United Arab Emirates Oil and its Effects on their Economy - Case Study Example

United Arab Emirates Oil and its Effects on their Economy Name Institution TABLE OF CONTENTS 1.0. Introduction 3 1.1. Contribution of oil to GDP 4 1.2. Employment and inflation 5 1.3. Foreign investments 5 1.3.1. Impact of oil prices on the economy of UAE 6 1.4. Domestic oil prices 7 1.5. Investment Climate 8 1.5.1. Infrastructure 8 1.6. Macroeconomic Policies 8 1.6.1. Monetary policy 8 1.7. Conclusion 9 References 11 1.0 Introduction This paper presents an analysis of United Arab Emirates Oil and how it affects their Economy. The production, use and export of oil will be deliberated, as well as their economic influence, the government policies and future predictions. So as to deliberate in detail the different involvement of oil to the economy of UAE, it is imperative that the country is shortly defined principally in relation to the oil and its economy. It is located on the south-east end of Saudi Arabia. The Arab emirates is geographically located in the desert of Arabia implying that the climatic conditions of this country are harsh and mostly comprise sandy landscapes and desert outlines. Its climate is hot and dry with a typical summer hotness of 40oC in the course of the day and 30oC in the course of the night. Additionally, the winter temperatures for day and night are correspondingly 23oC and 14oC. The above diagram shows the total energy use in the UAE relative to developing economies. 1.1 Contribution of Oil to GDP The UAE mainly rely on crude oil as its main export thus oil is the stronghold of the financial system. Conversely, it does not fully rely on the export of crude oil and natural gas since it also exports dried fish and dates. Re-exportation of most of the goods also puts in to the growth of the economy. This is conceivable, since the UAE are positioned laterally southern approaches to the Strait of Hormuz, and is then a vital conveyance point for instance for crude oil. The key consumers are the Japanese who rely on the emirates for oil plus natural gas. In 2009, Japan acquired even 60% of UAE’s oil disseminates. The sum of all the export products generates an approximated total of about $142 billion annually. Since the United Arab Emirates is situated in the middle of the Arabian dessert, it is obliged to purchase food by trading with the export of oil. They also import bulky quantities of equipment, transportation of apparatus and chemicals; they trade them with a variety of states. As a result, uae can stand on its own without relying on the other nations. It is estimated that the annual import value is about $90.2 billion. Large proportion of the UAE’s manufactured oil is envisioned to be shipped to Eastern Asia and Japan. The daily shipping of the oil is approximated to be about 3.8 million barrels daily of which 250,000 are preferred for export on daily basis. Although the production of oil fluctuated time to time, the oil consumption of the UAE persisted somewhat relentless. 1.2 Employment and Inflation This paper indicates that the UAE fiscal surplus is likely to increase to 5% this year as compared to 2.5% last year due to great oil prices, which are probable to keep on over US$100 a container. The country's present account excess is also anticipated to go up to approximately 13.8% of GDP from around 10.2% in the same historical. The country’s statistics forecast inflation in the UAE, one of the world's top 10 oil producer, to keep on as low as 1% in 2012 against 0.8% in 2011. It is probable the rate to some level pick up to 1.5 per cent in 2013 and 1.7 per cent in 2014. 1.3. Foreign Investments The country has embarked on intense campaign to market itself in the global market. This is done with the aim of catching the attention of extra foreign investors. This has been effected through the sustained founding of free zones and improvement in genuities (El, 2011). UAE initiatives to liberalize form part of a general trend of adopting a more harmonized method to foreign investment. The decision to attract far-off investors has been encouraged by the need to branch out the UAE economy, advancing enlargement of the private sector, promoting employment to the citizens and to be a focus for training. While many countries in the Middle East have enacted new foreign investment regimes, currently the UAE still relies on older legislation and practice (Hitti, and International Monetary Fund, 2007). In other occasions the individual emirates that are part of the lager UAE have created zones that operate outside the laws of the joint emirate. This has allowed 100% ownership of the companies that have been incorporated in the free zone to the foreign investors (Ramady, 2010). The notable free zones include the Dubai international Finance Center (DIFC), Dubai Airport Free Zone, Jebel Ali Fee zone and Dubai Technology and Media Free Zone (TELCOM). 1.3.1 Impact of Oil Prices on the Economy of UAE The regulation of oil prices in UAE is not controlled by single entity rather the organization of oil producing countries. In some instances, the oil sector prices are regulated by RSB for the Emirate. This organization is structured to promote competition in non-monopoly activities such as generation and purification of water. The different companies within the area require a license that is issued only when a wide range of conditions is complied with. Production companies generate electricity and water and sell their revenue to ADWEC. ADWEC sells either to the AlA in Distribution Company or the Abu Dhabi Distribution Company. There is perceived weakness in the growth of advanced economies leading to onset of oil prices decline. Additionally, a renewed deterioration of universal financial settings may perhaps make it more complex to revolve over some of the GREs' maturing debit and affect liquidity conditions in the banking system. In this setting, the authorities’ plan to progressively combine fiscal policy is suitable (United Arab Emirates2010). country 1999 2000 2002 2003 2004 2005 2006 2007 2009 2010 2011 United Arab emirates 4 4.5 2.8 3.2 3.2 10.5 10 14 20 1.6 0.9 1.4 Domestic Oil Prices The global prices of oil are regulated by the OPEC. This is an association of nations that sell abroad petroleum. OPEC consists of twelve oil producing countries, which form a permissible alliance. These countries constitute 78% of the global oil prices forming an oligopolistic market where the countries can influence the market price of oil through quantity restriction and control. The cartel situation expected of these countries in real life situation does not hold. OPEC approves on production allocation for each country to accomplish the best price per barrel, but often these quotas are surpassed by the detached countries. The problem is that the promise is based upon self-reliance but these countries cannot be obligated to edge their production. Every country strives to produce more oil so as to add to its income. In this case, the supply of the oil will also increase hence the prices will ultimately go down. As this scenario continues, it becomes hard for the oil price to be stable. UAE local purchaser prices are not affected by the policy of OPEC, as production quota and else arranged costs only distress the export market rate of crude oil. The last purchaser gasoline prices can be found in oil producing countries, and oil backed countries such as China and India. The gasoline prices of the UAE are very low likened to the rest of the domain, which are in numerous Western kingdoms over four times as high. 1.5 Investment Climate The investment environment of UAE is analyzed from the level of infrastructure, the underlying macroeconomic environment and the prevailing laws and regulations. All the above factors influence the direction of the economy through enhancing investment. 1.5.1 Infrastructure The earnings from the oil have been used by UAE to construct modern physical and community infrastructure. This has made it possible for the country to operate in the same infrastructure as in developed nations. Communal venture in the infrastructure brings into being an environment beneficial for private sector action, which is intending to attain supportable economic growth. Public responsibility in roads, ports, airports, power, water services, schooling and training of work force also increases productivity and upsurges economic effectiveness (Gause, 2008). 1.6 Macroeconomic Policies 1.6.1 Monetary Policy The crucial feature of financial policy in the UAE is aimed at making the economy constant. This is accomplished through the affiliation involving the UAE dirham to the US dollar. It pegged the US dollar against dirham at 3.67AED/$ .This exchange fee regime has been implemented since 1980 with great triumph due to the massive foreign cash the nation holds. In addition to upholding the steadiness of the currency, the strategy of involving the dirham to the dollar has also backed to a low interest rate (Reinert, Rajan, Glass, and Davis 2009). 1.7 Conclusion and evaluation This paper has provided an analysis of the contribution of oil to the economy of the United Arab Emirates. It was established that even though the oil production in the UAE tops the production of ordinary gas by far, the native energy use is mainly as long as for by gas. This is attributed to the low pricing of the gas leading to high demand hence distribution problems. The price of gas is held exaggeratedly low; gas price is even lower than the manufacture price. United Arab Emirates has been found out to use gas as a domestic source of energy. Electricity is extremely cheap to implement economy development. This means that the consumption of energy per capita is far above the ground. The UAE are placed top in the world regarding the use of energy. UAE being the largest oil and gas reserves globally, its economy is mainly based on the export of oil. Similarly, just like other states in the gulf region, UAE plays a critical role in the OPEC and in the production and pricing of crude oil in the international market. The autonomy of the UAE is not actually on the amount of crude oil, but to global oil prices. In a situation where the economy is affected by inflation, the oil prices will fall drastically hence the income of UAE will also fall. This situation occurs at this very instant and they are affected extensively. It is the main reason why the UAE is trying hard to develop a more diverse economy, to be less reliant on these properties. Ecologically, they are not performing as regards harnessing wind and solar energy. This natural resource hangs about as is not well exploited. The cognizance of the connotation of sustainability and renewable energy bases is rising, but since the countries income is mainly based on the oil production it will probably take a long time before substantial variations will take place. The plans are there but the arrangements are deficient. Furthermore, the employers of the Emirates are the same persons who own the oil manufacturing companies; it is not very likely that in the imminent much subsidization in renewable will take place. This is due to the simple fact that they would enforce cut-down on their own production and therefore profit from the attainment of crude oil. Lastly it can be summarized that UAE greatly depends on export income of crude oil than any other export in the country. Its economy therefore relies on the global oil lucrativeness and the stability of the economy. References El, M. R. (2011). The economic development of the United Arab Emirates. London: Croom Helm. Gause, F. G. (2008). Oil monarchies: Domestic and security challenges in the Arab Gulf States. New York: Council on Foreign Relations Press. Hitti, S. H., & International Monetary Fund. (2007). United Arab Emirates: Recent economic developments. Washington: International Monetary Fund. Ramady, M. A. (2010). The Saudi Arabian economy: Policies, achievements, and challenges. New York: Springer. Reinert, K. A., Rajan, R. S., Glass, A. J., & Davis, L. S. (2009). The Princeton encyclopedia of the world economy. Princeton: Princeton University Press. United Arab Emirates. (2010). Petroleum in the United Arab Emirates. Beirut: Commercial & Industrial Press. Read More