Oil Economics and The Gulf States - A closer look at Saudi Arabia’s plan for the future

Opinion analysis by Pau Luoning, Contributor

November 9th, 2021

This October, football fans in Britain and elsewhere saw how Newcastle United FC, a historical club in the British Premier League, was taken over in a £300m deal by the Saudi Public Investment Fund after 18 months of negotiations. While this might have come as another trivial sports business deal for those who do not follow football news,  or even an irrelevant surprise, long-time fans might not be quite shocked. The truth is, the latest news of new ownership does nothing but confirm one of the latest trends in the last decades in European football: the Arab influence as more and more clubs are being bought by Arab Sheikhs and their funds.

The takeover by the Saudi sovereign wealth fund chaired by Crown Prince Mohammed bin Salman (known as MbS) has been met both with money-blinding enthusiasm, but mainly criticism because of Saudi Arabia’s poor record of human rights and the Prince’s link to journalist Jamal’s Khashoggi’s murder. Nevertheless, Newcastle United belongs now to the group of Arab Sheik-owned clubs following prominent clubs in Europe such as Manchester City or Paris Saint Germain, owned by Emirati Sheikh Mansour and Qatari Nasser Al-Khelaifi respectively.

This latest trend in the state of affairs can be easily explained in terms of economic diversification. Taking a closer look at the Gulf’s economies, one can easily observe how astonishingly oil-dependent they are. The hydrocarbon revenues relative to the total national revenues are higher than 80 percent in Kuwait, Bahrain, Oman, and Saudi Arabia, and more than 70 percent in the UAE and Qatar. Petroleum and natural resources also represent between 70 and 95 percent of total exports in four of these six countries.

A national economy so highly dependent on income from only one source is vulnerable and put into a self-evident huge risk, especially when the income comes from a non-renewable source. Many Gulf States almost solely rely on hydrocarbon revenues, and their entire economies as well as social spending are subject to oil volatility. The Gulf region faces a future in which population growth and energy consumption rates increasingly pressure the depleted resource reserves. Local consumption will surpass the international demand and therefore put the whole basis of the regional economy at risk (al Naimi, 2021).

Furthermore, in a context of decarbonisation, many countries in the West are starting to transition to a more sustainable energetic future with increasing use of renewables. Given the unsustainable nature of its national economies, many Gulf states find themselves in a process of economic diversification. To have a long-term future beyond petroleum and natural gas and to secure permanent high life standards for future generations to come when oil and natural gas reserves run out, policy makers need to find revenue from other sources.

For this reason, we have seen how different funds and firms have landed in European football. The sport is a huge industry with great revenue opportunities, mainly through television rights and merchandise, but being the most popular sport in the globe followed by billions of fans worldwide, it further represents an invaluable opportunity for branding to expand and project one’s image and exert soft power. Big money sponsorship deals, such as those with Emirates or Etihad Airlines, with Sheikh-owned clubs can be seen as a clear example of this. While some analysts argue these takeovers are not very likely to generate any profit because of the necessary initial heavy investing, club owners profit the most through the commerce of the clubs and infrastructure projects in the cities the clubs play in.

Beyond the acquisition of European football clubs, Saudi Arabia has long been smartly planning for a prosperous diversified economy. The Kingdom has long been considered the largest economy in the Middle East and is a member of the Group of Twenty (G20), a group of the twenty world’s largest economies. Yet, although the rise of oil prices between 2003 and 2013 helped increase the credit worthiness of the Saudi economy and improved the welfare of its people considerably, the nation has not succeeded in creating an economy resilient to financial shocks. During recent developments, the Covid-19 pandemic brought many systemic vulnerabilities to the surface. The impact of the pandemic led to a notable collapse in total oil exports and a drop in the nation’s private sector activity, while oil prices per barrel dropped from $80 to $20, very far from the prices needed for public funding. The government in Riyadh announced drastic cuts in social spending to counter the large budget imbalance in consequence. The effects of the pandemic, thus, accentuate both this fragility and the urgency to intensify the process of economic diversification in the Gulf.

In this context, the Crown Prince adopted the 2030 Vision in 2008, a road map for the country’s economic future. The project aims to boost non-oil private sector job creation and to liberalize social norms to shift away from petroleum. To achieve this, the authorities look to raise foreign investments, increase the participation of small and medium enterprises (SMEs) in the economy and increase domestic consumption. The main sectors targeted for development are: petrochemicals, renewables, transportation, tourism, entertainment, mining and healthcare.

For effective diversification to take place, it is vital to develop a knowledge-based economy, defined by the OECD as “one based on production distribution and use of knowledge and information, with an important role of technology and learning in performance” (Fadhil Al-Hayali, 2010). Investments in human capital are necessary as well as a structural and curricular reform of the national educational system so that citizens grow in competitiveness, and develop analytical skills and key abilities demanded by the private sector in a globalized market (Al Naimi, 2021). The Saudi labour market grants its citizens easy access into the public sector, where salaries are substantially higher than in the private one, as the system lets the public benefit from a share of its natural resources wealth in a way to secure popular support for the ruling elites. The main challenge for MbS is to shift a considerable part of the workforce predominantly in the well-paid public sector to a private sector with similar benefits.

The Saudi 2030 Vision also aims to achieve its goals through the creation of diverse mega-projects such as NEOM, a future mega-city the size of Belgium at the shores of the Red Sea. It has an estimated budget of over $500 billion and it is intended to become an energetically sustainable technological and tourist hub.

How Saudi Arabia’s economic diversification plans unfold, as well as those from its neighbours in the Gulf, is yet to be seen. However, Mohammed bin Salman’s ambitious vision for his country’s future might present a golden opportunity for social development and democratization. According to the “Resource Curse Theory”, many resource-rich countries are blessed with a curse in disguise and fail to develop their full potential as a result of their natural wealth. They tend to be more authoritarian, economically unstable, prone to conflict and present more gender issues. Given the nature of its wealth, citizens from these countries tend to be less invested in questions of national budget since they are less heavily taxed than citizens from other countries, which, in turn, leads to politicians to feel less accountable for and attached to their citizens. As a consequence, some resource-rich countries develop weaker political institutions, systemic corruption and have elites which fight for the control of the resource reserves. Additionally, governments tend to over-spend and invest inefficiently (Natural Resource Governance Institute, 2015).

Moreover, by rising overall education levels, which in turn produce more articulate individuals better prepared to organize themselves in independent social groups (something largely and deliberately fought by many autocratic regimes through oil money-fuelled repression) as well as a more skilled and specialized workforce with better bargaining powers against elites, very important preconditions for democracy are established. This is known as the “group formation” and “modernization” effects (Andersen & Ross, 2013). If implemented effectively, Bin Salman’s reforms could indeed benefit Saudi society in political terms as much as in economic terms. Being one of the world’s most authoritarian regimes, the Saudi search for a sustainable future may leave the door open for a wave of democratization as an unexpected side effect for the years to come.

 

BIBLIOGRAPHY

al Naimi, S. M. (2021). Economic Diversification Trends in the Gulf: the Case of Saudi Arabia. Circular Economy and Sustainability. Published. https://doi.org/10.1007/s43615-021-00106-0

 

Andersen, J. J., & Ross, M. L. (2013). The Big Oil Change. Comparative Political Studies, 47(7), 993–1021. https://doi.org/10.1177/0010414013488557

 

Fadhil Al-Hayali, A. (2010). Knowledge Economy Determinants in GCC Countries. 7(20), 143–175. https://doi.org/10.33899/regs.2010.6482

 

Natural Resource Governance Institute. (2015). The Resource Curse. The Political and Economic Challenges of Natural Resource Wealth. NRGI Reader. Published.

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