Macro – Middle East

As oil prices gush, will the Gulf states’ bonanza last?

09 May 2023

Henk Potts, London UK, Market Strategist EMEA

Key Points

  • The resource-rich Middle Eastern Gulf states have gone from surviving to thriving in the post-COVID era
  • Many have benefited from higher energy prices – and have used this surplus to transform their economies, as well as introducing sweeping social reforms
  • The Middle East is also looking to expand as a financial centre and develop its renewable energy prowess, and is giving increasing levels of attention to tourism in a bid to further diversify its economies
  • Despite the positive changes, the Gulf states never seem too far away from religious or political conflict. In addition, the morphing geopolitical landscape, not least the tensions between the US and China, could further reshape the region’s future


While most of the world has struggled to cope with the disruption from the COVID-19 pandemic, the fallout from the energy shock and surging price pressures, many Gulf states have bucked the trend, being a bastion of growth and stability. 

A rapid vaccination programme, higher energy prices, supportive government policies and a rebound in tourism, have all helped the Gulf to outperform many of its global peers (see chart). Middle Eastern countries have dominated the global growth tables over the past couple of years, with Kuwait (8.7%), Saudi Arabia (8.7%) and United Arab Emirates (UAE) (7.6%) leading the way.


Annual gross domestic product for the Gulf Governing Council states, advanced economies and world since 2017

Strong recovery from COVID-19

The financial firepower of the Gulf Cooperating Council (GCC) countries and a strong organisational infrastructure allowed them to approve, produce and distribute vaccines at speed in the early days of the pandemic. GCC countries, when required, also proved to be adept at controlling new outbreaks of the disease, thereby limiting the extent of the disruption to the economy. 

The early vaccine adoption meant that the authorities were among the first to relax COVID-related restrictions. This freedom encouraged both businesses and holidaymakers to flock to the region, as aggressive lockdowns persisted in almost all other parts of the world. 

Higher oil prices

Many of the Gulf states are large energy exporters that have been among the leading beneficiaries of higher oil and gas prices. Saudi Arabia is estimated to hold approximately 21.5% of the world’s proven oil reserves1. Saudi Aramco reported record profits of $161 billion in 2022 after producing 11.5 million barrels per day (mbpd) of crude oil and other liquids, or around 10% of global crude supply.  

The UAE has one of the world’s largest proven oil and gas reserves. Oil exports account for around 30% of gross domestic product (GDP) for the UAE. Last November, the Emirate brought forward its target of producing 5mbpd to 2027 from 20302.  Kuwait holds around 7% of the world’s reserves, with oil revenues accounting for around half Kuwait’s GDP and approximately 90% of government export revenue. 

Global economy hit by energy-price shock

The recovering global economy and fears of a supply shock sent oil prices surging in 2022. Whilst crude costs eased back from the $140 a barrel peak at the start of Russia’s invasion of Ukraine in February last year, they are still expected to remain supported by relatively tight supply and demand dynamics for the rest of the year. 

On the supply side, the Organization of the Petroleum Exporting Countries’ Opec+ grouping of producers, led by Saudi Arabia, announced a production cut of 1.16mbpd3, which is scheduled to start in May and remain in place until the end of 2023. Simultaneously, Moscow also extended a 500,000 barrels-a-day cut. 

Meanwhile, Libya, Nigeria and Venezuela suffer significant disruption to their production capacity, while supply growth in non-Opec member the US, has also fallen short of expectations. The production cuts come at a time when inventory levels remain low by historical standards. 

On the demand side of the equation, forecasts remain robust. China, the world’s largest importer of energy and demand, is projected to surge as the economy reopens. Mobility data shows that transportation usage has jumped over the past few months as shops and restaurants have reopened and international air travel has resumed. 

The International Energy Agency estimated, at the start of the year, that Chinese demand would grow by 850,000 barrels a day in 2023, equating to nearly half of its projected increase. At a global level, Opec forecasts a 2.3% increase in global oil demand this year. 

Gulf economies to prosper from higher oil prices

The International Monetary Fund estimated that robust energy prices helped the GCC countries to generate a $100 billion fiscal surplus in 2022. While production cuts will reduce some of the economic benefit in the short term, if energy prices remain higher for longer it would be good news for the public finances of major producers. 

Surging energy revenue driving the growth agenda

The flow of petrodollars has created large budget surpluses and allowed the Gulf authorities to rebuild financial buffers, increase government spending and to drive the structural reform agenda. 

Governments have been liberalising, diversifying and digitalising their economies. Authorities have been improving education resources, healthcare provision and advancing worker equality. Officials have also introduced sweeping legal reforms that protect trademarks, increase data protection and introduce laws to protect industrial property rights. 

The impressive growth backdrop, improving legal/regulatory framework and pro-business reforms have encouraged Foreign Direct Investments (FDI) to flow into the region. The Gulf’s focus on infrastructure, innovation and technology has also attracted international investors and companies looking to expand. 

Many GCC countries have created free economic zones that have eased rules around licenses to operate and created beneficial tax breaks. Under its 2030 vision, Saudi Arabia aims to increase the contribution of FDI from 0.7% of GDP4 in 2016 to 5.7% by 20305.  

Gulf states are aggressively investing in energy transition

The windfall from higher commodity prices is giving the region the financial ammunition to accelerate the transition from hydrocarbons to renewable energy sources. Saudi Arabia has already started to construct a $5 billion wind and solar powered hydrogen plant at its Neom smart mega-city project. 

The UAE’s Net Zero by 2050 Strategic Initiative aims to achieve the goals set out in the Paris Agreement6 and develop green industries, skills and jobs. As such, the UAE has heavily invested in developing carbon capture technology and has already embraced clean energy by opening three nuclear power stations. The state’s hosting of the 2023 UN Climate Change Conference towards the end of this year reinforces its growing green ambitions. 

Tourism will support growth and diversify economies

The relaxion of border controls early in the pandemic made the Middle East (in particular the UAE) a popular oasis in a COVID-ravished world. Overall, the Middle East delivered the strongest tourism recovery rate last year, with arrivals accounting for 83% of pre-COVID levels compared to a global average of 63%.

Visitor numbers to Dubai have surged over the past couple of years and occupancy rates (77%) were some of the highest in the world despite an increase in room supply. Dubai officially received 14.36 million international overnight visitors in 2022, which was a year-on-year increase of 97% on 2021, according to figures from the UN World Tourism Organisation. 

Other destinations in the Middle East are looking to tap into Dubai’s success. Saudi Arabia, which already hosts millions of Muslim pilgrims to the holy sites of Mecca and Medina, wants to increase its appeal as a mainstream holiday destination. To help in achieving this aim, authorities have eased visa restrictions, ramped up the country’s sponsorship of major sporting events and embarked on an international advertising campaign.  

The Saudi government has a goal to raise the tourism sector’s contribution to the Kingdom’s GDP from 4% in 2022, to 10% by the end of this decade7. The authorities have also set an ambitious target of boosting annual visitors to 100 million, compared to around 67 million in 20218.  

The Middle East is an innovative financial centre

For centuries, the Middle East has been considered an important strategic trading centre. Given its geographical position, wealth of natural resources and extensive diplomatic ties, the region’s role as a key exchange hub looks set to expand. Part of that expansion is likely to be driven by its position as a growing financial centre. 

Sovereign wealth funds have long played a crucial part in global finance and, while that will continue, authorities have recently also sought to harness investment flows as a way to expand capital market capabilities in the Middle East. 

For example, the region’s promotion of cryptocurrency adoption and regulation illustrates how officials are looking to apply an innovative approach to find new opportunities in financial services. 

Strong growth, but risks persist

The combination of vast amounts of proven oil and gas reserves, a growing tourism base and an expanding trading centre should continue to provide strong economic growth over the next few years. GCC leaders appear to be using the energy price dividend to diversify their economies and implement significant structural and social changes. 

However, we should be mindful that this is a part of the world that continues to struggle with potential headwinds. Religious and political conflicts continue to destabilise parts of the region and its overreliance on commodities makes it vulnerable to a collapse in fuel prices.


Market Perspectives May 2023

Welcome to our May edition of “Market Perspectives”, the monthly investment strategy update from Barclays Private Bank.