Holy Oil: Saudi Arabia’s Struggle with Economic Diversification

Holy Oil: Saudi Arabia’s Struggle with Economic Diversification

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By Benjamin Lutz

Photo credit: Flickr/wonaboo (https://flic.kr/p/Doj2uW)

Saudi Arabia has more than 260 billion barrels of oil, which accounts for approximately 17 percent of the world’s known oil reserves and, to that effect, Saudi Arabia follows a conservative and protectionist ideology in its domestic and foreign policy. The nation helped create the Organization of the Petroleum Exporting Countries (OPEC) in 1960, leveraging the region’s geographic natural resources in order to raise its political and economic relevance. During the October 1973 Arab-Israeli War, the Arab countries in OPEC declared an oil embargo against Western countries. The destabilizing effects of this embargo reverberated throughout the world, setting a powerful precedent for Saudi Arabia’s allies and enemies on the effectiveness of price controls on oil. The monarchy soon after the October 1973 Arab-Israeli War expanded upon its oil-driven foreign policy initiatives by founding the Gulf Cooperation Council (GCC). The GCC is a consortium of Persian Gulf countries intended to address regional issues and promote cooperation.

Saudi Arabia’s oil pricing policy has been to stabilize the world market and to maintain reasonable oil prices and moderate sharp price movements, a term dubbed as a “price dove.” At the December 4, 2015, and the June 2, 2016, meetings, OPEC decided to maintain its policy of pumping near-record volumes of oil while increasing its collective output price ceiling. Like other meetings, Saudi Arabia stuck with its strategy of defending its market share of stable production, gambling that the lower prices would ultimately drive higher cost producers, such as U.S. shale oil firms, out of the market. However, countries with smaller economies in OPEC are disagree with kingpin Saudi Arabia’s stance because they want OPEC to decrease production to lift low oil prices and their own struggling economies. Contrary to Saudi Arabia’s best efforts, American output has skyrocketed in recent years, leading global oil to be around $45 a barrel. Most of OPEC countries, and especially those in the Middle East, have a much higher break-even point than $45 a barrel. In order to sustain high oil production at a price far below their break-even points, many of these countries are scrambling to find other ways to level their economies due to the fact that most of them are solely dependent on oil revenue.

Saudi Arabia is altering its spending and revenue policies to ensure fiscal sustainability. To counter the amount of money lost due to the price drop of oil, Saudi Arabia is, for the first time, instituting a land tax on its citizens owning empty plots of urban land. These citizens will have to pay a tax of 2.5 per cent of the value of the land each year. Saudi Arabia’s steadfastness in maintaining production, even with this new tax, can be seen as a move to gain political clout in the Middle East. Through partially sacrificing its economic prowess, Saudi Arabia will be able to counter Iran’s growing influence throughout the Middle East, which is undoubtedly their biggest foreign policy ambition. When the oil sanctions against Iran were lifted from the nuclear deal, Iran vowed to increase production of its oil in order to recoup all the money lost from years of sanctions.

If these new technologies and sources of oil become economically viable, the oil powerhouse of Saudi Arabia will begin its decline into obscurity. Of course, Mecca and Medina will always keep Saudi Arabia a relevant country in international relations due to their prime importance for the 1.6 billion Muslims in the world; but in terms of international political economy, Saudi Arabia will not matter when their oil is less economically advantageous than modern technologies and sources. This decline has not begun due to Saudi Arabia’s saturation of its oil on global markets to attempt to ensure their survivability with this contentious resource, in effect shaping OPEC agreements to maintain production and further delaying the inevitable effects of the resource curse of sitting on massive oil reserves. However, since November 2015, the price per barrel has plateaued, either as a testament to Saudi Arabia’s plan of oversaturation or the ebb of international economics. In either case, Saudi Arabia is actively fighting the non-OPEC sources of revenue by overproducing, which further highlights its dependence on oil.

Saudi Arabia recently released its plan for the future of its economy in a plan called Vision 2030. Foreign investment, increased job opportunities for women, religious and non-religious tourism, solar power, and modernization are among the highlights of this plan to truly diversify the one-note economy of Saudi Arabia. These goals are incredibly lofty, especially for a kingdom that has only championed one energy source.

In any case, Saudi Arabia has enough money to outlast other oil competition. While it has started to focus on a diversification plans for its long-term vision for the economic success of the country, Saudi Arabia can afford to reign over OPEC and maintain the high levels of production. No matter the plans in Vision 2030, Saudi Arabia is unmoved in its current production rates and continues to out produce the shale competition, which has seemingly begun to tighten its spigots.

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