The Looming Saudi Crisis – Oil & Gas and a Whole Lot More

The Arabian Post recently reported that the Kingdom of Saudi Arabia (“KSA”) spent about 5% of its central bank’s net foreign assets.1 The total foreign assets for the KSA amount to just over $36 billion in US dollars.2 So, that is 5% of $36 billion; not a small number. In light of this grand expenditure, it is important to note the following as well: Just after ascending to the throne, King Salman bin Abdulaziz Al Saud issued an order to increase the salaries of government employees and pensioners via a two-month bonus.3 But one of the key questions is this: Does this surprise anyone in the Arab World, the oil & gas industry and/or the analytical sector? Saudi Arabia, as we know, is the world’s biggest oil exporter.4 The KSA is facing a series of quickly escalating problems at home and abroad. With fifty percent (50%) of Saudi Arabia’s population below the age of 25, the country has its share of challenges.5 The nation will need to move quickly to adjust to shifting demands. At the end of the day, the KSA cannot keep spending at this rate and allow oil prices to remain so low. As Newton once said, what goes up must come down.

Undoubtedly, the Saudis have big problems and discontent at home. Mounting pressures in North Africa and the Middle East have not helped, along with the threats of extremism in Yemen and throughout Syria and Iraq. The nuclear issues with Iran, as well as the history of a 10 year war with that country, set the stage for another upheaval of sorts – not to mention the Sunni-Shiite dimension that is affecting and impacting the region. Having spent considerable time in Saudi Arabia, I can attest to the fact that there is disappointment and disenfranchisement among younger people there. And yes, the KSA is doing a great deal to attempt to rectify its problems and to modernize. Massive improvements have come in the form of infrastructure projects (i.e.; the Saudi Land Bridge rail project extending from the West Coast of the KSA to the East Coast) and the Princess Nourah bint Abdulrahman University for Women in Riyadh.

Consider these factors as well:

More than SR204 billion from the 2013 budget was channeled into education, a staggering 25 percent of the Government’s annual spending, and around 10 percent of its GDP. Saudi Arabia is now ranked as the world’s highest spending nation on education. Such initiatives have had a positive impact on the learning outcomes of individuals in the country, with the literacy rate among adults currently standing at around 97 percent, according to World Bank data, up from 30 percent in 1970.6

The KSA certainly deserves applause in these areas. However, the pace of change has not been fast enough and has not impacted enough people yet.

The issue of spending reserves is an important one and it is also multi-faceted. As stated above, Saudi Arabia needs to keep pace and even increase spending both at home and abroad. The United Arab Emirates (home to Dubai and Abu Dhabi) and Qatar provide important reminders about what can be done to positively impact and benefit local populations. Both countries reinvest oil & gas profits into the local economy in a way that is extraordinary and impressive. Granted, the UEA and Qatar do not have the same number of nationals and locals to support, but are – nonetheless – quite successful at creating longer-term opportunities and stability for their local communities. And while one can look slightly East to Doha and South to Dubai for successful examples in the Gulf Cooperation Council (GCC) countries, it is enough to go just a few more kilometers to find widespread discontent and conflict in areas such as Yemen, Kuwait, Iraq and Syria, not the mention Lebanon, Egypt and the Holy Land.

In essence, the Kingdom of Saudi Arabia is facing enormous threats including, but not limited to, the following:

a) A possible military showdown with Iran;

b) The Sunni – Shiite split, particularly pronounced in the Eastern part of the country (which is “oil country” and the land of ARAMCO), and affecting relations with both Kuwait and Bahrain;

c) An exploding population of young people and very few job opportunities to match that population increase;

d) The emergence of ISIS in bordering areas;

e) Human rights challenges at home;

f) Wahhabism;

g) Women’s rights;

h) Problems with infrastructure and logistics;

i) Food and water security;

j) Falling oil prices;

k) The military conflict with the Houthis in Yemen; and

l) The threat of a Saudi-style “Arab Spring”;

Given all of this, the price of oil and revenues generated from the sale of the black gold becomes even more relevant.

Oil prices: In August of 2014, Saudi Arabia cut its oil production by about 400,000 barrels per day.7 This was an apparent attempt to maintain its robust market share despite the dramatic drop in oil prices. According to The Arab Post, “Brent crude has recovered some of its losses, gaining 15 percent this year; Income from oil exports accounts for about 90 percent of government revenue.”8 At this point (and as of July 23, 2015), the price of crude oil is $48.91 and the price of Brent is $56.13 per barrel; by way of comparison, the 52 week low is $48.78 and the 52 week high $94.88). The next lowest period for an oil price slump in recent history was in February of 2009 and the price per barrel was $44.06 (WTI Crude).9 As a side note, the price of crude in June 2008 – just 8 months prior to that – was $146.12 per barrel.10 So what has changed in the world since then?

The answer is this: just about everything. Major dips in the price of oil were experienced post 9/11 ($26.11) and just after the beginning of the financial crisis in 2008 ($44.06). Obviously, these slides and slumps in oil prices can wreak havoc on international markets. They are destabilizing elements on the global scene. As we have are aware, these price drops reduce the ability of countries such as Saudi Arabia to spend both internally and externally. The pace of change and job creation within the KSA can come to a screeching halt. Increases in tension with rebels in Yemen, the Shiite regime in Iran and ISIS in Syria and Iraq only add more fuel to the flame. Indeed, scenes of burning oil in Iraq in a post-war scenario come to mine. Plumes of black smoke thickly rising into the irretrievable atmosphere.

And so more questions loom: What happens then to the world’s largest oil exporter if the price of oil continues to slide and spending at home continues to increase? What if spending at home must increase so as to avoid major societal problems such as exponential rises in unemployment for the younger population in Saudi Arabia? What happens if the conflict with the Houthis in Yemen continues to grow and Saudi defense spending increases as a result? What happens if there is an “Arab Spring” in the KSA and/or if ISIS draws even closer to the Saudi border? Furthermore, what is in store for the future relationship between Iran and the KSA? These are but a few of the notable sentiments and concerns that come to light.

Perhaps these are all rhetorical questions because a reasonable analysis would allow us to conclude that the results for the KSA could prove quite dramatic. At that point and assuming oil prices continue to slump globally, the KSA would need to continue to spend from its $36 billion reserve. This, of course, is a mathematical formula that can – and probably will – lead to a substantial future challenge for the KSA and its people. Additionally, it will threaten to destabilize that area of the world that is already treading on tenuous soil. If any of the above scenarios happens simultaneously or at around the same time, the impact could prove unmanageable by the government of Saudi Arabia.

From a geopolitical standpoint, the threats and challenges to Saudi Arabia can dramatically affect the rest of the world. This is not just because of the price of oil, but it is because of all of the other elements impacting the region at the same time. From the rise of ISIS to the Houthi invasion in Yemen, and from the growing conflict with Iran to the increasing challenges of unemployment at home, Saudi Arabia is in difficult waters at this juncture. And while this may seem like a “regional issue” of little import to the West, it is a powder keg of sorts. In fact, the KSA’s future may be inextricably linked to ours. Therefore and given the geopolitical significance of the country, it would probably behoove the West – as well as a host of other nations – to seriously consider options, opportunities and programs to boost the KSA at this point in history. Only time will tell, but the indicators for a modern-day disaster with rippling effects are present.

End Notes:

1. The Arabian Post – May 1, 2015 – “The kingdom spent $36 billion of the central bank’s net foreign assets — about 5 percent of the total — in February and March, the biggest two-month drop on record, data released this week show. The fall was in part due to King Salman’s order to give government employees and pensioners a two-month bonus after he ascended to the throne of the world’s biggest oil exporter in January.”

2. Ibid.

3. Ibid.

4. Ibid.

5. Arab News – July 23, 2015: “Pearson has welcomed a report by the International Monetary Fund (IMF) that finds youth unemployment in Saudi Arabia could be lowered by reducing reliance on public sector jobs and by improving the competitiveness of Saudi workers in the private sector. Fifty percent of Saudi Arabia’s population is below 25 years, a figure set to increase further in the future, leading to a phenomenon widely referred to as a “youth bulge”. Economists debate whether Saudi’s burgeoning youth population will be a burden or advantage to the country. Such a large number of young people brings with it enormous opportunity for growth through the generation of innovative, new ideas, and a sufficiently large work force to power these ideas into practice. However, if not managed appropriately, a rapidly growing population of young people could lead to an increased rate of unemployment amongst 15 to 25 year olds, a figure which already stands at around 30 percent. The IMF Saudi Arabia Country Report found that a large number of young people will enter the local job market over the next decade, and that creating a sufficient number of rewarding jobs will be a challenge.”

6. Arab News – July 23, 2015: “More than SR204 billion from the 2013 budget was channelled [SIC] into education, a staggering 25 percent of the Government’s annual spending, and around 10 percent of its GDP. Saudi Arabia is now ranked as the world’s highest spending nation on education.Such initiatives have had a positive impact on the learning outcomes of individuals in the country, with the literacy rate among adults currently standing at around 97 percent, according to World Bank data, up from 30 percent in 1970 … However, as the IMF report makes clear, equipping young people with effective education and training is critical to ensuring the youth bulge becomes an asset — and not a liability. Education and training needs to focus on preparing young people for the workforce.”

7. Brookings.Edu – October 17, 2014; World Oil Demand: And There Was None.

8. The Arabian Post – May 1, 2015: Brent crude has recovered some of its losses, gaining 15 percent this year to about $66 a barrel at 1:31 p.m. in London. Income from oil exports accounts for about 90 percent of government revenue.

9. MacroTrends.net and Energy Information Administration, BLS.

10. Ibid.