The member countries of the Gulf Co-operation Council (GCC) are expected to post robust growth over the next decade both in terms of population and GDP.
By 2020, the GCC population is forecast to reach 53.5 million, a 30 per cent increase over 2000.
Over the same period, the region's real GDP is expected to grow by 56 per cent.
Nominal GDP, which was $341.6 billion (Dh1.2 trillion) in 2000, is forecast to soar to more than $1trn in 2010 and $2trn in 2020, according to a new report released by The Economist Intelligence Unit (EIU), 'The GCC in 2020: Resources for the future'.
Although the economic forecast is positive, it carries a risk: that unmanaged growth will bring negative side-effects such as power shortages and soaring prices, in particular for food, said the report.
"Some GCC states are already experiencing sporadic shortages of electricity and gas, while water supplies are already strained and food shortages loom as risks for an import-dependent region.
"A key challenge for the Gulf in the next decade therefore will be to manage energy, water and food resources to ensure both high living standards and sustainable growth in the long term," the report said.
Despite controlling 40 per cent of the world's known oil reserves and 23 per cent of proven natural gas reserves, the GCC must conserve hydrocarbon resources not only because they are ﬁnite sources, but because conservation makes ﬁnancial sense.
Current trends show that demand for electricity, which is typically generated by domestic gas, is already outstripping supply in the GCC. The growing population is adding to the power woes. Moreover, using fossil fuels to generate electricity means having less available for export, which in turn means high opportunity costs.
"With these factors in mind, the GCC governments are starting to overhaul the way they manage their oil and gas. In particular, most are trying to rein in wasteful domestic consumption of electricity and gas.
"They plan to continue exporting oil as crude, but to reserve a greater proportion of the crude to manufacture value-added reﬁned products, such as petrochemicals and plastics, for export.
"With the exception of Qatar's plans to export liqueﬁed natural gas (LNG), the region's governments will use natural gas mainly to fuel domestic power plants.
"They will also invest more in developing cleaner fuels, both in response to global concerns about carbon emissions and as a way to supplement fuel supplies for domestic markets."
All of this represents, according to EIU analysts, a forward-thinking approach to solving a problem that is only beginning to emerge.
"The GCC has substantial fossil fuel reserves, but it cannot be complacent about its long-term supply advantage. Other regions are investing heavily in alternative fuels and in fuel efﬁciency, as well as in developing previously untapped oil and gas reserves, thus creating potential competitors for GCC supplies," the analysts said.
Discovery of shale gas in the US in the past two years also reduces the advantage the GCC had.
"Three years ago, the cost of buying gas in the US was about $13 per million btu compared with $1 per million btu in the Gulf. But the shale gas that's been found may stop the Gulf from being so competitive," Justin Dargin, research fellow at Harvard University's Dubai Programme, is quoted as saying in the report.
GCC governments are aware that they must prepare for a world of increased competition in energy markets, the report adds.
GCC states are also trying to diversify away from dependence on oil and gas.
"The aims of diversiﬁcation are to reduce the region's long-term vulnerability to shifts in international demand, to create jobs for GCC nationals in more knowledge-intensive industries, and to prepare for the eventual transition to a post-hydrocarbons economy.
"Although oil and gas will remain the mainstay of the Gulf economies over the next decade, the region's long-term development depends on investing in alternatives as well."
According to analysts EIU spoke with, the most attractive sectors for foreign investment in the GCC in the next decade will be "chemicals, metals and all the industries where low-cost feedstock matters, and all the related services industries".
Managing domestic demand remains a key challenge for the regional countries. "Consumption per head of fuel and electricity is high in the GCC relative to some other energy-intensive economies, such as Germany.
Analysts said that subsidies should be reduced, but that other measures – such as tightening the regulations on fuel efﬁciency – are likely to come ﬁrst. GCC governments to also looking at developing renewable energy sources alongside their traditional fossil fuel exports.
In stark contrast to energy, water is an extremely scarce resource in the GCC, which is one of the world's most arid regions.
With only limited groundwater resources, and amid growing signs that groundwater is being depleted by over-use, the GCC is facing potential water shortages, stresses the report.
As per the findings of EIU, the next 10 years will see rising water demand. Over the next decade, these countries will be among the world's highest per-capita users of water. One of the main issues is that the bulk of the water is directed into agriculture, a sector that provides less than five per cent of GDP."
Moreover, industrial demand for water is likely to rise faster than overall economic growth would suggest. Regionally, a combination of rising temperatures and expanding populations suggests that water will become increasingly scarce in the Middle East.
Given the problems, there is huge scope to make economies more water-efﬁcient. At present, there are considerable inefﬁciencies all along the production, distribution and consumption chain, starting with energy-inefﬁcient production and ending with water-inefﬁcient consumption.
As a food-importing region, the GCC is vulnerable to increase in global food commodity prices, such as the one that occurred in 2008.
"That price increase has had a strong impact on the region's food and agriculture policy, and will continue to have an impact over the next decade. A growing GCC population points towards increased dependence on imported food staples," said the report. The figures in the report show that food imports are set to grow to $53.1bn by 2020, or eight per cent of all imports in value terms.
Ensuring that food imports remain available at an affordable price is a key strategic priority for the GCC, it said.
In the aftermath of the food price crisis, both GCC governments and private investors in the region are studying alternative ways of ensuring food imports by controlling the source of supply, mentions the report.
"The main strategies are buying or long-term leasing land in developing countries to use for export-oriented farming. If oil prices average $70/barrel per year over the next decade, the GCC's cumulative current-account surplus would reach some $240bn by 2020. "If just five per cent of this total were to be invested in agricultural projects each year, this would provide an average investment fund of $10.6bn per year.
"A variety of GCC investment vehicles will be used to ﬁnance agricultural investments, including sovereign wealth funds, public funds that have been set up speciﬁcally to invest in agriculture, and private equity funds, while state-owned agriculture or food ﬁrms may also invest directly.
Gulf-owned farming projects are already being considered or negotiated in North Africa, Sub-Saharan Africa, central Asia, southern Asia and eastern Europe, including Sudan, Kenya, Pakistan, Indonesia and others.
The Gulf's evolving energy policy
Over the next decade, the GCC will invest in adding value to exported fossil fuels. An increasing proportion of oil and gas will be processed into reﬁned fuels, petrochemicals and plastics. In addition, more gas will be channelled for use in energy-intensive local industries such as plastics, aluminium and copper production. More such projects will emerge in the coming years.
The region will invest in power production to meet soaring demand.
Electricity demand will rise by seven to eight per cent per year on average; in the smallest and fastest-growing economies, demand will grow even faster.
In the face of seasonal electricity shortages, GCC states will invest in gas-ﬁred generating capacity, and will try to rein in demand for electricity.
Tighter energy-efﬁciency regulations are more likely to be enforced than changes to the subsidy system.
The countries will also invest in renewable fuels.
To diversify their economies and beneﬁt from increased global demand for renewable fuels, GCC states will invest in alternatives such as solar and nuclear power. These sources will help them to meet the shortfall in electricity supplies, and will free up oil and gas for processing and export. GCC will also devote more resources to developing "cleaner" energy technologies.
There will be growing recognition that global climate change concerns are not merely a fad, and that they in fact present opportunities.
To maintain their markets in countries that have set emission limits, GCC will invest in technologies such as carbon capture and sequestration.
Minerals: The new frontier
Alongside investments in energy, there will be more investment in exploiting non-oil minerals in the coming years – a potentially lucrative, albeit water-intensive, industry.
Minerals found in the GCC include gold, silver, iron ore, copper and bauxite. Some of the mineral deposits left after desalinating seawater, such as magnesium, are also recycled.
Historically, the region's mineral wealth has been under-exploited, as the region focused more on developing oil and gas resources.
But this is changing as a result of the drive to diversify economically and create jobs.
Investment in minerals development is rising, with foreign companies also playing a role. The GCC will continue to develop existing metallurgical industries such as aluminium and copper smelting. It is also investing in other mineral-based industries as part of diversiﬁcation efforts.
Like the hydrocarbons sector, the mining sector is vulnerable to shifts in prices. On the plus side, however, is the sector's relative labour intensity compared to oil and gas extraction.
However, the availability of local management for mining ﬁrms is limited because the industry is new and most of the experienced staff are employed by governments. It will take some years to build up local expertise and attract international experts.