Like all addictions, getting off oil will be painful at first but rewarding at last for Saudi Arabia. By seriously pursuing economic reforms and maintaining a firm position on oil production, Riyadh seems to be suggesting where there is a will, there is a way.
“We have a case of addiction to oil in the Kingdom of Saudi Arabia on the part of everyone.” Those words, mentioned to Al-Arabiya earlier this year, by none other than Prince Mohammed bin Salman – Saudi Arabia’s Deputy Crown Prince, Defense Minister and head of the country’s Council of Economic and Developmental Affairs (CEDA) – were a shocker to many.
There was also skepticism considering this was an extremely bold statement coming from the third most powerful man in the Kingdom. However, it turned out to be a decisive moment in Saudi Arabia’s economic transformation plans, and marked the beginning of tangible moves away from the country’s dependence on oil. That it coincided with the unveiling of “Saudi Arabia’s Vision 2030” makes it even more significant. On April 25, 2016, Saudi Arabia’s Council of Ministers, under the chairmanship of King Salman bin Abdulaziz, endorsed the country’s Vision 2030.
“The first pillar of our vision is our status as the heart of the Arab and Islamic worlds. We recognize that Allah the Almighty has bestowed on our land a gift more precious than oil,” the text said. The document set aside several misconceptions regarding the country that have existed over the years. “Our country is rich in its natural resources. We are not dependent solely on oil for our energy needs. Gold, phosphate, uranium, and many other valuable minerals are found beneath our land,” read the document. Among other things, there seemed to be a determination to reinforce and diversify the economy, turning its key strengths into enabling tools for a fully diversified future.
Saudi Arabia has realized that diversifying its economy is vital for its sustainability. There is no denying the fact that oil and gas are essential pillars of its economy. However, the country has started expanding its investments in additional sectors. This is indeed the result of the realization of complicated challenges ahead that need long-term plans going forward.
“In the past 25 years, the Saudi economy has grown by an annual average rate of more than 4%, contributing to the creation of millions of new jobs. Although we are already among the 20 largest economies in the world, our ambitions are even greater,” the vision document said, adding that it aspires to have an even higher ranking by 2030. Considering the headwinds of the global economic slowdown and the expected impact of its structural reforms, this will indeed need some doing.
The country certainly needs to invest in its resources, unleash the capabilities of its promising sectors and even privatize some government services. Saudi Arabia’s National Transformation Program (NTP) lays down the various dimensions of this vision by employing practical measures. Among NTP’s major goals is to generate jobs, accelerate privatization and cut the state’s wage bill sharply. In particular, the Program aims to generate 450,000 jobs in non-government sectors, reduce the wage bill from 45% to 40% of the state budget and implement more than 500 initiatives at a cost of $72 billion, 40% of which would come from the private sector. The plan to transform Saudi Aramco from an oil producing company into a global industrial conglomerate is a case in point.
Saudi Arabia has not only announced several transformative plans in recent months but has also walked the talk with concrete steps. This has been accompanied by talks of cutting oil subsidies and increasing fees on visas and other services.
In two separate interviews with The Economist, both the Deputy Crown Prince and the (now former) Chairman of Saudi Aramco, Khalid al-Falih, revealed that Aramco will be IPOed, a mammoth exercise that few expected to see the light of day. The revelation understandably created ripples considering its sheer size. The $100 billion involved in the IPO were four times the size of the biggest such public offer anywhere in the world to date, that of the Chinese e-commerce firm Alibaba in 2014.
This piece of news was preceded by a Bloomberg interview with Prince Mohammed bin Salman, which outlined the various dimensions of “the $2 trillion project to get Saudi Arabia’s economy off oil”. The details of this project became evident during the Saudi Deputy Crown Prince’s visit to the US, which resulted in various mega deals with major corporations enabling them to operate independently of Saudi local sponsors for the first time in the history of the Kingdom.
On June 17, 2016, Barack Obama met Crown Prince Mohammed bin Salman at the Oval Office essentially, according to the US President, “to continue discussions begun in April at the US-Gulf Cooperation Council (GCC) Summit in Riyadh.” I was privileged to be part of that visit and presented my perspective on the new “business as usual” in Saudi Arabia in light of the engagements between the two sides.
However, when I was told that the two leaders had discussed clean energy, I immediately approached Khalid al-Falih, who had just been appointed as Saudi Arabia’s Energy Minister (a position formerly known as “oil minister”) seeking more details. “Saudi Arabia will become the Saudi Arabia of clean energy,” was his prompt reply. It was evident that the winds of change were here to stay. The White House statement, issued following the meeting, was a testimony to this change.
There is evidence to suggest that Saudi Arabia is not being reactive, rather its approach is part of a well-thought out plan to drive the future. It is necessary to emphasize this considering the fact that the country’s motives have been questioned with regard to its policy on oil prices in recent months.
The Saudi government really can not afford to cause self-inflicted harm for the simple reason that it is currently engaged in two wars – one in Yemen and another as part of the anti-ISIS coalition. Last year during the G1 Summit in Tokyo, a BBC journalist asked me about Saudi Arabia’s role vis-à-vis oil markets. I answered him with another question: “Is there any evidence to suggest that Saudi Arabia was deliberately plotting to reduce the oil price?” His answer was no, and that statement remains just as valid today
Several theories have done the rounds related to Saudi Arabia’s decision to maintain oil supplies. A lot of them hover around the logic of driving out shale oil producers. With the sanctions being lifted on Iran, it also may make sense that Riyadh may want to keep prices down as way of ensuring no abundant amounts of cash find their way to its regional arch rival. If this is true, I can see why a country like Saudi Arabia might have chosen to take the same path. However, there is a difference between doing it intentionally and not cutting production. Many experts maintain that when Saudi Arabia cut its production in the past, it ended up losing market share to non-OPEC competitors and black market traders. In such a turn of events, not only do the prices not go up, there is also a loss of market share. With the benefit of hindsight, on this occasion, Saudi Arabia was not willing to fall into the same trap, especially if others were unwilling to play along.
Saudi Arabia may be willing to accept $50 a barrel. Going by the recent price levels, this already seems to be happening. However, the good thing that happened amid all of this is that it forced reforms on the country. Nobody chooses to reform and cut unnecessary subsidies unless they have their back against the wall.
All said and done, for the tenacity of its new approach, sheer timing and immaculate planning, it is fair to say that Saudi Arabia, with its transformation plan, will be on its way to achieve its 2030 Vision. Will this vision be fully implemented? Probably not, but if only half the set targets are achieved we will still be looking at a more diversified economy which means Saudi Arabia will no longer be at the mercy of the price of oil.