The Gulf can become the crucible of world industry if it acts now

Creative Commons/Wikimedia/Marcus Schoft

Climate change, the energy crunch and deglobalisation all pose a growing threat to the global economy. But in the Gulf, these related trends present a solution to a long-standing conundrum. This is the region’s industrial opportunity.

The GCC economies have diversified over the years. In Saudi Arabia, petroleum’s share of GDP fell from 65 percent in 1991 to 42 percent in 2019. But exports are still dominated by oil and gas and their derivatives. Even in the low-price year of 2020, fuels made up 66 percent of Saudi overseas sales, and chemicals and plastics another 21 percent.

Manufacturing offers the opportunity for greater economic sophistication, diversified exports and the creation of more jobs than in the petroleum sector. The GCC has several advantages: reliable and low-cost energy, high-quality infrastructure, abundant land, a flexible workforce, low taxes, macroeconomic stability and an export-friendly location between Europe and Asia.

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However, manufacturing has historically lagged behind in the GCC because of limited workforce productivity, the dominance of state-owned or government-related businesses, a relatively high cost base, and trade barriers within the bloc and with neighbours. Over the past decade, the share of manufacturing in GDP has risen in Saudi Arabia, but remained stuck around 5-10 percent in the UAE, Oman, Qatar and Kuwait.

The GCC countries have stepped up their efforts of late. There is interest in innovation: additive manufacturing (3D printing), aerospace and satellites, biotech and agritech. Saudi Arabia, the UAE and Oman each have in-country value programmes to localise spending by their state oil companies.

Sovereign wealth funds have also helped draw in manufacturers. Lucid Motors, an electric car maker with 62.7 percent ownership from the Saudi Public Investment Fund, will receive $3.4 billion of incentives for establishing a factory at King Abdullah Economic City. Strata, a subsidiary of Abu Dhabi investment vehicle Mubadala, has announced a partnership with two German firms to make the world’s most efficient air-conditioning system.

Many other countries have comparable policies so the GCC countries face a competitive landscape, but global trends can work in their favour.

They are on good terms with the West, so they can take advantage of the trend for ‘friend-shoring’ – as Europe and the US look to shift supply chains away from China and Russia. They have friendly relations with those countries too and are not yet being forced to make a zero-sum choice.

In response to the energy and climate crisis, the GCC countries can greatly expand their role as a centre for clean manufacturing. They have abundant low-cost solar power (and in some cases wind), large low-cost natural gas resources and the skills and subsurface geology to safely store large volumes of carbon dioxide.

Already leading global exporters of energy-intensive products – aluminium, petrochemicals and fertilisers – Saudi Arabia, the UAE and Oman are now developing ambitious plans to make a clean new fuel, hydrogen, and its derivatives, using both their gas and renewable energy.

Europe is planning to impose a carbon border tariff from 2026. It also faces an impending shut-off of Russian gas, which has driven up electricity prices enormously and forced the continent to turn back to coal, at least temporarily. These factors will favour exporters able to produce energy-intensive materials cheaply and with a low carbon footprint. For instance, the GCC can also step up its production of low-carbon steel and cement used in wind farms, nuclear plants and hydroelectric dams, among many other applications.

As the Gulf builds its own low-carbon energy system, it will deploy huge quantities of solar panels, wind turbines, batteries and hydrogen electrolysers. Existing players, notably China, have dominant positions in manufacturing these, but certain components could be profitably localised. 

Lithium-ion batteries depend on multiple supply chains, from mining materials such as lithium, nickel and cobalt, to speciality chemicals such as lithium hydroxide and carbonate, and anodes whose manufacturing requires petroleum feedstocks. Investment has focused on manufacturing cells more than securing raw materials, which are becoming a bottleneck.

Ahmed Mehdi, principal adviser at intelligence firm Benchmark Minerals, has suggested to me that: “The GCC’s biggest opportunity is to leverage its experience in chemicals, its oil refining sector, and new trade relationships with mining players such as Australia, to develop anode manufacturing and processing of input chemicals.”

To seize this opportunity, the GCC ought to integrate its own regional market better, to build scale, as well as concluding more trade pacts. It can engage more deeply with the EU, whose Commission recently released a plan for a strategic partnership.

GCC countries should accelerate the broader task of economic diversification by continuing improvements in the landscape for small and medium enterprises and rebalancing the incentives for Gulf citizens to work in the private sector or become entrepreneurs.

Where else in the world offers political and financial stability, low-cost, low-carbon energy, and reasonable diplomatic relations with all major blocs? The Gulf should seize the next few years to become the crucible of world industry – before the geopolitical environment shifts again. 

Robin M. Mills is CEO of Qamar Energy and author of The Myth of the Oil Crisis