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Some OPEC Nations Ready the Post-Oil Economy

view-from-burj-khalifa-dubai-uae1If talk of readying for “post-oil economy” in the petroleum-rich nations once served as fancy buzz words, that is not the case any longer.

The United Arab Emirates’ (UAE) official news agency announced that the Federation leaders met in the closing days of January to “discuss ideas and initiatives that will contribute in diversifying the UAE’s economy and ensuring its sustainability.”

The report said that Dubai’s ruler, who is the vice president and prime minister of the country, “gave directives at the end of the Cabinet retreat to launch the UAE Post-Oil Strategy in the coming weeks.”

Accordingly, the country, which grew significantly from the oil boom (and easier access to credit), feels the need to increase the competitiveness of its industries and introduce new sectors.

(As background: Of the UAE’s seven autonomous emirates, only Abu Dhabi has substantial oil reserves, which has been able to benefit other, less wealthy partners in the union – including Dubai, which enjoys global prominence and investments.)

The UAE is not alone. The need to adapt to a less oil-dependent world is forcing changes in other countries, such as Saudi Arabia, too.

UAE’s much larger neighbor is considering different options to bring Saudi Arabian Oil Co., better known as Saudi Aramco, to an initial public offering in the local or an international market. Although an IPO of the company would be limited in scope and would not include the vast reserves, it would still create a publicly listed company valued in trillions of dollars, said The Wall Street Journal.

The New York Times said the Armco IPO plan shows that Saudi Arabia’s leaders feel the need to shift away from an “oil-funded, government-dominated system to one where private business has a larger role.”

Bringing the company that provides nearly 90% of the country’s budget public would not be without challenges for the government. But the ruling family believes it is a necessary step in diversifying the economy, said the Times. It added that the king’s son, who serves as the chairman of the Supreme Council that governs Saudi Armco, is looking for ways to cut the budget, find new sources of revenue and energize the private sector.

“The government is under a great deal of fiscal pressure,” Farouk Soussa, a Middle East economist at Citigroup in London, told the Times. “They are looking at what assets might give them the biggest bang for their buck.”

According to the Times, Saudi officials are not just worried about the current low prices; they are also mindful that fossil fuel is not as attractive in an increasingly climate-conscious world.

In this, Saudi Arabia is behind the UAE. At the height of the oil boom, Abu Dhabi through one of the its investment companies launched Masdar to invest in renewable energy and clean technology, such as solar; and lobbied successfully to house the headquarters of International Renewable Energy Agency (IRENA).

But even Emiratis, who have been diversifying the economy for well over a decade, have more work to do. Petroleum industries contributed 30% to the UAE economy in 2014, down from 70% in 1979, according to The National newspaper.

However, the government earned 80% of its revenues from oil sales; that means at the current prices the government has to dig into its reserves or borrow.

The National, which is based in Abu Dhabi, quoted several analysts who said the economy needed to be re-tooled in light of new prices. One economist, for instance, called for relaxation of foreign ownership restrictions, the end of monopolies in telecommunications and other sectors, a wave of privatization and a value-added tax.

Policymakers seem to believe that triple-digit prices may not be achievable anytime soon. In a CNBC interview, Suhail Bin Mohammed Al Mazrouei, UAE’s energy minister, said he believe oil will regain some of its lost grounds in the second half of this year. His sentiments, however, were clear that a new direction for the country is necessary.

“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.

Value added tax (VAT) is another means to add to the state coffers. The UAE and Saudi are members of the six-nation Gulf Cooperation Council (GCC). Since summer, the group has held discussions to implement VAT, which would be the first direct taxation in a region. Arabian Business reports that the GCC countries have agreed on key points of implementing the new tax on goods and services, though it has not yet received final approval from all member states. The UAE aims to introduce VAT in 2018 and the government expects to collect around $3 billion in revenue in the first year, the article states.