Beyond oil prices
Saudi Arabia will face a financial crisis within two years due to high expenditure and the decreasing price of oil and will face an existential crisis by the end of the decade due to the challenge posed by shale oil, the British newspaper the Telegraph said in a recent report.
The fact is the term “existential crisis” is very accurate. Over the past few decades, Saudi Arabia’s oil wealth has been used to drive the development process, although this is something that has been weakened by the effects of corruption. Riyadh also used its oil wealth to overcome domestic issues, stave off external threats and help others.
The report’s findings are self-evident. Saudi Arabia’s oil wealth is not everlasting — it will lose its value and importance over time, in the same manner that steam and coal energy lost importance in previous eras. Although there are differences of opinion as to when this will happen, these are just details.
Saudi Arabia has been confronted by difficult crises in the past and successfully overcome them, not least the fight against the rising tide of Nasserism in the 1960s and ‘70s, the repercussions of the 9/11 attacks and the ongoing fight against terrorism. Most recently there was the “Arab spring”, the wave of revolutions and revolts across the Middle East.
None of these previous crises threatened the very existence of the kingdom. In all previous cases, the state remained in full possession of the sword of religion and the shield of its oil wealth. However, if its shield is shattered, religion will not be a feasible fallback to overcome the threats facing it and the kingdom will have no choice but to face these crises empty-handed.
There should already be plans in place to deal with this approaching moment of truth. Any rentier state that relies on oil as a major source of income should think about diversifying, not just its sources of income, but also its sources of energy, to protect public funds and invest in future generations.
The Council of Economic and Development Affairs, established by King Salman bin Abdul-Aziz Al Saud and led by Deputy Crown Prince Mohammed bin Salman bin Abdul-Aziz is, in the eyes of the Saudi people, entirely responsible for this daunting task. This council is pursuing this task in an open and transparent manner. One of the first royal orders issued by Salman after he came to the throne in January this year was the restructuring of Saudi Aramco, separating it from the Oil Ministry and granting it more independence under the direction of Prince Mohammed.
So after the restructuring of oil giant Saudi Aramco, will we see a restructuring of the kingdom itself?
If you ask any economic or oil expert about what Saudi Arabia’s budget would look like without oil income the answer is beyond frightening. The issue is not just outgoings being higher than income and a reserve that is already being depleted, but also the threat to the prestige of the state.
Sooner or later these fears will become reality and then the kingdom will be facing an unprecedented threat to its existence. At that point media spin, or the empty statements of patrons, will benefit nobody. Saudi Arabia will face a future of its own making.
At the same time, if we look at this issue optimistically, from the standpoint that every cloud has a silver lining, then one could argue there is a positive impact from all this. It has forced the issue into the open; there is no longer the luxury of ignoring what is happening. The only option is to search for a solution and hopefully it will come before it is too late.