We noticed you're blocking ads.

Keep supporting great journalism by turning off your ad blocker.

Questions about why you are seeing this? Contact us

Font Size

- Aa +

Fri 2 Jul 2010 04:00 AM

Font Size

- Aa +

Challenges ahead for the GCC

Gulf academic Dr Eckart Woertz talks about the challenges facing the GCC states in the short term.

Challenges ahead for the GCC
Challenges ahead for the GCC
Dr Eckart Woertz believes that about eighteen percent of oil production in the GCC is consumed by GCC countries themselves.

Leading Gulf academic Dr Eckart Woertz talks about the problems and challenges facing the GCC states in the short term future.

As director of economic studies at privately funded think tank Gulf Research Centre, it is a part of Dr Eckart Woertz’s job to concern himself with what will happen in the short term future. While the other delegates at the Learning from Legends conference spoke about what they had seen over recent years in their respective industries, and what could subsequently be learned, Dr Woertz spoke about what lies ahead for the region. Much of it wasn’t pretty.

“It would be advisable to bring down population growth rates, particularly in Yemen, which is a disaster waiting to happen,” Woertz said, addressing the issue of the possibility of coming food shortages. “Yemen is not food secure. They don’t have enough money to pay for food imports and have to rely increasingly on handouts from the United Nations World Food Programme.”

He added that while for other oil-rich Gulf countries buying food on the international markets was not currently a problem, the situation was by no means permanent. Certainly, GCC countries have in recent times taken steps to address possible future food availability problems — how else to explain the programme of buying up farmland in relatively nearby countries? But Woertz isn’t convinced of their efficacy.

“In 2008, what rang alarm bells in the Gulf was that a couple of food exporters announced they would restrict food exports — Argentina and Vietnam, for example — which meant that though the Gulf countries had their pockets lined with petrodollars they were not allowed in the candy shop.

“Now they have started to announce all of these investments in places that you don’t necessarily associate with food security. Sudan and Pakistan are the most favoured investment destinations, also Ethiopia is very important. Sudan and Ethiopia have five million people on food aid, each. Pakistan has a severe water shortage.”

In the wake of Gulf countries’ announcements that they were buying land in these places, mostly in 2008, there was some raising of eyebrows by the international community. Certainly, it seems counter intuitive to buy farmland in places where food is traditionally perceived to be in short supply in order to improve domestic food security. Many wondered if in times of famine in countries such as Ethiopia or Sudan, contracts for farmland ownership with rich GCC states would be worth the paper they were written on.

Woertz says that at this point the question is largely an academic one. “I don’t think it is really an option to ring fence farms and export food out of famine stricken regions. But nothing is really happening on the ground. Investments in land were the flavour of the month in 2008, it was like real estate investments in Dubai in 2006 and 2007: you made pompous announcements and a couple of years later you were happy if you were holding a hole in the ground. It is the same. There was a sort of competition of announcements. You go to the companies that made these announcements and sometimes you are really surprised, there is not a single agricultural engineer there. Sometimes they have commissioned some consultant to do a feasibility study, but they are far away from really building up a firm approach.”

Woertz is sympathetic to Gulf countries’ sense of imperative on the issue of food security. Point out to him that any European supermarket would love to be as well stocked as most in the Gulf are and he will point that situations can change fast.

He says: “World markets are inherently unstable. Take the Second the World War, in the region of 300,000 people in Saudi Arabia could have perished without food supplies from the Allied Middle East Supply Centre in Cairo. It was one of the reasons Qatar said they wanted to build up food production in greenhouses from solar based desalinated water, because in the Second World War the grains coming from traditional suppliers like India were not sufficient, because the Allies needed them for their war effort. And then in 1973, there were open threats from Kissinger that the USA could stop food supplies in retaliation to the oil embargo.
“But at the end of the day self sufficiency is not an option for Gulf countries as they lack the water. So they may as well embrace their increasing reliance on international markets and try to make them more dependable, by working towards an international food storage agreement for example.”

The ‘land grab’ projects are not simple. As well as the expense and the technical difficulties, there is politics to negotiate, and, surprisingly, perhaps, sometimes finance.

Woertz says: “A lot of these projects are in countries that face a physical water shortage like Pakistan or Kazakhstan. East Africa and Ethiopia have rather an economic water shortage that could be overcome by investments in irrigation, but their agricultural productivity will be disproportionately affected by climate change in the coming decades. So the problems with the investments are water, sometimes money — a large project for rice cultivation in Indonesia recently struggled to get financing — and also politics. There has been some political backlash, which GCC investors have started to take into consideration. For example, Qatar has put a hold on some projects while it tries to sort out differences with local stakeholders and communities.”

It goes without saying, it is not only on the issue of food security Gulf countries face serious challenges over the coming years. To many unfamiliar with the ME it would seem laughable to believe the region could experience problems related to provision of energy, but that is what Woertz predicts.

“There is an image that the Gulf is the petrol station of the world, which is true to a certain extent, but there is a substantial difference to the situation in the 70s (during the last oil boom), as they have also become one of their own best customers. About eighteen percent of oil production in the GCC is consumed by GCC countries themselves. The head of Aramco has already warned that there will be increasing conflicts of interest between export requirements and domestic energy needs. He said by 2028 exportable surplus of oil from Saudi Arabia might diminish to seven million barrels per day, from currently ten million. Not because of a decline in production, but simply because more oil will be needed in the country.”

This increase of consumption will be the result of increasingly successful attempts by Saudi Arabia, and other Gulf states, to develop and modernise in the way Dubai has done. Woertz points out that provision of air conditioning alone is enormously energy intensive, as is the desalination of water, the growing of crops, the manufacture of petrochemicals and aluminium and, of course, transport. As the populations in Gulf countries increase in line with their development plans, he says, so too will their ability to sell oil diminish.

“That has led to these headlines, about Gulf countries using nuclear power, coal power and renewable energy after they rather lobbied against it in the past. So, why all of a sudden now? It is because they have become their own best customer. In the 80s and 90s when the oil price was low, they had a lot of shut in capacity so dumping oil in domestic power stations did not really matter as there was no opportunity cost attached to it.

“But with oil at $80, like today, and many countries producing flat out, every barrel you have to dump into your power stations because you are lacking natural gas comes with a real opportunity cost. You would rather sell this beautiful oil on the international markets and use other energy sources for electricity production.”

Woertz says the first thing Gulf states need to do to address the problems the conflict between exporting or using oil will throw up — before the benefits of switching to new renewable energy technologies can be felt — is to change the consumption habits of populations who are currently the highest per capita users of electricity in the world.

“Electricity, like water, is subsidised here, and what costs nothing is worth nothing, so why save it? The Middle East region needs completely different price schemes for these items,” he says. Is enough being done? It is safe to say Gulf policymakers are largely aware of the problems that lie ahead — the ones that can be planned for, at least. Woertz is philosophical. “It’s like what Nietzsche said: one person alone is never right. The truth begins with two differing opinions.” It would be wise for GCC states to put differing opinions to one side to work together to tackle the issues of food and energy security.

Arabian Business: why we're going behind a paywall

Real news, real analysis and real insight have real value – especially at a time like this. Unlimited access ArabianBusiness.com can be unlocked for as little as $4.75 per month. Click here for more details.