World Economy

Saudi Economy and Tough Issues

Saudi Economy  and Tough IssuesSaudi Economy  and Tough Issues

The Saudi Arabian landscape, now more than ever, is ripe for serious discussions of its future. Over the past few decades the country’s vast oil wealth has ipso facto placed the country as one of the global economic and political leaders. Since then Saudi Arabia has developed some of the world’s strongest state owned enterprises (SOEs). These enterprises not only serve their respective industries, but also other domestic one’s through their administrative capacity,  Arabian Business reported.

However, much of this may soon come to a halt. On the one hand the kingdom’s domestic oil use is expected to surpass its export within two decades. On the other, global oil supply is, according to many, reaching a threshold (or ‘peak’).

Most importantly, the UN has recently issued its “Final Warning” on climate change, that is – unless carbon emissions are reversed by 2020 geological disaster inevitably lies ahead. Therefore, Saudi Arabia is at a point where it must come to terms with its use and production of oil, and ultimately its development of alternative energy resources and sectors. Like any other transition, in order for this to occur, proper incentives must be set in place.

 Economic Development

After World War II the western powers argued that states are the only entities sufficient enough to allow infrastructural and capital accumulation development. Hence, states were to play a leading role in economic development in the developed and developing world. At the time, the Middle East and North Africa (MENA) and parts of the later formed (Persian) Gulf Cooperation Council ((P)GCC) were undergoing decolonization campaigns. As one nation state formed after another, each with a distinct identity, a new era emerged: modernity.

Essentially, the nation-state system gave states more control over the lives of individuals than the previous empires and mandates. Partly to legitimize these new dynamics governments initiated full-fledged governmental campaigns to solidify and establish popular feelings of identification and support.

Collectively, the emerged national sentiments emphasized the distinctiveness of each state and solidified political divisions imposed by colonial powers (within the power-structures of the newly created states). As a result, similar modernization models guided national development efforts throughout the MENA.

In specific, a statist economic model was implemented as it was seen to be appropriate for the anti-colonial ‘nationalizations and state oriented development thinking...” of the time (SOEs in the MENA, OECD).

Aramco, the first Saudi SOE, emerged with the establishment of the kingdom. In 1933 Standard Oil Company (SoCal) was granted a concession by the Saudi government to explore oil in the kingdom. SoCal assigned this concession to its subsidiary—California-Arabian Standard Oil Co. (CASOC). In 1936 the Texas Oil Co. (Texaco) purchased a 50 percent stake in CASOC. Then in 1938 the first exploration success came at Dhahran’s seventh drill site – Dammam No. 7.

 Birth of Aramco

Ultimately, in 1944 the California-Arabian Standard Oil Co. name was changed to the Arabian Oil Co. (Aramco). A few other investors joined Aramco in the subsequent years, further distributing ownership ratios. By 1949 70 percent of Aramco was owned by foreign oil consortiums. Significantly, in 1950 King Abdulaziz threatened to nationalize Saudi oil facilities, resulting in a 50/50 profit-share agreement between Aramco and the Saudi government.  From then on Aramco was nationalized until 1980 when Saudi Arabia achieved 100 percent stake in the company, renamed as Saudi Arabian Oil Co. (Saudi Aramco).

On a geo-strategic and economic sense Saudi Arabia was undergoing one of its most significant developmental phases. With oil income increasing 25 times from 1970-1979 the kingdom’s role on the international stage became germane. Both domestically and internationally large economic strides were made and crucially oil emerged as the greatest driver of public policy, encompassing for 65% of the economy by the end of the decade.

The advent of an only expanding public sector also occurred. Societal functions ranging from telecommunications, water, finance, education to public bodies and Ministries began to develop under the statist model.

Significantly, almost all Saudi’s were affected by this framework, which implied that incoming oil revenue dictated the people and state’s welfare.

By 1970 the first 5-Year Development plan was instituted. This correlated with an increasingly technocratic public sector within a rentier-social contract, along with other significant preceding historical dynamics—globalization, colonialism and western developmental models in general: “Late Rentierism”.

Effectively, then, national development transpired via oil income (and state owned enterprises), bypassing industrialization. As part and parcel of the statist economic models of the surrounding region, national development then must move towards private, alternative economic development.