April 28, 2016
TSG IntelBrief: Saudi Arabia’s Plan to Get Off Oil
• Deputy Crown Prince Mohammed bin Salman’s announcement of Saudi Arabia’s ‘Vision 2030’ laid out the country’s ambition to move away from oil dependence within 14 years
• Since 1970, Saudi Arabia has periodically announced ambitious plans to diversify the oil-dependent country’s economy; none have had much impact
• The announcement follows a year of low oil prices and high military expenditures that pushed the Saudi budget deficit to 15% of GDP in 2015
• Saudi Arabia’s commitment to this initiative will be tested when oil prices inevitably rebound and economic pressures ease.
On April 25, Deputy Crown Prince Mohammed bin Salman stated that his country would never be 'at the mercy of commodity price volatility or external markets’—another sign of how persistent low oil prices have caused budgetary strains and societal tensions in Saudi Arabia. With a nearly $100 billion dollar budget shortfall in 2015, the influential deputy crown prince and defense minister announced 'Vision 2030,’ a plan to wean the country from its addiction to oil.
This is not the first time Saudi Arabia has announced such a plan. Beginning in 1970, Riyadh has periodically declared its intention to diversify its oil-dependent economy. However, oil still accounts for between 80-90% of government income. As in other countries, including the United States, Saudi reactions to low oil prices have tended to ease as prices cyclically rise. Still, at least some aspects of the plan suggest that Riyadh is perhaps more determined to make fundamental changes in a change-resistant Kingdom.
The plan to make public up to 5% of Saudi Aramco, valued at perhaps $2.5 trillion, would not only be the biggest initial public offering (IPO) in history, but an indication that Riyadh is more serious than ever about changing from a single-source economy that is, and has been, at the mercy of markets for decades. Some of the funds raised in the IPO would go into increasing the capital of the country's Public Investment Fund (PIF) that makes investments worldwide. Other details—such as education reforms—remain to be announced, though the proposal to issue 'green cards' to some categories of foreign workers would be a marked break from the past and a possible new source of steady investment.
A diversified Saudi economy could bring tremendous societal change if it actually lowers unemployment rates, decreases the percentage of citizens employed by the government, and creates additional employment and educational opportunities for women. The massive revenues from oil have long shielded the Kingdom from necessary change; subsidies and financial support have blunted the sharp edges of some postponed reforms.
The geopolitical implications of a Saudi Arabia less tied to oil are profound. The Kingdom's geopolitical power projection has stemmed directly from its primacy in the oil market. No other country has had such an ability to dictate supply as Saudi Arabia. Even now, Riyadh will not cut back on production—though many other OPEC members want to force higher prices—for fear of allowing Iran to increase its market share as it moves beyond sanctions. A more economically-diversified Saudi Arabia will retain its capability to move oil markets, given the sheer size of the country's reserves. Those reserves are not going away; they are just going to fund other possible streams of revenue. Yet moving away from oil dependency might bring about significant changes in the country’s regional and international relations. It is too early to determine the extent of real change that Riyadh will undertake, and far too early to know how those changes, if undertaken, will impact the region and beyond.
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