2.3%)

15- Venezuela: $26.4 billion (2.3%)

Challenges faced by oil economies

Right now, oil prices are high and as long as US president Donald Trump keeps putting pressures on China and Iran, oil supply will come at a premium to importers.

In a recent conference in London, UAE Energy Minister Suhail al-Mazrouei said in response to a question on whether he sees oil at $60-$65 as the sweet spot for the oil industry: "Am I seeing the right investments coming to the market? Not yet".

Bloomberg points to longer-term issues.

“For Middle East oil producers, the longer term is even more daunting. There is a growing consensus that growth in world oil demand will slow to near zero sometime in the first half of this century,” it said.

“Countries sitting atop proven reserves should be concerned. The idea that some of their oil may never be produced changes the entire valuation of reserves in the Middle East. The traditional argument that oil reserves in the ground would become more valuable as demand kept growing and other supplies dwindled has been turned on its head. Some of those reserves may end up having no value at all.”

UAE’s role in securing oil

With Iran threatening to close the Strait of Hormuz, and disrupting global trade routes, the UAE is a responsible partner in protecting global energy supplies, according to the UAE embassy in Washington.

About two-fifths of the world’s traded oil is currently shipped by tanker through this 34-mile-wide passage and Gulf governments, including the UAE are planning to build pipelines that could move as much as 6.5 million barrels of oil per day or about 40% shipped through the Strait. The pipeline allows the UAE to pump about 60% of its crude exports to Fujairah Port on the Gulf of Oman. 

Where the oil money goes

According to the UAE Ministry of Finance, The general federal budget 2018 totalled AED51.4 bn ($14bn), an increase of 5.6% from 2017 and the UAE cabinet approved a 17.3% rise in the UAE federal budget for 2019 compared to 2018.

The federal budget for fiscal year 2018 was allocated to the key sectors for the UAE, with the budget for Social Development and Social Benefits standing at AED26.3 billion, equating to 43.5% of the total. The UAE Government was allocated a total of AED22bn, or 36.5% of the total budget.

But oil money flows as well into a country’s Sovereign Wealth Fund (SWF), and in 2016, the Abu Dhabi Investment Authority became the largest sovereign wealth fund in the Middle East and the fifth largest in the world with $792bn. SWF investments are typically made in foreign countries and returns are reinvested locally to supplement national fiscal agendas.

One such projects is Dubai is implementing new projects for hosting World Expo in 2020, where AED30 billion (About $8.2bn) will be spent on infrastructure at the Expo site and the city.

The UAE reported a surplus of AED67.5bn ($18.4bn) last year as a rise in crude prices in the second half of 2018 boosted government revenues, the National reported, quoting state-run news agency WAM.