Reinventing Saudi Arabia after Oil: The Prince’s $2 Trillion Gamble

By Juan Cole | (Informed Comment) | – –

Prince Muhammad Bin Salman, 30, the deputy crown prince of Saudi Arabia laid out his vision for Saudi Arabia on Monday in a plan called “Vision 2030.” He wants to get Saudi Arabia off its oil dependence in only 4 years, by 2020, and wants to diversify the economy into manufacturing and mining.

In an interview with Alarabiya, the prince said the future of the kingdom would be based on

1. Its possession of the Muslim shrine cities of Mecca and Medina and the “Arab and Muslim depth” that position gave the kingdom

2. The kingdom’s geographical centrality to world commerce, with 30% of global trade passing through the 3 major sea routes that Saudi Arabia bestrides (not sure what the third is, after the Red Sea and the Persian Gulf).

3. The creation of a $2 trillion sovereign wealth fund through a sale of 5% of shares in Aramco, the world’s largest oil company.

Prince Muhammad said Monday that he thought these assets would allow the kingdom to cease its dependence on petroleum in the very near future.

CNBC summarized other planks of his platform this way:

“The planned economic diversification also involved localizing renewable energy and industrial equipment sectors and creating high-quality tourism attractions. It also plans to make it easier to apply for visas and hoped to create 90,000 job opportunities in its mining sector.”

Saudi Arabia’s citizen population is probably only about 20 million, so it is a small country without a big domestic market. It is surrounded in the general region by huge countries like Egypt (pop. 85 million), Iran (pop. 75 mn.) and Turkey (75 mn.), not to mention Ethiopia (pop. 90 mn.) Without petroleum, it is difficult to see what would be distinctive about Saudi Arabia economically.

The excruciatingly young prince, who was born in 1985, has a BA in Law from a local Saudi university and his way of speaking about the elements of the economy is not reassuring. Take his emphasis on the maritime trade routes that flow around the Arabian Peninsula. How exactly does Saudi Arabia derive a dime from them? The only tolls I can think of are collected by Egypt for passage through the Suez Canal. By far the most important container port in the region is Jebel Ali in the UAE, which dwarfs Jedda. His estimate of 30% of world trade going through these bodies of water strikes me as exaggerated. Only about 10% of world trade goes through the Suez Canal.

As for tourism in a country where alcohol is forbidden and religious police report to the police unmarried couples on dates, that seems to me a non-starter– outside the religious tourism of pilgrimage to Mecca. The annual pilgrimage brought in $16.5 bn or 3% of the Saudi GDP four years ago, but that number appears to be way down the last couple of years. Unless the prince plans to much increase the 2-3 million pilgrims annually, religious tourism will remain a relatively small part of the economy.

He also spoke about the new bridge planned from Saudi Arabia to Egypt as likely to drive trade to the kingdom and to make it a crossroads. But the road would go through the Sinai Peninsula, which is highly insecure and in the midst of an insurrection. And where do you drive to on the other side? You could maybe take fruits and vegetables by truck from Egypt to countries such as Qatar and the United Arab Emirates. Would Saudi Arabia collect tariffs on these transit goods? I can’t see how that generates all that much money. The big opportunity for overland transport would be to link Egypt to a major market like Iran (pop. 77 mn.), and via Iran, Pakistan and India. But Prince Muhammad and his circle are hardliners against Iran and unlikely to foster trade with it.

Saudi Arabia suffers from the Dutch disease, i.e. its currency is artificially hardened by its valuable petroleum assets. They may eventually not be worth anything if hydrocarbons are replaced by green energy or even outlawed. But in 2016, they are still valuable, and they make the riyal expensive versus other currencies. The result is that anything made in Saudi Arabia would be unaffordably expensive in India (the rupee is still a soft currency). As long as Saudi Arabia produces so much petroleum, it is unclear how it can industrialize in the sense of making secondary goods.

As for the sovereign wealth fund, let’s say the ARAMCO partial IPO actually realizes $2 trillion. Let’s say it gets 5% on its investments after overhead and that all $2 trillion are invested around the world. That would be $100 billion a year, or 1/6 of Saudi Arabia’s GDP last year. It doesn’t replace the oil.

Saudi Arabia’s Gross Domestic Product in 2014 was $746 bn., of which probably 70% was petroleum sales. In 2015 it was only $653 bn., causing it to fall behind Turkey, the Netherlands and Switzerland. It will be smaller yet in 2016 because of the continued low oil prices.

All this is not to reckon with the profligate spending in which the kingdom is engaged, with a direct war in Yemen and a proxy war in Syria, neither cheap. (Both wars are pet projects of Prince Muhammad bin Salman). It also has a lot of big weapons purchases in the pipeline, one of the reasons for President Obama’s humiliating visit last week. It ran a $100 bn. budget deficit in 2015. Saudi Arabia has big currency reserves, but I doubt it can go on like this more than five or six years.

Yemen in particular has proved to be a quagmire, and the Houthi rebels still hold the capital of Sanaa. The only new initiative is that Saudi and local forces have kicked al-Qaeda in the Arabian Peninsula out of the port of Mukalla. This campaign shows a sudden interest in defeating al-Qaeda, which had been allowed to grow in Yemen while the main target was the Shiite Houthis, which Riyadh says are allied with Iran (the links seem minor).

So it seems to me that the Vision for 2030 is mostly smoke and mirrors. As the electric car and better public transport replace gasoline-driven automobiles and trucks, the demand for petroleum will collapse over the next 20 years. A really big extreme global warming event, like a glacier plopping into the ocean and suddenly raising sea level by a foot, e.g., would spread panic and accelerate the abandonment of oil. Saudi Arabia probably cannot replace the money it will lose if oil goes out of style and so is doomed to downward mobility and very possibly significant instability. It has been a great party since the 1940s; it is going to be a hell of a hangover.

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Related video:

CCTV: “Saudi government plans restructure of economy, government”

32 Responses

  1. The future of Saudi Arabia is Nauru. A mid Pacific nation which was once a rock covered in seabird droppings. The guano was sold as fertiliser giving it a brief “highest per capita per head ‘ rating thirty years ago. Now it is just a barren rock.
    Its major earner? Locking up refugees and asylum seekers picked up by the Australian navy to keep them from making landfall in Australia. Given the instability in the neighbourhood, I see a future for the Saudis as a place to lock up Europe’s would-be migrants.
    One difference. The Republic of Nauru has only 10 000 citizens, Saudi Arabia has millions. The money earned from keeping people behind barbed wire won’t go very far.

  2. The problem seems more basic: will the average Saudi do the type of work now done by foreign guest workers? Will they get dirty working in a factory? Will they sweep the streets?

    Life has been grand for the average Saudi, how will they deal with the change?

    • The Royal Family have looted hundreds of billions and will deal with the change by moving to their London and New York townhouses. The average Saudi will be left living in a nation which can not grow or import enough food. Starve or flee are the choices.
      How could Saudi Arabia exist without oil revenues?

  3. Just a minor point. According to a 2014 census, Iran’s total population was 80,840,713, with 71.4 per cent living in urban areas. Iran Population clock gives a figure of 79 939 794. Both of these might in fact be slight underestimates, because traditionally many tribal people in Iran are reluctant to take part in the census as they wish to remain independent of the government. So I think it is safe to give Iran’s population figure at 80 million.

    I believe Prince Muhammad Bin Sultan’s ambition to get Saudi Arabia off her oil dependence is unrealistic, because although Saudi Arabia has a large number of educated people, many of them educated in the West, the Saudis themselves have seldom engaged in a great deal of scientific or technological work, and without a strong scientific or industrial base it is very difficult to see a vibrant economy. The sanctions imposed on Iran did her great service, as she was forced to live on her own means and manufacture a large part of her requirements, including a large part of her military equipment. In the current Iranian budget, oil (calculated at $40 per barrel) accounts for 26% of the total revenue, while in Saudi Arabia the government is dependent on its oil and gas revenue for nearly 80% of its budget. Apart from her costly adventurism abroad, especially in Yemen, with her policies towards pilgrims and the mismanagement of the Haj pilgrimage, Saudi Arabia cannot count on increasing revenue from that source. During the September 2015 stampede in Mina, Mecca, at least 2,236 pilgrims were crashed to death. Some reports put the figure at much higher than that. Such repeated preventable accidents will put many pilgrims off travelling to Saudi Arabia.

  4. Of course, all of this is suggests that it need not have been this way. Almost any other expenditure or investment would have been better than Saudi’s wasteful conduct in Yemen and Syria. Your analysis on Saudi’s plan is also correct. The IPO of Aramco and the resulting interest of the base investment $2-2.5 trillion would only help to mitigate their current budget deficit of near $100 billion dollars. After oil, Saudi Arabia would still be a major energy producer, shipping excess solar energy to Europe and the rest of the world. However, the trade dynamics with solar energy would be far different to what is currently done with oil.

    Your concluding sentence is probably also apt. “It has been a great party since the 1940s; it is going to be a hell of a hangover.” For the world economy, global warming will unfortunately have severe negative consequences, and perhaps irreversibly so. Some countries (Bangladesh, India, Pakistan, Nigeria, DR Congo) will pay a far larger consequence of global warming. Saudi, itself, will probably not lose much as a direct consequence of global warming, but will lose out in other ways.

    Saudi Arabia should invest in it’s people. The idea that it forever live like royalty off the interest of some oil savings is laughable. The world is already moving on, and if Saudi Arabia does not actively change trajectory, it will be left behind. On a brighter note, the potential end of Saudi dominance in middle eastern affairs is almost surely a salubrious outcome for us and residents in the middle east.

  5. “The kingdom’s geographical centrality to world commerce, with 30% of global trade passing through the 3 major sea routes that Saudi Arabia bestrides (not sure what the third is, after the Red Sea and the Persian Gulf).”

    Right on. Yemen is not a Saudi puppet state yet! Maybe then they can claim the Indian Ocean!

  6. Regarding Saudi Arabia, Prof. Juan Cole of Informed Comment says of their decision to move away from oil, “It has been a great party since the 1940s; it is going to be a hell of a hangover.”

    My own thoughts are that the version of Islam the Saudis have promoted abroad has been at the root of much of the terrorist mess we have endured over the past few years. That such a regime which panders to a bunch of retrogressive and viscous men, regards others as less than decent, educates children to hate Jews, and turns a blind eye to the wickedness at home…such a regime deserves to founder and the profligate who have benefited, to be punished.

    • When the oil money runs out, the rest of the Muslim world will not long tolerate KSA’s control of the Holy Cities. Expect the government to collapse.

      Expect most of the princes to have moved to London, New York, Hong Kong, Tokyo, or whereever before that.

  7. And that’s even with two important questions left aside:

    Who’s going to do the work when they can’t afford slave labor anymore?

    A large majority of the world despises the Saudis for their behavior and policies and doesn’t want to have anything to do with them, if it weren’t for their oil.

  8. They must be considering using the oil to manufacture plastics and organic chemistry products in general.

  9. I have heard that they are/have purchased lots of land out west here in the USA and will be planting crops but pulling/using all the water that the current ranchers need and then shipping it back to their land.

  10. Probably that third route is the Gulf of Aden, also not a big money maker.

    KSA will remain stuck on oil, following many other resource-cursed nations that have tried to get off their dependence on their overly abundant exportable natural resource. What will keep them on oil is not only that they have the world’s second largest reserves, but they have the lowest production costs aside from Kuwait. Even in a world of falling demand for oil, the Saudis will be producing it and exporting it long after most of the rest of OPEC will have shut down.

    Oh, and the largest export from there prior to the discovery of oil was dates, although the Hajj has always been a bigger money maker.

  11. Yes .. the price of oil will stay low until our civilization collapses OR fossil fuels get banned.
    The Saudis woke up to this fact a while back and opened the spigots. They will sell off their cheap, (relatively) ‘clean’ oil while they still can.
    Fracked shale oil & gas, and especially bitumen, will be shunned.

  12. 70 years of wasteful living, now they’re going to become industrious? Not going to happen.

  13. I have before expressed the idea that Prince Salman is an Arab neocon, that somehow he has assimilated the predatory ideology of Cheney and Prince Bandar.

    Now, let’s consider the possibility that neoconservatism is not really an ideology to restore an empire’s failing fortunes, but a last giant con job, to inflate an imperial bubble knowing full well that it will pop. Just as investors rig the system to profit from their speculative bubbles.

    Privatization is the big con that we repeatedly see in neoconservative and neoliberal scams. Public services and resources are sold off to cronies here and abroad, until there’s nothing left that the public can use to reverse the process when they wake up from their patriotic dreams. So first we need to get those dreams going, by war.

    War first, which enables a financial bubble, which hides the hollowing out of the economy, then the crash. What next? Bailout? Martial law? Maybe this is where the individual tricksters get to improvise. Maybe it just repeats over and over until the last cents have been extracted. The ultimate privatization scam for America will probably be when the Social Security fund is finally turned into private stocks, which will crash after the rich have gotten their insider warnings and cashed out (for the next great global currency). The ultimate Saudi privatization is obviously Aramco. There’s nothing else close in value. It will be a much faster process in Saudi Arabia’s undiversified economy.

    Who will really own the privatized Saudi Arabia? How quickly will they flee?

  14. Not a second too soon when Middle East oil becomes a remedy for crotch rash and a cure for hemorrhoids…. No oil means no more wars… sand does not burn well. Law degree from a local college? that means his grades in high school were so low he had to be be a prince to get admitted to college at all…. IQ? you guessed it! SA is not Korea, or Japan, or Germany…. Development needs culture and freedom and creativity and transparency in government…. by the time these are developed…..well…. maybe the rest of the world will be schmoozing with Martians.

  15. “As for the sovereign wealth fund, let’s say the ARAMCO partial IPO actually realizes $2 trillion. Let’s say it gets 5% on its investments after overhead and that all $2 trillion are invested around the world. That would be $100 billion a year, or 1/6 of Saudi Arabia’s GDP last year. It doesn’t replace the oil.”

    Are we appraising 5% of Aramco to be worth $2tr? Sounds like a pipe dream to me. I doubt if the entire company would fetch that sum. Who is going to buy it?

  16. Saudis are going to be consumed by own incompetence. They misused fossil water and have misused oil bounty. The scary thing is US dollar depends on these incompetent people. For different reasons both US and KSA have badly educated their populations. Both will suffer the consequences. US in 20 years will be country of mostly poor old and young people so will be even more debt dependent than now and that is scary.

  17. Here are some links to back up what I said earlier:
    link to theroot.com
    Why Are Democrats Still Chasing White Voters When Brown and Black Is Where It’s At?

    link to artvoice.com

    Detroit is America

    USA IS #7 IN DEBT TO GDP, BUT #2 IN DEBT TO REVENUE

    link to visualcapitalist.com

    link to washingtonpost.com
    We can’t save the economy unless we fix our debt addiction

    Debt addiction relies on this:
    “The petrodollar system elevated the U.S. dollar to the world’s reserve currency and through this status, the U.S. is able to enjoy persistent trade deficits, and become a global economic hegemony. The petrodollar system also provides the United States’ financial markets with a source of liquidity and foreign capital inflows through petrodollar “recycling.”

    link to investopedia.com

    link to dailymail.co.uk news/article-2007795/ Achievement-gap-Hispanic- white-students-unchanged- decades.html
    ‘Sobering’ report shows education achievement gap between Hispanics and whites remains unchanged in two decades

    link to nextcity.org

    Report: Poor U.S. Students Receive Developing-World Educations

    link to cnbc.com
    Most older Americans fall short on retirement savings
    link to money.cnn.com
    Millennials turn up heat against low wages
    link to washingtonpost.com

    Majority of U.S. public school students are in poverty

  18. It is unclear to me (an economist) what Prince Muhammed bin Salman bin Abdulaziz al Sa’ud really thinks he is up to with this partial ARAMCO IPO. Most of the publicity has been about the large amount of money that it might raise (or not) that will then be added to the Saudi sovereign wealth fund, which will presumably invest abroad and provide a flow of income. But this will be offset by the loss of a share of profits to the new partial owners. Not at all clear that there will be a net gain by all this.

    Of course he may be looking at using some of that windfall to offset short term budget deficits. But that is not a sustainable policy, unless he continues to sell off more and more of ARAMCO and similarly uses the money. But again, while that would stretch things out, eventually that comes to an end.

    Another argument might be that he has bought into general privatization ideology of private ownership is more efficient than state. Maybe, but this is a selloff of only 15% or something like that, which will not involve any change in management.

    Finally it should be noted that this reverses a long history. At the Red Line Agreement in 1928 in Achnacarry Castle, Walter Teagle of then Jersey Standard (now Exxon Mobil) was granted Saudi Arabia (while now BP and Royal Dutch Shell took other parts of the Gulf with the red lines drawn around them on a map on a table). ARAMCO was initially Exxon, Mobil, Gulf, and Texaco and found oil in 1938. They owned it and they took nearly all the profits. Starting in 1948 (or thereabouts) King Abdulaziz gained a 50-50% profit-sharing agreement that was the model for later such agreements in many oil-producing nations. By the time of the OPEC price hike in 1973, the Saudis had nationalized ARAMCO and their oil to get 100% of the profits. Now Muhammed bin Sultan wants to undo all of that, and people are cheering him?.

    • I wouldn’t rule out that the idea of selling some of ARAMCO stake to “big oil”, came to this juvenile prince out of fear and insecurity. Having US companies owning “part of the rock” he thought, it will compel them to come to defend the KSA regime to protect their stake. Maybe they’ve done that before, even after 1973 when 100% of ARAMCO had become Saudi, but it won’t happen again, not when oil is good for ointment. His plan is a pie in the sky and a mirage in the Empty Quarter. It will be good for the 1% of the world, though, through investment, fraud, and embezzlement.

  19. Wow – the negativity against Saudis here is remarkable..
    I say it is a good start; better late than never.
    It does not take rocket science to invest in, manufacture and maintain solar energy infrastructure..and export energy in electrons…
    Salman should be commended for trying to change the beddu culture..

    • You’re mixing up several distinct questions. Is Prince Md. correct that Saudia needs to transition from petroleum? Yes. Should he be applauded for urging it? Yes.

      Did his speech or interview give any indication of how exactly that could be accomplished or how the oil income could be replaced?

      No.

  20. First I thank you for puting some effort on this article, yes some and I will say why later on

    Secondly, Wow, so much negativity against my country (I am From SA) especially recently and it seems outa nowhere!

    I understand that Saudi royals are seen as oligharch by many (rightly so) but theire contribution to world order is next to nothing compared to American and European oligarch.

    Moving on to the article.. Yes MbS plan seems a bit over shooting and not everyone is buying it in SA reģardless of the media ads. That, however, is not because people here are limited and closed minded but because similar things been said over and over in the last 40 years.

    I do have few reasons to buy it non the less. MbS is young and ambitious, something SA lacked in its top leaders for.. well..ever!
    On top of that, he is hungry for reforms..something that was clear from day 1.

    The infrastructure boom and the plan to expand it even further (tho at slower rate) is something that been missing in SA and the region.

    SA surpluses were trasfared mostly to US bonds and US economy (as the case in JP and China) but now SA can utilize its assets (ARAMCO) to drive forigen capital (and mostly expertese) to shake up and drive the lazy private sector in SA.

    2.5 milion square km that is rich of minirals and history and located in a staregic position can be better utilized. 30% of man power in SA are non Saudi citizens which give them little incentives to look after SA future.. that will slowly change with the introduction of the green card program (no specific details yet)

    Africa on the rise! Yes slow.. but definitly rising.. having a direct route there is a plus (the bridge)

    SA was over spending on many gov projects with little to show for.. MbS was on top of that making sure the goods match the price!

    Yemen is slowly gathering around its elected righful gov. and rebeling against the Iranian backed huthi invadors. It is not little evidence Huthi backed by Iran mullas since they both admit it day and night!!

    Syria is a tragedy and I pray for the people of Syria.

    • I don’t usually allow pure propaganda as comments because it encourages paid-for comment and trolling.

      Your picture of Yemen bears no relationship to reality. Iran is virtually absent, the Houthis are Yemenis, and SA is a foreign power that has bombed civilian infrastructure, ports and markets to smithereens leaving over a million people homeless and most Yemenis food insecure.

      As for negativity, if you think simple economic and social analysis that doesn’t reproduce your national ideology is negativity, then you aren’t ready for these pages. Many are not.

  21. Prof. Cole:
    But is Md. b Salman really TRANSITIONING from petroleum? We need to give this another thought. I would be the first to applaud him if he’d pursue a policy that would keep the petroleum PERMANENTLY under ground. But he is not. He wants his trillions from others… who will do the extracting, so he can invest his riches in markets elsewhere. What that gives him and his family is liquidity and mobility. They would no longer be tied to the land, should a revolution knock on the door. And that incipient revolution scares the bejeezus of the Saudis. Why do you think the Saudis hate Iran with such passion? Because of the Shia-Sunni divide? No. That is a convenient fig leaf to seduce the ignoramuses who go out to fight the rafidis. What the Saudis hate and fear most is how Khomeini showed a path to mobilizing the religious sentiments of a population to topple a thieving, despotic monarch and replacing the regime with a democracy, albeit theocratic, which has survived all these decades in spite of bellicose belligerence from US.

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