Saudi’s Trillion Dollar Idea: Diversification from an Oil Economy

Author: Milutin Todorovic
Graphics: Nathan Nyaung

With Vision 2030, Saudi Arabia’s domestic spending must yield new industry results or collapse due to global crises.

---

Introduction

Just as people rely on their jobs for income, Saudi Arabia relies on oil for government revenue. In response to this narrow economic organization and circulation, Saudi Arabia launched the “Big Push” project called Vision 2030, which revolves around massive investments into AI, Automated Manufacturing, and Biotechnology. From soup to nuts, the deal is expensive and would require Saudi Arabia to maintain their oil infrastructure and increase prices to pay down the debt they will incur. With a possibility for a transition to renewables, Saudi Arabia is on the clock; however, failure could mean economic collapse, regional wars, and global risks.

Inward Expansion

Petrodollar Economies

A petrodollar is every dollar earned from the sale of crude oil exports; in other words, oil revenue denominated in USD. Saudis traditionally operated under the petrodollar recycling model that used oil revenues to boost exporter demand when domestic spending reached its capacity. All the money Saudi Arabia got through oil, which was 43% of its real GDP, flew back into global markets. The whole Arab world followed a similar model and, in exchange, they got political and military backing of the United States. That maintained the status of USD as a global reserve currency.

Funding via “Petroriyals” and other Currencies

To grow its Public Investment Fund (PIF) and fund massive infrastructure projects like bridges or roads, Saudi Arabia began to hold its oil surplus through domestic currency – “riyal.” Additionally, they began to explore Yuan, Euros, and even Bitcoin. This transition is the foundation of the Vision 2030, which encourages at least $40 billion PIF investment and more private sector participation that will hypercharge non-oil GDP.

The vision, however, isn’t plausible for one important reason. Saudi Arabia does not have the economic resilience to extend public investment beyond oil-revenue, as it is associated with $75-85 per barrel. In fact, more resilience will come from pulling more money from the global markets rather than a country’s domestic portfolio because foreign income finances their consumer goods.

Successful Climate Policy and Oil Prices

The Dilemma

Generally, high oil prices are good for the Middle East because that’s how the countries in the region are financing their welfare systems as they export oil. More advanced climate policies, as pioneered by institutions like the UN, can create a risk of declining oil prices. If there are lower oil prices, there is more uncertainty in the region which can create a grey area for a conflict. For Saudis, this will create an investment flight, as lower expected returns decrease capital available for diversification projects. There are ways to stop the trend, such as being politically against the concept of renewables. However, Saudis cannot merely veto every climate resolution in the UN, since that may put them in a diplomatic isolation as climate change is a majoritarian issue. Even trying to permute some of their 2030 policies with green energy projects risks decreasing the ethos of the government to their domestic population.

Modern-Day Implications

The only result, absent a diplomatic breakthrough, is sudden loss of oil revenue in the long run. The main funding for public services such as the military comes from oil, which means not paying for security could create a power vacuum in the state. This would replicate Libya’s collapse following Muammar Gaddafi, since absence of a military created an incentive for non-state actors to hijack oil facilities and assert control. Saudi Arabia can learn from such internal dissents to leverage a green friendly future. 

The key for Vision 2030 to succeed is speed. The global oil demand is set to peak around 2030, which will accelerate decarbonization efforts and threaten oil demand. Thus, Saudi Arabia needs to test the waters – and if it hits – quickly expand and capitalize. Alternative sources of energy are imperative since every year of delay will reduce oil revenue, which will weaken fiscal capacity for the next set of governmental reforms. The rapid rise of AI and cheaper EV vehicles will create disruptions along the way, which is why it’s nearly impossible to succeed if no action is taken.

Conclusion: 2030 is a Long Shot

Saudi Arabia has promised to engage in major projects like Qiddiya – a future epicenter of entertainment and international sport arenas – and ROSHN, a real estate megahub that will increase homeownership by 70%. However, the public does not know whether those projects will actually be finished. With the volatility in prices and the probability that oil economies may collapse, there are still questions to be answered by Saudi Arabia. What will happen when their government runs out of revenue? Why does their foreign policy not align with decarbonization? What will be the perception of Vision 2030 by the regional and global allies & adversaries? That must be addressed.

---

Take-Home Points

• Vision 2030 has the ability to succeed if the right decisions are made.

• Massive borrowing from oil income can raise the capacity at which Saudi Arabia is able to recover debt.

• The world actively trying to lower oil prices and create new forms of energy has created economic uncertainty.

• The potential failure of Vision 2030 creates a sustainability problem for the Arab world, and a potential for political and regional instability.

• It’s better to start diversifying now more than ever