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Political Analysis

The Saudi Petrostate in a Post-Oil Future

Saudi Arabia, the world’s largest exporter of petroleum products, faces the increasingly urgent issue of a post-COVID green revolution. The Gulf nation’s de facto leader and heir-designate to the throne knows that his country’s reliance on the price of oil to balance its books is a threat to the status quo not just in the Kingdom, but to regional stability too. The young but cutthroat Crown Prince, Mohammed bin Salman (MBS), has his work cut out for him: his family maintains their position through handouts and subsidies which are funded by oil; Aramco, Saudi Arabia’s economic engine, foots the bill[1]. Given the growing trend of developed nations committing to decreasing carbon emissions[2] [3] and developing their renewable energy sectors to combat climate change[4], oil prices are likely to become more unpredictable[5]. According to the IMF, Saudi Arabia needs a price of around $76.10 per barrel to avoid a fiscal deficit[6]. The toxic mix of a plummet in demand and a production war between the members of OPEC+ has meant that the price of petroleum products has taken a beating, with a barrel of Brent Crude being priced at $42.9 per barrel at the time of writing[7], underlining the urgent need for the world’s biggest petrostate to wean itself off black gold. However, this required economic reorientation must be accompanied by social change, which will likely put the government at odds with the Wahhabi clerics that provide the religious foundation of the House of Saud’s claim to sovereignty.

The backbone of the Kingdom’s economy is the veritable titan that is Aramco, hailed as the best run state oil company in the world.


In the 20th century, Saudi Arabia’s discovery and subsequent exploitation of the enormous hydrocarbon reserves that lie beneath the nation’s arid landscape catapulted the nation from an economic backwater to a major regional player with considerable clout on the world’s largest commodity market[8]. The backbone of the Kingdom’s economy[9] is the veritable titan that is Aramco, hailed as the best run state oil company in the world since the Saudi government bought out the other stakeholders in 1980[10]. Aramco’s petrochemical operations account for 50% of GDP and 70% of exports[11], and 80% of the government budget is funded by oil revenues[12]. In April, due to a drop off in demand from China which had locked-down to slow the spread of COVID, and exacerbated by MBS’ miscalculation in engaging in a production war with Russia, the price per barrel fell to below $20, the lowest level in decades[13]. With the price of Brent crude at $42.9 per barrel, it was still 37% down from the January high of $68[14]. Indicatively, Saudi Aramco’s 3rd Quarter report indicates that in 9 first months of the year, the firm’s net income dropped by 45% year on year[15]. To make matters worse, the Kingdom’s second largest source of revenue, the annual pilgrimage to Mecca undertaken by millions of Muslims every year[16], had to be cancelled in 2020 due to the pandemic[17]. To fill the void left in its finances, the royal family plans to borrow $58 billion from investors through bond issuance and withdraw a further $31 billion from its reserves[18], all in the shadow of a 7% drop in GDP and 15.4% unemployment[19]. The severe effect that the pandemic has had on Saudi Arabia’s finances, highlights the vulnerability to global markets and underscores the urgent need for economic reform. However, in this highly conservative corner of the world change comes slowly, illustrated by the fact that slavery was only abolished in 1962.

In order to raise funds for grandiose and futuristic projects, it was announced in 2016 that 5% of Aramco’s equity would be floated on the stock markets. Naturally, the announcement created considerable excitement, since Aramco is world’s most profitable company[20]. Initially, the Saudis sought to list the firm on the New York Exchange, however the way in which Aramco operates was not suited to the blue-chip exchange. For most of the company’s life, it was solely accountable to the Saudi state, and therefore the accounts were not up the standards of transparency required by the Securities and Exchange Commission[21]. Although a sizeable quantity of operations data was made public, financial information remained hidden and opaque. The suspicion, therefore, is that this was to hide payments made to the royal family. Furthermore, the high hopes MBS had for the valuation of Saudi Arabia’s main asset were not quite met: the young prince had hoped for a valuation north of $2 trillion, however western analysts priced the firm at between $1.1-1.7 trillion, nonetheless a staggering sum[22]. For this reason, the initial public offering was delayed repeatedly until December 2019, when shares equivalent to 1.5% of Aramco’s value started trading on the Tadawul, Saudi Arabia’s stock exchange, at a price reflecting a total valuation of $1.7 trillion and raising $26 billion for the Kingdom.

The Crown Prince’s plan, dubbed Vision 2030, sought to free Saudi Arabia from its dependence on oil by 2030.


In the halcyon days of the high oil prices[23], MBS had the financial firepower to make the changes to achieve the economic diversification that the Kingdom required for a sustainable future. Within days of his father’s appointment as king, he was appointed as head of the Council of Economic and Development Affairs (CEDA), created in the wake of fluctuating oil prices in 2014 to streamline the economic decision making process. The Crown Prince’s plan, dubbed Vision 2030, sought to free Saudi Arabia from its dependence on oil by 2030[24]. First, he sought to transfer a portion of Saudi Arabia’s massive oil wealth into foreign investments; second, he aimed to develop innovation in the private sector to ensure stable tax revenue for the state[25] and provide employment to his rapidly growing number of subjects[26]. To shift the Kingdom’s capital into foreign investments, MBS employed a method already used by other Gulf states in the form of a sovereign wealth fund.  In 2015 the Public Investment Fund (PIF) was unimpressive, sleepy, and held stakes in mostly local companies. Oversight of the fund was swiftly transferred from the Ministry of Finance to the CEDA, and the acquisition of glitzy and pricey overseas investments began quickly [27]. In June 2016, it was announced that the fund was acquiring a 5% stake in Uber, a deal worth $3.5 billion[28]; in August, $45 billion was committed to what would be later known as the Vision Fund, in partnership with Softbank and Abu Dhabi’s sovereign wealth fund. Since 2016, the fund has had its ups and downs, and although initially hammered by the crash in equity markets in February due the pandemic, the equity market’s V-shaped recovery have pushed the fund back into the black[29].

The centrepiece of Vision 2030 and perhaps the Crown Prince’s most ambitious project is straight from a science fiction writer’s fever dream. A futuristic city populated by robotic dinosaurs, flying taxis and holographic teachers, its goal: to attract foreign investment in the post-oil Saudi economy. The planned megacity, for which the government has ear-marked $500bn, has been called NEOM from the Greek for new, “neo”, and the Arabic word for future, “mustaqbal[30], and its sleek website promises just that, claiming it “a vision of what a New Future might look like”. Powered purely by solar power, the Prince’s pet project will serve as the centre of a gamut of new industries to Saudi Arabia including but not limited to biotech, food, healthcare, energy, and technology[31]. However, this utopian corner of the Gulf will not be open to anyone: only Saudis with certain qualifications will be permitted to enter MBS’ personal paradise[32].

The planned location of the project is in a sparsely populated are in the North West of the Kingdom on the Red Sea coastline. The inhabitants of this region include the Huwaitat, an ancient semi-nomadic tribe, despite official claims that the location consists of pristine land[33]. The people in this remote region of the country are far removed from the pillars of power in Saudi Arabia and in the eyes of the government they were considered relocatable. However early October of 2020, international media outlets published reports of attempts to silence tribesmen speaking out about their treatment by the Saudi authorities in their attempts to remove them from their ancestral land with both the carrot and the stick. Reportedly 20,000 members of the tribe are set to be evicted due to the project with no plans for what comes after their forced removal. Members of the tribe have sought a United Nations investigation into the matter, claiming that the forced removals amount to the eradication of their people. Furthermore, security forces shot and killed a local activist and tribesman, Abdul Rahman Al-Huwaiti, after he allegedly opened fire on them when they entered his home[34]. Naturally, this raises questions about the ethical foundations that the MBS’ vision of the future is built upon.

Reliance on the religious establishment, creates several obstacles on the Kingdom’s path to reform.


In addition to the Kingdom’s addiction to petrodollars, the economy is beleaguered by other but not unrelated problems. Saudi Arabia has been one of the most conservative societies in the region, as social policies are underpinned by the fundamentals of Wahhabism, from whose clerics the royal family derive their right to rule as the protectors of the holiest sites in Islam[35]. This reliance on the religious establishment, creates several obstacles on the Kingdom’s path to reform. Young Saudis can easily observe the freedom of youth across the world via the internet, and this puts them at odds with religious decrees of the clerics and the government social policies that are guided by them. For instance, women are legally restricted in what they wear, donning at least an abaya, or a long black cloak, enforced by the religious police[36]. The Kingdom’s substantial population (34.2 million in 2019), with a large proportion of individuals under 30[37], is an advantageous asset in contrast to the other, relatively small Gulf states. This presents the House of Saud with a large tax base, but a future in which the absence of petrodollars pushes the government to levy taxes. The absence of not just representation, but also fundamental rights for half the population is a hard sell for the royal family. In light of the fact that plans to cut energy subsidies and cushy salaries for civil servants are in the works to reduce fiscal spending and encourage innovation in the private sector, the House of Saud must curry favour with the public to avoid widespread discontent. MBS, it seems, recognises this, and has made inroads to allow women more freedom. In 2018, women were permitted to drive for the first time, a modest reform that King Abdullah had failed to implement over the course of his 10-year reign. In order to make the pill of taxation without representation more palatable to swallow, this type of change must be implemented. Additionally, strict laws deter expatriates from settling in the country, in stark contrast to the Emirates which have flourishing expatriate communities. For this reason, NEOM will be governed by a different set of laws to the rest of the country, overseen personally by MSB and outside the jurisdiction of the religious courts[38].

It is not just social policy that deters foreign interaction with the Saudi Arabia. The Kingdom’s patchy human rights record is often cited as a red flag for westerners looking for somewhere to park their money. In early November 2017, some of the Kingdom’s wealthiest men were invited to the Ritz-Carlton in Riyadh in what was later termed the “Sheikhdown”[39]. Many were stripped of their assets before being released in what the government called a corruption crackdown, although since, the state has had charges of torture, both physical and psychological, levied against it by both the UN[40] and US officials[41]. To many in the Kingdom, it was a popular move: the Crown-Prince was seen to taking action against the nation’s ultra-wealthy class, including al-Waleed bin Talal, one of the world’s richest men[42]. It may have bought favour with the public, but foreign investors baulked as the ability of MBS to seize funds with impunity became apparent. To add to the allegations of torture, the month prior to Sheikhdown, Lebanon’s Prime Minister Saad Hariri, a dual Lebanese-Saudi national, was also detained in the Ritz-Carlton, tortured and forced to resign in a televised appearance after which he was not allowed to leave the Kingdom. The international crisis was later diffused by an official invitation by French president Emmanuel Macron to Paris, to which the Saudis had to acquiesce as their official line was that Hariri was not under duress[43]. In 2018, the appalling murder of Jamal Khassoggi, conducted in the Saudi Consulate in Istanbul, shocked the world. The nature of the operation suggests that MBS must have known about the plan, although he has refuted these allegations, instead blaming rogue operatives seeking to please him[44]. The sum of these human rights abuses poses a serious ethical dilemma around investing in the nation, which in turn jeopardises the Kingdom’s future.

With the desiccated old men that represent the House of Saud’s traditional modus operandi pushed aside, Mohammed bin Salman has put into motion ambitious plans that will allow the Kingdom to flourish in a post-oil future. However, this pivot away from hydrocarbons is the most radical transformation in the country’s economy since the original exploitation of its oil reserves. This shift is completely at odds with what could be considered the orthodox method of rule employed by the House of Saud, in which preserving the status quo and balance of powers was the motivating imperative. The root and branch economic reform will inevitably require social reforms that will pitch the interests of the royal family, the Wahhabi clergy, and the public against one another. In addition to this delicate domestic situation, human rights abuses of activists and dissidents have outraged the global community, which poses an obstacle to creating close relationships with Western nations and enticing foreign investment. For Saudi Arabia, simply throwing cash into mega-projects and enormous equity portfolios will not suffice, good governance and adhering to the norms of the international community on human rights will be the key to challenging the Kingdom’s neighbours as centres of international business. Especially considering Joe Biden’s victory in the 2020 US election, Saudi Arabia’s primary ally is likely to push the human rights agenda harder than before.

 

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[2] Abnett, K., 2020. EU executive wants tougher 2030 climate goals and billions in green bonds. Reuters.

[3] Ambrose, J., 2020. China’s carbon pledge will require complete inversion of existing system. The Guardian.

[4] Roger Harrabin, 2020. Boris Johnson: Wind farms could power every home by 2030. BBC News.

[5] The Economist, 2018. Petrostates must diversify to cope with fluctuating oil prices. The Economist.

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[13]FT, n.d. Saudi Arabia to keep pumping despite fall in crude prices.

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[18] Brew, G., 2020. COVID-19 and the Oil Price Crash: Twin Crises Impacting Saudi-Iran Relations. Istituto Affari Internazionali (IAI). https://doi.org/10.2307/resrep25274

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[20] Gross, S., 2019. The Saudi Aramco IPO breaks records but falls short of expectations [WWW Document]. Brookings. URL https://www.brookings.edu/blog/order-from-chaos/2019/12/11/the-saudi-aramco-ipo-breaks-records-but-falls-short-of-expectations/ (accessed 10.3.20).

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[24] Even, S., Guzansky, Y., 2016. Saudi Arabia’s Vision 2030: Reducing the Dependency on Oil. Institute for National Security Studies.

[25] Hope, B., Scheck, J., 2020. Blood and Oil: Mohammed bin Salman’s Ruthless Quest for Global Power. Hachette UK.

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[27] Reuters Staff, 2019. UPDATE 1-Saudi sovereign fund’s strategy in focus. Reuters.

[28] Hook, L., 2016. Saudi wealth fund takes $3.5bn Uber stake.

[29] Nussey, S., 2020. SoftBank’s Vision Fund back to black even as some of Son’s tech bets sting. Reuters.

[30] Hope, B., Scheck, J., 2020. Blood and Oil: Mohammed bin Salman’s Ruthless Quest for Global Power. Hachette UK.

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[33] NEOM, n.d. An Accelerator of human progress [WWW Document]. NEOM. URL http://www.neom.com/ (accessed 10.27.20).

[34] Borzou Daragahi, Bel Trew, 2020. Ancient Saudi tribe in danger of ‘disappearing off face of the earth’ to make way for vanity project. The Independent.

[35] Barmin, Y., n.d. Can Mohammed bin Salman break the Saudi-Wahhabi pact?

[36] The Week Staff, n.d. What are women banned from doing in Saudi Arabia? [WWW Document]. The Week UK. URL //www.theweek.co.uk/60339/things-women-cant-do-in-saudi-arabia (accessed 11.16.20).

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[38] Hope, B., Scheck, J., 2020. Blood and Oil: Mohammed bin Salman’s Ruthless Quest for Global Power. Hachette UK.

[39] Hope, B., Scheck, J., 2020. Blood and Oil: Mohammed bin Salman’s Ruthless Quest for Global Power. Hachette UK.

[40] Human Rights Watch, 2018. Saudi Arabia: Allegations of Abuse, Death in Custody [WWW Document]. Human Rights Watch. URL https://www.hrw.org/news/2018/03/14/saudi-arabia-allegations-abuse-death-custody (accessed 11.12.20).

[41] Dan de Luce, Ken Dilanian, Robert Windrem, 2018. How Saudi Arabia’s crown prince crushed his rivals at the Ritz. NBC News.

[42] Erik Schatzer, 2018. Prince Alwaleed’s 83-Day Detention in the Riyadh Ritz. Bloomberg.com.

[43] Chassany, A.-S., 2017. Macron invites Saad Hariri to stay in France.

[44] France-Presse, A., 2020. Jamal Khashoggi murder: Saudi court overturns five death sentences. The Guardian.

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