The countries of the GCC have about 20 per cent of the world’s proven gas reserves. Add gas found in Iran and Iraq, and the figure for the Gulf as a whole rises to 40 per cent.

No place on earth has more. So why is the region suffering gas shortages that are hindering economic development?

Investors have plans for new downstream industries in Saudi Arabia, but the kingdom cannot guarantee the gas the proposed projects need. Saudi Arabia is at least self-sufficient. Kuwait, Oman and the UAE are now gas importers and Bahrain has a contract to buy supplies. Only Qatar among the Gulf six has no immediate gas worries due to abundant North Field supplies. But a moratorium has been declared on new North Field developments. Even here, gas is not limitless.

The greatest Gulf gas enigma is Iraq. It has the world’s second largest oil reserves. But it does not even have enough gas to support its existing electricity generation capacity. Almost 90 per cent of Iraq’s power comes from crude oil and other liquids. Meanwhile, 700 million cubic feet a day of associated gas are being flared.

Lack of gas has become an obstacle to Gulf growth. Some say it is due to bad planning and poor execution. These charges are largely false. GCC states have invested for decades to discover and exploit their hydrocarbon reserves. GCC oil production in 2010 averaged more than 14 million barrels a day (b/d).

The problem is simpler but probably more serious: GCC states, to satisfy world demand, have prioritised finding and producing oil over gas. The results until recently were mainly positive. Saudi Arabia’s sustainable production is now more than 12 million b/d and is confidently forecast to rise to 15 million b/d by 2030. It is evidence of highly effective long-term thinking.

GCC countries have invested massively in oil production capacity. But four of them are also members of Opec, an organisation that exists principally to ensure oil nations do not produce too much. This strategy too has worked. Returns on oil production assets are often mind-boggling.

The Gulf gas strategy could not be more different. Most Gulf states until the end of the 1970s flared much of the gas produced with oil. Capturing and processing gas and delivering it to a global market with no distribution system looked prohibitively expensive. Small amounts of liquefied petroleum gas (LPG) were initially exported. A new direction emerged in 1963 when Kuwait created the Petrochemical Industries Company to convert associated natural gas into fertilisers. It was the first time in what is now the GCC that the value of using gas to produce higher-value products was proven. The key was keeping the gas price low.

The region took a giant step forward in 1976 when the Saudi Basic Industries Corporation (Sabic) was formed to convert associated gas into petrochemicals, fertilisers, aluminium and steel. The strategy was compelling. Saudi Arabia would use gas that was previously wasted to generate export earnings, diversify the kingdom’s economy and create jobs. Sabic was a turning point for the region comparable to the first discovery of Arabian oil in 1932.

By the start of the 21st century, Saudi Arabia and the wider GCC were the world’s fastest-growing commodity plastics manufacturers. There have been since then similar trends in aluminium and Abu Dhabi aims to have steel capacity of 6 million tonnes a year. And it is all because of gas.

Cheap gas has also supported massive increases in electricity generation capacity. GCC power stations can produce more than 80,000MW of power. Plans call for this figure to grow by about 7,000MW annually for the indefinite future. Without the electricity cheap gas is being used to make, the GCC’s trillion dollar economy would have been impossible.

The success of the region’s heavy industry and electrification programmes are the root cause of the gas problems. GCC national oil companies (NOCs) face a dilemma. With the world oil markets largely sated, there is little incentive to continue the massive crude production investments needed to deliver more associated gas. Opec agreements cap oil production and, consequently, associated gas output. Investment to lift associated gas supplies looks pointless.

The NOCs are focusing on exploiting non-associated gas fields. But justifying the investment involved is largely impossible. Gas sold to GCC power stations and industries is generally priced at less than $1 a million BTUs. This is about one-fifteenth of the effective price charged for the energy-equivalent of crude oil in world markets.

This is great for those benefitting from cheap Gulf gas. But NOCs cannot validate pure gas projects. GCC governments have dealt with the issue by directing NOCs to produce more gas. Saudi Arabia has effectively stopped exports. Kuwaiti and Saudi power stations are now burning crude oil to reduce demand. The UAE’s nuclear power programme is driven by the need to contain gas use in electricity generation.

The region’s now approving the first large-scale solar plants at least in part to save gas.

Shadow-pricing – which involves setting a tariff for gas in investment plans closer to its true opportunity cost – helps, but generates no money. A decent cash price would decisively lift the attractiveness gas producing assets. The impediment is that decisively higher GCC gas prices will deliver a crushing blow to the industries that rely on it and force governments, reluctant to raise power tariffs, to increase explicit subsidies for electricity consumers. It is the right choice in principle. But its consequences are unacceptable.

The resulting perversity is almost poetic. The Gulf has as much gas as it can conceivably use, but lacks the incentives to make it domestically available. The gap between Gulf gas demand and supply is going to get bigger. And it is going a headache for the world, as well as the region.