Reverse the curse

By Nasir Nawaf Al-Sabah

As the official 40-day mourning period for His Highness Sheikh Sabah Al-Ahmad Al-Sabah, the late Amir, ends this week, his vision to transform Kuwait into a regional financial and commercial hub should be realized now more than ever. According to the Chairman of the Parliament’s Budget Committee, over KD 50 billion of accumulated budget surpluses in Kuwait’s General Reserve were depleted over the past few years because oil revenues lagged behind government expenditures.

Furthermore, Reuters reported that in the first 100 days alone since the COVID-19 lockdowns started, the General Reserve Fund dropped by 4 billion dinars. Alarmingly, the Finance Minister recently announced that a liquidity shortage may prevent the government from paying next month’s salaries. With a large sovereign wealth fund, however, Kuwait is still more secure than other oil-dependent countries, many of which teeter on failure, causing potential regional instability.

The world’s endowment of oil-fueled global economic growth lifted large portions of Earth’s communities out of poverty, but it also carried with it a curse that requires immediate action. Since the adoption of oil as the world’s main transportation fuel just before World War II, developing countries raised their standards of living. At the same time, however, this cheap hydrocarbon introduced two curses: the resource curse theory, where oil-producing countries over-relied on their oil revenue to the detriment of their economies, and a curse on geopolitics arising from the indispensable role of oil as a tool of economic growth.

International dependence on oil creates political, environmental, and economic tensions between nations; to preserve human development, the world must strike a balance between economic growth and security, on the one hand, and sustainability, on the other.

Many of the major political events of the last century trace their roots to the insatiable global want for “black gold.” The war-fighting machinery of World War II required oil to function. Axis countries lacked that natural resource, leading Nazi Germany to target Middle Eastern oil fields, while President Franklin Roosevelt and King Abdulaziz ibn Saud traded oil for national security promises.

About half a century later, the 1990 Iraqi invasion of Kuwait threatened to tip the balance of power between oil and security, causing the world immediately to restore the status quo. Since these events, the share of oil as part of the world’s energy mix has decreased only slightly, indicating that it remains a volatile ingredient in international economics.

Driving global security policies are the economic calculations necessitated by growing energy needs. Although oil’s share in the energy mix dropped from about 40 percent in the 1960s to approximately one-third today, current IEA projections show continued strong absolute oil demand through 2040. Because Gulf producers lie on the lower end of the cost curve, these producers will form a greater percentage of world oil production as other producers ramp down production due to higher economic and environmental costs. At that point, instability in the Middle East will be even more threatening for the world economy.

Kuwait’s economy remains almost entirely reliant upon petroleum; with oil revenue accounting for over half of real GDP and 90 percent of government income, Kuwait is in real danger of succumbing to the resource curse. Unless Kuwait urgently reforms its economy, the current generation will face a lower standard of living than the previous two generations. And with a diminished Kuwaiti economy, Kuwait’s political influence will wane, causing increased regional instability. To mitigate the risks brought by reliance on oil, producers and consumers must adopt policies that reduce the social and economic impacts of oil on their societies.

First, Kuwait must take serious steps to diversify its economy. At current oil production levels of approximately 2.3 million barrels per day and prices of nearly $40 per barrel, Kuwait receives about $90 million a day from the sale of crude oil. That revenue almost exactly equates to the government’s salaries budget, meaning that Kuwait’s oil sales go only to pay salaries, leaving barely any government funds for investment.

Second, through research institutions and international energy organizations, oil producers and consumers should invest in technologies that reduce the environmental impact of burning fossil fuels. Because the environmental cost of oil is a major reason for the popularity of renewables, actions to reduce oil’s environmental impact will prolong demand for oil, thereby making oil-dependent countries’ adaptation to a new energy economy smoother.

By preserving Kuwait’s powerful economic potency, Kuwait can not only stabilize regional strife, but it can also continue to fulfill the late Amir’s vision for the future of Kuwait. If immediate and efficient action is taken, Kuwait will have secured a healthy standard of living for the generations to come.