Present at the Disruption
How Trump Unmade U.S. Foreign Policy
The September 11 collapse of a crane at the Grand Mosque in Mecca provided a grave metaphor for Saudi Arabia experts. A number of observers, citing supposed infighting among senior Saudi royals, have predicted an unprecedented political upheaval. Other critics however, have focused on the precipitous drop in oil prices since June 2014 to argue that the kingdom is in serious economic trouble. Indeed, the decline in oil prices from about $115 to below $45 today seems the more daunting challenge.
Of course, oil does play a central role in the functioning of the Saudi state. Riyadh, however, is no stranger to oil crises. The lessons Saudi Arabia learned from previous crashes have taught it to curtail public spending and maintain access to large foreign currency reserves when in trouble. As a result, Saudi Arabia is better positioned than ever to weather the effects of flagging oil prices. Although it will still face difficult decisions in the months ahead, the challenges alone are not enough to bring about the state’s demise.
OIL, OIL EVERYWHERE
Oil accounts for 90 percent of Saudi Arabia’s exports and 40 percent of its GDP. More importantly, it constitutes almost 80 percent of the Saudi government’s revenues. With the bulk of its wealth coming from the sale of its natural resources rather than taxation, its citizens have had relatively limited involvement in the political decision-making process.
The Saudi economy—like many of those across the Middle East—combines free market policies underlying its banking, healthcare, manufacturing, construction and telecommunications sectors with heavy state involvement in regulation, planning, and development funding. The Saudi public sector remains immense; recent reports, including a poll conducted by Gallup, estimates that the Saudi government employs as many as eight out of every ten citizens. The government has pumped billions of dollars into education, housing, and healthcare in the hopes of preparing its young population to compete in a global economy.
Saudi policymakers readily admit that they have formidable economic and demographic challenges ahead of them. The nation’s population has quadrupled since 1970. It is estimated that 200,000 Saudis enter the workforce every year. Although the oil sector has powered the Saudi economy and the government for decades, it is not labor intensive enough to absorb the nation’s booming population.
Saudi planners have tried to expand development within the nation in order to address the looming unemployment problem, but the solution may exceed the dozen industrial and economic cities across the country that the government has already funded. Although a number of Saudi cities, especially the capital city of Riyadh, have the trappings of a modern metropolis, other regions are still relatively underdeveloped. Repeated flooding in the port of Jeddah, for example, suggests that the kingdom’s physical infrastructure is still a work in progress.
Thanks in part to domestic development, Riyadh’s government spending has quadrupled since 2003 alone—some would argue, beyond what the country’s oil income can finance. For Saudi Arabia, the catch is that even current spending probably isn’t enough. On average, Saudis consume more than twice as much water than their counterparts in the developed world. Saudi Arabia’s domestic energy use is increasing at such an alarming rate that the government has spent billions to increase its natural gas production. Saudi Arabia has also allocated $87 billion to build as many as 16 nuclear reactors to meet its energy needs, cool its residential buildings, and desalinate its drinking water. In 2012, a report by Citigroup warned, however, that increasing energy consumption could make Saudi Arabia a net oil importer by 2030.
WHAT TO DO NOW?
During past oil slumps, Saudi Arabia has resorted to a combination of spending cuts and revenues boosts by instituting hiring freezes, delaying the implementation of some industrial projects, raising the fees associated with licenses and permits, and even increasing the price of its heavily subsidized gasoline. Some of these same measures are under consideration once again. The Wall Street Journal has reported that Saudi Arabia might follow the example of other Gulf Cooperation Council states and reduce energy subsidies, which comprise up to 20 percent of the government’s budget, although officials have said that such a measure is not yet necessary.
Saudi officials have also made assurances that the government has adequate reserves of approximately $650 billion. Nevertheless, in July, Saudi Arabia issued public bonds for the first time since 2007 and issued another $5.3 billion worth in late November. For its part, the International Monetary Fund has warned that if Saudi Arabia continues to tap into its reserves at the current pace in order to meet its budget shortfall—predicted to be in excess of $130 billion—it will deplete the funds within five years.
Saudi Arabia has appeared unconcerned about such shortfalls in other respects. Critics have argued that Riyadh has intentionally exacerbated the current drop in oil prices by refusing to cut OPEC production levels during a meeting last December. Saudi Arabia has traditionally played the role of swing producer, cutting its production to prop up lagging oil prices and by increasing its output during oil shortages. But this time around, Saudi Oil Minister Ali al-Naimi has made it clear that the nation wants to protect its market share, rather than act as an OPEC safety valve.
Saudi officials have argued that a global oil glut, brought on by increased shale oil production in the United States and lower demand from emerging markets such as China, is to blame for the current low prices. Critics, however, maintain that the Saudis are deliberately trying to force out high-cost producers, especially U.S. shale producers, by forcing global prices to plummet due to an oil surplus. Russian President Vladimir Putin himself has even suggested that the Saudis are using oil as an economic weapon against Russia and Iran for their support of Syrian President Bashar al-Assad, forcing prices downward as financial punishment for the two other prominent oil-producing nations Tempting as it is for some to believe the latter of these narratives, there is little evidence to support this contention, and a number of prominent energy analysts have attributed the current slump to simple market fundamentals.
A combination of unprecedented regional tumult and the emergence of a new generation of Saudi Arabian leaders has led the kingdom to reduce its reliance on quiet, behind-the-scenes diplomacy and push for a more assertive foreign policy. Daunting economic challenges and painful lessons from the past have also compelled the Saudis to adopt less risk-averse economic policies. Both departures appear to stem from a loss of trust in the benefits of international cooperation. Saudi officials, however, have recently indicated their willingness to consider lowering production as long as OPEC and non-OPEC countries do so as well.
The new Saudi leadership has stressed the importance of increasing the efficiency, transparency, and accountability of the government. In one of his first moves as new monarch, Saudi Arabia’s King Salman dissolved 12 advisory councils and replaced them with only two: one overseeing national security, and the other tasked with guiding economic development. King Salman moved nimbly to remove the Saudi minister of housing in March as a result of housing shortages, and installed a well-known Saudi bureaucrat to handle the nation’s healthcare system when the system was widely regarded as inadequate. The King’s willingness to take quick and decisive action has been welcomed by many Saudis, and suggests that the nation’s leadership is aware that better government performance is necessary to address the grave economic and governance challenges ahead.
A recent report suggested that the Saudi government is on the verge of embarking on major reforms including substantial budgetary cuts, a redoubled effort to reduce the size of public sector employment, and an increase in the state’s private sector. It is unusual for Saudi officials to reveal reform plans in such a manner, but they are not nearly as averse to political, social, and economic reforms as many assume. There is little doubt that they would prefer to embark on gradual reforms on their own terms and at their own pace, but the state of the global oil market will make that exceedingly difficult.
The Saudi government will continue its effort to diversify its economy in order to reduce its dependence on oil profits, and has directed its efforts toward crafting a knowledge-based economy in the years ahead through investments in education. It will also likely continue to privatize some government-owned corporations, including in the telecommunications, healthcare, and education sectors. Likewise, efforts to reduce the number of non-Saudis working in the private sector—estimated to be eight million—have paid some dividends, showing some significant improvements in the number of Saudi women in the workforce. To curtail government spending, the Saudis have even taken some measures to slowly open their stock market to foreign investors. Even tourism is now viewed as a sector with significant potential to generate employment. In this new oil economy, the Saudis are considering all their options, and nothing is off the table.
Senior Saudi leaders have long advised the country’s citizens that the nation’s boom of the 1970s, when oil income increased almost exponentially, is over. Saudi citizens by and large have proven willing to temper their expectations during hard times. That is not likely to change any time soon. At some point, King Salman may reprise former Saudi Arabian King Abdullah’s version of the “fireside chat” in which he spoke in a frank manner about the challenges ahead, as well as the nation’s need to recalibrate its social contract with its citizens. If these efforts are executed successfully, Saudi Arabia will weather this storm.