The Ukraine war is wreaking havoc on the global economy, however Middle East oil exporters are taking advantage of this situation.

Western countries that were reliant on Russian oil, are now negotiating new contracts with the Middle East to prevent a major energy crisis. The Middle East makes up the world’s largest energy exporting bloc, holding 31% of global oil production, 18% of gas production, 48% of proved oil reserves and 40% of proved gas reserves.

Gulf states that rely on hydrocarbons for the bulk of their income are used to oil booms and busts. In the past, they have redoubled their rhetoric to diversify sources of revenue during busts but have often fallen short on those ambitions during booms.

Although the Middle East produces a quarter of world oil supplies, it holds between two-thirds and three-quarters of all known oil reserves. For that reason the United States and the West have continued to define the region as being vitally important.

Some of the world's biggest hydrocarbon producers, the Gulf nations are seeing billions of dollars added to their coffers aided by a Ukraine war-driven rally in oil prices. They are expected to register their first budget surpluses after an eight-year oil slump that was compounded by a pandemic-linked downturn.

Gulf Cooperation Council countries have been blessed with an abundance of natural resources. They have invested this wealth in improving the lives of their citizens, developing their infrastructure, and preparing for a future without oil. 

The war in Ukraine has highlighted the West's need to reduce its dependence on hydrocarbons, it has also exposed the difficulty in doing so. Gulf states have repeatedly said in the past weeks that the Ukraine war has proven that Europe's desire to move away from hydrocarbons was premature.

Research by Mitsubishi UFJ Financial Group (MUFG) in February showed that Gulf Cooperation Council (GCC) countries are likely to see a GDP surge of 6.1% in 2022 on the back of increased oil prices, as well as fiscal surpluses for the first time since 2014. The GCC consists of Saudi Arabia, Oman, United Arab Emirates (UAE), Kuwait, Qatar and Bahrain.

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 private sector activity in the GCC continues to rely heavily on government-funded projects 

Gulf oil exporters are aware that much of the demand is circumstantial, driven by market disruptions after Russia's invasion of Ukraine and will inevitably drop. And so, as they collect their profits, Gulf states will continue tight fiscal policy with an eye on economic diversification.

The mindset in the Gulf now is that economies need to fortify themselves against future crude price dips and reduce dependence on oil income.

In order to succeed in the long run, economic diversification is key. It requires other key ingredients, including moderating government spending, increasing non-oil exports, and increasing foreign direct investment (FDI).

While the Gulf Arab states may wish to avoid getting caught in the middle of a “Russia versus the West” conflict, the Ukraine crisis is already affecting the region’s tourism, food, energy, and other economic sectors.