Saudi Arabia and Oil Depletion

Image Caption: As Saudi Arabia’s production and export of oil slows down, the nation will have to undergo a number of significant changes as it adjusts.

Saudi Arabia is the main global exporter of crude oil, and its economy has relied on oil revenue for decades. The government has accumulated a large enough surplus that it is able to not only pay its debt but also accumulate reserve assets. In 2014, Saudi Arabia had the 19th largest economy in the world, and the largest economy in the Middle East and North Africa region. Saudi Arabia’s GDP is 85% reliant on the oil sector, especially after 2003 when crude oil prices and exports increased heavily. Smaller industries such as light manufacturing, food processing, and packaging have played a minor role in Saudi economy, and mostly domestically rather than internationally. However, oil prices have never been stable, a fact that has made Saudi Arabia’s economy vulnerable to the fluctuating prices. The global prices of oil have been decreasing, leading to drastic effects on the Saudi economy. Specifically, the price of a barrel went from around $104 in 2014 to $70 in 2018. Because of the nation’s large reserve of assets, it has been able to cope with the economic instability resulting from oil price drop in the 1990s and today. Oil is a nonrenewable natural resource, which means that the amount of oil that is present on Earth today is the only amount available for the next centuries to come. The rate of replenishment of oil reserves is lower than the rate of human consumption of the resource; thus, oil reserves will likely deplete in the coming 25 to 30 years if the trend of consumption does not change.

A slight drop of oil prices affected the economy of Saudi Arabia and led to drastic changes in state policies. Saudi Arabia applied for a loan of 10 billion dollars from the IMF in 2016, its first after decades of living debt free. Furthermore, it also started imposing taxes such as family taxes of 100 Saudi Riyals per member (roughly equal to $27), whereas citizens did not pay any taxes in earlier years. Given that Saudi Arabia’s economy relies heavily on the oil sector and industries, how would Saudi Arabia be influenced by the depletion of crude oil reserves? This paper will argue that although Saudi Arabia will face economic and political difficulties, it will not collapse completely. It would sustain its political stability by relying on coercion and a strengthening of its Wahhabi religious identity. On the other hand, it will try to keep its economic stability by seeking assistance from its current allies and establishing new alliances. Economic aid will focus on diversification of Saudi economy rather than keeping the current rentier state system, in which the state relies on exports of natural resources for revenue instead of civilian taxes, thus making it independent from and unaccountable to its citizens.

Political Changes

The monarchy in Saudi Arabia derives its legitimacy from oil wealth and religion. The ruling Al Saud royal family in Saudi Arabia, like other Gulf monarchies, owns major banks and industries, through which it accumulates wealth. In other words, private wealth is accumulated through state-run projects. Although the state provides different welfare services for the people, oil wealth is not shared by all citizens equally. Oil revenues have previously provided for public goods and services such as free education, hospitalization, and the development of roads. In previous decades, whenever oil revenues dipped, these services tended to suffer, especially in less wealthy areas. In addition, Saudi Arabia has high rates of unemployment, with 6% of men and 35% of women jobless, and with a shortage of qualified people in sciences, research, and technology. Its small population of around 32 million people is quickly increasing, suggesting even higher unemployment rates in the future. The ruling family has always used welfare opportunities such as civil service jobs, infrastructure, and rising wages in order to calm down Saudi discontent with the rising inequality. This is the strategy that Saudi Arabia adopted in the 1980s to deal with the rising Shia opposition. Saudi Arabia was always able to control how people perceive economic discrepancies by providing goods and services to people and promising future change. However, if one considers the reality is assuming that oil reserve will eventually deplete, then Saudi Arabia would have to rely solely on its reserve assets. It would thus be unable to so easily respond to people’s demands by funding healthcare, education, and infrastructure as effectively as it did before. Therefore, this would result in the collapse of the rentier state system.

Saudi Arabia would also have to limit the number of subsidies provided to the people. Many would become more aware of inequalities within the population, such as the divide between Shi’ites and Sunnis, and between the general population and the ruling class. For instance, many Saudis have been critical of the extreme wealth of the ruling family even while some still live in extreme poverty. These critics claim that, while the members of the ruling family are spending their wealth on personal gains, the common Saudi people have felt the consequences of the drop in oil prices through new taxes and decreased subsidies. The discontent with the ruling family’s wealth, alongside the perceived economic discrepancies within the general Saudi population could motivate many to express their opposition, and perhaps some would go to the extent of demanding a regime change. The strongest opponents of the regime will likely be those who were most oppressed under the monarchy, such as women and Shi’ites who were banned from any political representation, from the rewards of the 1970s oil boom, and, in the Shi’ites’ case, from the practice of their religious beliefs and cultural customs.

Regime instability might also be fueled by a struggle for power among different princes. King Salman is one of the last sons of Saud Bin Abdel Aziz Al Saud, the kingdom’s second monarch. After Salman’s death, the line of succession of the Saudi throne would move to the next generation, which includes Saud Bin Abdel Aziz’s grandsons. There are more than 80 princes that might start a struggle for power. Countries such as Iran might take advantage of this rising opposition and support these opposing groups to further weaken Saudi Arabia. Iran aims at increasing its influence in the region, and Saudi Arabia is one of its main rivals, not just on the religious level, but also in terms of its foreign policy and alliance with the West. Thus, by weakening Saudi Arabia, Iran would be seen as the major Islamic state in the Middle East, and it would also be the second most important exporter of oil in the region. Iran’s position against the US would also be reinforced with the collapse of Saudi Arabia since the US in this case would have lost one of its major allies in the Middle East.

Finally, political instability might further stem from different reforms done within the state. For instance, Crown Prince Mohamad Bin Salman limited the power of the religious police, amounting to a decreased Saudi religious identity. Not everyone in the population is satisfied with these changes, since they clash with Saudis’ tribal, cultural, and conservative values. Instability could thus be accentuated through the process of rapid social change and reform.

Nonetheless, the Saudi regime would take different measures to combat rising instability and to preserve the power of the ruling family. The Saudi Family and its supporters came to power through a series of bloody campaigns across the Arabian Peninsula. They used violence to force resistant tribes to submit and fostered alliances with various existing tribes. They also took advantage of Islam by empowering the clergy to oversee the social and cultural life of the people. Wahhabi ideology has long been a tool for legitimizing the ruling class in Saudi Arabia. Saudi citizens do not have a shared memory or history that unites them under a Saudi state, and Islam is not a defining feature of Saudi national culture, since Islam is widely diverse and spread throughout the world. To make up for this identity deficit, the state used Wahhabism to legitimize itself and to provide a common nationality for people of different tribes. Since the 1980s, Saudi Kings have been called the Custodian of the Two Sacred Spaces (“Khadim al-Harameyn al-Sharifain”) and were seen as the protectors of religion. Thus, any opposition to the government is seen as an opposition to religion.

The religious Ulama (Islamic scholars) have always been under the influence of the state. For instance, any scholar who spoke against the ruling family could be fired or even jailed. Therefore, Saudi Arabia will probably use violence and would reinforce its Wahhabi religious identity to maintain stability and counter opposition as the ruling class did when it first came to power and in subsequent opposition to its power. In the 1950s, for example, the ruling family came under attack not only from Wahhabi Ulama who disapproved of “non-Muslim” interference in Saudi Arabia, but also from Saudi workers dissatisfied with a perceived economic inequality between themselves and American workers in Saudi oil companies. Opposition was met with coercion and a further strengthening of religious identity. Faced with similar opposition in the near future, the government may call for patience in response to economic hardship as a religious duty, making reference back to the early Muslims and modesty in their way of life as a religious strategy to keep people from revolting. The ruling family might nationalize and spend part of its private wealth for public purposes, investing it in infrastructure and non-oil industries. Finally, it will portray itself as equally affected by economic hardship to minimize popular critique of its wealth.

Economic Changes

Saudi Arabia depends heavily on oil exports for its sustainment. The private sector in Saudi Arabia is suffering as a result of decreased profits from those exports. Furthermore, the banking system rarely provides loans for small businesses, limiting the development of the private sector and preventing the state from diversifying its economy away from oil revenues. In addition, the Saudi state does not provide for bankruptcy protection policies. As a result, investors are reluctant to invest in Saudi Arabia, which further pushes the state to rely on its own investments revolving around oil. Saudi Arabia has started with the diversification of its economy, but with most of its assets being directed toward supporting the war in Yemen and funding several US military research projects, Saudi Arabia would likely not sustain long on these savings. Saudi Arabia would have to specify how to spend its reserve assets to be able to fund non-oil projects.

As Saudi Arabia must choose how to spend its limited reserve of assets, it may cut down on subsidies and on military support in foreign countries, instead focusing on diversifying its economy. Saudi Arabia relies economically on the Muslim Holy sites within its borders, including Mecca and the Medina, to which thousands of Muslims travel every year to perform pilgrimage. As one way of growing its economy, the state may further develop its religious tourism industry and provide for infrastructure to accommodate more people, increasing the flow of religious tourists. Crown Prince Mohamad Bin Salman has also started supporting small businesses and is aiming to revive other forms of tourism in the country, beyond the religious pilgrimages. It could also seek to develop other industries such as wheat, transportation, and mining to diversify its exports. Saudi Arabia would also benefit from further investment in political stability in neighboring countries to emphasize trade and attract investors from different countries.

In order to diversify its economy and not collapse, Saudi Arabia will most likely rely on its reserve assets, as well as on loans from the international community and its allies. This economic aid would not maintain the rentier state system, but merely prevent its collapse by allowing for smooth changes in the system. Saudi Arabia may take loans from international actors such as the IMF, as it previously did during economic hardship. It could also seek alignment with different countries, most importantly China.

Through its One Belt One Road initiative focusing on trade and investment in Eurasia, China supports building international transport routes and increase cooperation between countries. Saudi Arabia could spend it assets improving its sea ports and airports to establish itself as a relay station for trade, an important component of the One Belt, One Road Initiative. China also supports and benefits from political stability in countries with which it has economic relations. Saudi Arabia and China have recently signed a number of agreements on issues such as trade, energy, postal services, communication, and media. China could thus provide economic support and investment in Saudi Arabia’s successful rising industries (like transportation and mining). And since China is attempting to make its currency a possible alternative for US dollars, Saudi Arabia could attract Chinese investors by allowing trade in Yuan with China and by influencing other Gulf countries to effect this change as well. Furthermore, China has a shortage in water. In 2005, former Chinese Minister of Water Resources Wang Shucheng acknowledged the importance of fighting for water as it might threaten the very existence of China. Saudi Arabia was able to overcome this problem by relying on desalination and treatment of wastewater to provide for the needs of the population. Saudi Arabia could therefore provide water desalination technology and expertise for China in exchange for various goods.

If Saudi Arabia continues to face significant economic drawbacks from the depletion of its oil reserves, it will likely rely on its closest allies. Saudi Arabia provides the model for the Gulf States as an Islamic authoritarian regime controlling most aspects of the state and led by one ruling family, and yet it is still able to thrive on the economic level and support the prosperity of the country by prioritizing a more open economy. If Saudi Arabia fails, then other Gulf States may feel more vulnerable. In addition, Saudi Arabia is seen as the Muslim leader in the Middle East (if not the world). Thus, the Muslim Gulf states, specifically the UAE, its most important ally in the region, have an interest in providing economic and political support to Saudi Arabia to prevent total collapse and a potential dependence on foreign powers. The UAE does not depend as heavily on oil revenue as Saudi Arabia, since its oil and gas sector consists of only 30% of its GDP while other sectors, including tourism and non-oil exports, make up the other 70%. Thus, the UAE would be in better position to support Saudi Arabia economically in terms of investments and loans. In the long run, however, Saudi Arabia would fall behind despite its attempts to diversify its economy; it will not be able to economically cope with the loss of oil revenue as well as states that have already decreased their oil dependence. Saudi Arabia would still have its position as the leader of the Muslim world because of its control over the Holy sites, but it will no longer have any economic leverage over other Middle Eastern countries. Its position as the economic leader of the Middle East will likely be supplanted by the UAE, which may eventually become the model Islamic authoritarian state led by ruling monarchy but providing social and economic freedom (although not political) and embracing the diversity of its population.

The United States relationship with Saudi Arabia is very complex. The US has long supported Saudi Arabia despite its lack of democratization and liberalization. As the United States relies on its own oil production by hydraulic fracturing of shale rocks, and as it is suspected that the United States will become the leading oil-producing nation in the near future, it will no longer have to rely on Saudi wealth and oil. The US-Saudi relationship could fall under strain as a result, especially if Saudi Arabia builds deeper trade relations with China, the US’ largest economic competitor. However, the US would continue to support Saudi Arabia as it benefits from its presence. Saudi Arabia unites Muslims in the Arab World. Iran seeks to extend its influence in the region and focuses on discourses of anti-colonialism and anti-Western intervention in the region. Having Iran as a major model for Muslims in the Middle East would decrease US influence in the Middle East. The US would help Saudi Arabia keep its position in the Muslim world by supporting its internal political and economic stability. Additionally, the US has five military bases in Saudi Arabia, giving it a presence at the heart of the Middle East, close to Iran, Iraq, and Yemen. Therefore, the US would still support Saudi Arabia economically, but it would also have some leverage over it. Along with the IMF and the International community, the US may pressure Saudi Arabia to further liberalize its economy and modernize its political system, which may weaken the traditional Saudi Arabian strain of conservatism and authoritarianism. This will mark the end of the rentier state system. When the dynamics of power in the Middle East change in the long run, the US may decrease its support for Saudi Arabia while strengthening its relations with the UAE, the emerging economic leader in the region.

To conclude, in the case of a near depletion of Saudi oil, Saudi Arabia would face important struggles. It will face political instability as it will be unable to subsidize the goods and services to calm the population’s discontent. The ruling family will likely rely on religion and coercion to maintain its power until its economy diversifies. It could also face economic instability because of its heavy reliance on oil exports as its primary revenue source. The rentier state will seek economic and political support from the IMF, current allies such as the UAE and the US, and a new ally, China. It will also spend its reserve assets on maintaining peace in neighboring countries and developing new infrastructure, like sea and air ports, as well as funding tourism and metal industries to attract investors. These changes will mark the end of the Saudi rentier state system and the beginning of a gradual shift toward a new system if the Saudi state overcomes the upcoming instability without collapsing.

About the Author

Carine El Jamal is a Lebanese Psychology and Political Science student in her third year at the American University of Beirut in Lebanon. She is interested in Middle Eastern politics, international law, and political psychology.


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