Oil and Energy Industry in UAE - Term Paper Example

Oil and Energy Industry in UAE The United Arab Emirates (UAE) oil and energy industry assets and liabilities are unique. Given unprecedented GDP growth rates over past decade (“Non-Oil Sectors Accelerate UAE Growth Rate” 2008), current global economic and financial crisis presents UAE’s economy, energy sector in particular, with game-changing opportunities if proper fiscal and economic policies are enacted and /or steady spiral down on global level if historical dependency on fossil fuels continues to drive overall economy (Boer and Turner 2007). This paper examines oil nd energy industry in UAE and investigates implications for macroeconomic performance. According to Organization of the Petroleum Exporting Countries (OPEC) (United Arab Emirates Facts and Figures 2008) UAE produces 2.572 million barrel per day (b/d), her proven crude oil and natural gas reserves are estimated at 97.8 billion barrels and 6,091billion cubic meter (cu. m.) respectively and hence world’s fifth and fourth largest respectively (Khalil 2009). UAE is OPEC’s third largest oil producer and currently pumps 2.4 million b/d (Khalil). UAE projects to enhance upstream as well as downstream production capacities (Energy Information Administration 2007). [Insert Your Last Name] 2 Historically, oil, and recently natural gas, has contributed vitally to UAE’s overall economic development and growth (UAE Federal e-Government Portal 2006). Currently, energy sector, especially oil and gas, contributes as much as 62% to UAE’s overall economy (UAE Federal e-Government Portal). Essentially, Abu Dhabi holds sway over UAE’s oil capacity both in overall production capabilities and proven reserves (9.2 billion barrels) (EIA). Moreover, Abu Dhabi National Oil Company (ADNOC), UAE’s largest state-owned company, dominates production (EIA) and controls UAE’s quota prescribed by OPEC (EIA). Notwithstanding plans to diversify economy (Abu Dhabi Economic Vision 2030 n.d.), UAE continues to rely on oil and gas as major sources for state revenues (“Non-Oil Sectors Accelerate UAE Growth Rate”). Indeed, no one economic forecast for UAE’s overall economic performance can ignore energy sector as one main driver of economic development and growth. This, in fact, poses serious challenges for an economy whose performance has depended largely on international oil markets (Husain, Tazhibayeva, and Ter-Martirosyan 2008). Moreover, not only has economic performance in an oil-rich country such as UAE depended on energy sector’s positive or negative shocks but fiscal policies seem to strongly correlate with oil prices as well and hence impact positively or negatively, depending on fluctuations in oil prices, non-oil production sectors (see fig. 1). [Insert Your Last Name] 3 Fig. 1. Husain, Tazhibayeva, and Ter-Martirosyan Indeed, a growing body of analyses and government reports (Boer & Turner; Abu Dhabi Economic Vision 2030 ) have repeatedly stressed significance of and implications for economic diversification in Gulf Council Countries (GCC), of which UAE is a member. The case for diversification in UAE is even more pressing given UAE’s reliance on Abu Dhabi and Dubai as leading engines for country’s economic growth (O’Sullivan 2007). Further, given each emirate’s autonomous status according to constitution (O’Sullivan), UAE cannot enact a universal and binding economic policy unless political authority steps in. This is, again, particularly true given Abu Dhabi’s and Dubai’s attraction force as opposed to remaining emirates’ fading allure, especially to youth. So far, Abu Dhabi and Dubai, UAE’s leading economies, both have managed to maintain healthy economic growth rates according to each emirate’s strategic vision. [Insert Your Last Name] 4 However, overall, UAE’s leading economic sector, i.e. energy and oil, seems to project growth in oil production capacity (see fig. 2) and increasing foreign investments in exploration and production capabilities as well as joint ventures in Upper Zakum, Bu Hasa, Bab, Asab, al-Dabbi’iya, Rumaitha, and Shanatet (EIA), let alone upgrading refining capacities (UAE Federal e-Government Portal). Fig. 2. EIA Similarly, gas production and supply projects, such as Dolphin Project (UAE Federal e-Government Portal), underlie oil and energy’s strategic indispensability for UAE’s overall economy. To UAE’s government’s credit, however, revenues from oil exports have been increasingly invested in agriculture, industrial, real estate and service sectors, according to UAE Annual Social and Economic Report 2007 (“Non-Oil Sectors [Insert Your Last Name] 5 Accelerate UAE Growth Rate”), notwithstanding declining oil prices from a peak of $140/b in July 2008 to a record low around January 2009 at $40/b (El-Badri 2009). This is especially promising given positive prospects for an outstanding sustainable growth rate if investment in human capital and diversification of economy has been prioritized (Boer and Turner). Typically, UAE’s OPEC quota has hovered around 2.5 – 3 million b/d (United Arab Emirates Oil and Gas Report Q3 2009 2009). This has not made UAE a swing country by which she can impact global oil production, probably a mixed blessing. Given growing awareness of economy diversification as well as of GCC’s precarious reliance on international oil markets for economic development plans (Boer and Turner), UAE has entered into a foray of manufacturing expansion (“UAE Economic Policy Eye Industry” 2009) as well as alternative energy projects and agreements. For example, planned Masdar City in Abu Dhabi, a $22 billion, zero-emission cluster city, does not only demonstrate UAE’s willingness to decrease country’s carbon footprint but also to invest in more viable sources for energy as demand for electricity continues to increase (Khalil). Moreover, UAE’s strategic agreement with U.S. on peaceful use of nuclear energy, well-known as 123 Agreement, (“UAE, U.S. Sign Bilateral Agreement for Peaceful Nuclear Energy Cooperation” 2009) is yet another step towards cleaner and more sustainable sources of energy and away from non-renewable resources. This is particularly significant for UAE’s position within OPEC as well as for UAE’s overall economic performance. [Insert Your Last Name] 6 On one hand, as GCC countries continue to incur increasing pressures both from within OPEC and big energy consumers such as U.S. for “fairer” prices and “reasonable” production levels, UAE seems, by investing in alternative energy resources and diversifying economy, to distance herself from an organisation i.e. OPEC whose impact on global economy fluctuates and is only reactive rather than proactive given unending cyclical volatility of member states whose economies are heavily dependent on international oil markets. On another hand, by abiding to OPEC’s assigned quota, UAE maintains her international commitments within OPEC and remains part of any future initiatives “big producers” might propose in order to influence decision making on a global level, let alone preferential status given to member states for international joint ventures and consortia. Overall, UAE is poised to achieve a spectacular economic growth, global economic crisis notwithstanding. This is increasingly viable given UAE’s comparative economic advantages (e.g. growing significance of Dubai as a global hub for trade, export, re-export, and tourism) over her GCC neighbors and her investment-friendly business environment evidenced in enormous FDI inflows (see fig. 3). [Insert Your Last Name] 7 Fig. 3. Boer and Turner In conclusion, UAE is an economy at crossroads. Traditionally, a petro-dollar one, UAE’s economy has increasingly diversified in areas of real estate, tourism, finance and export services. However, much of UAE’s economic performance still relies mostly on oil and energy industry as engine for economic development and growth. Further, UAE’s economy has yet to spread investments and development projects across all UAE emirates such as to avoid growing economic drag on leading Abu Dhabi and Dubai. [Insert Your Last Name] 8 Works Cited Abu Dhabi Economic Vision 2030. Emirate of Abu Dhabi Executive Council, n.d. Web. 26 Sept. 2009. Boer, Kito, and Turner, John. “Beyond Oil: Reappraising the Gulf States.” McKinseyQuarterly. McKinsey&Company, Jan. 2007. Web. 26 Sept. 2009. El-Badri, Abdallah. World Oil Outlook 2009 (Foreword). OPEC Online Library. OPEC, 2009. Web. 26 Sept. 2009. Energy Information Administration. “Country Analysis Briefs: United Arab Emirates.” U.S. Dept. of Energy, July 2007. Web. 26 Sept. 2009. Husain, Aasim, Tazhibayeva, Kamilya, and Ter-Martirosyan, Anna. “Fiscal Policy and Economic Cycles in Oil-Exporting Countries.” International Monetary Fund, Nov. 2008. Web. 26 Sept. 2009. “Investments in Non-Oil Sectors Accelerate UAE Growth Rate.” Power Generation and Water Middle East. Power Generation and Water Middle East, 2008. Web. 26 Sept. 2009. Khalil, Ali. “Abu Dhabi to Keep Investing in Solar Energy Despite Crisis,” IndustryWeek. Penton Media, 20 Jan. 2009. Web. 26 Sept. 2009. O’Sullivan, Edmund. “The UAE Needs an Economic Policy More Than a New Governor.” MEED. EMAP Media, 12 Dec. 2007. Web. 26 Sept. 2009. [Insert Your Last Name] 9 “The United Arab Emirates and the United States Sign Bilateral Agreement for Peaceful Nuclear Energy Cooperation.” Press Releases. Embassy of the United Arab Emirates in Washington, D.C., 15 Jan. 2009. Web. 26 Sept. 2009. “UAE Economic Policy to Eye Industry: Mansouri.” UAE Interact. Media National Council, 12 June 2009. Web. 26 Sept. 2009. UAE Federal e-Government Portal. “Oil & Gas.” UAE Government, 2006. Web. 26 Sept. 2009. “United Arab Emirates Facts and Figures”. OPEC, 2008. Web. 26 Sept. 2009. United Arab Emirates Oil and Gas Report Q3 2009. ResearchandMarkets Reports (Description). Research and Markets, 2009. Web. 26 Sept. 2009. Read More