Saudi Prince Plans to End Oil “Addiction”

Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman basically runs government economic policy in the kingdom. Yesterday, he announced an ambitious plan to ween the nation off its oil “addiction.” His plans, called “Vision 2030,” call for non-oil revenues to increase to 600 billion riyals ($160 billion) by 2020 and 1 trillion riyals ($267 billion) by 2030 from 163.5 billion riyals ($43.6 billion) last year. One wishes him luck, but the devil is in the details, and many genies will be released who won’t want to go back in their bottles.

His Royal Highness is entirely correct that Saudi Arabia relies far too much on oil for income, and he is also correct in believing that ending the addiction will be good for the nation. “We will not allow our country ever to be at the mercy of commodity price volatility or external markets,” Prince Mohammed said at his first news conference with international journalists, who were invited to a Riyadh palace for the event. “We have developed a case of oil addiction in Saudi Arabia,” he had earlier told al-Arabiya television news channel.

Reuters notes, “At the center of the plan is the restructuring of its Public Investment Fund (PIF), which Prince Mohammed said would become a hub for Saudi investment abroad, partly by raising money through selling shares in Aramco.

“Asked where Riyadh would find the funds for a $2 trillion dollar fund after recent borrowing, he said it would come from transferring the ownership of Aramco to the PIF.

“‘We are speaking about more than $2 trillion. We expect the valuation to be more than $2 trillion. In addition to that there are other assets that will be added to the fund, and part of it is already added’.”

“He said it could ‘turn into a global investment fund with a size of up to $3 trillion dollars’.”

For comparison purposes, CNBC notes “As of March 2015, sovereign wealth funds around the world had amassed $7.1 trillion in assets under management, according to the Sovereign Wealth Fund Institute (SWFI), up from $3.4 trillion at the start of 2008.” The largest is Norway’s Government Pension Fund Global at $880 billion.

His Royal Highness must solve four problems to make this whole thing work. First, Aramco’s books and financial reports need to be clear as crystal, and who knows what they really look like. No matter how exciting it would be for many investors to get a piece of the Aramco pie, if the financials are dodgy, the IPO will not meet expectations. He can’t do this without loads of money, and he will need every riyal.

Second, the fund can do well investing abroad, but what would be far better is developing industries that would benefit Saudis with jobs and opportunities for entrepreneurial activity. Given the nation’s location and traditions, shipping and travel would be good places for investment, sinking money into education never hurts and engineering of any kind will pay dividends. He must find a way to make these investments prudently rather than just throwing money at them, and he must be able to say “no” to some plans.

Third, the Norwegians have found their fund becoming difficult to manage at just under $1 trillion. His Royal Highness needs to find a structure for this that allows effective deployment of the $3 trillion he expects to raise. Economies of scale will clash with the law of diminishing returns.

Finally, this is going to bring social change, which rubs many in the kingdom the wrong way. Reuters also reported “The plan also envisaged increasing women’s participation in the workforce, something that has already grown quickly over the past five years, to 30 percent from 22 percent. But he [HRH] also said he did not believe Saudi society was ready to end its ban on women driving.

“A green card system would also be launched within five years to enable expatriate Arabs and Muslims to live and work long-term in the country, Prince Mohammed said, in a major shift for the insular kingdom.”

Of all the issues he faces, social changes could be the undoing of it all. Women working and driving (someday), foreigners holding jobs, buying homes and sending their kids to school will expose Saudis to other ways of doing things. That will create social pressures some may resist.

Perhaps Mr. Trump could build them a wall.