Is Saudi Arabia Moving Away From Crude Oil?

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The economy of Saudi Arabia, the largest oil producing member of the Organization of Petroleum Exporting Countries (OPEC), has been dependent on its oil industry for over eight decades. The Middle East country draws almost 40% of its Gross Domestic Product (GDP) from its oil rents, which is the difference between the value of oil produced at global prices and its total cost of production. However, the oil slump that began in mid-2014 has resulted in more than a 50% drop in oil prices globally over the last two years. While Saudi Arabia, along with other OPEC members, has maintained a high level of production to defend its market share and throw North American shale producers out of business, the downturn has finally started to take a toll on its own economy. In our previous analysis, “Are Low Crude Oil Prices Finally Hurting Saudi Arabia?“, we had discussed how the persistently low commodity prices over the last two years have pushed the Saudi Arabian economy into a heavy deficit position in 2015 and forced the country to raise a $10 billion loan from the global markets.

Given the deteriorating condition of the economy due to the weak oil prices, Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman unveiled the Vision 2030 Plan for the country in April, which seeks to reduce the country’s reliance on hydrocarbons. Further, he released the National Transformation Program (NTP) earlier this week that chalks out the reforms that the country is likely to experience over the next 5 years and beyond.

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The NTP, which is an integral component of the Vision 2030 Plan, also highlights the country’s intent to limit its dependence on oil going forward. According to the NTP, Saudi Arabia’s oil output capacity is expected to remain stable at 12.5 million barrels per day by 2020, as opposed to an 8.2% compounded annual growth in its dry gas output capacity during the same period. Further, the program forecasts the oil revenue contribution in the country’s GDP to drop significantly over the next few years.

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In order to fill the gap, the Saudi government targets to increase its non-oil revenue by almost $100 billion, and almost double its non-oil exports by 2020. The non-oil revenue would include more steps to restructure subsidies, imposing a value-added tax and a levy on energy and luxury items. This is also expected to include a Green Card-like program, which will allow employers to hire more foreign workers above their official quotas for a fee and could generate $10 billion annually for the country. In addition, the program seeks to create 450,000 jobs in the private sector by 2020 and to revamp industries such as health care and natural gas. The country aims to move to other sources of energy and produce around 4% of its power from renewable sources of energy by 2020. It also plans to cut electricity and water subsidies by $53 billion over the next five years. All in all, Saudi Arabia is likely to move away from an oil-dominated economy, if it is able to execute the NTP by 2020.

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Although the decision to move away from the traditional oil-dominant economy may be viewed as radical, in the long term it is likely to make the beginning of a post-oil era in Saudi Arabia, which will enable the country to come to speed with the other developed countries, provided the Vision 2030 Plan is successfully implemented.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for EOG Resources

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