Not that it was any surprise to learn that Saudi Arabia has a lot of oil and that pumping it is a hugely profitable business, but facts and figures from Aramco, the Saudi company responsible for it all released this week were still eye-popping.
Here are just a few of them: Saudi Aramco generated $111.1 billion in net income last year, making it probably the world’s most profitable company by far -- way ahead of Apple ($59.5 billion) and oil giants like Royal Dutch Shell ($23.9 billion) and Exxon Mobil ($20.8 billion).
Aramco produced an average of 13.6 million barrels per day in 2018, more than three times Exxon Mobil’s output. It has 257 billion barrels of oil equivalent, or more than 50 years of reserves based on current production levels. Its production costs are insanely low because basically all the company has to drill and, voila, the oil comes spurting out.
Like much else in Saudi Arabia, Aramco has operated in secret. But in order to raise money from foreign investors the company had to publish information in a prospectus ahead of a $10 billion bond offering. The proceeds are intended to help Aramco to buy the Saudi state-owned petrochemicals maker SABIC for $69 billon.
The proceeds from the SABIC sale will then be used by Prince Mohammed bin Salman to help fund his Vision 2030 plan, which aims to transform Saudi Arabia, from a rentier state where oil covers the bills and then some, into a 21st-century knowledge economy.
It’s a grand plan that won praise until the gruesome killing of the dissident journalist Jamal Khashoggi exposed his other side. Crown Prince Mohammed is a reformist who lets women drive but equally a despot who has no stomach for criticism or disobedience and jails the women who were fighting for the right to drive to begin with just to show them who’s the one implements reforms. None of this is grassroots stuff.
Prince Mohammed's politics are firmly entrenched into an era of royal privilege, but even his forward-looking reformist side is running up against the realities of Saudi society.
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The kingdom has taken business-friendly measures, such as reforming the bankruptcy laws, but the business sector hasn’t responded with enthusiasm. Saudis have been taking money out of the country. After shrinking in 2017, the economy grew a paltry 2.2% in 2018 and the non-oil sector by even less. Prospects for this year are little better. Unemployment is in the double digits and rising.
In lieu of private sector growth, Riyadh is resorting to its tried and true formula of spreading oil wealth around by increasing government spending, running big deficits in the process (in fact the deficit shrank last year, but that appears to be due to the 50 billion rials in effect extorted from rich Saudis jailed at the Ritz Carlton Hotel).
The prince's fundamental problem is that oil has enabled Saudis to live far at a far higher standard than the country’s human capital at its current level can ever generate. In 2018, Aramco paid about $160 billion to the government in dividends, taxes and royalties, alleviating the need for the rest of the economy to do much else. For many Saudis, holding a job is a hobby that doesn’t require real work or ambition.
Mohammed bin Salman's vision is of a kingdom (and, yes, a kingdom it will be) that is a global center for high-tech and entertainment, where oil is an afterthought. But these are highly competitive, people-centric industries that you can’t create simply by waving your wallet and building mega-cities and doing deals. You need the people.
Not up to snuff
Long before the prince became the power behind his father’s throne, Saudi Arabia was investing heavily in education, sending students to multi-billion-dollar universities at home or to schools abroad. But there is little show for it.
A lot of Saudis have college degrees, but that makes them averse to taking the low-skilled, manual jobs the country’s low-tech economy has to offer and traditionally have gone to foreign guest workers. But even with those degrees, Saudi labor skills aren’t up to snuff: The World Economic Forum’s Global Human Capital Report ranks the kingdom at No. 82 for the skills of its population. That is far below the global average and puts the country just below Uganda.
The crown prince may be a visionary to the extent he understands that Saudi Arabia has to end its oil addiction and that the only alternative is knowledge-based industries, but he doesn’t have the human capital pull it off. Foreign investors aren’t going to come to his planned high-tech supercity Neom if there isn’t a globally competitive workforce. If the city is populated with expats that do have the skills, it won’t be providing jobs for Saudis.
Saudi Arabia doesn’t have the luxury of time. Aramco’s vast energy reserves face more competition than ever from American shale oil, from renewables that are account for an increasing share of energy consumption and from natural gas, which Saudi Arabia doesn’t produce much of. World oil demand will peak in the next decade or so.
The 11 years left till 2030 aren’t very much to engineer the kind of transition he envisages and he’s off to a very slow, perhaps fatal, start.