Although it’s the largest exporter of oil in the world and holds about 16% of proven oil reserves globally, the price of oil is proving more of a liability these days than the boon to the Saudi Arabia’s economy that it’s been in the past. Of course, Riyadh itself is partly responsible for that, having insisted that OPEC continue to produce oil at rates that almost ensure that the price of oil will continue to fall—at least until the back of the fracking market is broken. Or at least bent.
But that doesn’t mean that it’s relying solely on oil to fund its operations. It can’t, not at current prices, even if the whole “peak oil” theory were nonsense and the upsurge in interest in clean energy weren’t looking likely to finally bring it mainstream. Petroleum is responsible for about 80% of its budget revenues, accounts for 45% of GDP and 90% of export earnings. But at current prices, that’s put the country’s budget in the red; it needs oil to bring in more than $100/barrel to balance its budget, and it can’t keep financing operations forever by means of foreign asset drawdowns or loans. While those strategies will work for a while, if oil remains below $100/barrel, the country has to diversify.
It’s been working on that, although in addition to seeking to develop other sectors, it’s also encouraging efforts in the sectors of power generation, petrochemicals and exploration for natural gas—after all, one sector it knows well is energy. But it’s also looking at boosting telecommunications, information technology and transportation infrastructure.
Other efforts include efforts to encourage manufacturing—Riyadh hopes to capitalize on its centralized location for shipping; although the country is primarily desert, its coastline along the Persian Gulf and Red Sea mean that it holds a strong position, both through the Gulf and through the Suez Canal as well—and retail and wholesale businesses; the country has just announced that it will reduce restrictions on foreign ownership of such businesses so that outsiders are no longer barred from owning more than 75% of such ventures.
It remains to be seen whether the move will create enough jobs to be worthwhile, particularly since the country’s people lack technical skills and education levels that would attract employers, and youth unemployment is high at 28.3%. Indeed, it’s also embarking on a spending program to promote education and job training, marked most recently with the launch of the co-ed King Abdallah University of Science and Technology. It’s an important move; with more than 6 million foreign workers in the country, locals need to be able to compete if the government truly wants to move away from an oil-based economy.
To that end, Riyadh also announced other lower restrictions for foreign investment and visas that will take effect next year. In addition, Saudi Aramco, the state-owned oil company, will be allowing foreign participation in a series of new projects it will undertake in refining, distribution and support services. Banking will also be opened further to foreign participation, with services for individuals and smaller companies providing some of the opportunities for non-Saudi banks to gain entrée.
Broader opportunities for foreign business and investment are just what the country hopes to provide, since its need to move away from an oil-based economy is growing just as foreign investment is shrinking. According to the most recent figures available from the United Nations Conference on Trade and Development, while foreign direct investment in 2012 stood at $12.2 billion, in 2013 it had fallen to just $9.3 billion.