Anyone who stands in the chilly air of a shopping mall on a summer’s day in the Gulf, watching their children snowboard down an artificial ski slope or sluice through the flues of an indoor water park, could be forgiven for thinking that wealth and human ingenuity have conquered nature.

It is not quite a delusion. Oil and gas income has paid for an escape from the reality of outdoors for several decades now. At vast expense, the August heat is kept at bay behind treated glass and insulated walls, air-conditioning units grinding day and night. Sweet water no longer comes from wells but arrives bottled and crated at the docks or is extracted from seawater and pumped from energy-hungry desalination plants on the coast.

Artificial paradise

In the literature of the sun-baked Middle East, paradise is a cool garden with running water. In that respect, the pleasure domes of Dubai or Kuwait City are heirs to the sultan’s shady courtyard and fountain. But they come at a far greater cost. Drive a few miles west from Manama and you find the dusty

remains of ancient, natural springs where many middle-aged Bahrainis remember bathing as kids. The groundwater is gone, drained by industry, private farms and demand for modern luxuries such as flush toilets and swimming pools. An artificial paradise has replaced a natural oasis.

Crude oil and natural gas have underpinned the rise of modern civilisation in the Gulf, but these resources will run out within a few generations. The challenge is to sustain living standards beyond that horizon. Diversification is usually posited as the solution. Certainly, having a broad-based economy rather than one dependent on a single dwindling resource sounds like a good idea. However, the quest for diversity is a great deal more challenging than it may first seem.

Take as an example Bahrain, which was the first of the Arab Gulf states to strike oil in 1931 and also the first to exhaust its reserves. Declining production in the 1970s spurred the government to look at other ways of structuring its economy, using the waste gas once flared off by the oil trade to fuel new industries such as aluminium and petrochemicals production.

Bahrain has one of the most varied economies in the region

Bahrain has one of the most varied economies in the region

The result today is that Bahrain has one of the most varied economies in the region, with a modest manufacturing base and decades-old factories and smelting plants. But its attempts to diversify away from oil and gas have hit a snag. Local industries still depend on the very fuels from which Bahrain is supposed to be weaning itself. Aluminium production, for example, is so energy intensive that the metal is often referred to as ‘frozen gas’. Desalination and electricity production – both of which are rising sharply due to population growth – are also heavily reliant on gas feedstock, which is now in such short supply it has to be imported.

Many other Gulf states find themselves in the same predicament, stuck at the first hurdle in the race to diversify. At current rates, demand for gas across the GCC states is likely to rise by more than 50 per cent to 400 billion cubic metres in the two decades ending 2030, according to energy consultant IHS. Yet there is not much to go around. Even Kuwait and the UAE, two of the world’s biggest crude oil producers, are currently forced to follow Bahrain’s example and import gas from their neighbours.

Intensive investment in ‘difficult’ hydrocarbon reserves such as sour gas will help to prolong the life of local fields for many decades to come. Greater availability of gas will also help to free up supplies of crude oil for export. But these are still remedial and increasingly expensive measures.

Solar power

An alternative route is to increase the diversity of energy sources on offer. Solar power, once considered a fringe obsession of utopian scientists, is an increasingly competitive alternative to fossil fuels, particularly in North Africa and the Arabian peninsula, where there is no shortage of sunshine. Wind power is also an option for several countries.

Advanced solar schemes are under development in Abu Dhabi and Dubai, but perhaps the most symbolic shift is in Saudi Arabia, the world’s second-largest producer of crude oil. The kingdom has committed to producing at least 10 per cent of its electricity from renewable energy sources by 2023, with plans for the first solar plant and wind farm already well under way. The country’s oil minister, Khalid al-Falih, has stated that this is only the beginning of a wholesale restructuring of the energy sector, describing Riyadh’s commitment to renewables as being as significant as the discovery of oil in the 1930s.

“We are seeking for the kingdom, in the medium term, to become a nation that develops, manufactures and exports the advanced technologies of renewable energy production,” Al-Falih said at a forum on renewables earlier this year. “This is really transformational. You’re talking about a significant socio-economic transition that’s going to take place.”

Skills shortage

Technology and services will be key to the diversification of Gulf economies, not least because such industries place fewer demands on resources. Financial, logistical and transport services are also promising areas of growth, capitalising on the position of cities such as Dubai as nodes on the world’s main shipping and air cargo routes. But here too, there is another resource that is in short supply, and that is skilled labour.

The benefits of diversification are largely being felt by foreign workers and not the local population

The Gulf states have traditionally relied heavily on expatriate workers, with higher paid but less demanding jobs in the public sector reserved for nationals. As local populations have grown and the burden on public finances has intensified, this has led to widespread unemployment. Between 2000 and 2010, almost 80 per cent of jobs created in the private sector in the GCC were filled by non-nationals, according to IMF data. In other words, the benefits of diversification are largely being felt by foreign workers and not the local population.

In tandem with their diversification drives, governments will not only need to ensure young school leavers have the right skills to enter a fast-evolving job market, but they also need to manage their expectations. The generous civil service sinecures enjoyed by past generations are no longer an option.

More broadly, governments should question whether they can manage the expectations of luxury that the oil and gas years engendered. Returning to the issue of natural resources, Saudi Arabia faces ‘absolute water scarcity’, meaning it will not be able to meet its water needs, in the next decade, yet its domestic water usage is one of the highest in the world. Some 13 other Arab states face a similar situation. Curbing demand will be essential to engineering a radical overhaul of Gulf economies and building a future way of life that is not only diverse but also sustainable.