Tomas Bravo / Reuters A sculpture made of discarded metal oil barrels is seen at the Instituto Mexicano del Petroleo (Mexican Institute of Petroleum) metro station in Mexico City, February 15, 2015.

Down, But Not Out

How Saudi Arabia Will Avert an Oil Economy Collapse

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

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