The silver lining to lower oil prices for Gulf states

Uneven exposure

The six GCC states—Saudi Arabia, the UAE, Qatar, Kuwait, Oman and Bahrain—are not equally exposed. The UAE and Qatar, with diversified economies with strong non-oil sectors as well as smaller populations, have the resilience to maintain momentum. The UAE's non-oil activities already account for about three-quarters of GDP, and growth of 4 to 5% is projected for 2025. Qatar continues to benefit from LNG expansion and a high-income base. Oman, having reduced its debt to around 34% of GDP by 2024, is better positioned than it was during the previous oil downturn.

Saudi Arabia remains cushioned by vast reserves and the PIF's investment capacity, but its fiscal pressures are growing. Kuwait, which still derives roughly 90% of its government revenue from oil, faces reform paralysis amid the centralisation of governance and the suspension of participatory politics. Bahrain, with a debt forecast to reach 142% of GDP, remains dependent on financial support from its neighbours.

At the core of the challenge lies the structure of the Gulf's development model, which is simultaneously state-driven and market-oriented, yet globally integrated and domestically focused. The state dominates investment, sets the direction of reform and mediates access to capital. The result is a hybrid form of capitalism that is ambitious, controlled and deeply reliant on hydrocarbons for funding. Even the boldest diversification projects—from Saudi Arabia's NEOM to Abu Dhabi's AI and clean energy initiatives—are financed by oil-derived surpluses. When oil prices fall, diversification slows because the means to fund it shrink.

The same tension is visible in the private sector. Across the GCC, governments champion entrepreneurship and foreign investment, but much of the non-oil economy still depends on state spending and contracts. The PIF, Mubadala and other state-linked giants dominate emerging industries such as AI, technology and clean energy, crowding out smaller private players. In a high-price environment, this model sustains impressive growth. In a lower-price one, it exposes structural fragility. If governments are forced to scale back spending, the quasi-private ecosystem built on state patronage will struggle to generate organic growth.

This same dependency dynamic is also evident in the labour market. Nationals continue to prefer secure, well-paid public sector jobs, while the private sector relies heavily on expatriates. Saudi Arabia has made visible progress, with citizen employment in the private sector rising to 2.4 million. However, localisation policies remain subsidy-driven. The result may be a widening gap between citizens' expectations and economic realities, especially if fiscal retrenchment curtails public hiring and subsidies.

Fiscal consolidation

Fiscal consolidation will define the next phase of Gulf development. With oil revenues under pressure, governments are moving towards new tax regimes. Oman and Saudi Arabia are expected to introduce or expand corporate income taxes, while VAT and excise systems will broaden. Sovereign wealth funds, from the Saudi PIF to Kuwait's KIA, will play a greater countercyclical role by supporting domestic investment when revenues fall. Their dual mandate creates tension. They are asked to grow wealth abroad while simultaneously driving domestic transformation. In a low-price environment, that balance becomes harder to sustain.

However, despite these challenges, there are options available to the Gulf. Lower oil prices could, in fact, accelerate reform. They may push governments to prioritise viable projects over prestige ones, to empower the private sector rather than crowd it out, and to pursue fiscal discipline as a matter of necessity rather than rhetoric.

The UAE's steady diversification and Oman's fiscal turnaround demonstrate that structural reform can succeed even in a low-price environment. For Saudi Arabia, the imperative is clear; Vision 2030 must become self-sustaining, with growth driven by productivity rather than public expenditure.

The next five years will test whether the Gulf's managed capitalism can evolve into a more resilient model. The era of easy rents is ending, and the region's leaders are acutely aware of the stakes. In a world of $ 60-per-barrel oil, success will no longer depend on how much revenue can be extracted from beneath the sand, but on how effectively that revenue is transformed into human capital, innovation, and competitive enterprise. The Gulf's transformation was born of oil. Its sustainability will depend on learning to thrive without it.