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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Is Saudi Arabia’s Post-Oil Future Realistic?

Riyadh

In case anyone had any doubts that Saudi Arabia has very ambitious economic growth plans, the 2018 budget, announced earlier this week by King Salam, must have dispelled them. The kingdom plans to spend $261 billion in 2018, its largest-ever budget. And that’s not all.

Riyadh also eyes reducing the share of oil revenues in the total to less than 50 percent. That would be a huge reduction given that oil accounted for more than 90 percent of revenues just three years ago. To date, oil revenues are about two-thirds of the total. So, basically, there are now two questions that pique the curiosity of observers: Where will the money for the record budget come from, and how will Riyadh accomplish the huge cut in oil revenues as a part of the total?

To answer the first question, it seems that the government is counting on higher taxes and duties as well as lower fuel subsidies to get things going. Fuel prices are to rise by as much as 80 percent from the start of 2018 as a result of the lower subsidies, and some new taxes, including a 5-percent VAT and taxes on expats, are about to come into effect.

Leaving aside the effect these changes would have on the population—an 80-percent price hike will hardly leave everyone cold—it’s doubtful that these measures on their own would be enough to fill the state coffers with enough money for the ambitious spending plans. It seems reasonable to suggest that Saudi Arabia is counting on a scenario where oil prices remain high. Related: U.S. Slaps Sanctions On Israeli Oil Billionaire

The shift from an oil-dependent economy to a diversified one does not happen within a fortnight, so it would make sense to make the best of high oil prices while they last. And they may not last as long as most expect: OPEC sources just said yesterday that the cartel’s secretariat has begun work on various exit scenarios for the OPEC/Russia production cut deal. This is remarkably fast, since OPEC and its partners just agreed to extend the cuts until the end of 2018.

The plan is really ambitious, as is everything in the Vision 2030 program of Crown Prince Mohammed. Saudi Arabia will seek to reduce the share of oil revenues to just 42 percent by 2023. How? Apparently, by developing its tourism sector, building the city of the future that will cost it $500 billion, and betting big on renewable energy and nuclear power. Also, with taxes, of course.

Energy historian Ellen Wald lists three possible sources of the higher income that Saudi Arabia will need to generate, in order to break even in 2023, as it plans to do. These sources are, higher oil prices, higher taxes, and diversification. Of course, a combination of the three is also a possibility.

All of these are risky for different reasons. Higher oil prices, Wald says, may be good for Aramco’s bottom line, but Riyadh just cut the state giant’s tax rate to 50 percent from 85 percent to sweeten the upcoming IPO. Hence, the oil contributions to the budget will not be as great as they used to, even if oil prices rally even higher. Related: Aramco’s “Acquisition Hit List”

The topic of higher taxes is a sensitive one for any society, but a lot more so for a society that until very recently had only heard about personal income tax. Anything can happen, at the very least a slowdown in consumer spending because of higher prices. Falling consumer spending is not exactly conducive to economic growth.            

Diversification is the big goal. It is the ultimate goal, actually—an end rather than a means to one. But diversification takes time before it bears fruit. That’s in general. In Saudi Arabia specifically, there is a unique risk: the Aramco IPO. The diversification program of Prince Mohammed relies almost entirely on the proceeds from the listing. Should this fail, Saudi Arabia’s prospects of true diversification away from oil will become very distant.

By Irina Slav for Oilprice.com

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  • Jeffrey J. Brown on December 24 2017 said:
    Saudi Arabia’s Annual Net Exports (Gb/year, total petroleum liquids) and ECI Ratio (ratio of production to consumption) by year, 2005 to 2016, BP data:

    2005: 3.2 (Gb/year), 5.0 (ECI Ratio)

    2006: 3.1, 4.7

    2007: 2.9, 4.3

    2008: 2.9, 4.1

    2009: 2.5, 3.3

    2010: 2.5, 3.1

    2011: 2.8, 3.4

    2012: 3.0, 3.4

    2013: 2.9, 3.3

    2014: 2.8, 3.1

    2015: 3.0, 3.1

    2016: 3.1, 3.2

    Est. post-2005 Saudi CNE based on 2005 to 2016 rate of decline in ECI Ratio:

    ECI Ratio declined at 4.1%/year from 2005 to 2016, implying that ECI Ratio hits 1.0, and thus zero net exports, around the year 2045.

    Est. post-2005 Saudi CNE (based on 2005 to 2016 data) = 3.2 Gb/year (net exports at apparent export peak) X 40 years (est. number of years to zero net exports) X 0.5 (area under a triangle) less 3.2 Gb (net exports at peak) = Approx. 60 Gb.

    CNE Cumulative Net Exports 2006 to 2016 were 32 Gb, implying that Saudi Arabia has already shipped about half of their post-2005 CNE.
  • Robert on December 24 2017 said:
    Do not expect Saudi Arabia to produce anything of value. They wouldn't export oil if the Europeans hadn't created the business for them.
  • Mamdouh G Salameh on December 24 2017 said:
    Yes Saudi Arabia's post-oil future is realistic but it will take quite a long time and will be dependent on a high oil prices and diversification.

    In the short term, Saudi Arabia could use part of its oil and natural gas resources to become the world's biggest producer and exporter of petrochemicals. It could also use part of its oil revenues and sovereign funds to invest in successful companies worldwide. It can also generate income by raising taxes at home. And above all, it can save a lot of money by stopping the war in Yemen.

    Long-term, diversification of their economy is the best bet. They may invest in food production in the Sudan for instance as part of a Gulf Cooperation Council's (GCC) venture. It can invest heavily in solar power and nuclear energy to replace both the oil and gas it uses to generate electricity and run water desalination plants.

    To achieve its objectives as outlined in Vision 2030, Saudi Arabia will continue to need a high oil price to ensure a smooth transition from 90% dependence on the oil revenue to a more diversified one where the non-oil sector accounts for some 40% of the economy.

    Politically it will need the political will to go ahead with its reform plans and to ensure transparency in financial matters. It will also need to involve the Saudi people in government decisions.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School

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