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When The Largest Oil Exporter Quits the Game (Forbes)

My latest article now on Forbes


University of Houston Energy Fellows

Emran El-Badawi, Program Director and Associate Professor of Middle Eastern Studies

oil-pumps
(Forbes)

When The Largest Oil Exporter Quits The Game

“We have a case of oil addiction in the Kingdom of Saudi Arabia which is dangerous.” So says Muhammad ibn Salman Al-Saud, deputy crown prince and minister of defense in his highly publicized April 25, 2015 interview with Al-Arabiyya. He continued, “We should treat oil as an investment, not a primary or absolute commodity.”

This is precisely the impulse behind the “Saudi Vision 2030.” The plan was crafted by Prince Muhammad – a young but shrewd visionary in his own right – and its aim is to wean the world’s largest oil exporter of its ‘dangerous addiction’ by 2030.

The 15-year plan comes at a time of historic economic and political instability. Since June 2014 oil prices that typically had been over $100 per barrel fell to below $50 and have not recovered. Going from “hero to zero” cut over 350 thousand energy sector jobs in just one year – 120,000 jobs in the U.S. alone – and starved the Venezuelan economy, literally. Meanwhile much of the Middle East still suffers from war, popular demonstrations and renewed government crackdowns since the so-called “Arab Spring” of 2010/2011.

The Impact of Oil on MENA Societies

Studying the Saudi 2030 Oil Plan, its political context in the Middle East and North Africa (MENA) region, and the global energy market became part of my mission as a researcher and educator at the University of Houston. I piloted an interdisciplinary course last summer for UH Energy and the C.T. Bauer College of Business on “Oil, Religion and the Middle East.” In this course, students of engineering, political science and the humanities came together to discuss the impact of oil on MENA societies. We examined in detail:

1. The “oil curse” and the phenomenon of the “rentier state”
2. How the oil and gas sector shapes cultural and social norms
3. Initiatives promoting transparency, corporate social responsibility (CSR) and environmental sustainability.

And what does religion have to do with oil in this region? Everything. Or as Prince Muhammad summarizes, “Our constitution has become scripture, tradition and oil!”

King Salman Al-Saud remains the “custodian of the two holy mosques.” His Kingdom is simultaneously the most powerful member state of Organization of the Petroleum Exporting Countries (OPEC) as well as the Organization of Islamic Cooperation (OIC).

In other words, Saudi Arabia controls global oil as much as it does modern Islam. Therein lies the gravity of this economic plan.

Vision 2030: Growth, Diversification and Investment

Currently Saudi Arabia remains the largest global exporter of oil at about 360 million barrels per year; it is home to the largest proven oil reserves at almost 260-270 billion barrels (18 percent of global reserves). So how does the leader of the pack quit at the top of his game? Among the plan’s details are three sweeping economic changes:

  1. Selling 5 percent of government-run Saudi Aramco in the largest IPO in history
  2. Reducing government subsidies and introducing taxes for the first time
  3. Establishing a $2 trillion national investment fund

Valued at several trillion dollars Saudi Aramco remains the largest corporate entity in the world – state-run or otherwise. Aramco’s precise value is a state secret, which is a problem for any investor. So the plan calls for increased transparency. The size and importance of the company mean the Saudis are unlikely to give up the strategic value of oil itself. They might instead turn over logistics or petrochemicals to the private sector.

For an investment deal this big there are skeptics as well as optimists– and justifiably so. In sum, a successful IPO is critical to the plan’s execution … and its credibility.

Reducing government subsidies is a must. Since its founding almost a century ago the Saudi welfare state has given generous lifelong subsidies to its citizens. There are no taxes to speak of, and immigrant workers make up 30 percent of the general population. Government hand outs and foreign labor are part of Saudi culture. This might explain why the government has begun to tax immigrant workers but not Saudi citizens – a highly problematic start. How will imposing income, property or utility taxes affect the demographics of the kingdom? What ripple effects will this have on GDP, labor laws, political reform? Only time will tell.

When it comes to his investment, Prince Muhammad is on more solid ground. He claims the “Saudi mindset is a financial mindset” – and he is right. The Saudi central bank holds $117 Billion in US treasury bonds – surprisingly low given its sheer wealth. On the private sector front, the billionaire Al-Waleed ibn Talal, a member of the Al-Saud royal family, has bailed out everyone from CitiGroup to GOP presidential candidate Donald Trump. This is to say nothing of domestic Saudi investment in infrastructure, healthcare and retail – which are all state of the art. In this vein a $2 trillion investment fund may have a chance of diverting resources from oil towards realizing the prince’s dream to make Saudi Arabia a “global investment powerhouse.”

The plan also calls for diversifying Saudi Arabia’s economy – currently 90 percent oil driven. What other industries can flourish in the desert? The plan aims to spur growth in natural gas, real estate, mining, tourism and other sectors. The plan also calls for creating jobs for both men and women, improving people’s quality of life and – given the government’s religious mandate – improving the country’s morals while empowering its global Islamic prestige. Overall, the stated goals of Vision 2030 are ambitious bordering on inconceivable. But they are steps in the right direction.

Why Now?

For energy economists and historians – even the skeptics among them – the 2030 Saudi Oil Plan is long overdue. It represents a milestone in global energy and geopolitics: using oil wealth to divest from oil. It also comes in the wake of the Kyoto Protocol of 2005, Paris Agreement of 2015, China’s “five year plan” to reduce air pollution and other concrete efforts by the world’s largest economies to cut emissions in response to climate change. By framing the plan as a “vision” and underscoring large government projects, the Saudis are doing business the “Arab way.” President Abdel Fattah El-Sisi’s “New Suez Canal” has been the region’s most recent marvel, although revenues have been too low to help Egypt’s struggling economy. But the Saudis are thinking much bigger than the Egyptians anyway. It was Prince Muhammad ibn Rashid Al-Maktoum’s 2004 economic development plan, “My Vision,” that transformed Dubai into the opulent global city-state it is today. (The Saudis and Emiratis are also competing for who can build the tallest building in the world – an entirely different matter!)

Saudi Arabia is also fighting a number of foreign as well as domestic battles. Quarrels over succession within the Al-Saud family have persisted for years; Saudi women are increasingly active in their fight for equality and the nation’s youth are increasingly marginalized and open to radical influences. The kingdom is mired in wars in both Yemen and Syria, draining a record $100 billion out of the Saudi economy between 2015 and 2016 alone.

In both wars its arch nemesis is Iran, with whom U.S. president Barack Obama has made a deal. To complicate matters further, today’s record low oil prices are the result of economic warfare between Saudi crude and U.S. shale. In this context, Vision 2030 means the Saudis are desperately getting rid of a depreciating commodity – some analysts say bursting the “oil bubble” – and adjusting their economy for a future where oil may be overtaken by alternative fuel sources. That, however, is a subject for another day.


Dr. Emran El-Badawi is Program Director and Associate Professor of Middle Eastern Studies in the Department of Modern and Classical Languages, at the College of Liberal Arts and Social Sciences, University of Houston. His research examines liberalism, Islamism and the impact of oil and gas on MENA societies. His work includes advising government, legal and business communities on Middle East related projects.

UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.

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