Oil-reliant Saudi Arabia envisions a new economic path

As global oil prices drop, Saudi Arabia is struggling against its reliance on oil export revenues. Over the weekend, the first signs emerged of an ambitious new plan to diversify the Saudi economy while maintaining power in the Middle East. Hari Sreenivasan talks to Sarah Ladislaw of the Center for Strategic and International Studies and Simon Henderson of The Washington Institute for more.

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    But first: Saudi Arabia's bold plan to diversify its economy by moving away from oil, while facing a rise in Iran's influence in the region.

    We examine the kingdom's challenges with Simon Henderson, director of the Gulf and Energy Policy Program at the Washington Institute, and Sarah Ladislaw, a senior fellow at the Center for Strategic and International Studies, where she is director of its energy and national security program.

    Sarah, let me start with you.

    Oil prices have gone up in the last few days, maybe because of the fires in Canada. But how big of an impact is the change in specifically oil or energy leadership in Saudi Arabia?

    SARAH LADISLAW, Center for Strategic & International Studies: Well, it's pretty significant, especially if you take the long view of leadership on energy policy within Saudi Arabia.

    I think both of the response that they had the response that they had to the oil — the sort of overcapacity in oil supply in the oil market in 2014, which have led to the period we are now, where you have sort of lower oil prices, was really the turning point for the way people viewed the role that Saudi Arabia was going to play in the markets.

    I think what happened over the weekend was a much-anticipated leadership shift that falls in line with that broader message of, you know, we're going to play a new and different role in the oil market. We have a new sort of economic diversification strategy. And now we're going to have both the institutional structure and sort of the leadership to lead that.


    Simon Henderson, how much of this has to do with a power grab or power struggle or shuffle inside Saudi Arabia, the deputy crown prince, Mohammed Bin Salman, putting his fingerprint on things?

  • SIMON HENDERSON, The Washington Institute:

    Well, he's certainly putting his fingerprint on things.

    This is a young man, 30 years old. And he has risen from nowhere, or mostly nowhere. But he is the son of the king, King Salman, and so when King Salman came to the throne last year, since then, this young man has had a meteoric rise.

    And he appears to have a vision, an economic vision. He's announced a grand plan for vision 2030, which is a much less of a role for oil. And I suspect also he's got a vision for himself, that he wants to be the next king of Saudi Arabia.


    Sarah, what about that Vision 2030 project, the idea we equate or we connect Saudi Arabia with oil in our heads, the idea that they could be less fossil-fuel-dependent in 15 years?


    Well, I think it follows along the lines of what you have seen coming out of Saudi Arabian energy ministers and political leadership for awhile, which is this recognition that the energy landscape is changing, right?

    They understand that climate change is an issue that a lot of different countries take seriously. They have talked about it quite openly. They are involved in most of the major multilateral initiatives to deal with climate change.

    And I think if we weren't talking about their broad reform effort, we would be talking about their need to undertake economic reform at some point, given the outlook for oil markets, given the role — the outsized role that it plays in their own economy. And so, in many ways, this new vision is actually an extension and a much bolder extension of domestic economic reform that people have thought needed to happen in the kingdom for a long time.

    I think the thing that people are surprised about is that it's happening at a much faster pace than people are used to seeing coming from the Saudi kingdom.


    Put this in perspective to the struggle that is happening between Saudi Arabia and Iran right now.


    It's such a struggle. And it dominates so much thinking, certainly in Riyadh.

    The house of Saud, the Saudi family, are immensely suspicious of Iran and, frankly, on religious terms, as Sunni Muslims, they're very suspicious of Shiite Muslims of Iran. On top of that, the Iranian nuclear program concerns them. And they think the deal which the Obama administration led last year is a lousy deal.

    And so they're very concerned about that. For the moment, though, it's a question of oil price. Originally, when the Saudis allowed the price of oil to fall, their target were U.S. shale producers. And to an extent, they have made it uncomfortable for U.S. shale producers. But they have got a new target now, which is Iran, which wants to expand its oil production.

    If that's going to happen, the Saudis don't want the Iranians to get much revenue out of it. So, they — this is an additional argument why they want to keep the price of oil comparatively low.


    Sarah Ladislaw, how do they stay competitive here? Iran wants to wake up out of these sanctions. They want to get their market going and find a lot of customers.

    At the same time, Saudi Arabia can pull more crude oil out of the ground faster than anyone else. And — but they need that money for their society to function.


    It's a great question.

    I mean, I think when you look at the — what the Saudis contribute to the oil market historically and currently, it's about 10 million barrels a day. And they have, as you said, the lowest listing costs in the world. And they have spare capacity, which means they can bring more on quickly.

    I think that the real challenge for them is — looking at this period long term, is to try and insulate their economy from volatile oil markets, right? I mean, part of what people see in their activity today is some of this sort of geopolitical rivalry.

    But if you look at it from an oil market perspective back in 2014, there is really nothing they could have done to stabilize oil markets at that time. And, therefore, they're using the market to basically get rid of the higher cost oil in the system and then, you know, look for being able to keep a market share perspective going forward.

    It's been fairly successful thus far. We were oversupplied by about two million barrels a day about a year-and-a-half ago. And things are starting to come into balance. The question going forward really for any major oil-producing economy is, how in charge of their oil economy will they be? What kind of — what can they do to ratchet up or down production?

    And for them, it's really a question of how dependent they are on that revenue.


    All right, Sarah Ladislaw, Simon Henderson, thanks so much.


    Thank you.

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