Trouble Brews in the Kingdom

Saudi Arabia's looming economic woes could turn the country into an international problem.

The headquarters of Saudi Aramco in Dhahran.A new report from Citigroup’s Heidy Rehman suggests that Saudi Arabia's domestic petroleum consumption may equal production in 2030, leaving none to export. Of course, it won’t get this far—the kingdom’s balance of trade would quickly become unsustainable as oil exports dropped—but the report still highlights one of the many distortions in the Saudi economy.

The kingdom, like many of its oil-rich neighbors, is a cut above the rest of the world in per capita oil consumption, thanks in great part to the use of oil to make electricity. Riyadh is able to provide oil to its power plants for just a few dollars a barrel, a practice that is cheap on paper but expensive in reality. With many Saudi crudes persistently fetching 100 dollars or more per barrel, each barrel burned for electricity is a large sum forgone. Providing oil at far below the international market rate also leads to consumption of oil far above the international norm, compounding the inefficiency. The kingdom is “paying” hundreds of millions of dollars each day in opportunity costs.

The Saudi economy also leans toward the production of low-value-added goods. In several recent years, the largest share of Saudi exports that was not a mineral or chemical product was tugboats, topping out at just under four-tenths of one percent of the kingdom's export value. (To be fair, the Saudis have transformed themselves into a key player in the international tugboat sector in only a decade.)

The undeveloped economy has left Riyadh with many jobs in sectors that Saudi employees consider inappropriate for their status and few jobs in more advanced sectors that better fit an increasingly educated (and increasingly high-status) public. As long as it has its oil revenues, it can partly mask the problem with make-work jobs in the bureaucracy, handouts to religious institutions and the provision of a respectable quality of life for many of its citizens. When there are worries of instability—as there were during the Arab Spring—the government dramatically increases this provision.

The government’s role in the economy is thus an integral part of its power, and its distribution of oil revenues is essential for so many millions to live comfortably in a region that was long a sparsely populated land of herders and trade caravans. However, the outsized bureaucracy—the private sector makes up just 30 percent of GDP—makes doing business very difficult. Princes within the system battle for influence, while ordinary employees keep their heads down through inaction. The system is so corrupt and inefficient that a cottage industry of mu’aqqibs, privately employed power brokers with connections that can move stagnant government bureaucracy, has emerged. The cost of doing business in the kingdom is thus quite high; the challenges facing innovators are higher. Established and connected institutions have a natural advantage, hindering the creative destruction at the heart of economic dynamism. New oil-extraction methods and new public projects are often the Saudi approximation of innovation.

Religious strictures on women add to the economy’s problems. Mainstream culture favors very traditional gender roles, and the state has institutionalized this culture. In order to keep the sexes segregated, companies must maintain separate offices, increasing operating costs, decreasing job slots for women and creating inefficiencies when coworkers cannot speak face to face. Barred from driving, women must either use relatives or retain the services of a driver, reducing their ability to get to the workplace while adding to their bills. The results of these hindrances are stark. Though Saudi women hold college degrees at double the rate of their American counterparts, American women are four times more likely to participate in the labor force. Any economy that mandates idleness for half of its people will be hobbled.