Saudi Arabia's falling oil revenues

Article Summary
Saudi Arabia should speed up construction of its public transportation network and its nuclear and solar energy sources.

“Immiserizing growth” is an economic term that first appeared in a paper by economics professor Jagdish Bhagwati in the late 1960s.

This economic term, which is not taught or used very much in the West, is of a big concern to the Gulf states, especially Saudi Arabia. The term explains the impact of lower export prices on countries whose exports rely on one commodity for economic growth, as well as the impact on social welfare in those countries.

Oil prices are down 45% since a year ago, directly impacting some government budgets and revenues, which will drop by almost the same percentage.

In Saudi Arabia, oil revenues account for 90% of government revenues. The lower revenues will no doubt be followed by reduced government spending. Even if the rate of economic growth is not significantly affected in the coming years, it will definitely be affected in the medium term. Government spending is still the main engine for most economic activities in Saudi Arabia.

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To maintain growth and stability, the services sector must be activated as it is qualified to play the leading economic role in Saudi Arabia. This is the first point in the article.

The second point: the World Bank said this week that the Saudi government was working on a plan to increase energy and fuel prices and to enhance efficiency in the non-oil revenues by imposing fees. This of course would be a welcome step, but not right now. Subsidized energy is going to two uses. According to some statistics, about 60% of it goes to transportation and 40% goes to electricity and water desalination.

Everyone knows that the government has been working on this issue and has been trying to address the large energy subsidy for transportation by building public transportation networks between and within large Saudi cities. The government has already announced that nuclear energy will be used to produce electricity starting in 2020. For this reason, the news by the World Bank was premature because the government is not expected to end the energy subsidies before the public transportation projects are completed and before nuclear-powered electricity production starts. The government has started working on those projects before the drop in oil revenues. So the matter of ending the subsidies is only a matter of time.

The third point is that if the government “loses once” because of lower oil prices, it “loses twice” because of low petrochemicals prices. In other words, crude oil represents 87% of Saudi Arabia’s exports. This means that with the drop in oil prices, Saudi Arabia loses 45% of its revenues from oil exports, which represent, as already mentioned, 87% of total exports (there will be no change in its revenues from locally consumed oil, which is a part of the cost as a result of the subsidy).

Saudi non-oil exports account for 13% of exports. Petrochemicals represent 62% of the total non-oil exports (or 7% to 8% of total exports). Since revenues from non-oil exports dropped 17.16% in December 2014, according to a report by the Department of Statistics, Saudi Arabia has lost twice. It lost the support provided to these products for the purpose of export (there is no published data from a reliable source regarding the size of that support), and it lost 17.16% of the revenue because of the lower prices of petrochemical exports.

On the previous point, subsidies for petrochemicals should be stopped because those subsidies were intended to support manufacturing and establishing a competitive petrochemical industry in the kingdom. However, continuing that policy for 30 years is not justified. It should be stopped and manufacturing should be left to find its place among the competitors in the free market.

It's unfortunate that the government and its funds continue to own the lion’s share of petrochemical companies in the country. The result is that if crude oil revenues fall, petrochemicals revenues follow. This means that the government always loses when oil prices fall. It loses a part of the oil revenues and a part of the petrochemicals revenue.

How the government makes investments should be re-examined. The basic principle is to invest in resources and activities with stable revenues, not revenues that drop when the oil price drops. This should be addressed amid the current talk about diversifying revenues by investing in activities that are not related to the oil price.

In summary, the government should stop its subsidies for petrochemicals and shift its investments toward activities that are not linked to the oil price, which goes up and down. The government should speed up the construction of public transport networks between and within cities, and work quickly to exploit nuclear and solar energy. When that happens, energy subsidies can be ended, and the government would be able to manage resources more efficiently.

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Found in: transportation, subsidies, solar energy, saudi arabia, petrochemicals, oil prices, nuclear energy, economy
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