Trouble Brews in the Saudi Kingdom

Trouble Brews in the Saudi Kingdom

A new report from Citigroup’s Heidy Rehman suggests that Saudi Arabia's domestic petroleum consumption may equal production in 2030, leaving none to export. Of course, it won’t get this far—the kingdom’s balance of trade would quickly become unsustainable as oil exports dropped—but the report still highlights one of the many distortions in the Saudi economy.


The kingdom, like many of its oil-rich neighbors, is a cut above the rest of the world in per capita oil consumption, thanks in great part to the use of oil to make electricity. Riyadh is able to provide oil to its power plants for just a few dollars a barrel, a practice that is cheap on paper but expensive in reality. With many Saudi crudes persistently fetching 100 dollars or more per barrel, each barrel burned for electricity is a large sum forgone. Providing oil at far below the international market rate also leads to consumption of oil far above the international norm, compounding the inefficiency. The kingdom is “paying” hundreds of millions of dollars each day in opportunity costs.


The Saudi economy also leans toward the production of low-value-added goods. In several recent years, the largest share of Saudi exports that was not a mineral or chemical product was tugboats, topping out at just under four-tenths of one percent of the kingdom's export value. (To be fair, the Saudis have transformed themselves into a key player in the international tugboat sector in only a decade.)


The undeveloped economy has left Riyadh with many jobs in sectors that Saudi employees consider inappropriate for their status and few jobs in more advanced sectors that better fit an increasingly educated (and increasingly high-status) public. As long as it has its oil revenues, it can partly mask the problem with make-work jobs in the bureaucracy, handouts to religious institutions and the provision of a respectable quality of life for many of its citizens. When there are worries of instability—as there were during the Arab Spring—the government dramatically increases this provision.

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