As oil prices continue to wallow at lows not seen for more than decade, petroleum exporting countries in the Middle East are looking to reform their economies so that they can weather the shock of far lower oil revenues – and prepare for a future after fossil fuels.
Oil prices rose as much as 7 percent on Friday to above $31 in their largest weekly rally in three months, as a cold front sweeping the U.S. and Europe supported prices. But that's cold comfort for the oil producers, however, which have seen prices fall from $114 a barrel in June 2014 to current levels. As such, the question of diversifying traditionally-oil based economies and reducing the reliance on oil has become a key issue in the Middle East.
Suhail Bin Mohammed Al Mazrouei, energy minister of the United Arab Emirates (UAE) told CNBC on Friday that the Emirates were moving away from its dependence on oil.
"In the UAE we are diversifying the sources of energy…and also we are diversifying the sources of income. We are developing our economy, and year on year we are seeing that the non-oil economy's contribution is growing," he told CNBC on the sidelines of the World Economic Forum (WEF) in Davos.
He said that the UAE's government was about to go on a ministerial retreat to discuss developing the economy so that " the impact of the oil prices' fluctuation is not going to impact the budget of the United Arab Emirates and all of its states, and I think it's doable."
"We are also investing a lot outside Emirates, and I think collectively we can manage that transition to have the revenues from the oil industry as a luxury, or as an additional profit that's going to be reinvested and not to have it as a major contributor in our budget," he said.
Saudi Arabia, the de facto leader of oil producing group OPEC, has been largely blamed for the continued fall in prices given the group's decision not to cut production amid a glut in supply as part of a strategy to pressure non-OPEC rivals who have higher production costs.
The policy has hurt producers closer to home though. Six Gulf oil-producing countries (Saudi Arabia, Kuwait, Bahrain, Oman, Qatar and the United Arab Emirates) are planning on introducing a sales tax for the first time amid the drop in prices and as they see budget surpluses turn into deficits as oil revenues drop. In addition, countries like the UAE have removed long-standing fuel subsidies.
Al Mazrouei said OPEC was not to blame for the glut in oil supply that was hurting the Middle East's domestic economies. "OPEC produces around one third, and two thirds comes from the rest of the world. The rest of the world introduced 2.7 million barrels of additional capacity, so they've basically flooded the market," he said.
There has been much speculation that OPEC could change course as its strategy bites at home but Al Mazrouei was optimistic that there would be a correction in oil prices without OPEC intervention, saying it was anyway unfair for OPEC to "step in and correct the market, 100 percent of the market, of this oversupply, by itself."
"The market will balance itself, ultimately, and the timing is not going to be way far from either. There are two camps, there are optimistic people and there are pessimistic, and I am with the first camp, and I think this is a year of correction. The first half of the year is definitely not going to be easy, but (I think) we are going to see correction in my view in the second half, because I cannot see from where additional oil is going to come from, except from Iran, and their announcement, and that is not going to offset the growth in demand, so I am optimistic."
While the lower oil price has undoubtedly brought pain to the Middle East's economic powerhouses, others see the new era of low oil prices as an opportunity.
Speaking at a panel discussing economic reforms in the Middle East at WEF on Friday, fellow Gulf Cooperation Council (GCC) minister Anas Khalid Al Saleh, who is deputy prime minister, finance minister and acting oil minister of Kuwait, said reforms were needed with or without a backdrop of lower oil prices.
"We must not tie reforms with the oil prices," he cautioned. "Everybody agrees that there is no choice but to take the necessary steps for the sustainability of growth. It's not something we can wait for anymore, not just because oil prices have dropped but for many reasons."
On the same panel, which was hosted by Al Arabiya news network, the chief executive of Bahrain's Economic Development Board laid out the challenges facing the Middle East but said they could present an opportunity for transformation.
"The region is facing numerous challenges, oil prices declined by 70 percent and there's pressure on the fiscal budgets of all the regional economies. You layer on top of that the demographic challenge and the youth unemployment that we see – which is north of 30 percent – and lastly, the security challenge," Khalid Al Rumaihi said.
He said Bahrain and its neighbors could, and were, embracing fiscal and economic diversity and investing in more infrastructures in their countries. "We need innovation in our economies…and we have to look at how we allow innovation in our economy," he said.
"In my mind, this period is a blessing in disguise. I think it was Mr (Winston) Churchill who said 'never let a good crisis go to waste'. I think it is an unprecedented opportunity for reform."