Like many of you, my weekend was spent with family — wearing pastels, stuffing my face with chocolate, and watching the younger members of the group scour the backyard for hidden eggs.

Since the weather was so nice, a few of my nieces and nephews proposed opening a lemonade stand — a tiny economic endeavor that has become a rite of passage for America’s future entrepreneurs.

According to our plans, it would be a small but open market, dependent on the export of our lemon-based product to a few adult family members.

We started off strong, making approximately three to five sales in the first half hour.

But then we hit a very large speed bump. Despite our relative commercial success, there was just one problem that we could not overcome: no more lemons.

And just like that, our tiny, lemon-based economy was kaput.

Unfortunately, we had failed to plan for an economic future in which lemons could not support us. We had also failed to diversify our revenue sources. Maybe if we had produced Kool-Aid or iced tea along with the lemonade, our economy could have survived this hurdle.

Alas, we were forced to shut down and play bocce ball instead.

Now, this is a very tiny (and possibly convoluted) metaphor to explain current oil events, but bear with me and we can pull it all together.

The Arab Winter

Let’s state the obvious here: Things are not looking good for oil. Prices are hovering around $35 per barrel, the lowest since 2004. (And some analysts warn they will go lower.)

Oil firms have been slashing capital spending and jobs and cutting back spending on investment and exploration strategies. More than 200,000 oil workers have lost their jobs, and more than 60% of rigs have been decommissioned.

In the Middle East, the economic concern is not about running out of oil. Rather, the problem is the opposite: a supply glut.

Still, problems arise when economies (even the most stable) are centered on one product or industry — in this case, oil.

The development of fracking technology greatly disrupted the status quo of global oil supply, which created a significant problem for those economies dependent on oil.

“The impact of this disruptive force on the earnings of companies that produce oil, and those that consume it, is likely to be substantial and sustained. Leaders of not just businesses, but also countries, must act now to make the best of what will soon be considered the new ways of doing things.” — Harvard Business Review

In countries like Libya, Venezuela, Angola, Kuwait, and others, revenues from oil account for dangerously high percentages of GDP and government revenue.

With prices hovering at record lows not seen in over a decade, those single-industry economies are suffering greatly.

Even those Gulf producers with more stable economies are not immune to the impact of low oil prices.

Saudi Arabia ran a deficit of $98 billion last year — more than double the original forecast of $38 billion.

Qatar’s 2016 budget forecasts its first deficit in 15 years at $12.8 billion, after failing to achieve the planned $2 billion surplus last year.

The energy minister of the United Arab Emirates told CNBC earlier in the week that the nation was working to diversify not only its energy sources but also its sources of income:

We are also investing a lot outside Emirates, and I think collectively we can manage that transition to have the revenues from the oil industry as a luxury, or as an additional profit that’s going to be reinvested and not to have it as a major contributor in our budget.

Saudi Arabia, UAE, and Oman have all raised petroleum prices for consumers and cut other subsidies. Higher prices will be a shock for Saudis, who have traditionally experienced some of the lowest fuel prices in the world.

In addition, six oil-producing countries (Saudi Arabia, Kuwait, Bahrain, Oman, Qatar, and the UAE) are planning on introducing a sales tax for the first time.

But will this all work?

Unfortunately, we have very few historic examples of nations diversifying oil-dependent economies… and none of them look promising.

A Future After Fossil Fuels

Angola is another OPEC member that was dependent on oil for economic growth. In fact, it boasted the least diversified economy in the world behind Iraq. Prior to its diversification efforts throughout the past few years, oil production contributed to more than half of Angola’s growth and more than 70% of government revenue.

After feeling the burn of plummeting oil prices, Angola made efforts to increase non-oil revenues, cut domestic fuel subsidies, and continued to develop a new tax agency (in part due to recommendation by the IMF).

“A comfortable level of international reserves has allowed the economy to weather better the consequences of the fall in oil prices than in 2008/09. However, with oil accounting for over 95% of exports and about 75% of fiscal revenue, recent developments underscore the importance of promoting the diversification of the economy by preserving macroeconomic stability and moving forward an ambitious structural reform agenda.” — IMF

So the nation has turned to steel, erecting a mass-producing mill as part of a $300 million investment initiative. Unfortunately, steel is also in oversupply thanks to China, so we’re already seeing some holes in Angola’s plan.

It’s also crucial to recognize that diversification is often a politicized issue and requires the right “social climate.” 

(I think we can all agree that in the Middle East, current conditions are far from that point.)

While economic solutions remain inextricably tied to political regimes, I would say that restoring stability remains far in the future. Some analysts have gone so far as to predict complete societal and economic collapse for the Middle East should oil prices linger at current rates. 

Although no one can be sure of the future, we would advise investors to adjust their portfolios accordingly. 

Until next time,

Jennifer Clark for Pro Trader Today