The Arab Spring and the Gulf: Changing Energy, Economic, and Security Dynamics

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The Arab Spring has profoundly impacted energy, economic, and security dynamics in the six states of the Gulf Cooperation Council (GCC). [1] Whereas in North Africa, Yemen, and Syria it is the political impact of the Arab Spring that has been transformative, in the Gulf States it is the economic repercussions that are resonating through governing structures. In both regions, the Arab Spring has injected urgent new pressures that radically are reconfiguring the political landscape and the permissible boundaries of protest. Old certainties have been shattered by powerful demands for democratic participation, social justice, and human dignity. Across the Middle East and North Africa, the size and contagious overspill has distinguished the Arab Spring uprisings from earlier expressions of discontent, and demonstrated the magnitude of the socio-economic and political challenges facing the region. They also revealed the narrow social base of support underpinning longstanding authoritarian rulers, and their reliance on the use of coercion or the threat of force.

This paper examines the implications of the policy responses to the Arab Spring in the GCC states. It argues that the legacy of the political decisions taken in 2011 to pre-empt or minimise the likelihood of unrest will reverberate in the years ahead, and complicate the shift toward post-oil economies that eventually must take place. The economic challenges facing the Gulf States are inextricably linked with political decisions on how to utilise the revenues from hydrocarbons. In this regard, the economic implications of recent policies have greatly complicated the political-driven projects of transition that were underway across the GCC. This has consequences not only for domestic and regional stability but also for the energy security of countries - such as Japan - that heavily depend on the Gulf for imports of oil and gas.

There are five sections in this paper. It begins by describing how the Arab Spring has irrevocably changed the 'rules of the game' that for so long determined the relationship between state and society in the Gulf States. This opening section analyses how the Arab Spring rapidly moved from North Africa to the Gulf during the spring of 2011. It assesses Gulf officials' local and regional reactions to the unfolding unrest and focuses on three dimensions - mutual assistance to monarchies both within and beyond the GCC, escalating sectarian tensions between the Arabian and Persian coasts of the Gulf, and concern at the rising power and influence of the Muslim Brotherhood. The second section explores the wider economic challenges that face the Gulf as well as the immediate policy responses unveiled in 2011. It sets the contextual parameters for what follows by distinguishing between immediate and longer-term challenges but also demonstrating how they crucially are interlinked.

Section three addresses the consequences of the decisions to intensify the politics of patronage for the longer-term projects of economic diversification and development in the Gulf. It argues that the emphasis on 'tried and tested' technocratic measures ignores the critical social dimension of the Arab Spring, which across the Middle East has empowered people with notions of accountability, justice, and freedom. Bureaucratic responses in North Africa notably failed to quell popular demands for reform, and they already have shown signs of faltering in the Gulf monarchies too. These themes are examined in greater depth in section four, which looks at two major challenges of unsustainability, namely the rapidly-rising break-even oil prices needed to balance GCC states' budgets, and surging patterns of domestic energy consumption. Both cases are acutely sensitive as they represent pillars of the 'ruling bargain' that has underpinned political and social stability in the Gulf for decades. This section demonstrates that ruling elites now face an enormously difficult choice as they face a trade-off between short-term stability and long-term sustainability.

The final, concluding section draws together the main points in a discussion of whether the GCC states will opt for a strategy that maintains the status quo or instead will embrace the systemic change that will be needed to smooth the path toward sustainable post-oil political economies. It offers a pessimistic assessment as policy decisions taken thus far indicate that regimes will attempt to resist change until they no longer can do so, and then will choose repression over reform. This final section also considers the implications for Japan, a country with high dependence on oil and gas from the region, should the Gulf States experience prolonged periods of domestic internal and, possibly, regional instability.

1. The Arab Spring and the Gulf - new games, new rules

The demonstrations that sparked the 2011 civil uprisings originated in North Africa following the self-immolation of Mohamed Bouazizi in Tunisia in December 2010. His plight resonated heavily among people across the Arab world. It tapped into powerful feelings of helplessness and a perceived lack of prospects for a better future among youthful populations lacking sufficient opportunities for employment or advancement. [2] The contagious overspill of the protests highlighted also how globalisation and the acceleration of global interconnectedness have dramatically transformed the global order, not least through the revolution in information and communication technologies (ICT). This has created new forms of private, public and increasingly virtual spaces in which to mobilise, organise and channel societal demand. [3]

Although the unrest originated (and was most transformative in) North Africa, it did not spare the Gulf States. The civil uprisings that swept Presidents Ben Ali and Mubarak from power in Tunisia and Egypt galvanised the popular opposition to the ruling Al-Khalifa family in Bahrain. Bahraini cafes that usually showed Lebanese music videos instead aired non-stop Al Jazeera coverage of the enormous demonstrations in Cairo's Tahrir Square. [4] Emboldened protestors voiced demands ahead of the 14 February day of protest for greater political freedom and equality for all Bahrainis. These targeted the regime's policies of fomenting sectarian division to inhibit the emergence of any popular cross-community opposition movement. Moreover, they facilitated the expansion of an already-existing social movement of young Bahrainis desiring political reform. Recognition of this popular uprising against them prompted the Al-Khalifa ruling family to violently crush the dissenters, ultimately through the use of Gulf Cooperat in Council Saudi-led forces and the declaration of a three-month state of emergency that lasted until June 2011. [5]

Kuwait also experienced sustained and large-scale public demonstrations, which escalated sharply following allegations of a massive political corruption scandal in August 2011, and culminated in the dramatic storming of the National Assembly in November, and the resignation of the embattled Prime Minister, Sheikh Nasser al-Muhammad Al-Sabah, in December 2011. Widespread demonstrations among Shia communities in Saudi Arabia's Eastern Province began contemporaneously to the Bahraini uprising, and since have turned into "the largest and longest protest movement in Saudi Arabia's modern history." [6] In Oman, protests in the industrial town of Sohar took place in February and March 2011 and were met with deadly force by state security, while officials in the UAE responded to a petition for political reform by arresting prominent human rights and opposition activists, closing down non-governmental organisations and international branches of think-tanks, and taking over local civil society organisations. Only Qata, with its fortuitous combination of large hydrocarbon wealth and a small citizen population, escaped unrest. [7]

Local policy responses to the Arab Spring focused overwhelmingly on short-term measures to blunt or pre-empt the social and economic roots of potential political tensions. These included hand-outs of cash (Kuwait, Bahrain, and the UAE), creating jobs in already saturated public sectors (Saudi Arabia, Bahrain, Oman), and raising workers' wages and benefits (Qatar, Saudi Arabia, Oman). In addition, Saudi Arabia announced generous financial aid packages to Bahrain and Oman, Egypt and Jordan, pledging $10 billion aid packages to the former two countries, $5 billion to Jordan, and significant bilateral assistance to Morocco. [8] Saudi Arabia's King Abdullah also engineered the surprising offer of GCC membership to Jordan and Morocco in May 2011 before announcing his aspiration for closer 'Gulf Union' at the GCC Summit in Riyadh in December. However, despite Saudi Foreign Minister fleshing out the proposals for an integrated military and regional security policy, an extraordinary mid-year GCC Consultative Summit in Riyadh on 14 May 2012 failed to reach consensus as the rulers of Oman and the UAD did not even attend the meeting. [9]

Ruling elites in the GCC states turned to another familiar tactic of externalising the root causes of discontent by attributing them to external meddling. Initially, they targeted Iran, particularly as the uprising in Bahrain and the demonstrations in the Eastern Province of Saudi Arabia were largely Shia protests. Thus, in April 2011, Bahrain's Foreign Minister, Sheikh Khalid bin Ahmed Al-Khalifa, claimed that "We have never seen such a sustained campaign from Iran on Bahrain and the Gulf as we've seen in the past two months." [10] Five months later, the report on the uprising published by the Bahrain Independent Commission on Inquiry found no evidence of any Iranian role in the unrest, despite months of Bahraini government claims to the contrary. [11]

The tactic of ascribing domestic unrest to foreign intervention served two purposes. First, it enabled the (Sunni) regimes to de-legitimise Shiite-led opposition and demands for political reform by conflating the issues of Shiite loyalties and Iranian manipulation into one amorphous threat. Thus, Shiite activists in GCC states have long been depicted as potential or actual fifth columnists with allegiance to Iran. Second, by portraying Shiite demonstrators as disloyal and/or potential extremists, the regimes are playing a classic divide-and-rule card by hindering the emergence of a unifying cross-sectarian opposition group. [12]

As protests continued throughout the GCC states (with the notable exception of Qatar) into 2012, the Muslim Brotherhood gradually replaced Iran as the target of the finger of blame. Especially after Islamists performed strongly in Kuwait's February 2012 election to the National Assembly, and following the Muslim Brotherhood's stunning victory in the June 2012 Egyptian Presidential election, the organisation came to resemble a potent trans-national threat in the minds of many Gulf officials. Many of the 64 academics, lawyers, and human rights activists arrested in the UAE had ties to Al-Islah, the local affiliate of the Muslim Brotherhood, which retained a strong base in the poorer northern emirate of Ras al-Khaimah, where it even had a senior member of its ruling family, Sheikh Sultan bin Kayed Al-Qassemi, as its Chairman. [13] Aware of the potential Islamist strength in the Northern Emirates, ruling officials in the UAE were the bluntest in their criticism of the Muslim Brotherhood, with the Chief of Police in Dubai [14] going so far as to claim that the group planned to take over the GCC states one by one, beginning with Kuwait in 2013. [15] Later in 2012, after significant street protests in Kuwait City in October, the UAE's Minister of State for Foreign Affairs [16] argued that "the painful developments in Kuwait confirm a coordinated plot spurred by the Arab Spring events." [17]

2. Immediate and Longer-Term Economic Challenges

The GCC states confront a daunting array of short- and long-term challenges to economic sustainability. Moreover, these issues are interlinked as they constitute the core of the redistributive mechanisms that have underpinned social and political stability since at least the 1970s. Immediate challenges include demographic pressures stemming from the youth bulge that is working its way through the population pyramid; saturated public sectors and the weakness of private sectors to generate sufficient jobs to absorb labour market entrants; entrenched layers of subsidies and vested interests, and unproductive rent-seeking patterns of economic behaviour especially in the energy sector (as discussed below). None of these issues is new, as a study conducted by the McKinsey consultancy group in November 2007 laid bare the scale of the challenge posed by mounting unemployment alone. The report estimated that, contrary to official claims of much lower rates, real unemployment in Bahrain, Oman and Saudi Arabia exceeded 15%, and that the figure rose to 35% for those aged between 16 and 24. Furthermore, it identified severe deficiencies in local education systems that meant that most entrants into GCC labour markets lacked the requisite qualifications to enter the private sector. [18]

Longer-term issues include unsustainable increases both in public spending and domestic energy consumption. Both of these issues will be explored in full in section four of this paper. At this point, two examples can be noted in order to illustrate the scale of the challenges that face policy-makers in the Gulf States. Throughout the region, public expenditure surged during the prolonged windfall generated by the post-2003 rise in world oil prices. In Kuwait, budgeted spending trebled between 2004 and 2011, by which time the cost of meeting public sector salaries was calculated to be equivalent to eighty-five per cent of the country's annual oil revenue. [19] Meanwhile, in Saudi Arabia, the government is estimated to forego $70 billion each year in lost export revenues owing to the heavy subsidies on gasoline that see Saudi consumers pay just $0.12 for fuel. Moreover, the Middle East Economic Digest (MEED) noted in 2011 that the Kingdom's refining capacity cannot meet the demand for gasoline and diesel, thereby necessitating large-scale imports of both products which will, it is estimated, cost a further $170 billion over ten years. MEED added that "the world's largest oil exporter now finds itself in the peculiar position of being a large-scale importer" of refined products, reflecting the fact that "low fuel prices are a principal mechanism in which wealth is shared in the Kingdom." [20]

As governments in the GCC acknowledged this array of short- and long-term tasks in the 1990s and 2000s, they began to formulate ambitious and increasingly long-term economic strategies and 'visions' to combat them. Reflecting their greater urgency of depleting oil reserves, Oman and Bahrain were the first to launch national economic visions in the late-1990s. Policy-makers adopted reforms designed to broaden their economic and industrial base and interlink them with changes to labour markets, education and training. Bahrain, in particular, promoted a high-profile pro-business agenda around the slogan Business-Friendly Bahrain that aimed at making the archipelago a regional financial centre. The other four GCC states followed suit in the 2000s, using their comparatively greater levels of resource wealth to improve indices of human development and social capital, strengthen local private sectors, and create value-added and knowledge-intensive production chains. Especially noteworthy was Saudi Arabia's two-pronged strategy that concentrated on creating economic cities as hubs of agglomeration and the creation and diffusion of knowledge, as well as the developing a sophisticated downstream petrochemicals industry. These formed the core of the Kingdom's economic diversification and job creation, and built on Saudi Arabia's long-delayed accession to the World Trade Organisation in 2005 and the privatisation of key economic sectors by the Supreme Economic Council in order to attract foreign investment. [21]

These initiatives only partially succeeded. Notable successes included the more prudent fiscal policy during the oil-price boom of the 2000s as compared to that of the 1970s, and the measured and nuanced responses to the global financial crisis in 2008. Both developments reflected a maturation of Gulf economic policy-formulation and assimilation of lessons learned from the profligacy of the earlier boom years. [22] Nevertheless the reforms did not substantively rebalance local labour markets or boost genuinely autonomous private sectors. Patterns of rent-seeking behaviour persisted in the enduring mechanisms of wealth redistribution that underpin the social contract in each Gulf State. Corporate governance remained vulnerable to personalised networks linking state-business relations, as evidenced in disputes in Saudi Arabia and Dubai in 2009. These linkages and the opaque business culture that they represented were clearly delineated in the aftermath of the sudden debt restructuring announced by two Saudi conglomerates (Saad Group and Ahmad Hamad Algosaibi and Brothers) in May 2009. [23] This affected more than 80 domestic, regional and international banks, including Citigroup and BNP Paribas, but the lack of transparency and inadequate disclosure of information over the degree of exposure demonstrated the obstacles to overcoming an older way of conducting business on "a wink and a nod" on "the basis of a family name." [24]

The scale of ambition and financial resources devoted to economic diversification in the GCC states during the 2000s was impressive. The large-scale projects were forecasted to create 10.8 million jobs in Saudi Arabia alone; however, a report compiled by the National Bank of Kuwait in 2009 estimated that suitably-qualified Saudi workers would only fill about half, or 5.45 million, of the positions, leaving the remainder to expatriate labourers. [25] Continuing lags in local indices of human development exist alongside other constraining factors on the pace and extent of economic diversification. These include education systems that still score very poorly in international benchmarking standards in the critical areas of languages, mathematics, and the sciences. Moreover, meaningful reforms would have involved a decisive shift away from notions of citizens' entitlement in redistributive states, and also would have required the rebalancing of the public and private sectors, together with a fundamental reshaping of state-business relations. [26]

3. The Politics of Patronage

In light of the short- and longer-term challenges of economic diversification and development outlined above, the responses to the Arab Spring have greatly complicated the policy outlook. Indeed, Steffen Hertog correctly has identified how the most lasting and troubling legacy of the regional upheaval will be the legacy of the economic, rather than political decisions, taken to counter the unrest. This is because "expectations are easy to raise but difficult to curb, creating a ratchet effect that demands ever larger outlays during every political crisis." [27] The contagious overspill of citizen demands for additional government largesse was demonstrated in January 2011 shortly after Kuwait's ruler announced the Gulf's first hand-out worth $4 billion - mere days after the ousting of President Ben Ali from Tunisia, when Qatari nationals demanded that their own government follow suit. Despite the fact that Qatar has the highest Gross Domestic Product (GDP) per capita in the world, a local newspaper [28] reported how the announcement "has led to huge excitement in the Qatari community" with many Qataris publicly suggesting that their government "should announce a similar or even more attractive 'gift package' for its people." [29]

The scale of the additional government spending is enormous. Total state spending in the six GCC states soared by 20 per cent during 2011 alone as the measures came into effect. [30] Saudi Arabia announced two emergency welfare packages collectively worth $130 billion. This figure exceeded every annual government budget until 2007 and included a provision to employ 60,000 additional Saudis in the Ministry of Interior alone. It also contained stipulations for increasing the minimum wage of public sector employees (but not private sector workers), offering a one-time bonus of a month's pay to all public officials, and constructing 500,000 new homes to combat a crippling shortage of social housing. [31] In Bahrain, the Ministry of Interior promised to create an additional 20,000 new jobs in an already-bloated public sector, while in Oman, Sultan Qaboos announced 50,000 new public sector jobs as well as a pay increase in February 2011, while leaving the private sector largely untouched. [32]

Similar packages were announced in the comparatively richer GCC states, whose high oil and gas revenues and lower populations might otherwise have shielded rulers from the socio-economic discontent witnessed elsewhere. As mentioned above, the Emir of Kuwait set the ball rolling in January 2011 with a 'gift' of 1000 Kuwaiti Dinars (roughly $3600) to each citizen, as well as free coupons for basic food items for fourteen months between 1 February 2011 and 31 March 2012. The ostensible reason for this display of rulers' benevolence was the triple anniversary of Kuwait's independence (50 years), liberation (20 years) and the current Emir's accession (5 years), but its subtle reminder of the state's role as distributor of wealth was very timely in the turbulent aftermath of the Tunisian and Egyptian revolutions. The hoped-for impact on a grateful population was encapsulated in the response of one happy beneficiary:

In the UAE, the federal government (based in Abu Dhabi and controlled by senior members of the Abu Dhabi ruling family) rushed ahead with infrastructure and welfare spending to quell discontent in the poorer Northern Emirates. Pledges made soon after the start of the Arab Spring, in March 2011, included significant investments in electricity generation and water distribution, as well as health care and job creation programmes to boost the employment prospects of citizens from these less well-off regions. These announcements attempted to tackle endemic problems of citizen unemployment, which reached 20.6 per cent in Fujairah and 16.2 per cent in Ras al-Khaimah, as well as the startling results of a 2010 survey conducted by the Federal National Council that revealed that 900 homes in the Northern Emirates still lacked access to electricity. [34]

Similar to Kuwait, the President of the UAE used a convenient anniversary (the 40th anniversary of the creation of the UAE in 1971) as a pretext for doubling the salaries of citizens working in the health, education, and judicial sectors, a 35-45 per cent increase for all other public sector workers, and the creation of a $2.7 billion fund to help pay the debts accrued by low-income workers. [35] Even Qatar, with little to no threat of domestic unrest, announced 60% increases in basic salary, social allowance and pensions for public officials and 120% rises for military officers in September 2011. Significantly, the decision was made in a decree (50/2011) originating from the Heir Apparent (Sheikh Tamim bin Hamad Al-Thani) rather than the powerful Prime Minister (Sheikh Hamad bin Jassim Al-Thani). Being associated with such a popular and benevolent display of monarchical generosity has, consequently, been interpreted by observers as forming part of the domestic power struggle between the two dominant figures in Qatari politics. [36]

However, the decision to intensify the politics of patronage by increasing the flow of unproductive payoffs to key sectors of society delivers damaging blows to the attempts in recent years to scale back the role of the state in the economy and boost the role of the private sector. In the case of Bahrain, economic populist measures introduced after the Pearl Roundabout uprising in 2011 systematically dismantled the measures introduced by the Labour Market Regulatory Authority (LMRA) since its formation in 2006. These targeted pioneering reforms that had attempted to correct the imbalance in the labour market by stepping up labour nationalisation. Specifically, the two flagship measures - imposing fees on business owners for every foreign worker hired, and the imposition of minimal quotas for hiring local workers - were suspended, seemingly for good. As a result, Bahraini scholar Hasan Tariq Alhasan commented in July 2012 that the government had "driven the last nail into the coffin of the economic and labour market reforms... in an attempt to secure political support from the business community." [37] More generally across the Gulf, instead of strengthening the private sector and weaning citizens off public sector employment, the new packages expanded government spending and widened the already-large discrepancy between the public and private sectors. In addition, they created hostages to fortune by locking in government spending at very high levels that depend on the price of oil remaining high, as it is much easier to give hand-outs than to take them away in redistributive political economies. [38]

Conspicuously absent from the packages described above has been any meaningful engagement with demands for political reform. The emphasis on handouts and censorship suggest regimes are - once again - relying on technocratic or technological solutions to the problems facing them. Yet these ignore the crucial social dimension of the 2011 Arab Spring, which has empowered people across the Arab world with notions of entitlement and a desire for justice and accountability in their rulers. This cannot be extinguished by a simple flick of a switch or flourish of a ministerial pen. Indeed, the prevailing approach was eloquently criticised by Emirati economist Nasser bin Ghaith just a week before his arrest in April 2011: "They have announced 'benefits and handouts' assuming their citizens are not like other Arabs or other human beings... But this only delays change and reform, which will still come sooner or later." [39] Another prominent Emirati academic, political scientist Ebtisam al-Ketbi, echoed the call for political progress, stating that it reflected "an aspiration for widening the margin of freedom...Every person wants to be part of the decision-making process. This is a just demand. The world is moving forward." [40]

4. The Challenges of (Un)-Sustainability

This section examines two of the longer-term challenges facing Gulf governments. It argues that unsupportable trends in economic and energy patterns represent the Achilles Heel that, if left unchecked or inadequately tackled, will pose an existential threat to the survival of the regimes in their present form. The reason for this bold claim is that they call into question the viability of the mechanisms of wealth redistribution that lie at the heart of the social contract between ruler and rule. Oil rents played the central role in constructing and subsequently maintaining the social contract and redistributive mechanisms in the rentier-state systems of the Gulf. They also distorted the economic development of the redistributive states that emerged. [41] Meanwhile, the welfare strategies for co-opting support and spreading resources that developed in the 1960s and 1970s did so in times of comparatively small populations and seemingly endless resources. In all of the Gulf States, such transfers were vital to cushioning the impact of the transformational socio-economic changes that compressed decades of modernising and evolutionary change elsewhere into a single generational achievement. [42]

Oil and natural gas reserves are not, however, distributed evenly throughout the Gulf, and pockets of energy poverty already have emerged. Two examples are Bahrain's reliance on increasing reliance on its shared Abu Saafa oilfield with Saudi Arabia for up to 74 per cent of its total output, without which the archipelago would not be able to maintain the export of oil from its own rapidly-depleting reserves, [43] and the paradoxical shortage of liquefied natural gas in a region that holds 25 per cent of proven global gas supplies. [44] These are creating new intra- and inter-regional dependencies, which will be analysed in full later in this section.

Two sub-sections examine each challenge in turn. The first addresses the problem of unsustainable fiscal policies while the second looks at domestic energy consumption patterns. Both demonstrate how the dilemma that now confronts GCC governments is one of implementing policies that balance between short-term measures to ward off discontent but without exacerbating the systemic problems that undermine long-term solutions. Caught in a pincer trap between rising demands for, and falling supplies of, finite natural resources, policy-makers in the Gulf States must address these vulnerabilities to internal contradictions and pressures that otherwise will only intensify over time under the pressure of rapidly-rising populations and depleting reserves of oil and gas.

Rapidly-rising break-even oil prices

The first challenge concerns what price-level will be necessary to be able to sustainably maintain the increases in social and welfare expenditure outlined in the previous section. During the long years of the oil price boom that began in 2003 and has continued, with a major dip in 2008-9, to the present day, the Gulf States ran significant budget surpluses. This sustained period of capital accumulation sharply contrasted with the prolonged period of low oil prices in the 1980s and 1990s, when Saudi Arabia ran a budget deficit for nineteen consecutive years, and Qatar recorded only one surplus (in fiscal year 1990-91) between 1985 and 2000. [45] Yet, as oil prices rocketed in the 2000s, collectively, the GCC states acquired $912bn of foreign assets in the five years to June 2008, and Gulf sovereign wealth funds were an important source of liquidity for struggling Western financial institutions during the first phase of the financial crisis in 2007 and early 2008. [46]

Since 2008, however, GCC economies were hit first by the rapid slump in oil prices in late-2008 and into 2009, and later, as economies returned to surplus in 2010 and 2011, by the impact of the spending increases. The volatility of world oil prices highlighted the GCC states' vulnerability to external factors that directly affect government revenues and which largely are beyond their control. It is within this context that the rises in the break-even price of oil need to be assessed. This has risen inexorably over the past decade. In Saudi Arabia the increase has been from $20 to nearly $90 per barrel, with the Institute for International Finance forecasting a break-even price of $110 by 2015. [47] Bahrain already faces a break-even price exceeding $120, while in the UAE the break-even price has soared from $23 per barrel in 2008 to an estimated $92 in 2011. [48] Most remarkably, in March 2012, Kuwait's Minister of Finance claimed that the state's current rates of expenditure would require an oil price of $109.50 to balance the budget in the 2012-13 fiscal year, and that, if spending patterns remained unchanged, by 2030, Kuwait would need to be producing three million barrels of oil per day at the astronomical price of $213.50 to meet its fiscal requirements. [49]

This steady rise in public spending leaves the Kuwaiti government (alongside the other Gulf States) dependent on oil prices remaining high. Any significant drop would leave them exposed, and although their massive capital accumulations and budget surpluses in recent years provides a buffer of sorts, it does leave them a hostage to fortune should prices remain low. It is, after all, only three years since prices plunged to $33 a barrel. Moreover, for less resource-rich countries such as Bahrain and Oman, they already are dependent upon GCC aid and development packages, as discussed in section two. [50] Yet, even in the richer states, officials already face a series of policy dilemmas, encapsulated in Kuwait's recent decision to suddenly increase the proportion of oil revenue going into the country's Reserve Fund for Future Generations from ten per cent to 25 per cent. [51]

This followed an alarming assessment by the International Monetary Fund (IMF) in May 2012. This predicted that at current trends, "government expenditure will exhaust all oil revenues by 2017, which means that the government will not be able to save any portion of these revenues for future generations." [52] Later in 2012, the IMF also drew attention to Saudi Arabia's vulnerability to relying on uncertain revenue flows, as it warned that the Kingdom could slide into a 0.6% budget deficit, also by 2017, as a result of falling oil prices and increasing state spending. [53] Lastly, the organization laid out a scenario whereby oil prices fell by $30 per barrel and remained at that level into the medium-term. If this happened, the IMF forecast that the GCC states would begin to go into deficit by 2014, with Bahrain and Oman running deficits of up to 16 per cent by 2017 and Saudi Arabia also facing a double-digit deficit by that time. [54]

Domestic energy consumption patterns

Closely related to this looming fiscal crunch are unsustainable patterns of domestic energy consumption. This reflects the market-distorting pricing policies that deliver energy at greatly-subsidized prices as well as the energy-intensive nature of GCC states' industrialization (and urbanization) projects reliant on cheap feedstock of gas. Both trends support a culture of almost unrestrained energy consumption, and are underpinned by the provision of crude oil to local markets at around $8-10 a barrel, far below the global rate upwards of $80-90. This imposes a double cost on governments, which must continue to subsidize artificially low domestic prices of oil while incurring a significant opportunity cost as they cannot export and sell at international market prices. As perhaps the most extreme example, Kuwait has not raised electricity prices for individual consumers since 1962, but in Qatar also, domestic consumption of oil has trebled since 2000. [55]

Similar to the break-even price, unsustainable consumption presents a problem that will become more challenging the longer it is unresolved. Its scale became clear in an official report compiled by the Saudi Electricity Company in the spring of 2011. The report pointed out that nearly one-third of current Saudi oil production (8.5 million barrels per day) is used to meet local demand, primarily for power generation, and that the revenues from the export of the remaining oil provide nearly 80 per cent of government revenue. However, it also warned that if present rates of local consumption continue, current production levels would be unable to meet local demand by 2030. Already, domestic oil consumption increased by 11 per cent in the year to May 2011, and high population growth will translate into increasing future demand for energy. Moreover, a leaked diplomatic released by WikiLeaks in 2010 predicted that domestic energy demand would grow 10 per cent each year and that the Kingdom's ability to export oil would decline as these domestic requirements escalated. [56]

The diversion of crude oil to meet domestic energy demand therefore imposes a growing constraint on GCC states' export capabilities. Aside from Qatar, the increasing shortage of natural gas to fire power plants and generate electricity means that ever-larger amounts of oil are being burned to generate sufficient power to meet the demands of energy-intensive industrialisation and high population growth. Two recent reports, both published in 2011, highlighted the dangers hidden within these approaches. The first was a paper published by the British think-tank Chatham House, which warned that continuing growth in domestic demand for energy would cause economic and social pressures long before the ending of oil exports. Alarmingly, the authors added that this could come by 2020 at the earliest. [57] Meanwhile, the Riyadh-based consultancy Jadwa Investments drew up a 'worst-case scenario' over the summer of 2011 covering the oil and fiscal challenges in the Kingdom. Their report warned the Saudi government that it faced an especially difficult future if spending and oil trends did not change. Indeed, it raised the prospect of substantial budget deficits by the 2020s and, sensationally, predicted that domestic oil consumption would reach 6.5 million barrels per day by 2030. By this time, it warned, Saudi Arabia would be facing a reduction in foreign assets to minimal levels, rapidly-rising debt, and a break-even price of more than $320 per barrel. [58]

Domestic energy consumption and rising break-even prices therefore are interlinked. Saudi oil use nearly has doubled in just eight years, from 1.6 million barrels per day in 2003 to 2.8 million in 2011, while government spending also escalated during the same period. Between 2003 and 2009, the government wage bill rose by 76 per cent while the number of employees in the public sector increased by 24 per cent, despite the avowed policy of 'Saudisation' of the workforce. [59] Similar to the Kuwaiti figures cited above, the difficulties of reducing or rolling back subsidized utilities or public sector employment are manifold. The longer that the Gulf States' put off the politically sensitive issues of reformulating the subsidy regimes and the social contract, the harder it will become to wean citizens off such mechanisms that increasingly are taken for granted. Resource shortages may therefore develop into intractable threats to security if they call into question the state's capacity to deliver essential goods to its citizen population.

5. Status Quo or Systemic Change?

The core issue at stake is the updating of the social contract to bring it into line with sustainable and long-term patterns of consumption and production. Yet the danger that faces Gulf policy-makers is that their failure to roll back subsidies and patterns of wasteful consumption in times of comparative plenty increasingly means that reforms will instead occur during periods of relative hardship. This raises the question of 'stability versus sustainability' as identified by Jim Krane. [60] Put simply, officials increasingly must confront the reality that traditional methods of redistributing wealth are no longer fit for purpose; furthermore, their continuation actively damages medium- and longer-term economic prospects. Present economic models of development, and the current high-intensity consumption of energy, place at risk the viability of the political model that has maintained stability for the past four decades.

Thus far, the evidence from the Gulf States' responses to the Arab Spring is not encouraging. At first glance, the GCC states, Bahrain apart, appear to largely have weathered the storm of protest, thereby confirming the monarchies as the great survivors of the Middle East. Moreover, Qatar and the UAE have emerged as regional powers with truly international reach, engineering the Arab response to the crisis in Libya in 2011 and leading international efforts to resolve the civil war in Syria. [61] Their interventions demonstrate a newly-proactive stance in attempting to control and contain the unrest generated by the Arab Spring.

And yet, the combination of medium- and longer-term challenges outlined in this paper present profoundly difficult questions for ruling elites in the Gulf. Addressing them would involve reformulating the political and economic structures that constitute the pillars of regime stability in redistributive states. Rather than tackling the problems head-on, the policy responses to the Arab Spring instead suggest that GCC governments lack both the capability and the intent to undertake the sensitive - and momentous - reforms needed to guide the Gulf States into the inevitable post-oil era. This transition will inevitably take place, and it may be sooner rather than later, as rising break-even prices of oil and surging domestic consumption eat into export sales and government revenues. After all, revenues come from the export, rather than the production, of oil, yet the internal trends and local pressures described above look set to accelerate and intensify in the absence of concerted, and transformative, counter-measures.

Stability in the GCC states consequently is rather more fragile and transient than at first it appears. This has important implications for the energy security of countries like Japan that heavily rely on the Gulf region for oil and gas. As the oldest and most important Asian partner in the region, with a long tradition of assisting GCC states develop their hydrocarbons infrastructure, key issues for Japan now include the internationalisation of the Gulf and the growing commercial presence of China and India, in addition to the aforementioned domestic and regional security concerns. Energy, economic, and security dynamics thus will become increasingly intertwined in the coming years and decades, as old assumptions of stability are rapidly being replaced by new sets of global and local pressures that, together, may radically reshape the regional political landscape.

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