Article

Saudi Oil Economy: Not Fragile

When oil prices began to decline, everyone offered their opinions, optimistic or pessimistic based on their mood rather than economic market factors. They believe our oil economy is fragile and repeat the fabricated term 'rentier economy,' which has no place in economic literature. In economics, the term used is 'economic rent,' which arises when factors of production are non-reproducible, such as natural resources. It is the surplus value from a resource after deducting all costs, including opportunity costs, from revenues generated by selling goods and services. It measures the difference between the price at which a resource can be sold and the costs of discovery, extraction, and production, including the rate of return on capital that could be obtained by investing in projects of similar risk and size.

The economic rent from oil is used in Saudi Arabia as a financing tool for government sectors, building cumulative cash reserves against uncertainty, and completing infrastructure projects that diversify the economic base, provided that private sector participation is substantial and effective, and not an end in itself.

A distinction must be made between diversifying state revenue sources and diversifying the economic base—they are completely different issues. Diversifying revenue sources for a non-oil state, as practiced in many countries, involves government investments (sovereign wealth funds, etc.), service fees, imposing income and value-added taxes, or both. Other countries reduce or eliminate subsidies, cut spending according to their fiscal policies, or adjust their currency through monetary policy. However, our wise government does not impose taxes on its citizens but supports them through social programs, most importantly energy subsidies, which cost it more than 230 billion riyals annually at a minimum.

Diversifying the economic base, on the other hand, involves creating productive industries or sectors intended for export and independent of each other (a diversified economic portfolio), where a decline in one does not affect other industries or overall productivity. This is what the Ninth and Tenth Five-Year Plans focus on in detail.

Some may say we have not achieved economic diversification yet, but we did achieve 14% non-oil exports in 2013, and the non-oil sector's contribution rose to 58.92% of GDP, surpassing the oil sector. This does not mean we have succeeded in diversifying the economic base, but we are moving in the right direction, and there is still a long way to go.

We must also distinguish between produced and exported quantities and production capacity, as each has a different impact on global prices and oil market stability. Saudi Arabia still has the largest production capacity in the world (12.5 million barrels per day) and the second-largest proven reserves (265 billion barrels). Global energy alternatives remain very limited in the short and medium term.

If our economy were fragile, it would have collapsed during the 2008 financial crisis. Instead, our government continued its spending policy, recognizing the importance of the opportunity cost of implementing infrastructure projects in the short and medium term.

Our government continued development projects despite historical budget deficits in the following years: 1969, 1977, 1978, and from 1983 to the end of 1999, and in 2001, 2002, and finally in 2009. The deficit reached its highest level in real terms at 86.7 billion riyals, or 5.4% of GDP, when prices fell from $91.3 in 2008 to $61 in 2009. The deficit occurred because actual spending exceeded the budget estimate by 122 billion riyals. Nevertheless, real economic growth slowed from 9.8% in 2008 to 5.3% in 2009 and remained around that rate through 2012 and 2013, despite large surpluses.

Oil price fluctuations and budget deficits are nothing new.