Rentier States and the Transition Away From Oil: Oman, Kuwait, and Saudi Arabia

Abstract

This paper examines the recent movements to transition away from oil in the Gulf Cooperation Council immediately following the oil price crash of 2014. To provide a useful frame of analysis, we examine the oil production of state-owned firms in Saudi Arabia, Kuwait, and Oman through the lens of the microeconomic shutdown rule. This reveals that these states have entered a phase where they wish to exit the market in the long run, but maintain operations in the short run, as operations still yield an immediate accounting profit. We find that the drive to transition was created by a fall in average oil price to around USD $50 a barrel. We also find that this process is significantly hampered by the strong presence of the so-called ‘authoritarian bargain’ in these countries, whereby governments reduce austerity measures and taxation in order to maintain popularity. As the world lessens its reliance on fossil fuels, we examine the dilemma faced by oil dependent states: they must choose to either lose political capital in an attempt to become economically sustainable or risk the oil rents that sustain their regimes drying up.