How will Saudi Arabia reduce dependence on oil?

Screenshot 2016-05-03 20.20.54

The (un)expected turning point occurred in the energy market when one of the world’s biggest crude oil exporters – Saudi Arabia declared that it will cut dependence on oil revenue by 2020. The new ambitious strategic concept intends to lay out a new economic trajectory amid the deep crisis in the oil market. The chief mastermind behind this ambitious plan is Minister of defence of the Kingdom – a top Prince Mohammad bin Salman.  According to his latest interview to Bloomberg, the main idea of the concept will be released in 6 weeks. However, a long oil-boom period left the Saudi Arabia’s economy dependent on oil export, it made the country the biggest oil exporter. Yet it is very arguable topic whether the new economic reforms will be successfully implemented until 2020 or not.

Prior to the crisis in oil market, taxes for oil export in Saudi Arabia consisted 90% of the government revenue (2012), but in the shadow of the slump in crude prices (from $110 up to $30) the government revenue downed up to 70%, which caused unforeseen deficit in ($98 billion) the state budget of Saudi Arabia after long period of time. The Saudi 2016 budget is estimated to be based on a $37 a barrel for Brent oil prices and an annual average export level of 7.2 million barrels a day of crude oil, he said. The 2015 budget was based on a Brent price of $47 a barrel and the same level of crude exports. Under such conditions prince Mohammad bin Salman decided to take strong measures in order to fulfil the economic shortages, such as to reduce a mass import of the U.S made weaponry. Prince Mohammad bin Salman belongs to a royal group who is in favour of improvement of national military industry and defence system.

In the light of declared reforms, the Ministerial Cabinet of Saudi Arabia has approved a “Saudi Vision 2030” plan. The Saudi Vision 2030 plan will re-calibrate its strategy on energy assets after the budget deficit dramatically impacted on the country. Oil accounted for 72% of Saudi’s total revenue in 2015, made innovative diversification and strategy in the new game. Seemingly,the plans of Prince Mohammad bin Salman include the selling of shares of Saudi energy giant, Aramco, and the establishment of a new investment fund with a budget of 2 trillion dollars. Saudi Aramco is the world’s leading oil company with 10% of global oil production. Undoubtedly, with this budget it could become the world’s largest fund, and the earned capital will be transferred to Saudi-linked foreign companies that mainly act in non-oil sector. The income might be the main finance source of Saudi Arabia in the next two decades. Apparently, the selling of shares of Aramco will not be sufficient for full implementation of reforms, as there is also need for huge privatization policy, such as privatization of state-owned telecommunication companies, airlines, and medicine, which is free of charge for all Saudi citizens. Moreover, additional cuts in government subsidies are also necessary, even if Saudi citizens will pay additional taxes for water, food, and sugary drinks.

At a time of great instability in the Middle East and Saudi military forces in neighbourhood Yemen, Prince Mohammad bin Salman has an intention to create a tool in order to make direct investments to companies outside of Saudi Arabia. The prince stated that the kingdom is committed to the planned reforms, which would go ahead even if oil prices go up again. “If the oil price goes back up, it would greatly support the vision but it does not need high prices. We can deal with the lowest prices possible,” he said.  A part of oil field, the new vision plan targeted the tourism field in Saudi Arabia, as Prince Mohammad expects to increase the number of tourists, mainly pilgrims who travel to the Holy lands every year up to 30 million. Taking into account that Saudi Arabia belongs to “strict theocracy” category, it is necessary to implement open door policy in contemplation of encouraging foreign tourists to travel more widely around the country.

It is not for the first time when a senior, young, and ambitious member of Saudi royal family committed to associate himself with “new economic breath” in the country. Prince Mohammad bin Salman, backed by his King father Salman wants to bring fresh confidence to aforesaid reform attempts. Prior to Saudi Arabia, the similar 2030 economic concepts were adopted in neighbourhood UAE, and Qatar in 2008, and 2009 by young members of ruling royal families. However, comparing to previous years, the current geopolitical turmoil in Arab world threatens to discourage the long-term peace in the Gulf monarchies by turning into strong opposition movements against absolute monarchs.

Despite the fact that detailed information about further plans and reforms has not been released yet, there occurs a possibility that sharp cuts in state subsidies and additional taxes will definitely alter political relations between Saudi authorities and citizens.

This article was published by The Politicon