Arab Open University
Tutor Marked Assignment (TMA)
Academic Year: 2018 – 2019 Semester: Spring/ Second
Branch: Tayouneh Program: Business Studies
Course Title: Economics and Economic Change Course Code: DD209A
Student Name:Tia Laurent Shaaya Student ID: 180196
Section Number:218 Tutors Name:Mireille Bogharian
Total Mark: Awarded Mark:
Allocated Marks Questions Introduction Main (body) text Conclusion Total
Weight 10 80 10
deducted Marks Criteria Presentation
– 5 Referencing
– 5 Word Count
– 5 E-Library
– 5 Total
100 Students Total Mark
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? Verbatim copying of printed material and submitting them as part of TMAs without proper academic acknowledgement and documentation.
? Verbatim copying of material from the Internet, including tables and graphics.
? Copying other students notes or reports.
? Using paid or unpaid material prepared for the student by individuals or firms.
B. Penalties for plagiarism ranges from failure in the TMA to expulsion from the university.
Declaration: I hereby declare that the submitted TMA is my own work and I have not copied any other persons work or plagiarized in any other form as specified above.
Tutor Name: Tutor Signature: Date returned:
Oil and GCC Countries
Economic crisis is a situation in which the economy of a country experiences a sudden downturn brought on by a financial crisis. An economy facing an economic crisis will most likely experience a falling GDP, a drying up of liquidity and rising or falling prices due to inflation or deflation. An economic crisis can take the form of a recession or a depression.
In our modern time, the world has gone through several economic crises such as the financial crisis of 2008, the great depression of 1929-1939 and the OPEC oil prices shock of 1973.The sharp decline in oil prices began when OPEC (organization of the petroleum exporting countries) member countries primarily consisting of Arab nations decided to retaliate against the United States in response to its sending arms supplies to Israel during the fourth Arab Israeli war. This caused a major oil shortages and a sever spike in oil prices and led to an economic crisis in the US and many other developed countries.
Larger oil exporting nations particularly benefit from rising crude Oil prices by increasing their negotiating power due to the size of their oil reserves and their presence in OPEC. Oil prices rely on the forces of supply and demand and rising prices are often attributed to undersupply or an increase in demand. This essay will begin by providing the reasons of slowdown of growth, sharply falling revenues from exports, expanding budget deficits, and shrinking current account by establishing a link between economic growth, change in oil prices and the current account during 2000-2015 and examples will be provided.
Bahrain, Oman, Saudi Arabia, Kuwait, Qatar and the United Arab Emirates comprise the Gulf Cooperation Council (GCC). They are all rich in oil reserves and their high rate of the gross domestic product and economy is reliant on their capacity to export oil at competitive prices to other nations. As provided in an empirical evidence by (Vohra, 2017) there is a link between economic growths, the percentage change in oil prices and the current account in GCC nations. The GCC nations benefitted financially from rising oil prices from 2000-2007.
Oil is central to Saudi Arabias economy as it possesses 16% of the worlds petroleum reserves which is the largest exporter of oil in the world. Additionally, in 2000 Saudi Arabias economy was growing by 5.6% and by 2008, when oil prices were at their peak, its real GDP grew by 6.3% (The World Bank, GDP Growth, 2016). While Kuwait, another major oil exporting nation, also experienced economic growth due to the rise in oil prices resulting in overall GDP growth from 4.7%in 2000 to 6% in 2007 (The world Bank Report,2016). Qatar similarly experienced a high rate of economic growth during the period from 2000 to 2007 as a result of high oil prices, its GDP grew by 3.9% in 2000 and 18% in 2007 (GDP Growth, Annual Percentage, 2016). Moreover due in part to its prosperity during this time and substantial growth rate, Qatar became the highest income per capita country in the world, there by reflecting the improved standard of living according to the rise in oil prices brought to the country and its citizens( The world Factbook:Qatar,2016). The UAE benefitted from the price of oil during this time but it had also experienced instability in its GDP by having 12.3% in 2000 but only by 3.2 % in 2007.
Bahrain and Oman, two oil exporting nations that are not full members of OPEC, also grew economically due to the increase in the price of oil. In 2000, Bahrains GDP grew by 7% and in 2007 it grew by 8.3% (GDP Growth, Annual%, 2016) while Oman had an increase in GDP by 6.5 % in 2000 and 8.2% by 2008.
Although from 2000to mid -2008 the rise in oil prices was responsible for bringing economic growth to the GCC States, it also have been the main support of leading the governments of these countries to use additional revenues and funds from national savings to fund for social spending and give subsidies to different industries aimed to foster further growth and ensure affordability of goods domestically. For example, Saudi Arabia focused on spending for education so it could decrease the unemployment rate. Furthermore, Qatar used some of its savings to invest in better infrastructure, construction, and buildings stadiums and sports revenues, with the purpose of hosting future sporting events and tourist attraction and Oman dedicated its resources to develop social welfare and job creation programs.
Title: Graph represents the change in GDP for GCC nations.
Despite the fact that the increasing of oil prices in 2007 led to a large amount of economic growth in the six oil exporting GCC countries, the period from 2008-2010 was largely marked by a major drop in oil prices due to many factors: in 2008, Brent crude oil prices were US$96.94 per barrel but by 2009 they fell to US$61.74 per barrel. However, prices rose again to US$111.26 per barrel in 2011, but fell again to US$52.32 per barrel in 2015(US Energy Administration, 2016). Part of the economic recession is happened due to the sharp drop in oil prices from 2008 to 2009, while the falling prices since 2014 is linked to the slowdown in economic growth in China and other developing countries resulting in reducing demand for oil.
Although the six GCC nations reacted to some extent differently to the fall of oil prices from 2008 onwards, all of them experienced sharp declines in their GDP from 2008-2009, to be more specific it happened when the economic recession caused a decrease in the demand and price for oil. Moreover, most of the incurred budget deficits because low oil prices could not account for the cost of the subsidies and social spending provided to their citizens. Saudi Arabia dedicated 373$ billion for economic and social development projects in a purpose to protect its economy from the impact of falling oil prices. Kuwait likewise aimed to lower subsidies on electricity and water fees to reduce government spending noted that Kuwait did not incur a budget deficit until 2015 due to its .in addition to Qatar that also did not experience a budget deficit until 2016 but it is projected that the country will have a deficit of 6% of its GDP due to the fall in oil prices.
The UAE in 2015, eliminated it fuel subsidies to reduce national spending (shehine, 2015). Lastly, Bahrain and Oman have cut their social spending.in general, all GCC countries are hurting from low oil prices, slow growth and rising unemployment.
Title: Bar Chart represents the unemployment rate of GCC countries in 2012
Arezki and Nabli (2012) stated that one way countries can improve their economies is by taking more saving measures to protect themselves from unstable oil prices. Dijkhvizen has suggested to invest more in human capital and job creation, its important that these six nations focus on dedicating social spending towards education and job training in areas in which there is stronger demand for labor.in addition that job creation in these countries is important for maintaining social and political stability which lead to more foreign investment that could help the GCC nations to diversify their economies beyond the petroleum industry. Last, it has also been suggested that building strong institutions, greater checks and balances on the oil industry, and perhaps even introducing democracy to the region can promote more accountability and oversight over the oil industry and a more coordinated response to unstable oil prices.
Since oil is a main fade for growth and can affect the economy of GCC nations easily. Tough, these countries have not yet recovered from the effect of the fall of oil prices, governments should adopt policies such as: diversify labours, saving some of their government revenues to protect themselves from future unstable oil prices, investing in education and job creation to increase the skills of labour force. Further they should expand their economy, bring social stability to the region, and build stronger institutions and governments.
Santos et al. (2013). Running the economy. The Open University
Vohra, Rubia (2017). The impact of oil prices on GCC Economies. Journal of business and social science, vol8, No2.
Arezki, R., & Nabli, M. (2012). Natural Resources, Volatility, and Inclusive Growth: Perspectives from the Middle East and North Africa. International Monetary Fund.
Shahine, Alaa (2015). Oil Rout Means Fewer Freebies in GCC as subsidies Are Cut. Retrieved from (July 20, 2016)
Organization of the Petroleum Exporting Countries (2016). OPEC: Brief History. Retrieved from (July 20, 2016)
The World Bank (2016). GDP Growth (Annual %). Retrieved from (July20, 2016)
Central Intelligence Agency (CIA), (2016). The World Factbook: Qatar. Retrieved from (June 7. 2016)
Central Intelligence Agency (CIA), (2016). The World Factbook: Oman. Retrieved from (June 7. 2016)
U.S. Energy information Administration (2016). Europe Brent Spot Price FOB. Retrieved from (July20, 2016)
Young, Karen (2016). Drop in the Bucket: Reduced Fuel Subsidies Offer Little Deficit Relief. Retrieved from (June 7, 2016).
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Kumah, F.Y., Khamis, M.Y., Hasan, M., Prasad, A., Semlali, A.S. and Sensenbrenner, G., 2010. Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead. International Monetary Fund.