Written by: Saul Brodkey
Soon after the first oil prospecting expeditions seventy years ago, the Arabian peninsula was tipped on its head. Saudi Arabia went from a barren desert kingdom reliant on subsistence agriculture to a bustling oasis with a GDP per capita on par with Canada. The petroleum industry accounts for nearly all exports out of the country and 42% of Saudi Arabia’s GDP. However, as governments worldwide take increasing measures against climate change and electric cars gain ground in the automotive sector, Saudia Arabia will need to abandon its oil dependence and diversify its economy.
Petroleum certainly has applications outside of energy and fuels. Petrochemicals and plastics permeate everyday life through cosmetics, packaging, and cleaning products. Nevertheless, gasoline and other transportation fuels contribute to 68% of American crude oil consumption. The petroleum industry depends on continued demand from transportation needs. Saudi Aramco, a state-owned enterprise, dominates the oil industry in Saudi Arabia. Prior to low crude oil prices stemming from the first months of the COVID-19 pandemic, Aramco was the most valuable company on Earth, with a 2019 income of $88 billion. Likewise, Saudi Arabia’s economy is pegged to fuel.
In the past, gasoline maintained inelastic demand; however, the rise of electric cars and their independence from petroleum-based fuels undermines gasoline’s inelasticity in the market. Following Tesla’s example, the auto industry, from Volkswagen to GM, threw their hats into the electric vehicle ring. The latter plans to shift production solely to electric vehicles by 2035, though the feasibility of this is questionable. Deloitte estimates electric vehicle sales will grow 29% every year of the next decade, with electric vehicles eventually contributing a third of new car sales by 2030. The increasing elasticity of gasoline will chip away at global demand and, consequently, crude oil sales. The timing of peak oil demand has been conjectured to little success for almost a century now, but if trends maintain themselves, peak oil demand will occur in the next few decades. Even if climate change efforts fail to curb oil by law, BP projects global oil demand to peak in 2030.
The consequences of peak oil demand are obvious. Falling oil exports imply a lower GDP and subsequently lower standards of living in Saudi Arabia. Given 87% of the government’s revenue stems from oil, the government would be rendered bankrupt without substantial tax hikes. None of this is to mention the jobs that the country will lose with a shrinking petroleum sector. Recognizing the risks of continued oil dependence, Saudi Arabia took the initiative to restructure its economy five years ago. Spearheaded by Crown Prince Mohammed bin Salman, the Saudi Vision 2030 plan is a social and economic program aimed at diversifying and modernizing the country by 2030. The economic aspect of Saudi Vision 2030 can be broken down into two agendas: privatization and tapping into new markets.
The private sector in Saudi Arabia, mostly excluded from the oil industry, has steadily grown to over 50% of the GDP. As part of a law passed in March 2021, industries ranging from education and healthcare to transportation are rapidly transferring from public to private ownership.
Even Aramco, in 2019, became publicly traded, though only 1.5% of shares are public. Over the next decade, the Saudi government plans to invest approximately $3.2 trillion in the private sector. By altering the business environment to suit private sector growth, the hope is to make the private sector the backbone of the new Saudi Arabian economy, aiming to account for nearly two-thirds of the GDP by 2030.
The natural by-product of privatization is competition and innovation, leading to the second part of Saudi Vision 2030’s agenda: new market opportunities. Saudi Vision 2030 is placing bets and hopes in tourism. Investors are hoping to transform Saudi Arabia into one of the world’s foremost tourist destinations with a jaw-dropping $810 billion worth of investments. Qiddiya is the first of several Saudi megaprojects that seek to aid the shift in the economy. Qiddiya, adjacent to Riyadh, aims to essentially become the world’s Disneyland, with a series of amusement parks, stadiums, entertainment venues, and racetracks. The cost of infrastructure alone for Qiddiya is estimated to be around $8 billion, with the final price tag likely to be much higher. Tangent to this effort are recent attempts to bring international sporting events to the country, such as the 2021 Saudi Arabian Grand Prix, the 2027 AFC Asian Cup, or the 2034 Asian Games.
Several hurdles oppose the tourism ambition. It’s unclear if the travel and hospitality industry, in general, will rebound after the pandemic, especially internationally. Additionally, the political and social atmosphere of Saudi Arabia generally alienates Western tourism. Despite progress both prior and under Saudi Vision 2030, the legacy of Saudi Arabia’s less than stellar women’s rights record dissuades potential tourists from more liberal societies. Compounding political hurdles, Jamal Khashoggi’s death in 2018 stunted earlier endeavors into tourism, such as the country’s second WWE event.
Besides tourism, the tech sector is expected to fill the void left by oil. In conjunction with Aramco, Google is investing in the country’s cloud infrastructure, accompanied by similar moves from Amazon. The outcome of this will hopefully jumpstart a domestic tech sector to compete abroad. Tying everything back together neatly, the Saudi Public Investment Fund (PIF) has gambled on the future of electric vehicles. Lucid Motors, an up-and-coming electric vehicle company based in the US, received over $1 billion in funding from the PIF. In return for the investments, Lucid, hopefully, will build a production plant in Saudi Arabia, setting the stage for the country’s entry into the market. Emblematic of these technological efforts is NEOM. With a $500 billion price tag, NEOM is a planned megaproject in the country’s northwest. Encompassing a landmass equal to Belgium, NEOM aims to be the world’s foremost tech hub, with technological goals such as flying taxis, artificial clouds and rainfall, and an AI that can monitor the entire city. While certainly these planned technological wonders teeter on a pipe dream, they nevertheless show Saudi Arabia’s commitment to progress in the tech sector.
NEOM and Qiddiya only break the surface of the Saudi megaprojects. These megaprojects, often predating Saudi Vision 2030, seek to erect cities and industries essentially from scratch. The King Abdullah Economic City, or KAEC, broke ground in 2008 on the shores of the Red Sea. KAEC sought to be home to 2 million people with a series of new universities, resorts, golf courses, and a world-class port adjacent to the Suez Canal. Today, KAEC, after billions poured in from domestic and international investments, still is not complete. For all intents and purposes, KAEC is a failure, yet these megaprojects continue, and the success of Saudi Vision 2030 lies in the hands of these empirically-attested wastes. The Saudi megaprojects echo Stalin or Nero’s gigantomania; they are massive undertakings fueled purely by notions of grandiosity rather than practical use or efficiency. Case in point, as part of NEOM, just under $200 billion of NEOM’s budget will be invested into creating a city that is just a 106 mile long straight line, cleverly named “The Line.”
Will Saudi Vision 2030 succeed in shifting the Saudi economy? There’s certainly a commitment by the Saudi government towards the metamorphosis; however, the means of going about it are questionable. The half dozen megaprojects such as NEOM or Qiddiya carry exorbitant price tags with them with only speculative returns on investment. Essentially, the Saudi economy is going from placing all its eggs in one basket to placing all its eggs in a different basket. There are better ways of burning money than megaprojects. Idioms aside, a series of smaller investments, fueled by current oil revenues, into the Saudi private sector and human capital would, in all likelihood, net greater diversification and returns to the economy at a fraction of the risk. While the Saudi government should play a role in bankrolling and monitoring the initiative, top-down economic planning leads to oversights and numbness to market forces that otherwise may benefit the economy. That said, privatization efforts currently underway show promise for Saudi Arabia in a world with declining oil demand, regardless of the megaprojects. In summary, the Saudi government needs to be applauded for its forward-thinking efforts in the face of change; however, there’s a fine line between healthy ambition and being Icarian. Much of these efforts sadly rest on the latter side of this dichotomy.