When oil was discovered in huge quantities in Saudi Arabia and the Gulf countries, it led to a tremendous influx of wealth. An English proverb states that, "A good beginning makes a good end". Unfortunately, the beginning in the early 20th century for the Gulf was bad.
When oil was discovered, it led to around 50 years of greed, extravagant spending on luxury goods and misuse of public wealth. Instead of making the local populations work and skill themselves to be useful contributors to the economies, the governments bought them off with subsidies, crony capitalism and hired expatriate labour to do all their work. The rulers were even worse.
What they bought off their populations with, they indulged 1000 times more on themselves. Unlike a Singapore, which even now insists on their local populations skilling themselves and provides no social security benefits, the Gulf countries provided cradle to grave mollycoddling and pampering to create an entire generation of citizens who depend on the public purse to survive.
But why the end?
Because "black gold", as oil as always been called, is now becoming black silver! Considering that silver is around 50 times cheaper than gold, you can image the problems these countries are starting to face.
Saudi Arabia's budget in 2018 is expected to be 250 billion dollars, all from oil revenue. The price of oil will slowly decline (though it has gone up a little right now) over the next few years. Imagine getting 50 billion dollars instead of the 250 billion from oil. What will happen to these economies, and, how long will this take? Most importantly, why the decline, or end as we have so brutally put it?
The first question to answer is why? There are two reasons for this. One is the development of alternative energy, which is around 5-10 years away.
A major consumer of oil is the transport sector (cars, trains, etc). However, countries are spending billions on electric energy to replace oil and it will replace it in 5-10 years. However, the biggest disruption to oil prices is not electric cars, but the United States.
The USA always had huge reserves of shale oil, some say even bigger than Saudi Arabia. It was preserved and not used. However, today, with alternative energies coming on board, the USA is expanding its shale oil production and looking at dirt cheap oil prices. It is only a matter of time, a couple of years at most, that oil prices become dirt cheap and the price of black gold becomes black silver.
And Saudi Arabia, where it all began is hastening the end, at the speed of a racing car.
The new crown prince Mohammed bin Salman is lauded in the media and among his own population for silly initiatives like allowing women to drive and allowing movies to come back. While these are laudable moves in a stable society, in Saudi Arabia, they are a smoke screen for the disasters he is actually creating and which he cannot solve. All his moves have been illogical and foolish in the extreme.
The first is a war in Yemen, which has cost 100 billion dollars so far and which the Saudis are effectively losing. The second is attacking the very bedrock of his support.
The Saudi people absolute hate their rulers and the clergy. They see them (quite correctly) as corrupt, hypocritical and robbing public wealth. Prince Salman has arrested over 11 members of his family, over 200 crony businessmen who support them and a large number of clergy who are the bedrock of his support. Then he has gone head to head with Iran, trying to gain regional hegemony. However, Iran has had 30 years of war and a battle hardened army. Saudi Arabia has the best equipped army in the Middle East.
Unfortunately, like the Italians in the 2nd world war, their tanks have 5 reverse gears and only 1 forward gear! That at least is the worlds opinion of their army! And the cake on the icing for the so called 'reforming' crown prince? A slew of billion dollar acquisitions, from a Yacht, fancy french chateau, and a Leonardo da Vinci's painting for $450 mn. Not a good reputation for a serious reformer. And, he has put his entire eggs in the Donald Trump basket for support, a total recipe for disaster.
Trump has made Saudi Arabia work with Israel, a total anathema for the Middle East. The collaboration is a barrel of dynamite waiting to explode and damage the entire region and put it into chaos.
Where is India in this?
The chaos that is coming will not help. There are 18 million migrant workers in the Gulf, of which India has around 4 million while 14 million are mostly from the Middle East countries. These countries will face every greater chaos when workers are sent home further increasing instability and decline. And there are at least 5 million Pakistanis who will be sent home contributing more to the collapse of that country. But India? Where is India in this scheme of things?
India has always been complacent. We talk about our huge population, strength, political system and the fact that we can weather any storm. Demonetisation and GST are now spoken of as the worst is over (though it is not), and that we are on the road to recovery. After all, who cares for the Gulf countries. They were a bunch of arrogant neophytes, who mistreated their expatriate workers, flaunted their wealth, and in the case of Saudi Arabia and Qatar sponsored terrorism inadvertently across the globe.
Today and in the future, if they go back to being inconsequential, everyone, including the other Middle East countries, will be happy. This is the true sentiment of the region. Unfortunately, no one is looking at the economics of the situation. And, the economics is that India's dependance on oil is huge.
We import 92% of our oil for the economy. In the last 3 years, lower oil prices allowed the government to get a large surplus which helped cushion the effects of demonetisation and GST. However, with the Middle East becoming unstable, prices of oil will go up. This will adversely affect the Indian economy, and prevent recovery or growth.
End of the Middle East and the Gulf
Emotionally, everyone will cheer as they have been a thorn in everyone's flesh and have exerted an influence they do not deserve due to oil. A small insignificant region that oil has made into a giant.
Unfortunately, for countries like India, South Asia, and even East Asia who have not invested anything in electric or solar energy, we will still depend on oil for the next decade and will face difficulties until we develop alternative energies like China is doing by investing billions in it. When the Gulf sneezes, we will get a cold. That is the future for the next decade. Expect a lot of colds and fevers!