A lavish palace said to be the largest in the world. Located in the capital of Brunei Darussalam (hereafter Brunei), Bandar Seri Begawan, this palace astonishingly has 1,788 rooms. Surrounded by roughly 7,000 luxury cars and other extravagances, the person leading an unimaginably wealthy life is Brunei’s supreme leader, the Sultan, Hassanal Bolkiah. In Brunei, whose 2019 gross domestic product (GDP) per capita ranked 34th in the world, such wealth is above all thanks to its abundant oil resources. What kind of history has Brunei followed as a petrostate? And what concerns can be seen going forward within Brunei, which at first glance appears prosperous?

A mosque in Brunei’s capital (Photo: Bernard Spragg. NZ / Flickr [CC0 1.0])

Islamic dictatorship

Brunei is a Southeast Asian country located in the northern part of Borneo Island, which it shares with Malaysia and Indonesia. Its area is 5,765 km² and its 2020 population is about 465,000, making it a relatively small country. The only absolute monarchy in Southeast Asia, it has been ruled by a Sultan, the monarch of an Islamic state, who has maintained unshakable power since independence from the United Kingdom in 1984 Sultan. The Sultan concurrently serves as prime minister, minister of foreign affairs, minister of defense, minister of finance, and the head of Islam in Brunei, and wields complete executive authority not constrained by politicians, parliament, or the judiciary.

Islam is the official religion in Brunei and accounts for 78.8% of the population. A major characteristic of Brunei is the strict discipline imposed by the sultanate. In daily life, alcohol consumption and smoking are prohibited, and music and films are subject to stringent censorship to ensure they do not contain content insulting Islam. In addition, holding Christmas events—an observance of a non-Islamic religion—or handling related cards and costumes can in some cases be punishable by imprisonment. Non-Muslims, such as Christians, may celebrate Christmas, but not in public. Under such restrictions, some Bruneians seeking entertainment cross over to neighboring Malaysia to relax and freely enjoy music and alcohol.

In recent years, the Sultan has taken a hard line toward LGBT people—lesbian, gay, bisexual, and transgender minorities. In April 2019, a strict penal code amendment was implemented that imposes whipping, imprisonment, or death by stoning for same-sex acts, signaling an even harsher stance.

As the strict censorship of music and films mentioned above indicates, Brunei imposes severe restrictions on expression and reporting. According to the 2020 World Press Freedom Index, it ranks 152nd, making it one of the countries where free reporting is not guaranteed. A major factor hindering press freedom is that the government can shut down media outlets. In particular, it responds repressively to content critical of the Bruneian government, and in 2016, the Brunei Times, the country’s second-largest news organization, was abruptly shut down.

Brunei’s Sultan, Hassanal Bolkiah (Photo: Kremlin.ru/Wikipedia Commons [CC BY 4.0])

Brunei the petrostate

What sustains such an authoritarian regime is the wealth generated by oil. Brunei is known as one of the world’s leading oil states, producing about 121,000 barrels/day in 2019, ranking 40th in global production. Gas production is also a major industry, ranking 39th in the world in 2019. While these rankings are not particularly high, when adjusted per capita given the small population, resources are very abundant.

Oil and gas accounted for 77.2% of total government revenue in 2019 and roughly 96% of export value. Brunei is not a member of the Organization of the Petroleum Exporting Countries (OPEC), which coordinates and unifies member states’ oil policies, but it participates in OPEC Plus. OPEC Plus is a group of 24 oil-producing countries consisting of the 14 OPEC members and non-OPEC producers, which enter into agreements to stabilize oil prices.

How, then, is the vast wealth obtained from oil returned to ordinary citizens in Brunei? Although per capita income is not particularly high, the government provides substantial welfare to its people. For example, medical care at public hospitals and education at public schools are free, and there is no personal income tax. Although there is no clearly defined poverty line in the country, the UN Millennium Development Goals Report estimates the 2011 poverty rate at 5.04%. While it is undeniable that wealth is concentrated with the Sultan, living standards among citizens appear to be maintained to some extent. In terms of the Human Development Index as well, Brunei ranks 43rd, indicating that income, health, and education are relatively well developed. In this way, Brunei has greatly benefited from oil.

Brunei’s major city, Bandar Seri Begawan (Photo: Jorge Láscar/ [CC BY 2.0])

Brunei’s path as an oil state

Brunei has had a sultanate for more than 500 years and has maintained its own political system. However, from the late 1800s, British traders began exerting influence, and the British government followed, gradually gaining a foothold in Brunei. Ultimately, facing the threat from neighboring Sarawak (now part of Malaysia), Brunei came under British protection. When oil was discovered at Raja Brooke Coal Mine on Berambang Island in 1903—the first in Brunei—the UK, seeking that wealth, formally made Brunei a protectorate in 1906.

After the largest Seria oil field in northwestern Borneo was discovered in 1929, commercial development was carried out by British Malayan Petroleum, a subsidiary of the Anglo-Dutch oil company Royal Dutch Shell. In 1957, British Malayan Petroleum became Brunei Shell Petroleum, jointly managed by Royal Dutch Shell and the Bruneian government. The UK, which also had Malaysia under its protection, then began considering a merger of Malaysia and Brunei, and Malaysia was also inclined toward union. However, it is said that the Sultan was reluctant to relinquish control over oil, and Brunei Shell Petroleum also lobbied against it; as a result, Brunei rejected the merger with Malaysia in 1963. Legal revisions that same year increased the government’s share of oil profits, and by 1975, profit distribution between the government and Royal Dutch Shell reached 50:50.

In 1984, Brunei gained independence from the United Kingdom, but given its small territory and population, it was difficult to field a defense stronger than potential attackers. Even after independence, Brunei has borne the costs of hosting British troops. In post-independence Brunei, oil-derived wealth not only became a major source of national revenue, but was also used to develop various systems and infrastructure, playing a significant role in rebuilding the economy.

A Shell gas station in Malaysia (Photo: CEphoto, Uwe Aranas/ Wikipedia Commons [CC BY-SA 3.0])

An economic base showing cracks

So far, we have seen how Brunei has sustained itself and become economically wealthy through oil. However, an economy dependent on oil also brings problems—namely, it is greatly affected by crude oil prices. When oil prices slump, there are no major profits from non-oil sectors to cushion the impact, and the economy is directly affected. In 2012, when oil prices soared, the opening price of oil was 103 USD per barrel; prices began to fall from 2013, and by 2019 had dropped to 46.3 USD—less than half. Brunei’s GDP per capita has moved in tandem with fluctuations in oil prices, from 35,967 USD in 2012 to 32,327 USD in 2019. As a result of this prolonged slump in oil prices, Brunei has run large fiscal deficits, and its economic growth has stagnated.

Moreover, at the current rate of extraction, it is said that oil can be produced for only another 15 years (Note 1), raising concerns about the sustainability of future extraction. In response to this situation, foreign companies, led by Royal Dutch Shell, have already suspended investment in the country after assessing its prospects, and major Western banks have closed their branches.

Furthermore, rising unemployment in Brunei has been noted. In 2020, Brunei’s unemployment rate was expected to be around 9.1%, the highest in Southeast Asia. Given that the unemployment rate was high in previous years as well—8.9% in 2018 and 9.1% in 2019—this is not a temporary issue and suggests fundamental problems in Brunei’s social structure and economic conditions.

The immense wealth gained in the oil industry may have dampened the entrepreneurial spirit needed to develop new markets outside oil. The government also serves as an employer, employing about 23% of Bruneians. Because the public sector offers better pay and benefits, fewer young Bruneians are willing to take private-sector jobs, and workers in private sectors such as construction and agriculture are often foreign laborers. Moreover, Brunei’s economy, heavily focused on oil and gas, has led to a skewed and shrinking labor market, which is also believed to contribute to lower employment rates.

Fuel pump at a gas station (image) (Photo: Solange Cabe/Public Domain [CC0 1.0])

Domestic efforts to break oil dependence

Moves are underway within Brunei to improve this dependence on oil. In its long-term national development plan, Brunei Vision 2035, the government sets out efforts to attract foreign direct investment and to promote bilateral trade with as many countries as possible. For example, there are calls to further strengthen ties with countries like India, which is making economic strides in fields other than oil, such as information and communications technology (ICT), finance, and manufacturing.

To increase revenue from sectors other than oil and gas, Brunei is strengthening its tourism sector. Although affected by COVID-19, the Ministry of Tourism aims to increase tourist arrivals from 218,000 in 2015 to 450,000 by 2020 and to raise tourism’s share of revenue from 1.1% to 3% through initiatives such as improving air connectivity. Interest in ecotourism that showcases the natural environment and historical culture is growing.

Furthermore, Brunei aims to be at the forefront of hydrogen projects through pioneering research and development. In 2019, it launched the world’s first hydrogen supply demonstration project and made its first shipment from Brunei to Japan, among other pilot initiatives. Although domestic efforts to break oil dependence are underway, oil still accounts for a large share of the revenues supporting Brunei’s economy, and continued efforts will be necessary.

Relations with other countries

Thus far we have looked at the relationship between Brunei’s economy and oil, but oil wields significant influence beyond the economic sphere. Foreign relations—that is, diplomacy—are also closely tied to oil. As the remaining years of Brunei’s oil decline and the national power sustained by oil shows signs of weakening, how are its relationships changing?

Amid concerns about the future of Brunei’s oil, China is making massive investments in infrastructure, trade, and agriculture. Behind this is the expectation that Brunei will acquiesce to China’s territorial claims in the South China Sea. For its part, while asserting its own maritime claims based on the Law of the Sea, Brunei also seeks agreement with China and other ASEAN member states, as seen in a statement issued in July 2020, indicating a desire to maintain strong ties with Southeast Asian countries and China.

Meanwhile, the United Kingdom, which has had a military presence in Southeast Asia including Brunei, is responding to China’s growing influence by further strengthening direct military cooperation, such as defense dialogues and counterterrorism efforts, in a move to deepen its relationships with Brunei and other Southeast Asian nations.

Furthermore, the United States, which has strong ties with Brunei, has conducted naval exercises at Brunei’s naval base, showing moves to counter other countries that are strengthening their ties with Brunei. In this way, Brunei, which must sustain itself with waning national power, also finds itself entangled in the rivalries among other countries such as the United States, the United Kingdom, China, and Southeast Asian nations.

A U.S. military helicopter transporting personnel during an exercise hosted by Brunei (Photo: U.S. Pacific Fleet/ Flickr [CC BY-NC 2.0])

We have now looked at Brunei’s history and current status as an oil state. Although it may not be obvious from the Sultan’s opulent palace or the relatively generous social welfare system for citizens, there are problems that arise precisely because of oil dependence and issues that are cause for concern going forward. Oil is also the key in Brunei’s relations with other countries, and the relationship between Brunei and oil will remain inseparable. Going forward, we hope to see sustainable national management while also focusing on the development of other industries.

Note 1: There are various views regarding the remaining years of Brunei’s oil. Here, we refer to the data in BP’s World Energy Outlook, published by the UK energy major BP.

Writer: Akane Kusaba

Graphics: Yow Shuning

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