Saudi Arabia's Oil Problem

this video was made possible by skillshare learn new skills for free for a month by being one of the first 1000 to head to the link in the description the story of saudi arabia's oil problem starts with success almost a century ago after three decades of bloody complex conquest over belligerence as small as tribes and as large as the ottoman empire abdulaziz bin abdullah rahman al-saad finally held nearly all of the arabian peninsulas territory his military and political triumph was rewarded with his ability on september 23 1932 to unify his dominions into a single modern arab state the kingdom of saudi arabia that was hardly the end of his success though with new-found tenuous stability across the peninsula abdulaziz started work to verify a long-held hunch he believed without any real evidence that there must be oil in arabia this was typically brushed aside by oil companies as the starry-eyed fantasies of a desperate ruler of an inhospitable land but he was of course correct in 1932 neighboring bahrain struck oil and suddenly the king's fantasies weren't so fanciful after all on march 3rd 1938 standard oil of california struck oil at saudi arabia's daman number 7 drill site successful oil exploration was followed up by more exploration which too was successful and as more and more wells punctuated the arabian peninsula the success only compounded as it turned out this bearing dusty peninsula was home to the single largest proven oil field on earth this was good for abdulaziz he grew rich his country developed his kingship was solidified in a mere decade he went from leading some lowly nomadic tribes in an uncharted land to striking diplomatic deals with the president of the united states prosperity reigned over the coming decades as power was passed from abdul aziz to his son then to another of his sons and so on and so forth in an era defined by unprecedented success there was little reason for the people to push back on a now antiquated form of governance a social contract started to emerge the people would support the monarchy politically if the monarchy supported the people financially infrastructure subsidies handouts housing the monarchy provided all saudi arabia's fortunes only improved as the start of the 21st century ushered in a historical rise in oil prices the country's gdp nearly tripled in just eight years and riyadh was inundated by high-end hotels foreign faces and international consulting firms the money and fortune seemed endless and effortless until of course it ended crude oil traded at an all-time high of 147.26 in july 2008. over the coming months as the world descended into its deepest financial crisis since the great depression prices steadily slid down to just dollars a barrel and nearly four-fold collapse in half a year the direct impacts of this crash on saudi arabia were surprisingly minimal as the government had amassed vast financial reserves over the prior decades of prosperity and oil prices quickly started ticking up again ending 2009 at around 80 dollars a barrel a figure the kingdom could live with but then it happened again in summer 2014 prices began a steady slide that would bottom out at 33 a barrel in january 2016 a symptom of incredible global oversupply between 2016 and 2020 prices would average about 51.20 the problem however was this number over the same period the breakeven oil price the average price at which the country's oil industry as a whole turns a profit was 85 and 70 cents this isn't to say that saudi oil companies simply couldn't turn a profit but it does mean that there were fewer opportunities to turn a profit there were fewer wells whose operating costs were low enough to enable profitable operations with an oil sector representing close to half of gdp saudi arabia had to dip into its financial reserves which therefore began a precipitous decline in a country defined by its social compact financial support by the monarchy in exchange for political support by the people seismic changes occurred starting on january 1st 2018 for the first time ever the saudi people were asked to help fund the government on any purchase of goods and services they would now pay a five percent value added tax some of the risks of running such a deeply oil entrenched economy are straightforward for example we know that sometime in the future a day will occur that will come to be known as peak oil experts agree that either demand decline supply constraints or mix of both will lead to the world's oil production reaching a plateau before a decline now past predictions on the timing of such an event have overwhelmingly proved inaccurate most experts in the 70s expected production to level off by 2000 but there are now stronger indications that peak oil is nearing between 2018 and 2019 oil production ticked down slightly this wasn't the first year-to-year production drop in the 2000s but both other instances 2002 and 2009 can be directly attributed to major external crises 911 and the great recession in 2019 production dropped simply because of market factors of course then in 2020 another external crisis occurred which led to the steepest year-to-year decline in recent history but the pandemic might lead to structural long-term changes such as less driving with more people working from home that would result in a permanent drop in demand so now whether oil production will fully recover and start growing again is in legitimate question and some answers have started to emerge shell one of the world's largest oil producers has said that it believes 2019 was its high water mark for production peak oil might have already occurred that is undoubtedly bad for saudi arabia but potentially less devastating than one might think at least in the near term located on some of the most accessible oil fuels in the world saudi wells boast some of the world's cheapest production costs meaning they will not be the first to close down once demand declines however it's still the case that going forward is going to be harder to base an economy on oil than before looking at the graph of crude oil prices since 1983 the era before 2005 is noticeably different than that after it's not the prices themselves that matter here it's the fluctuations oil prices have never before been this volatile these semi-regular four-fold spikes or drops that occur in mere months are a new phenomenon running an economy on such a volatile commodity is incredibly difficult and this price volatility is only expected to increase in the future as industry disruption ramps up simply put running an economy on oil in the 21st century is not a good idea some in saudi arabia know this of king abdulaziz's 45 sons 36 survived to adulthood and six ascended to the throne upon the death of his half-brother in 2015 king salman bin abdulaziz became the latest to rule the kingdom already aged 79 and with brothers only marginally younger the decision was made that salman would be the last of his generation to rule and so muhammad bin naif a grandson of king abdulaziz was appointed crown prince next in line for the throne meanwhile muhammad bin salman would serve as deputy crown prince two years later however shortly before midnight on june 20th muhammad bin naif was summoned to the safa palace in mecca for a meeting with the king that meeting did not materialize however as he was led into another room held captive and told by royal court officials that he must give up his claim to the throne after hours locked in that room muhammad bin naif agreed to resign the deputy crown prince and son of the king mohammed bin salman was now next in line for the throne over the years prior the 31 year old had quietly worked to amass power in the background and increasingly became the face of the saudi royal family reports indicate that he was indeed responsible for orchestrating the former crown prince ousting which is not a stretch to believe in fact he has gained so much influence over his father's decision making that he is now considered nearly universally the de facto ruler of saudi arabia mohammed bin salman recognized his country's oil problem before his ascent however in late 2015 the mckinsey global institute published a detailed 144-page report analyzing the future prospects of saudi arabia's economy in the wake of 2014's oil price crash this issued some dire predictions their base case what they expected would happen without any major proactive changes by saudi arabia predicted that between 2014 and 2030 the country's average monthly household income would fall from 3 800 to 3 000 the unemployment rate would rise from 12 to 22 percent and 900 billion dollars in government assets would be replaced by two trillion dollars in debt in short saudi arabia was on the path towards fiscal collapse this attracted attention most importantly that of muhammad bin salman marking the first major move on his rise towards de facto ruler mbs took on the country's biggest challenge ever he fulfilled his reputation as a reformer and plotted a path to transform saudi arabia it was called vision 2030. according to this plan transforming saudi arabia into a sustainable nation involved three primary objectives improve the government the economy and society that first pillar government was perhaps the broadest in scope ranging between decreasing corruption stripping down bureaucracy moving government services online and far more perhaps the most dramatic manifestation of this mission occurred mere months after mbs's promotion to crown prince when some 500 government ministers business people and royal family members were rounded up and detained in the ritz-carlton hotel in riyadh until they could stand trial for corruption the degree to which this crackdown was legitimate is up for debate but it did net the government a hefty 170 billion dollars in assets in the ensuing settlement deals the second pillar related to economic reform was also composed of a broad collection of initiatives including privatizing certain government services increasing participation among women in the workforce attracting increased investment in the country by foreign companies recharging government coffers and growing private sector industries in addition in a country known for its prohibition of all but religious tourists saudi arabia would now allow and embrace foreign visitors taking a page from the uae's economic diversification playbook of course to make tourism work one needs a place that tourists want to go and that's a key focus of the third and final pillar improving society now saudi society has long been defined by a strict interpretation of islamic principles shops briefly close for each of five daily prayers religious police roam the street enforcing strict dress codes homosexual activity is punishable by execution adult women are required to have a legal guardian to make decisions on their behalf atheists are legally defined as terrorists and plenty more in some saudi society was not one that many foreign tourists would feel comfortable visiting and beyond that considering their interpretation of islamic principles prohibited it there was little of what most foreign tourists would consider entertainment therefore mbs went on a mission to change that the country reversed a 30-year ban on movie theaters and partnered with amc to open dozens of cinemas across the country it established the region's largest music festival with artists like david guetta steve aoki and tiesto getting to deal with six flags to open a theme park in the country and it gained a coveted spot on 2021's formula one calendar with the first ever saudi arabian grand prix in addition some of their most regressive social policies were abolished women were now allowed to drive leave the country without their guardian's permission watch live sports and wear a wider variety of clothing types altogether saudi arabia increasingly on the surface was starting to look more like its neighbors bahrain qatar and the uae countries socially and politically rooted in islam but open to elements of the increasingly globalized western lifestyle below the surface however it soon became clear that far less had changed on october 2nd 2018 shortly after 1pm journalist and saudi dissident jamal khashoggi entered the consulate of saudi arabia in istanbul turkey to seek necessary documentation for his upcoming marriage he was never seen again in the days weeks and months that followed it emerged that khashoggi had been assassinated seemingly in retribution for critical coverage of the saudi government and according to the cia and other intelligence organizations the killing was ordered directly by muhammad bin salman while stifling descent was nothing new for saudi arabia the assassination of a journalist for a western paper on foreign soil struck a chord with international observers that elicited a level of outrage unfamiliar for saudi arabia the country was used to condemnations by amnesty international critical statements by ministries of foreign affairs and world news section stories about their various human rights abuses but never before had the country's misconduct reached front page status globally never before had an instance of saudi cruelty permeated into common knowledge backed up by less covered incidents such as saudi arabia's alleged war crimes in yemen the hacking of jeff bezos's phone who owns the washington post where khashoggi's columns were published and continued stifling of dissent an informal international consensus was formed despite the more liberal laws the theme parks the music festivals and more deep down saudi arabia was not reformed and now the world knew it this is an issue for saudi arabia now when david guetta performs in saudi arabia he has to deal with a barrage of critical articles when formula one announces its upcoming saudi arabia grand prix it is faced with memes liking it to racing in pyongyang or kabul when amc continues with its planned expansion into the country it encounters reputational damage when his competitor pulls out on ethical grounds this all has a cost if a business faces similar profit opportunity in both saudi arabia and say the uae they're going to pick the uae as it's been far more successful at building a friendly face for the west despite an also iffy record on human rights altogether these and other factors have meant that vision 2030 is still but a vision the plan laid out four key performance indicators to track the highest level goals of the project the first was the percentage of the country's gross domestic product attributable to the private sector rather than state-owned enterprises like saudi aramco considering the private sector involves non-oil industries growing it is key to diversification in 2016 this percentage stood at 40 percent and the goal was for it to reach 65 by 2030. today over the past four financial quarters that number stands at 42.7 a crucial aspect of growing non-oil revenues involves attracting foreign direct investments they want for example an investor from singapore to decide to open a hilton at the new six flags theme park foreign investment is key to kickstarting natural compounding private sector economic growth in 2016 foreign direct investment represented 3.8 of the country's gdp at least according to the saudi government and the goal was for it to grow to 5.7 by 2030. today according to the world bank foreign direct investment represents only 0.57 of gdp the next indicator non-oil exports as a percentage of overall exports is perhaps the only glimmer of hope with a 2016 baseline of 16 and a goal of 50 by 2030 22.4 percent of the country's exports are now non-oil products this is however well below the pace of growth needed to reach the goal finally the unemployment rate of saudi nationals stood at 11.6 in 2016 and despite the goal of bringing it down to 7 by 2030 it has since ticked up slightly to 11.7 all around the vision of 2030 is not being realized now of course there's been an unprecedented pandemic of course oil prices have been low and of course these are only the first years of reform but all that notwithstanding there's little evidence of deviation from the current failing path a huge chunk of the government's money is being sunk into mega development projects like a 500 billion planned smart city along the red sea or a three billion dollar entertainment district near riyadh to play host to the six flags formula one track and more but mega projects like this don't work in the united arab emirates flashy developments like the burj khalifa and the palm islands weren't what transformed the country into the most diversified economy in the region it was the unglamorous boring task of crafting a business environment that the world feels they can cooperate with businesses want access to saudi arabia because it's a massive untapped market but right now it's just too risky an environment for them it's too risky to operate in an absolute monarchy with a track record of volatile infighting it's too risky to operate in a country known for eye-catching human rights abuses at home and abroad it's too risky to operate in a country where women in the workplace have fewer rights than their male counterparts it's too risky to operate in a country whose legal system is based on a strict yet ambiguous interpretation of sharia law saudi arabia has the riches to brute force some private sector growth it has the money to lure some international investment but as of yet it does not have the vision to kick-start organic economic transformation reform so far has been superficial but those making the decisions that matter to saudi arabia can see through that therefore if saudi arabia actually wants to cement its place in 2030's world it's going to have to engage in what its leaders want least radical fundamental systematic change as the story of saudi arabia proves so well diversification is crucial and this doesn't only apply to massive world economies but also to you being someone who can do one thing well is great but being someone who can do a wide variety of things makes you uniquely valuable and irreplaceable that's why i find skillshare so useful they're an online learning community with thousands of well-produced classes taught by the actual practitioners of a given skill for example one really useful skill applicable to almost any job and even school is graphic design it can help spruce up your reports powerpoints websites and really any other visual project skillshare's class on graphic design basics is taunted by ellen lupton curator of the smithsonian's design museum in new york and in just 36 minutes you'll pick up principles that you'll use for the rest of your life whether you want to learn web development painting music production video editing or really any skill skillshare is the place to go and you can start improving 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Channel: Wendover Productions

Views: 2,703,369

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Id: V16GdzRvhRU

Length: 21min 9sec (1269 seconds)

Published: Thu Sep 23 2021

Reddit Comments

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