Can Saudi Arabia Really Break Its Dependence On Oil?

Could Vision 2030 be all “smoke and mirrors?”

By Gregory Brew,

Saudi Arabia appears committed to its recently-announced long-term economic plan, dubbed Vision 2030, which aims to remove the country’s economic dependence on oil exports within the next several decades. The removal of Ali al-Naimi, who for twenty-five years acted as the Kingdom’s oil minister and engineered the production surge guiding Saudi policy since November 2014, is a further indication of the government’s determination to make a major economic course correction.

But can they do it?

Oil covers 70 percent of government revenue, while the oil industry is a major employer for the Saudi workforce. The immediate reaction to the plan, announced on April 25 by Crown Prince Muhammed bin Salman, was guarded optimism. Recently there has been much more skepticism, with some doubting how Saudi Arabia could accomplish all that it has planned for itself.

Prince Salman, who at 30 is both a powerful member of the royal family and a standard-bearer for a new generation of Saudi leaders, emphasized in his announcement that Saudi Arabia would begin its transition to an “oil-less” economy through an IPO of Saudi Aramco, the state-owned oil company.

A 5% IPO will take place in 2017, and due to the size of Aramco will take place on the London, New York and Hong Kong markets simultaneously. The IPO is a clear sign that Saudi Arabia, perhaps the nation most associated with oil wealth and extravagance, has realized amidst the current energy glut that oil revenues simply aren’t the basis for a stable economy.

Economists have been arguing for years that oil revenues, rather than offering a strong foundation for a viable economy, actually create long-term systemic problems that can stifle practical growth, feed nepotism, patronage and corruption, and transform governments into rentier states disassociated from the needs of the people. It has been apparent for some time that major oil producers had to diversify their economies in order to achieve long-term viability, but that argument was hard to make when oil was $140 a barrel.

Now, in the midst of a crisis for oil-producers, economic reform looks like more than just a smart idea: increasingly, it’s looking like the only way for oil-producers to survive in a new energy economy. This is true for Saudi Arabia, which ran a $100 billion deficit last year and has already cut workers and trimmed spending to cope with the downturn in prices. Vision 2030 is a permanent plan to end the country’s dependence on oil and replace Saudi Aramco with a brand-new economy.

But what, in the Saudi case, could replace a $2 trillion industry?

Prince Salman offered some suggestions: tourism, investment in manufacturing, health care, education. Private investment will be crucial, and one of the many goals of Vision 2030 is to increase the privately owned share of the economy from 40 percent to 65 percent. Even more important will be the Public Investment Fund, into which the proceeds of the Saudi Aramco IPO will be funneled. Much of the possible success of Vision 2030 hinges on this fund paying out in the long-term.

However, there are now doubts that the declared value ($2.5 trillion) is a massive exaggeration: at least one commenter has pegged Saudi Aramco’s worth at closer to $400 billion, which means an IPO would generate far less than what Vision 2030 assumes.

There is also traditional investor wariness regarding state industries, which are often ill-ran and exposed to political upheavals, which may further depress the share price, as in the case of the Russian company Rosneft in 2006.

Saudi Arabia will need more than capital. Education will have to be overhauled, with some ramifications for Saudi culture. It was recently announced that the Saudi government hopes for women to make up 30 percent of the workforce by 2030, up from 22 percent. How this will be accomplished when men and women are largely forbidden to work together in close quarters is a particularly pertinent question.

The Saudi population is around 30 million. Two-thirds of that populace is under 30, and of that number one-third are unemployed. In the next decade 1.9 million young Saudis will enter the workforce, and it is not entirely clear what kinds of jobs they will be able to find. There are institutional problems, such as a lackluster education system (which the late King Abdullah worked to reform, with some success), and a dependence on imported labor in some industries: there are more than 9 million foreign expatriates working in Saudi Arabia. The internal Saudi market is relatively small; industries created to feed domestic demand will not have much room for growth.

Decades of oil exports have afflicted Saudi Arabia with the “Dutch Disease,” where its currency has remained artificially high, rendering its goods more expensive in foreign markets. If Saudi Arabia hopes to export to South Asia, as is suggested, it would have to do from a position of weakness. In some cases products with high pedigrees or luxurious associations can carve out niches for themselves, particularly among the urban affluent. But Saudi Arabia has no products, no industries to call its own: just oil.

There is more to Vision 2030 than just economics. Prince Salman has maneuvered himself into a position of pre-eminent power within the Saudi government. As foreign minister he has been responsible for the Saudi intervention in Yemen, and it was his intervention at the Doha conference in mid-April that scotched plans for an oil freeze and led, indirectly, to minister al-Naimi’s removal this weekend. Prince Salman is well-positioned to eventually become King, and his influence over foreign policy, the oil industry and the country’s economic future solidifies his position as one of the most powerful people in the Saudi government, after perhaps only King Salman himself. Vision 2030 could be all “smoke and mirrors,” a veil disguising the power politics inside one of the world’s last absolute monarchies. By Gregory Brew,

The hangover of oil dependence has only just begun. Read…  Saudi Arabia’s Oil-Bust Cash-Flow Debacle Begins to Bite

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  34 comments for “Can Saudi Arabia Really Break Its Dependence On Oil?

  1. Petunia says:

    The kingdom needed new leadership going all the way back to the 80’s. They have nothing to show for all the oil revenue. It was all wasted. They didn’t even do the simple stuff, like water desalinization. Their culture is inconsistent with progress so I don’t expect much.

  2. walter map says:

    Human civilization surviving until 2030? Boy, that’s hopeful.

  3. nick kelly says:

    Tourism? OMG.

    • Joe Dubyah says:

      Lol.. RIGHT?!

    • polecat says:

      “Oh Jeeves……would you please hurry and get the limo ready…..we’re running a bit late for the beheadings…..”

      • nick kelly says:

        You polecat! I came back to this just to say ‘let’s take in a beheading’
        But what if i’m cracking a beer to get in the mood and then I get publicly flogged.

        Seriously: see BBC documentary “Stoning of a princess”
        Also: A few years ago a big wig Saudi woman killed her servant for burning the spuds or something- only problem- she did it in London;
        Result: life in prison.

    • WoogieBoogie says:

      You don’t see the full picture -> Moslems are going to be the tourists by 2030, Medina and Mecca is the heart of Islam, every Moslem “has” go at least once in his life to Mecca, most of them go more than once. Their long term goal is to widespread all over the world and “replace” “our” culture. They fund very heavily mosques all around the world with their “partners”.
      One of their partners once said: “Democracy is the train we step on until we reach our goals.”

      • polecat says:

        Yeah…but that’s if they don’t get trampled to death first…like spooked lemmings.

    • nick kelly says:

      Actually most historians agree that the monasteries were the only islands of learning left during the Dark Ages.
      But I agree they may have outlived their usefulness by 1400.
      BTW: at the time of the US civil war a large swath of Italy was a Papal
      State- ruled by the Church.
      The Lateran Treaty reached with Mussolini relegated it to its present size- 109 acres.
      However it remains a sovereign state.

      • Wolf Richter says:

        Monasteries in Germany, Belgium, and other countries – as you said the “only islands of learning left during the dark ages” – did a great job at advancing the art of beer brewing.

        And to this day, monasteries make some great and sometimes very alcoholic brews.


      • nick kelly says:

        Actually most historians agree that the monasteries were the only islands of learning left during the Dark Ages.
        But I agree they may have outlived their usefulness by 1400.
        BTW: at the time of the US civil war a large swath of Italy was a Papal
        State- ruled by the Church.
        The Lateran Treaty reached with Mussolini relegated it to its present size- 109 acres.
        However it remains a sovereign state.

    • nick kelly says:

      Pass the Benedictine

    • Agnes says:

      Of course there are these people who did not hold back Europe (see more at wiki ‘catholic cleric scientists’)

      Leonardo Pisano Bigollo (1170-1250) a.k.a. “Fibonacci”
      Robert Grosseteste (c. 1175-1253)
      Albertus Magnus (1193/1206-1280) a.k.a. “Albert the Great”Theodoric Borgognoni (1205-1298)
      Roger Bacon (1214-1294
      Taddeo Alderotti (1215-1295)
      Ramon Llull (c. 1232-1315), a.k.a. Ramond Lully
      Theodoric of Freiberg (c.1250–c.1310)
      Thomas Bradwardine (1290-1349)
      Jean Buridan (c. 1300-1358)
      Nicole Oresme (1320-1382)
      Filippo Brunellescchi (1377-1446)
      Nicholas of Cusa (1401–1464)
      Leon Battista Alberti (1404-1472)
      Johannes Muller von Konigsberg (1436-1476)

      I stop at 1450A.D. but there are lots more. As a Catholic and a Scientist(biologist) I was so surprised to learn these fellows from my public schooling books were not secular humanists. Just as I was surprised it was the Catholic hierarchy that paid for the Gutenberg Bible–my high school teachers somehow made me believe it was all due to the objectors-to-the church.

      My personal favorite is Luca Pacioli who invented double entry bookkeeping and who I personally believe saved the West from the economic fundamentalism of Muslims.

      I have a “7 Deadly Zins” bottle sitting on my windowsill, but it is God to whom I keep my face turned. And Jung said he had so few Catholic clients because they had Confession. Ironic, isn’t it…the fine line between appreciating and sinning?

  4. Chicken says:

    “As foreign minister he has been responsible for the Saudi intervention in Yemen”

    It’s probably more accurate to call it genocide of Suni, for it was King Salman.who proclaimed Suni must go. It’s not clear why (aside from obvious religious reasons), without considering Suni happen to occupy the oil-rich regions. This is similar to Native American genocide, no native Americans are featured on US currency and the museum in DC is a half-hearted insult.

    So if SA really is committed to the death of oil, why the Suni genocide?

    Whatever happened to the remaining unclassified 28 pages of the 9/11 report?

    Vote the self-conflicted liars and thieves out, elites aren’t public service workers, they’re simply playing us.

  5. EVENT HORIZON says:

    Let us be real.

    Just what does Saudi Arabia have to sell the world other than oil, which only has value due to the science and inventions of Europeans? Really?

    They want an economy NOT based on oil (which they sat on for thousands of years and had NO value until Rockefeller’s Standard Oil asked some camel rider for permission to drill)?

    Here is what they MUST do. Drop the 6th century pathetic religion/military doctrine. Drop it. If they get resistance from the Wahabi fools, then kill them. Rather than kill Europeans and Americans in their demented “holly war”, kill off the Wahabi idiots and free up their nation.

    Then, turn Saudi Arabia into one beautiful tourist location. The desert, the architecture, the history is awesome. I’ve been there. Next, turn all the Sea Side beaches into nude beaches, night clubs, etc. Northern tourists will flood the place and a beach full of naked Scandinavian women is something to behold. I know, I’ve been to Mykonos, Ios, etc.

    Until they do this, and join the REAL WORLD, they will be sitting in a desert selling oil to China thinking they have real value.

  6. Yoshua says:

    Saudi Arabia’s population and oil consumption is constantly rising, by 2030 the Saudis will consume all the oil they produce if they continue on this trajectory… well… at least in theory, since they have to export oil to buy food.

    It’s an interesting bottle-neck dilemma that needs a creative solution.

    • EVENT HORIZON says:

      Saudi needs to deport everybody who is NOT a Saudi citizen.

      Next, they cut off ALL freebies. All.

      If a Saudi citizen wants food or money, then they get to work. No more subsidy. No more payments for being “Saudi”. Get to work or starve.

      Next, find a way to grow their own food and manufacture basic items. Everybody, including the absolutely spoiled off-spring of the Original King Faisal (I went to school with some of these brats at the American Community School in Beirut) need to get a job and sell the private fleet of 747 (now Airbus) jets.

    • Nicko says:

      Saudi have signed contracts to go big nuclear and solar. The transition is under-weigh.

  7. JimTan says:

    Interesting article on how McKinsey & Company developed this new “economic vision” for Saudi Arabia:

    Best Quote – “The company teams up with young heirs to the throne, who are eager to make their countries’ economies conform to their vision of the future. A less palatable similarity for someone like Prince Salman is how many of the countries who drank the McKinsey Kool-Aid became epicenters of the Arab Spring. Bahrain, Egypt, Libya, Yemen — each was convulsed by demonstrations, often animated by economic grievances.”

    • EVENT HORIZON says:

      I went to school with some of these Saudi snot princesses. I had an allowance from my dad of $5 US a week. With the exchange rate, back then, of 3 Lebanese Pound to the dollar, I had 15 Lebanese, per week, to spend.

      To give you an idea of the value, it costs 25 piastres for a taxi. 100 piasters to the Lebanese Pound. (think of them like a penny) Do the math. It costs 15 piastres for a movie. Do the math. 15 US cents for a movie? 25 cents for a taxi? 25 cents for a sandwich at a restaurant?

      I was one rich little American kid. Now, imagine one of the Saudi punks getting perhaps $100 or $200 a week for an allowance. Can you imagine how intimidating that was for me? One class mate of mine rented an entire fleet of Taxis to take us up into the mountains of Lebanon to go skiing. (Yes, it snowed up in the Mountains, east of Beirut, near the border of Syria). They taxi cabs would take us up there and wait while we goofed off and, illegally, drank beer, etc. When you tip an Islamic taxi cab driver a cool $50, he keeps his mouth shut. That is more money than he makes in a month.

      These are the snots that rule Saudi Arabia. Totally spoiled rotten punks. They have NO idea about economics, society, religion, etc, yet they make the laws. This is why the world is insane and why it can only get worse until it all collapses.

      There is nothing you can do…………except prepare for the collapse.

      • EVENT HORIZON says:

        I was too young to appreciate how [sex] really runs the world. Sex was just a concept, and not the reason for living, at that age. BUT, I understood that money and ego and power was the way, the … [[remainder deleted by Wolf … Please note, on WOLF STREET, we do not comment on religion if at all possible]]

  8. JimTan says:

    Not sure what Aramco is worth at $40 oil, but interesting article below explains how a countries “proven reserves” are the quantity of oil that is “technically AND economically recoverable” therefore dependent on the market price of oil:

    “…Venezuela’s proved reserves went from ~80 billion barrels in 2004 to nearly 300 billion barrels in 2014. Oil at $100 meant that more of Venezuela’s heavy oil was economical to produce, shifting it from the resource category into the proved reserves”

    • EVENT HORIZON says:

      “Proven Reserves” depends on the price of lifting the oil.

      There is, technically, and infinite supply of oil on this planet. BUT, the question is the price of getting it out of the ground. The planet is actually awash with oil, but some costs $2 a barrel (Iran, Iraq, Saudi) to lift it out of the ground, versus about $75 for some Canadian Tar Sands.

      “Proven” just means there is oil there. The good news is that we will never run out of oil. People will just need to shift their spending from $100 diners at Bone Fish Grill to $5 a gallon gas. We will never “run out of oil”. IT is only a pricing game.

      You can spend $600 for a Gucci handbag or one month’s of gas for your Tahoe. Since I LOVE my Avalanche, I have no problem filling up the 25 gallon tank and doing without the extra Heineken.

  9. Jerry Bear says:

    Saudi Arabia has an unbelievably parasitic upper class in the guise of the ever multiplying royal family. They will continue to drain the life blood of the economy until the eventually starving population finally rises up in outrage and overthrows them. The vicious and obscurantist Wahabi religious establishment weighs upon the people’s hearts and souls like an enormous granite boulder. They will have to be overthrown too if the land is to have any future. At times in the past the mullahs tried to declare the “spherical theory of the earth” heretical and one cleric is still attempting to discredit the Heliocentric Theory of the Solar System. Keep in mind, that Wahabia is NOT Islam but a barbaric and primitive perversion of it. The Muslims in the past could be far more reasonable.
    it will take a great deal for such a revolution to happen but I think it will happen or their nation will not survive. The Saudis do have a huge resource in the form of cheap energy and could use this to create all kinds of industries instead of exporting it for others to use. But this will require most university students to major in useful topics and not “Islamic Studies” as most now do. It will require replacing the foreign work force with the Saudis themselves doing their own work. Wahabism is being steadily undermined by the influence of Western “decadence”, and this process will go on.

    I taught English for a year in Saudi Arabia to ordinary rank and file Saudi young men. They were of Bedouin origin and were learning English so they could undergo technical training and work for petro-industries. This was necessary to earn the bride price (about a hundred grand U.S.) needed to get married into a respectable family.
    They struck me as fine spirited young men not too different from their American counterparts. They were not all that obsessed with things Wahabi but were very proud of being Muslim and derived great satisfaction from their religion.
    i get the impression they would be willing to accept a more mainstream reasonable form of Islam.
    As for tourism, while the Wahabi establishment rules the roost this is unlikely but I think the potential is there. I and the other teachers loved to go on R&R to Bahrain, which was beautiful, exotic and fun and like something out of an Arabian Nights fantasy. of course it is not Saudi, there you see women drivers, people smile and laugh in public and you have bars with singing girl acts from the Phillipines. You have outdoor cafe’s with locals drinking coffee or eating dinner or smoking those big hookah pipes called “Sheeshas”. The downtown area had wonderful architecture and was quite scenic and felt comfortable and relaxed, unlike the up tightness and squalor I associated with Saudi towns. Especially interesting to me were the young women. They dressed modestly but in beautiful silks and satins instead of shapeless black bags and they wore their finery with as much pride as princesses. It made me aware of how our own culture subtly forces even older women to parade themselves like prostitutes without any dignity and I am not so sure they have the better deal. At any rate, I certainly wouldn’t mind going back to Bahrain. ^,..,^

  10. Chris says:

    Tourism? Oh, hey honey, let’s go watch a public beheading. Such a rich culture!

    • Jonathan says:

      Yup tourism in Saudi sounds totally like fun…If you a cultural relativist nutjob who loves defending how well they treat their own women, or you happens to be a female who loves to put in places you feel sexually repressed and uncomfortable in.

  11. Thomas Malthus says:

    The real oil limits story; what other researchers missed

    A great article explaining that there is a huge amount of oil left — that one would expect high priced oil would mean we will find and extract it…

    However – high priced oil destroys growth.

    So that oil is not going to be found nor is it going to be extracted.

    To understand this … imagine that there was a tonne of gold silt washing about in Lake Ontario. That gold was there for many thousands of years…. and it will remain there for many thousands of years…. connect the dots

  12. KSA is and will forever be anchored to oil. They may think that they can make money selling value added downstream products (polymers and industrial chemicals/intermediates).

    The problem with that thinking is that they will not be the only one doing this. Cheap oil will have EVERYONE wanting to do the same thing. And Saudi Arabia will find that the downstream products they so hope want to sell will be subject to the same market conditions that their oil is now (and forever and ever) a slave to.

    This is a lose-lose game for them.

  13. Negotiam Perambulans in Tenebris says:

    Umm…… I have to assume there are other people on here who have traveled or lived in other parts of the world and are not totally provincial, culture bound “ugly Americans”. It is the height of ignorance to assume that because YOU know nothing about a topic then there is nothing worthwhile to be known about it. You really should be ashamed of yourselves!
    The Arab/Islamic cultural tradition is a very rich one whether you know anything about it or not. Do you even know that much about your own cultural tradition or even care?
    I have lived in the Far East, the Middle East, the South Seas and Mexico. Have you lived outside your own home area or even traveled much beyond it?
    I can speak three languages besides English. Can you speak
    even one?


    Ye Thing That Walketh In Darkness

  14. Shu Hada? says:

    The scary thing is that there ins’t a single Arab country that can be thought of having “made it” economically without petro support so there isn’t even a successful model that can be followed from a cultural perspective. (When I say “made it” I mean having a high value-added economy). The only country that comes remotely close is Lebanon but even its GDP per capita is half that of first world nations. In fact in that entire part of the world there is only one, maybe two high value-added economy countries – Israel but obviously it cannot be a model for its neighbors (although it should be noted that Israel has a substantial Arab minority). The other country is Cyprus but its population is so small it is really a special case.

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