Why the world’s biggest exporter of crude is trying to wean itself off oil
It would be hard to exaggerate the importance of oil in Saudi Arabia. So when an influential young prince started talking this year about selling shares in the state-owned oil company and weaning the economy off its dependence on petrodollars, many were skeptical both inside and outside the conservative kingdom.
This week, the world got a closer look at what the ruling Saud family has in mind.
In an interview with Saudi-owned broadcaster Al Arabiya, Deputy Crown Prince Mohammed bin Salman outlined a sweeping plan dubbed “Saudi Vision 2030.” It includes listing for sale less than 5% of the Saudi Arabian Oil Co., building the world’s biggest sovereign wealth fund, reducing government subsidies and developing sectors such as tourism and mining.
With these steps, the prince said, “I think that if oil stopped in 2020, we can live.”
The bold assertion signaled a growing urgency among the country’s leaders to chart a new course for the world’s largest exporter of crude in an era when vast stores of petroleum reserves are no longer a guarantee of flush government coffers.
Economic policymakers have been speaking about diversifying for decades. But when oil prices were high, there was little pressure to act.
“It’s now urgent because of the low oil price,” said Jane Kinninmont, a Middle East scholar at the Chatham House think tank in London.
When oil prices fell from around $100 a barrel in mid-2014 to less than half that last year, it pushed Saudi Arabia into an economic crunch that saw the government burn through some $116 billion in foreign-exchange reserves and post a budget deficit of $98 billion.
At the same time, Kinninmont said, “You have now someone at the top of royal family decision-making who is very young, who buys into the idea that the private sector needs to be an engine of growth and employment and who is staring the end of the oil era in the face.”
Mohammed, King Salman’s son and second in line to the Saudi throne, has been entrusted with unusual power for someone in his early 30s. As defense minister, he oversees the kingdom’s costly war in neighboring Yemen and other efforts to counter the influence of archrival Iran in the region. He also serves as chief of the royal court and chairs a council responsible for the kingdom’s economic policy. Western diplomats and some media have dubbed him “Mr. Everything.”
In meetings with diplomats and journalists, Mohammed has been unusually candid about the challenges facing the kingdom. Saudi Arabia has an “addiction to oil” that has hurt development in other sectors, he told Al Arabiya in the interview that aired Monday.
“He is predicting that in 20 to 30 years, the oil will be pushed out,” Khashoggi said.
The monarchy has used the kingdom’s oil wealth to heap benefits on the country’s 21 million citizens, including cheap energy and free education and healthcare. The low price of oil — something to which Saudi Arabia contributed by refusing to limit output unless rival producers follow suit — poses a threat to the unwritten social contract that underpins the Saud family’s absolute rule.
At the end of last year, the government took the difficult steps of cutting spending and raising the domestic price of water, electricity and fuel. New taxes and fees on undeveloped land, sugary drinks and luxury goods also have been announced.
“The steps are impressive for their range and ambition — unprecedented really in a country where taxation has been politically taboo for decades,” said Steffen Hertog, an associate professor at the London School of Economics who studies Saudi Arabia. But he said it would take some creative accounting to achieve in so short a time frame the ambitious targets approved Monday by the cabinet.
Some observers have suggested that the royal family may be attempting to negotiate a new deal with its citizens.
Steps have been taken to curb the powers of the religious police, who are charged with enforcing the kingdom’s ultra-conservative interpretation of Islam. There has been talk of bringing greater transparency to the country’s economic affairs — one of the main benefits of the initial public offering in the national oil giant Aramco, according to Mohammed. He also has spoken about issuing green cards for expatriates, providing new sport and leisure options for Saudi youth and bringing more women into the workplace.
But others say it is too soon to talk about a new social contract. Khashoggi for one believes the government is attempting to shore up the arrangement it already has.
“There is no mention of democracy,” he noted.
Some resistance to the plan appears inevitable. The sudden rise in water rates, along with costly billing mistakes, already generated a social media backlash. This month, the minister in charge of water and energy was removed from office, although the new prices remained in effect.
Mohammed told his interviewer Monday that there were plans afoot to further “rationalize” subsidies but said the cuts would apply only to the 70% of the population with above-average incomes — “such as me and you.”
“Do not let me say on television what you have, Turki!” the prince retorted, according to a translation provided by Al Arabiya.
The prince offered few details about how the government proposes to implement its plan. Those will come later, he told reporters in the Saudi capital, Riyadh.
Previous government attempts to diversify the economy and encourage private enterprise have yielded some notable failures, including a $10-billion project to build a glitzy financial district in Riyadh that failed to attract many of the banks and other high-end clients it was intended to house. The government is now reportedly proposing to convert parts of the development, launched in 2006, into housing, hotels and commercial establishments.
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