Saudi Arabia is continuing to profit from its strong oil sector, with state-owned Aramco announcing incredible profits for the second quarter of 2022. But as well as maintaining its oil operations, the country is focusing on using oil revenues to pump funds into other industries as it strives to diversify its economy. As the world transitions to clean energy, smart diversification will ensure that Saudi Arabia can develop its economy sufficiently to remain on top.
Aramco announced a record-breaking profit of $48.8 billion for the second quarter of 2022, marking a 90 percent increase year-on-year. This is the biggest quarterly adjusted profit of any listed company, according to Bloomberg. The growth in profit is largely due to higher oil prices as well as a shift in global demand away from Russia due to sanctions on Russian energy.
President and CEO of Aramco Amin Nasser stated: "While global market volatility and economic uncertainty remain, events during the first half of this year support our view that ongoing investment in our industry is essential both to help ensure markets remain well supplied and to facilitate an orderly energy transition." He added, "In fact, we expect oil demand to continue to grow for the rest of the decade, despite downward economic pressures on short-term global forecasts."
Aramco is not the only oil major to achieve major profits this year, with Exxon, Chevron, and BP all announcing massive earnings. This has led some governments to introduce a windfall tax on oil and gas firms to support a public that is facing rising consumer costs. In the U.K., the government introduced a $5 billion tax on oil firms that benefited from the increase in crude prices.
But Saudi Arabia is now worried about consumer prices and is pumping its oil funds into other industries to help boost its economy. The spill-over effect that its oil revenue boost is having on other sectors has become increasingly clear with its real estate industry boom. Just recently, 300 new properties in Almajdiah Residence's Riyadh complex sold to cash buyers within one month, priced at $266,400 apiece. Greater freedoms for individual male and female buyers have helped support the property boom.
The de facto ruler of Saudi Arabia, Mohammed bin Salman, has been relaxing strict rules on entertainment since he came into power in 2015, allowing men and women to mix more in society and allowing for women to drive and rent or buy their own homes. A greater number of women are now working and 30 percent of investors in Almajdiah properties were female.
The country's GDP grew by 11.8 percent in the second quarter of 2022, with the non-oil economy rising by 5.4 percent, to above pre-pandemic levels. Bin Salman has been stressing the importance of economic diversification, as much of the world begins to shift away from fossil fuels to renewable alternatives. Saudi Arabia is rapidly developing its construction sector, racing to build shopping malls and parks across Riyadh, as well as planning for a new city and a Red Sea tourist development. Saudi's manufacturing industry has also expanded in recent years, with a growing electric vehicle (EV) market. Related: Europe's Gas Price Is Now Equivalent To $410 Per Barrel Of Oil
While much of the country's industrial development still relies heavily on oil revenues, which are likely to fall as oil prices eventually decrease, greater investment in other sectors will help Saudi Arabia develop a stronger, more diversified economy. Investments in manufacturing, construction, and tourism will allow for greater profits to be seen in other sectors as the green transition takes place.
In June, Saudi Arabia announced a budget surplus this year of $15 billion, with $80 billion expected by the end of 2022. As well as continuing plans for rapid economic diversification and expansion, bin Salman decided to save much of the excess funds to avoid the commodity boom-and-bust cycle and focus on shifting the state's economy from being purely oil- and gas-reliant. This is a different approach to previous economic policies during oil price increases, with finances previously being used to boost public-sector salaries, invest in the military, and develop major infrastructure. But with new industrial cities and massive skyscrapers having already been built, the country's current plans for growth are more focused on attracting greater revenues from a range of industries in the future.
Finance Minister Mohammed al-Jadaan explained the previous approach to government spending, "The big mistake that we have been doing over the last couple of decades is we've been coupling these two: When you have more oil revenues, you spend more; when you don't, you're in shock, and that is very painful for the economy."
Saudi Arabia is acting wisely by profiting substantially from its oil revenues by boosting production, as well as pumping funds into economic diversification while at the same time saving some money for when oil prices eventually drop. As the green transition takes place, Saudi Arabia will likely achieve the all-around economic development it needs to build strong industries and ensure long-term prosperity in a post-oil world.
By Felicity Bradstock for Oilprice.com
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Felicity Bradstock is a freelance writer specialising in Energy and Finance. She has a Master’s in International Development from the University of Birmingham, UK. More