Countless times over, we have seen incidents regarding the rise and fall of countries that base their economy, as well as domestic currency, on oil: Algeria, Venezuela, Nigeria, Iran, Indonesia, and many more. Most countries such as these, after resource booms, cannot stabilize their economy, and fall victim to Dutch Disease. The sheer appreciation of wages and domestic currency yields a field in which exports become uncompetitive and cause damage to other industries such as agriculture and manufacturing; this renders countries de-industrialized (Mohamed).
Countries with exceptionally large oil exports can rarely escape this curse of plenty. They fail to make steps to reform their oil dependence, and instead, plunge headfirst into a sudden (yet predictable) violent political, economic, and social upheaval, as seen currently in Venezuela. However, one country within OPEC has managed to keep its head above the oil.
Despite oil prices plummeting, poor national perception regarding Yemen, as well as the murder of Jamal Khashoggi, Saudi Arabia still makes and maintains massive profit margins as it only costs them $9 USD to produce a single barrel (WSJ News Graphics).
This begs the question: What makes Saudi Arabia any different than these other countries, who have seemingly doused their economies, citizens, governments, and domestic currency in crude oil, lit a match, and set themselves ablaze? Why is it that now, in a time when oil prices are steadily dropping, Saudi Arabia can function with oil prices so low, and how does the volatility of oil affect Saudi Arabia’s environment domestically and geopolitically? Oil prices have been dropping in response to a large production output and a weaker global demand (International Energy Agency).
However, this is not the sole reason; oil has also been known to drop in response to political climates as well. With regards to exports, Yemen should not be someone of unique importance on a global oil scale; Yemen only produces 133,000 barrels of oil a day which is 0.1% of global generation (Johnston). However, Yemen is geographically positioned in a way that exerts power with regard to the very core of the industry of oil. Neighboring Yemen’s southern coastal city, Aden, is Bab el-Mandeb. These straits, of which are located at the opening of the Red Sea, are known to be fourth in the world as one of the busiest and most crucial petroleum choke points (Johnston). Approximately 3.8 million barrels of oil-based products arrive at the entrance every day, and because of Bab el-Mandeb, transportation rates of oil remain at a lower rate as no one has to round the southern tip of Africa in order to complete exports (Johnston). It is important to know that Bab el-Mandeb is not the only prime spot that is located beneficially to Yemen as it is adjacent to multiple other oil-rich regions.
A large majority of OPEC members such as Saudi Arabia and Egypt have large stake in Bab el-Mandeb and these other locations, which leads to massive tension when their stake is threatened as it was in 2015. 2015 marked the beginning of the ongoing war in Yemen that continues to impact oil prices today; the end is not in sight. The conflict is a result of a failed Arab Spring movement within Yemen in which the political transition from Ali Abdullah Saleh, an authoritarian president, to Abdrabbuh Mansour Hadi; due to Hadi’s inability to fend off separatists, al-Qaeda, unemployment, poverty, starvation, corruption, Iran’s intervention on behalf of the Houthis, and a military that still held loyalties to Saleh, he failed to bring stability to the country and people of Yemen (Yemen Crisis). The Houthis, a group of armed religious individuals who affiliate with the Zaidi Shia Muslim sect, took this transition period as the prime moment to strike. They had fought against President Saleh many times yet had failed (Yemen Crisis).
This time around, they preyed on Hadi’s transitional weakness and gained control of Saada province and other areas of which surrounded the region. Then, the Houthis made a grab for control of the entirety of Yemen, which forced Hadi to seek refuge elsewhere in March of 2015. It is known that Iran has been backing the Houthi’s military and that the United States has recently poured $110 billion USD worth of arms into the Saudi Arabian military (Trump and Saudi Arabia). This Iranian backed instability incited Saudi Arabia and other countries such as UAE, Senegal, Sudan, Morocco, and Qatar, to bomb-strike with the hopes of Hadi regaining power and stability being renewed to Bab el-Mandeb. There have been many strikes since on both sides. At one point, Saudi Arabia tightened its blockade of Yemen even further due to a ballistic missile being fired with the intent of hitting Riyadh (Yemen Crisis). This blockade has ruined Yemen’s economy. Saudi Arabia has taken over the Yemen Central Bank, engineered a currency crisis, collapsed purchasing power, left ¾ of the Yemeni population with little to no food or healthcare, and in the process of bombing have contributed to over 56,000 civilian deaths since 2016 (Mohamed).
Yemen is not the only political climate inciting volatility in Saudi Arabia’s oil market. After the brutal kidnapping and dismemberment of highly connected Washington Post writer, Jamal Khashoggi, within the Saudi Consulate in Istanbul, it has become obvious that Saudi Arabia, Turkey, and the United States are playing a game of political poker and using oil as the cash-out. President Erdogan of Turkey has been in power for 15 years. In this time period he has managed to gain control of nearly all Turkish news and media; Erdogan is not above promoting his own personal agenda through these means. Just as news broke of Khashoggi’s murder, Turkish officials and the news outlets controlled by them alerted the world that they had possession of audio recordings of Khashoggi’s death.
Turkey then attempted to use their possession of these recordings as a direct threat to Saudi Arabia; this kind of pressure was put in place on Saudi Arabia and the United States in order to have the outcome turn to be in Turkey and/or President Erdogan’s favor (Gall). Unfortunately for Mr. Erdogan, President Donald Trump is not always a predictable player, and oil can often find itself replacing the space reserved for political transparency. Trump decisively backed Mohammed bin Salman and told the world that “rogue killers” were responsible for the murder of Khashoggi despite the CIA later stating that M.B.S was wholly complicit in the most intricate details of the affair (Gall; Harris). This did not please Erdogan; in response, he released in depth descriptions of the tapes in a mounting act of pressure on the two countries. Amanda Sloat of the Brookings Institution says, “Initially, it seemed Turkey was seeking a bargain with or financial support from Saudi Arabia, but it increasingly appears that Turkey is seeking to inflict maximum damage on M.B.S.” (Gall).
While this may be the case, the United States will not be turning their back on the Saudis any time soon. Saudi Arabia stands far higher than any of the other struggling OPEC members as it is the world’s largest oil producer, net exporter, and the only OPEC nation with a set plan to rebound its economy from Dutch Disease: Vision 2030. With the recent sanctions being re-imposed on Iran due to the collapse of the Iran Nuclear Deal, Donald Trump wants to maintain key Saudi financial, oil, and arms backers with respect to national interest. Let’s face it, arming Saudi Arabia in the Yemeni Civil War as well as steering clear of implementing repercussions over the death of Khashoggi, while tragic, was the price America had to pay in order to maintain the steady arms related cash flow and keep oil prices low. This graph, created on November 23rd, 2018, demonstrates how the precipitous drop in oil also has a correlation to the murder and dismemberment of Jamal Khashoggi in the Saudi Consulate on October 2nd, 2018 (Blokland).
Previously, oil was at a 2018 all-time high trading at a peak of $76 a barrel in early October. On exactly October 2nd, oil prices began to plummet, resulting in US crude oil trading at $51 a barrel. Since changes in production affect the price of oil on a medium and long term basis (as there is not enough time to get the oil into the system), what we see is trader volatility. Production changes can’t affect the price of oil that quickly, so when there are more sellers than buyers in a specific market, that stock’s price will drop, revealing that this massive selling of oil futures by energy traders is related to the perception of Middle East instability. In their 2018 break-even oil budget, Saudi Arabia has one barrel placed at $74.4 USD (Khan). Therefore, some would claim that the drop to $52.2 USD per barrel would be detrimental to Saudi Arabia. In some ways, yes; however, for a country that claims to have $48 billion sitting in foreign reserves, the disproportionate budget-to-revenue ratio only creates a shift in where they place their money, an example of this being a slowing of government-funded construction of cities on the coast, not a stop (Wald).
Even when below their budget, Saudi Arabia still has access to imports such as food and other important resources for their citizens and government. This is due to their political leverage as the controller of world oil, foresight to stock up on foreign reserves, purchasing power of companies in other industries in an attempt to diversify exports, as well as their massive investments in other countries such as the United States; this sets them apart from other OPEC countries such as Venezuela who do not have cash flow or political influence, and therefore, cannot feed their population as Dutch Disease has practically rotted their domestic currency, the bolivar, from the inside out. Saudi Arabia will not fall victim to this; they have made many severe economic and fiscal reforms in order to steer clear. With regard to Saudi’s domestic oil climate, M.B.S has enacted Vision 2030; a direct attempt to manufacture a complete economic overhaul through ambitious reforms in taxation, the severance of subsidies, and spending.
Saudi also plans on creating the world’s largest initial public offering (IPO)through the partial privatization of Saudi Aramco which would bring in an approximated $100 billion of non-oil revenues for Riyadh, however, this plan has been delayed multiple times already (Khan). Because of these reforms and future partial privatization, combined with investments in infrastructure, military, and education, M.B.S is hopeful that this will create an impenetrable division between Saudi Arabia and total oil dependence/Dutch Disease. One of the most intriguing aspects of Vision 2030 is the blue print for NEOM, a mega-city run on clean renewable energy that will connect Saudi Arabia to Jordan and Egypt (Ellyat). NEOM is intended to be funded through foreign direct investment (which they are aiming to increase through these kinds of attractions) as well as the partial privatization of Saudi Aramco. NEOM aims to be a new and modern technological hub that will embrace the digital era in order to become a major middle-eastern commercial location (Ellyat). The building of NEOM will produce a large amount of jobs for the citizens and create a sustainable environment in which, perhaps, new and old businesses can thrive.
However, the question is will the people of Saudi Arabia take advantage of these new job opportunities as well as the growth of their nation? The past says more than likely not. The government revenue and expenditures of Saudi Arabia rely heavily on oil generated royalties. This is primarily due to the lack of implementation of personal income tax on the citizens of this country. And so, the social contract between the people and government is dominated and dictated by the rentier’ effect; this rentier social contract has a direct negative impact on the power of the people, however, they have silently agreed to its repercussions. With the oil royalties funding the fiscal system, the people of the country acquiesce their government representation for their emancipation from taxation, gift of free education, as well as free health care.
As the people and the petro-state rely on economic stability fueled by a steadily depleting resource they remove themselves from any glimpse of change and growth. They become largely removed from government corruption and waste as it has little impact on their pockets, in turn propagating their own moral hazard. The citizens attend school, yet, recently, they have graduated and remained unemployed for an extended period of time. If the available jobs on the market are not offered by the government, individuals find little to no incentive to take them. Instead, imported foreign workers from surrounding countries find themselves filling these jobs and sending the money back to their families. Therefore, the building of NEOM will more than likely succeed if the government strategically allocates money and diversifies their investments, however, the citizens of Saudi Arabia may contribute very little to this.
Why work hard for your riyal when your father who humbly worked before you can give it to you with ease and the imported foreign workforce can sacrifice their energy and lives for their families and build the technological hub of the country’s dreams? Saudi Arabia may plan to avoid downfall by slowing its dependence on oil with the reforms of Vision 2030, but it does not mean the country will stop doing whatever it takes to have its way… and its oil; Saudi Arabia will continue to attempt use its political and oil leverage to shirk off the part they have played in the death of Khashoggi, blockade the people of Yemen, fight off the Houthis/Iranians, and gain control of the straits of Bab el-Mandeb over the course of the Yemeni Civil War. In the crusade for oil and power, they propagate death and destruction; Saudi Arabia will not stop for a single life… certainly not the life of the famous Jamal Khashoggi or little-known Yemeni citizens.