How Qatar And The United Arab Emirates Found An Ideal Diversification From Oil

Qatar And UAE Economies Follow Oil Prices, But Found A Diversification From Oil.

Oil producing nations, such as Qatar and the United Arab Emirates (UAE) are heavily dependent on their fossil fuel exports. The size of their economies is highly correlated with the price of oil, causing large fluctuations in economic activity and economic instability. The following chart shows the gross domestic product (GDP) for Qatar and the UAE over the last 36 years together with the price of oil exported from the region. (Data from the FRED)

Oil production is a major contributor to the emerging economies of Qatar and the UAE. But the over-dependence on oil results in economic instability and is bad for long-term development and planning. The Qatari and the Emirati wanted to change this, and they invested oil revenues in their own national airliners: Qatar Airways and Emirates Airlines.

Diversification From Oil

For airliners, oil is a major expenditure. When oil prices go up, then airliners have more difficulty turning a profit. If oil prices go down, more people can afford to fly and the airliners can take bigger margins. So airliners benefit from low oil prices. This is the exact opposite economic pattern of most oil exporting countries, who benefit from high oil prices. Therefore, owning airliners should have a smoothing effect on the economies of oil-exporting nations. The airline industry is a good diversification from oil because if one industry performs poorly, the other industry is likely to perform better.

Map showing Qatar and the UAE
Map showing Qatar and the UAE

The Qatar and UAE governments correctly identified this opportunity to add a stabilizing factor to their economies, and each started their own airliner. Today, both airliners are a major hub in the region and ensure that their countries are well connected with the rest of the world, giving the countries some soft power.

But the oil industry in these countries is still much larger that the airline industry, even though the airliners are large – relative to the country. Even with the airliners as a stabilizing industry, these countries’ economies are still heavily affected by oil prices. To further diversify, the oil producing countries should try to add other industries that are uncorrelated or even negatively correlated with oil prices. These could be cruise shipping or production of oil-based, plastic products. Alternatively, they could even choose to insure themselves against low oil prices.

Beyond airliners, how would you diversify an economy from oil? What measures would you suggest? Leave a comment to let us know!

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