Eyes wide shut

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Dr. Fahd Ali examines the potential difficulties Saudi Arabia is facing

Red Sea coastline of Jeddah

Pakistan looks up to Saudi Arabia as a benefactor who is committed to its welfare and plays a credible role in its internal affairs. In the hoopla of reverence the dispassionate analysis of Saudi Arabia is usually missing although it is important to periodically review the state of the kingdom as it is recognised need of nation-states to view other states particularly the ones that are crucial to their existence. The state of countries are also required to be analysed that are widely categorised as client state and are solely dependent on a natural resource for their sustenance.

Pakistan may indeed be the victim of abysmal poverty and lack of resources but in a stark contrast Saudi Arabia is practically moth-eaten by excessive wealth that indeed is ironical because wealth is universally regarded as a sure sign of prosperity and development. Apart from the social and governance dichotomies the kingdom suffers from, the actual difficulty lies in the underlying structural anomalies that are very difficult to rectify. It is beset with interconnected challenges that may be difficu lt to surmount with the passage of time.

Saudi Arabia is the creation of the dependence of the industrial world in oil resource that made it to follow a policy of consuming cheap oil from most of the Middle Eastern countries instead of utilising their own oil wealth. Canada is rated to possess the highest proven oil reserves in the word but it uses the imported oil. The strategy is clearly to utilise cheaper oil and preserve own resources for use in the long term. The result is like countries like Saudi Arabia are gradually getting bereft of their oil wealth and have not been able to branch-out in creating base for sustainable economic development.

The problem is compounded when viewed in the
context of translating oil production capacity into
`exports against rising rates of domestic consumption

Despite the widely held view that Saudi Arabian oil wealth will continue to hold good for a very long time it is the very hemorrhage of this resource that may prove damaging. The Saudis have leisurely pumped record levels of oil so that they can sustain production in order to keep oil prices in check. They also pump more to undermine their competitors by ensuring upper hand in distribution even if profits are small because such a ploy paves way for continued Saudi Petro dominance. But a new study has revealed that Saudi Arabia will be nearing its peak production after which the decline will follow sometime in 2028, just eleven years away.

The problem is compounded when viewed in the context of translating oil production capacity into exports against rising rates of domestic consumption. The inflection point denoting crisis situation comes when an oil producer starts lacking production capacity to export under pressure from domestic demand. Keeping this analysis in view experts, on the basis of continuously monitoring Saudi example, confirmed that Saudi oil exports started declining as of 2005. They predicted that this trend will continue and so it did. Between 2005 and 2017 the Saudi net exports declined to the tune of 1.4% annually and it is now predicted that net exports will plummet to as low as zero in the next fifteen years. The Kingdom earns 80% of its revenues from oil exports and any decline thereof means downward levels of state income.

Future reckoning
Saudi Arabia
Oil running out

The population of the kingdom is growing at a steady rate and it is estimated that it will grow to 37 million from the current 29 million by 2030. Saudi Arabia is rated as the region’s biggest energy consumer and its domestic demand increased by 7.5% in the last half a decade that was primarily driven by growth in population. Keeping this factor in view the kingdom invested in renewable energy sources so that to wean off domestic demand that would free up the capacity for exporting oil. But early this year the financial constraints compelled Saudi government to delay its $ 109 billion solar program for eight years. This program was supposed to produce a third of the electricity demand of the kingdom by 2032.

The oil revenues have started to show signs of going down due to the kingdom’s short-sighted strategy to undermine competitors. Through this ploy it has kept prices low thereby making new ventures unprofitable for rivals such as US shale gas industry as well as fellow OPEC producers. But such measures have now come home to roost by hitting the coffers of the kingdom as an offshoot of price squeeze. The Saudi policy makers planned to offset this imbalance by utilizing their significant financial reserves till their competitors lost the ability to compete further. This plan did not succeed and on the contrary the considerable reserves are depleting fast. Going by the current rate it is estimated that by late 2018 the reserves could touch the low of $200bn that may trigger flight of capital. To ward off such eventuality King Salman has resorted to accelerate borrowing that may eventually increase debt levels whereas oil revenues will remain strained.

Crisis point
Saudi key oil fields

An essential element of the survival of autocratic regimes is to dole out massive subsidies to keep unrest down. Saudi Arabia has so far managed to generously subsidize oil, housing, food and other consumer items. The extent of subsidies granted by the kingdom could be gauged from the fact that only energy subsidies account for almost one fifth of the Saudi gross domestic product. Currently almost 80% of the country’s food requirements are bought through heavily subsidized imports and in absence of such subsidized protection the impact of fluctuations in food prices would be difficult to sustain.

The declining revenues will sooner or later affect the ability to maintain the burden of heavily subsidized existence that in turn will create unrest as witnessed by similar autocratic regimes in Egypt, Syria and Yemen. It may be borne in mind that seeds of unrest are already present in the Saudi body politic as a quarter of its population lives in poverty, unemployment is 12% mainly affecting the youth that constitute 30 percent of the population.

Faced with scorching heat, the kingdom is severely subjected to climate changes that will ultimately cause food and water shortages. The country is already experiencing the negative effects of climate change in shape of strong warming temperatures in the inlands and vast rainfall deficits in the north. It is estimated that the average temperatures will rise as much as 4 degrees Celsius by 2040. It is not very uncommon in such conditions that long pent up rain falls in torrent inundating vast areas as happened in Jeddah flooding in 2010 wherein a year’s worth of rain fell in just four hours. Such cataclysmic changes may seriously erode agricultural productivity that is already handicapped by overgrazing and unsustainable industrial agricultural practices leading to accelerated desertification.

It is noted with concern that the kingdom is vulnerable to fluctuation in climatic conditions because its ecosystems are sensitive and its renewable water resources are limited. Saudi Arabia is rated as one of the most water scarce areas in the world where the average availability of water is estimated at 98 cubic meters per inhabitant per year. Most water withdrawal is from groundwater, 57 percent of which is non-renewable, and 88 percent of which goes to agriculture. In addition, desalination plants meet about 70 percent of the kingdom’s domestic water supplies. Desalination is very heavy on energy consumption and it currently accounts for more than half of the domestic oil consumption. The dwindling export of oil will diminish the ability of the kingdom to use desalination to meet its water requirements.

The turmoil in the region is the direct offshoot of gradual weakening of state power in the wake of climate-induced droughts, agricultural decline and rapid oil depletion. Saudi Arabia is experiencing the same symptoms with the added disadvantage that it has become the focal point of gradually mounting global dissatisfaction about the retrogressive policies it has been pursuing that have given rise to a turmoil affecting the world at large.

Dr. Fahd Ali is a medical practitioner in the US and is very active socially

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