RCEM: Views on Energy News

Since the discovery of oil in commercial quantities at Dammam oil well No.7 in March 4, 1938, Saudi Arabia has been almost totally dependent on the oil-export revenues. Seventy eight years later and a cumulative production of 146 billion barrels of oil (bb) since then, Saudi Arabia’s budget is still dependent on the oil revenues to the tune of 90%.

This is a moment of high anxiety in Saudi Arabia. Oil prices, currently $48/barrel, are less than half the level the Saudi government needs in order to balance its books. Moreover, its financial reserves are depleting very fast.

Though crude oil prices have risen recently to almost $50/barrel, they are still far away from the level of 2014 and it will be sometime before the glut in the global oil market caused mostly by OPEC members overproducing beyond their production quota, is contained.

Saudi Arabia currently finds itself in an awkward geopolitical situation. Its biggest regional rival, Iran, is out of the sanctions and on the rise. Traditional allies, including the United States, are keeping their distance and Saudi Arabia is currently involved in conflicts from Yemen, to Syria and Iraq. Finally, the kingdom stands on the verge of a generational change in leadership and there is a risk of succession fight when king Salman passes away.

There is nothing the Saudis need more than comprehensive economic reform. The kingdom must end its deep dependence on the oil revenue and build a dynamic 21st century economy. The current path can’t be sustained much longer.

That is why the kingdom has launched Vision 2030. Led by the king’s son Deputy Crown prince Mohammed bin Salman, the vision aims to expand the non-oil sector of the economy, triple the share of non-oil exports and reduce unemployment. Saudi Arabia needs to create three million jobs by 2020.

However, to achieve the objectives of Vision 2030, Saudi Arabia needs to start the diversification of its economy without a minute’s delay. The diversification I am talking about is not industrialization because Saudi Arabia can’t compete with the top industrial nations in the world. It is investing in food production projects in Sudan for instance as part of a Gulf Cooperation Council’s (GCC) collective investment effort and also in renewable energy, particularly solar power, nuclear energy and water desalination plants. Sudan has the land and the water resources not only to become the food basket of the GCC countries but also a great source of food export revenues for them.

Another aspect of diversification is petrochemicals. Saudi Arabia is already heading to become the world’s largest petrochemicals producer and exporter. This would enable it to enhance its market share in the global oil market. Moreover, Saudi Aramco should be given the authority to operate freely investing not only in petrochemicals and refineries but in any futuristic and commercially successful industries around the world.

An integral part of the diversification process is intensive investment in renewable energy, particularly solar power and nuclear energy. Solar power along with nuclear energy could provide all the electricity needs of Saudi Arabia. Solar energy could also power an extensive network of water desalination plants along the Arab Gulf countries’ coasts extending from the Arabian Gulf to the Arabian Sea and the Red Sea, not only for drinking but also for irrigation to make the desert bloom. Moreover solar electricity could in the future be exported to Europe earning a very sizeable income for Saudi Arabia and other Gulf countries.

Phasing out the financial subsidies for gasoline, diesel, water and electricity could save the country some $71 bn annually and reduce the mindless waste of the country’s resources. The saved money could be used to fund new wealth-creation projects.

And while marginal spending cuts and adjustments might be achievable, the Saudi bureaucracy has never before accepted such a comprehensive reform plan.  More important, the Saudi system is built on a social contract whereby the government provides generously for its citizens in exchange for political obedience. The subsidies the government has been providing for years has now become a real financial burden on the government finances.

Fundamental changes in education are also required if young Saudis are to compete for 21st century jobs. Furthermore, Prince Mohammed bin Salman will face serious opposition in the implementation of his vision from the powerful conservatives who suspect this project is designed mainly to boost his chances of succeeding his father.

After King Salman departs the scene, a power struggle within the royal family is likely. No one can say how intense or violent it might become, but the prospect of crisis comes at an especially bad time. The region is afire, and oil prices are plummeting.

Vision 2030 is a plan designed to create a 21st century Saudi economy virtually from scratch, which is why it will encounter some stiff obstacles. Still it is achievable if there is the political will to go ahead with it.

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*Dr Mamdouh G. Salameh is an international oil economist. He is also a visiting professor of energy economics at the ESCP Europe Business School, London.

 

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