Energy Fact and Opinion: Saudi Arabia on the Move
May 13, 2016
- On April 26, Saudi Arabia’s Council of Economic and Development Affairs released “Saudi Vision 2030” which outlined a new economic and societal vision for the Kingdom.
- The vision is built on three pillars to maintain and strengthen Saudi Arabia’s role as (1) the heart of the Arab and Islamic worlds; (2) a global investment powerhouse; and (3) a global hub connecting three continents.
- On May 7, King Salman bin Abdul Aziz Al Saud issued a royal decree restructuring a number of Saudi Arabia’s ministries and changing several ministerial and court appointments.
- The Ministry of Petroleum and Mineral Resources has been turned into the Ministry of Energy, Industry, and Mineral Resources. It has expanded to include the electricity portfolio of the now-defunct Ministry of Water and Electricity, and the industry portfolio of the Ministry of Commerce and Industry, which is now the Ministry of Commerce and Investment.
- Khalid al-Falih, chairman of Saudi Aramco and the Saudi mining company Maaden and board member of the Public Investment Fund, has been named minister of the newly-created Ministry for Energy, Industry, and Mineral Resources.
Since the advent of a lower oil price environment in 2014 and the transition to new leadership in 2015, the pace of economic reform in Saudi Arabia has picked up. The government has cut spending by almost 14 percent, seems to have lowered its (unpublished) assumed oil price for budgeting purposes from around $60 to $45, and raised prices for gasoline and electricity, lowering implicit energy subsidies. These changes are in line with actions taken by other Gulf Cooperation Council (GCC) oil producers and largely viewed as rational responses to a lower oil price environment.
Saudi Vision 2030 is a much more aggressive formulation of economic reform ideas – economic diversification as well as labor, taxation and investment reform – that have been bandied about for years and pursued in a much slower and more cautious way. The pace and scale of the reform, in addition to the proposal to partially privatize mid- and upstream assets of Saudi Aramco have taken analysts and investors by surprise, though proposals for downstream and petrochemical joint ventures and privatization have been talked about for almost a year. However, looking at the internal and external economic drivers in Saudi Arabia – a country of 29 million people, two-thirds of whom are under the age of 30, and a government whose revenues were 90 percent dependent on oil revenues between 2010 and 2014, it is hard to see how some sort of reform could be avoided much longer.
Much is also being made about what these reforms mean for Saudi Arabia’s role as a global oil producer. The ascension of Khalid al-Falih to minister of energy, industry, and mineral resources while retaining the role of Aramco chairman consolidated the positions held by his predecessor Ali al-Naimi, who served as minister of petroleum and mining for over 20 years and as an Aramco executive for decades prior. Both men are highly regarded as knowledgeable and respected figures of authority in the oil market context. Both played key roles in shaping Aramco strategy over past decades. It was Minister Naimi, who back in the fall of 2014, articulated Saudi policy of letting market forces determine oil pricing, and ensuring that Saudi Arabia’s customers’ petroleum needs were met. Minister Falih recently reaffirmed those objectives even as the market continued to evolve.
It is also significant that while Saudi Vision 2030 espoused diversification away from a predominantly oil-based economy for reasons of resilience and economic diversity, the plan also carries obvious environmental and social benefits, including increased efficiency and expanded efforts to deploy renewable energy forms and reduce emissions to benefit future generations. And though the ambitious effort is not without significant challenges, it undergirds a broader effort to reshape the kingdom and the region.