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Bahrain: Economic Cooperation and Diversification in Challenging Times

By Paul Sullivan

Bahrain’s economic development is intrinsically tied to its neighbors’. The judicious adoption of infrastructure projects, financial investments, and more evenhanded growth must take place within the framework of close cooperation with members of the Gulf Cooperation Council (GCC) like Saudi Arabia and Qatar. This more evenhanded growth and development are also important for the domestic tranquility of Bahrain.

Bahrain’s oil and natural gas production and sales create about 85 percent of the Bahraini government revenues. Oil is about 70 percent of government revenues and about 60 percent of export revenues. Clearly oil is an important part of the Bahraini economy despite the country’s tiny reserves producing only about 42,000 barrels a day. The connections with the Saudi oil networks are vital to Bahrain.

Bahrain and Saudi Arabia share an oil field, Abu Saafa. Crude oil is transported to Bahrain from Saudi Arabia through a key pipeline at about 220,000 barrels a day. This oil is refined in Bahrain and re-exported by Bahrain. Its main export markets, according to the annual report of the Bahraini Petroleum Company, include: 48 percent to the Middle East and North Africa, 15 percent to the Far East, 17 percent to Africa, 10 percent to the European Union, six percent to India, and four percent to South East Asia. 

At 25 percent of GDP, finance may be the largest component of the Bahraini economy. Bahrain’s financial markets got hit as the world recession hit. Oil and aluminum prices also dropped with the recession. Greater diversification is necessary for stable economic growth in Bahrain.

This diversification needs to be done in a way that reduces positively correlated volatilities amongst industries. Put more simply: a country does not want all of its industries going up and down in the same or similar patterns. You want some combination of industries and investments that tend to dull the waves of volatility.

Bahrain consumes all of the natural gas it produces. Its demand for natural gas for residences, commercial establishments, and the very important aluminum, petrochemicals, and steel industries is increasing very quickly. The Bahrainis will have to start importing natural gas and lots of it in the not too distant future.  Bahrain is looking to its close neighbor, Qatar, for sources. This may not make the Saudis happy. The Saudis blocked a plan to export Qatari gas to Kuwait. Bahrain is also looking at, of all places, Iran. I asked a senior Bahraini official about why this is happening. He said it was to show Iran that Bahrainis are reasonable neighbors. This part of the world can be baffling at times. Turkmenistan may be another option. Bahrain has the world to look at, but it needs to be smart and strategic in its choices for natural gas import sources.

The Bahrainis still have some time to figure this out, but not a lot of time. However, any expansion into natural gas imports will require large investments, including in at least one LNG (liquefied natural gas) facility.

Interestingly enough, Bahrain is looking to be an LNG import hub for the northern Gulf. If it does follow through with this it will need many more LNG facilities. Significant pipeline systems would also have to be built to move the gas over land or under the sea, whichever option is chosen.

There are plans to expand and renew the old oil pipeline with Saudi Arabia, along with plans to refit and expand the Bahraini refineries involved with the re-export of this oil. Bahrain is looking at becoming a transport and processing hub for refined oil products and petrochemicals also.

Bahrain has put significant investments into port facilities, road networks, electrical networks, and more. The expansion of the present causeway connecting Bahrain to Saudi Arabia and the building of the Bahrain-Qatar Causeway could add much to the trade, investment, and other connections amongst those countries. About 40 to 50,000 trucks and cars cross over the causeway every day. Tourism from Saudi Arabia is an important part of the Bahraini economy.

There are plans to connect Saudi Arabia and Bahrain by railway. Both countries are hoping that their expanded and improved transport connections will expand and improve their economic and other connections.

It could be to the great benefit of all countries in the GCC to better coordinate their investments in these infrastructure, processing, and industrial projects. Pooling their efforts to take advantage of what each of them has in favor of the others is the way to go. Developing the same industries to compete with each other makes little sense in this environment. They should focus on developing what economists call dynamic comparative advantage and what the non-specialists would call industrial and market niches that change with the economic and other environments to be faced.

Dynamic comparative advantage has meaning in the real world. Oil, gas, aluminum, steel, and petrochemicals markets are hardly static. Also, hopping on the bandwagon and investing tens of billions of dollars in things that may work out in the medium run is not really the best of all long-run strategies.

Let us focus on aluminum for a bit.

I was talking to an Emirati official a while back. He was quite proud of their aluminum industry. Bahrain is proud of theirs as well. The Aluminum Company of Bahrain (ALBA) has the ninth largest aluminum smelter in the world. Dubai Aluminum has the sixth.

ALBA exports about four percent to the United States, 12 percent to the European Union, 14 percent to Asia, and 24 percent to other parts of the Middle East and North Africa. Most of the rest of its production is sold in Bahrain.

ALBA is also smartly starting to focus more on the shaped and improved aluminum and not just the raw aluminum exports and domestic sales to grasp more of the value added of the product. The real value of a product is not just in the initial processing of the raw materials, but in the refinement and increased value that can be extracted by developing things more downstream and more creatively. Bahrain gets that as does the United Arab Emirates.

However, aluminum prices are set mostly by the London Metals Exchange. The profits from aluminum production for Bahrain will be determined by this, but also by the price of imported bauxite mostly from India and the cost of natural gas, the main energy feedstock to Bahrain’s industry. Bahrain’s natural gas is now domestically produced and heavily subsidized. In the future more gas will be imported at likely a lot higher prices than those administered and controlled by the Bahraini government for its aluminum and other industries. As more and more expensive gas is imported, the aluminum industry of Bahrain and the Bahraini government could be put under economic stress that did not exist before. The government may be forced to reduce subsidies. The aluminum industry will then have to face the business and economic consequences of that.

The economic and political stability of Bahrain’s future depends on its ability to adopt the changes it will be facing in its major markets of oil, aluminum, and finance. It will have to face challenges to its industries and its society as there is a need for an increase in natural gas prices as more gas is imported. Bahrain and the rest of the GCC need to work together in smarter ways to survive the economic and other challenges that they will face in the future. Proper coordination will be a key element to this. Mutually assured diversification may be the way to go.

All the economic and political ships in the GCC can rise. All people in the GCC can also rise with them. If neither happens Bahrain and the other countries of the GCC could be in deeper trouble than they are now. The siren song of Iran for the Shia in Bahrain will be weaker if Bahrain helps them obtain better economic and political security. This could also apply to Saudi Arabia, the UAE, Kuwait, Iraq, and more.

Economics counts. The realities of the economics of Bahrain today and what they may be in the future need to be faced in more creative and constructive ways.

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Paul Sullivan is a professor of economics at the National Defense University, an adjunct professor of security studies at Georgetown University, an adjunct senior fellow at the Federation of American Scientists, and a columnist for UB Post in Mongolia and Turkiye Gazetesi in Turkey.

All opinions expressed are the author's alone.

[Photo courtesy of MySecretBahrain]

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