Gulf States: Weathering Tariffs, but Crude Prices Pose Risks

The Gulf Cooperation Council (GCC) countries, long known for their oil wealth, are better positioned to navigate the current tariff storm than many other economies. However, the recent crash in crude prices poses significant risks to their economic stability. The GCC nations have made substantial strides in economic diversification, which has bolstered their resilience to external shocks. Yet, the volatility in oil prices remains a critical challenge that could undermine their progress.

Economic Diversification: A Shield Against Tariffs

The GCC countries have been proactive in diversifying their economies, a strategy that has paid off in mitigating the impact of tariffs. The Global Economic Diversification Index (EDI) measures diversification across output, trade, and government revenue for 112 nations. The latest EDI report, released at the World Governments Summit in February 2025, highlights the progress made by GCC countries in this regard.



The UAE and Bahrain lead the pack with higher EDI scores compared to their peers. The UAE, for instance, scored 97.5 in the 2020-2022 period, reflecting its successful diversification efforts. These include investments in new tech sectors, broadening tax bases, and trade liberalization through free trade agreements. Such initiatives have helped the UAE become the 8th largest exporter in world trade of commercial services in 2022, according to the World Trade Organisation. This diversification reduces the country's vulnerability to oil price shocks and tariff storms, as it has a more balanced and resilient economy.

Saudi Arabia and Oman have also made significant progress. Saudi Arabia's EDI score improved from 82.8 in 2000 to 93.1 in the 2020-2022 period. This improvement is a result of reforms such as incentives to invest in new tech sectors, trade liberalization, and improvements to regulatory and business environments. These reforms have strengthened Saudi Arabia's economic resilience, as evidenced by its ranking as the 24th largest exporter in world trade of commercial services in 2022.

The Digital Economy: A New Frontier

The EDI 2024 edition includes three digital-specific indicators in the trade sub-index, capturing growth of the digital economy. One main finding is that digital economy investments tend to improve trade diversification, notably through the ability to export services. The UAE and Saudi Arabia were the 8th and 24th largest exporters in world trade of commercial services (excluding intra-EU trade) in 2022, according to the World Trade Organisation.

The accelerated adoption of digital technologies during the pandemic has resulted in societal gains such as higher labour force participation rates and productivity gains. For example, the remarkable increase in female labor force participation in Saudi Arabia, from 17.4% in early 2017 to 36% in the first quarter of 2023, is a direct result of the Kingdom's Vision 2030 reforms and the adoption of digital technologies. This increase in labor force participation has contributed to the diversification of the Saudi economy, making it more resilient to external shocks.

Crude Prices: The Elephant in the Room

Despite these positive developments, the recent crash in crude prices poses a significant risk to the GCC economies. The International Monetary Fund (IMF) estimated that, unless GCC countries undertake substantial fiscal and economic reforms, they will deplete their conserved wealth by 2034. The pandemic has likely shortened this timeline. GCC countries have been concerned about the sustainability of their hydrocarbon revenues for decades. In the long term, oil and gas reserves will eventually run out. Bahrain and Oman are in the most precarious position, with reserves expected to run out within the next decade for Bahrain and within 25 years for Oman.

The expected fall in hydrocarbon reserves and revenues has long motivated GCC countries to diversify their economies by developing productive sectors outside oil and gas. However, private sector activity in the GCC continues to rely heavily on government-funded projects and consumption that are ultimately supported by oil and gas revenues. GCC policymakers must overcome the shortcomings of previous diversification efforts and create incentives for real economic development that is not reliant, directly or indirectly, on the oil and gas sector.

The Road Ahead

The GCC countries have made significant progress in economic diversification, which has enhanced their resilience to external shocks such as tariffs. However, the recent crash in crude prices poses a significant risk to their economic stability. The GCC nations must continue to implement reforms and diversify their economies to mitigate the risks associated with their dependence on hydrocarbon revenues. This includes investing in new sectors, broadening tax bases, and promoting digital economy investments.

In conclusion, while the GCC countries are better positioned to weather the tariff storm, the crashing crude prices could spell trouble for their economies. Continued efforts in economic diversification and structural reforms are essential to ensure long-term economic stability and resilience in the face of global economic challenges.