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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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How Vision 2030 Will Transform The Oil World

Saudi Arabia

For evidence that the world is changing, one need look no further than Saudi Arabia. It’s been a good century for the Saudis in general. Having come from the lowest echelons of the third world to a point where wealthy Saudis can drive Bentleys and fly private jets, oil has clearly been good for the Saudis. But what will the Saudis do if it becomes irrelevant in the future? That question is at the heart of a recently released plan from the Saudi government called Vision 2030.

Vision 2030 aims to broaden the Saudi Arabian economy beyond oil. And to do that, Saudi Arabia’s first step is an IPO of Aramco. The plan does not end there though. Vision 2030 is a grand design intended to move beyond a business culture tranquilized by oil wealth and stifled by bureaucracy and replace it with a competitive economy driven by private enterprise. The only problem with this plan – it is without precedent. No other nation has ever pulled off anything like it.

The Saudi plan is comparable in some respects to the post-Communist changes in Eastern Europe, but the reality is that Saudi Arabia with its vast wealth and sprawling royalty is unlike any other society in the world.

Vision 2030 is a broad plan with some specific goals, but not nearly enough. The plan aims to lower the unemployment rate in The Kingdom from 12.1 percent at present to 7 percent. It also aims to broaden the participation of women in the workforce, reduce reliance on foreign workers, and move from a state-driven economy to one powered by the private sector.

Those changes might not seem that significant, but they are the equivalent of a revolution in the Saudi world. Take the goal of reducing reliance on foreign workers for instance; foreign workers are often hired by Saudi companies because they are empirically more productive and they have training and skills that the Saudis often lack. As a result, roughly one-third of the population of Saudi Arabia is made up of foreign born nationals. There are 10.2 million Saudi men, 9.9 million Saudi women, and 11.7 million foreign nationals. Most of these foreign nationals are in Saudi Arabia to work. In other words, the Saudi government is proposing to change perhaps half or more of its current workforce. Related: Canada’s Oil Exports Are Dead Without U.S. Shale Production

Other aspects of the proposal are complicated as well; how can women enter the workforce if they are banned from driving? But perhaps an even bigger problem is the mentality of the Saudis as a group. Oil wealth and government largess has fundamentally changed the way many see the working world. Saudi employers cite the complexity of hiring their fellow citizens. Companies say that if they have job interviews lined up with 10 Saudi candidates, only two of them will show up. Changing the work ethic at that level needs to begin with a complete change in world view at the earliest levels of education, according to some Saudis.

Whatever the future holds for Vision 2030, it is clear that the Saudi world is changing. For investors, this is significant for two reasons.

First, to the extent that Vision 2030 contributes to any type of destabilization of Saudi Arabia, it could upend the oil markets over night. The Saudis produce 3 times what the Iranians do – if social, political, or economic changes engulf Saudi Arabia in turmoil any time in the next few years, oil prices could spike overnight. That is a possibility which is always worth paying attention to.

Second, Saudi royalty are doing all of this for a reason – they clearly see the current state of the world as untenable. The Saudis appear to see the era of high oil prices as being over. Fundamentally they are saying that The Kingdom cannot continue to support all of its citizens on the back of government production. It is not clear at this point what that means or the impact it will have on oil, but investors should be paying attention. The Saudi world is changing, and that change will bleed out to the rest of us over time.

Michael McDonald for Oilprice.com

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