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The $2 Trillion Gamble That Saudi Arabia Cannot Win

The $2 Trillion Gamble That Saudi Arabia Cannot Win

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 Al Arabiya, 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 percent 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 percent 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.”

Related: Despite Claims, Ukraine Not Free Of Russian Energy Dependence

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 million) and Turkey (75 million), not to mention Ethiopia (pop. 90 million) 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 percent of world trade going through these bodies of water strikes me as exaggerated. Only about 10 percent 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 billion or 3 percent 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 highly 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 million), and via Iran, Pakistan and India. But Prince Muhammad and his circle are hardliners against Iran and unlikely to foster trade with it.

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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 percent 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 percent 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.

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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.

By Juan Cole via Juancole.com

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  • Last911 on April 28 2016 said:
    PAUL LEO FASO, what you're describing sounds very much like the proverbial perpetual motion machine. Simple physics says it can't happen. There will always be a need for supplemental energy to propel your electric automobile. Yes, range will almost certainly increase, but you'll still have to take the time to recharge your power storage device (battery?). "Unlimited range"? I don't think so...
  • Carter Duchesney on April 28 2016 said:
    Some of this analysis seems sensible and then the author goes and says things like this?

    "They may eventually not be worth anything if hydrocarbons are replaced by green energy or even outlawed".

    "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".

    This type of wild conjecture undermines any credibility this article may have had.

    Who is going to outlaw oil?

    Where does the bulk of electricity come from?


    What a moronic premise.
  • alx west on April 28 2016 said:
    #Saudi Arabia’s Gross Domestic Product in 2014 was $746 bn., of which probably 70 percent was petroleum sales. In 2015 it was only $653 bn.

    wow. i wonder did author take basic math classes , ever?

    lets say SA exports 10 mln barrels per day (that is way high), lets say avg price is 50$ (which is way high), so 10 000 000 * 50 * 365 days equals ~185 bln $ per year..

    so how is it possible that 180 is even close to $ 455 bln ( 650 * 0.7 )?
    so author is wrong at least by factor 2, in reality closer to 3 .

    Americans. 8 wonder of the world.

    good luck
  • PAUL LEO FASO on April 28 2016 said:
    Tesla Motors is driving the market now with the new models at a price point where most people will begin to move into the all electric vehicle.
    What has not made this a stampede is the limitation in range the electric vehicle has today. With new kinetic and ambient energy forces being harvested, it is possible to have an on board charging system propel the electric vehicle an unlimited range.
    An example of that technology is being clarified by the Goodyear Tire Company with its piezoelectric tire which creates electrical charge by converting the kinetic thermal friction of a rolling tire.
    With a diverse array of other kinetic energies being harvested as the vehicle travels, the collective inputs will be ample to keep the system in positive mode.

    Check the details online of The EVUR - ELECTRIC VEHICLE UNLIMITED RANGE.
    I believe the Saudi's already have.
  • Mahooley on April 28 2016 said:
    Is Tyre a now as bare as a rock (Ezekiel 26)? Did Jesus fulfill prophecy? Will there be a highway from Egypt to Iraq/Iran (Isaiah 19:23+24) Would you think the Egyptians and Iranians will honour the God of the Jews? It will happen - sooner than you can imagine - yet not because they will it...
  • Ajay on April 27 2016 said:
    Mr. Cole
    This article is a reasonably good piece of humor. Oil going out of fashion in near future is very much possible?? Electric cars replacing gasoline cars, how much of current electricity is generated from oil I wonder.

    The best part is about the party and hangover, there are many parties going on for a while, I believe fiat currency will go out of fashion much faster than oil and then some of these parties will get over fast.
  • mazen najjar on April 27 2016 said:
    Your article contains a lot of pessimism about Saudi Arabia. You forgot that Saudi Arabia contains one of the highest oil reserve in addition to solar & mineral potentials.
    In fact, your statement “So it seems to me that the Vision for 2030 is mostly smoke and mirrors” is a preconceived idea.
    My advice is to wait and see the implementation of this vision before judging it.
    Thank you.

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