Over the past year, Saudi Arabia – once among the richest nations on the planet – has wound up having to sell some $4 billion in bonds. It has been necessary in order to maintain levels of spending on public works and continue financing the war against Yemen. The Saudi government has also had to draw on its reserves of foreign currency. Falad al-Mubarak, who heads the Saudi Arabian Monetary Agency (the nation’s equivalent of the U.S. Federal Reserve), predicts “an increase in borrowing” in the face of a projected $130 billion deficit.
The primary cause is the drastic decline in the price of crude oil. Since hitting a peak of around $125 in February 2011, the price of a barrel of oil is currently under $50. It’s not going to get better anytime soon. Oil company executives predict it may be years before petroleum prices rebound. In order for the Saudi government to balance its budget, oil would need to be at least $105 a barrel. According to Dr. John Sfakianakis, an economist who oversees [Persian] Gulf Cooperation Council funds for the U.K.-based Ashmore Group, “reality is hitting home, and necessity is also hitting home.” Given the current state of the crude oil market, Dr. Sfakianakis predicts that Saudi Arabia will be broke by the end of the decade.
Prior to the 1930s, Saudi Arabia was among the poorest nations in the world. The people existed on subsistence farming and herding; most were nomads, wandering from one place to another in search of water and food sources. This all changed with the outbreak of the Second World War. Officially, the Saudis were neutral. However, because of its oil resources, President Franklin D. Roosevelt made the defense of Saudi Arabia a priority. The U.S. started supplying weapons under the Lend-Lease Act in 1943. Eventually, King Abdul Aziz declared war on Germany in early 1945, though by that point, Germany was all but defeated. The U.S. remained the dominant influence in the region for decades.
In 1960, Saudi Arabia joined with Iran, Iraq, Kuwait and Venezuela to form the Organization of the Petroleum Exporting Countries (OPEC). By 1973, the Saudis – in coalition with other OPEC members – began flexing its economic muscle by quadrupling the price of oil. During the following decades, Saudi Arabia enjoyed phenomenal economic growth. Budget surpluses allowed the government to spend lavishly on its military, public projects and aid to other Muslim countries.
That is all coming to an end. Between increasing oil supplies and falling demand, Saudi Arabia is looking at a return to a subsistence economy in the coming decades. Attempts have been made over the years to diversify the Saudi economy, but these have largely been ineffective. The situation is exacerbated by rapid population growth and a lack of relevant job skills among Saudi university graduates.
Saudi Arabia’s impending economic plight serves as a warning of the dangers of over-reliance on a single industry, as well as failure to keep up with the times. The falling demand for oil is driven by several factors. Among them is the realization that petroleum is a finite resource and its utilization is having serious environmental impacts. It is something that Shah Reza Pahlavi of Iran understood over fifty years ago when he decided to embark on a nuclear energy program.
If there is any silver lining for Saudi Arabia, it lies in the country’s solar power potential. Plans are in the works to make Saudi Arabia a “global leader in solar and wind energy,” according to Ali al-Naimi, current Saudi Oil Minister. However, progress is slow – and the impending financial crisis is closer than the Saudis realize.
