Saudi Arabia may have a budget deficit of 19.5% of GDP this year unless it rapidly changes course and accommodates the new, cheap oil world, according to the IMF.
Alas, the Kingdom has almost zero short term incentive to do so.
A generous social contract rapidly fraying
Saudi Arabia’s Kingdom is topped by the wealthy Saud family, whose ancestors conquered most of the Arabian peninsula in the 1920s and 30s. The discovery of oil allowed the Saud family to rapidly modernize their country’s infrastructure and sprout cities from sands, but such economic growth was accompanied by stagnant politics and an absurdly conservative mainstream culture. As the Saud family sought, and still seeks, absolute political dominion while enjoying leaps and bounds in economic growth, the Saud family wrote a unique social contract.
In order to forestall rebellion from cultural forces, the Saud family gave control of education, media, and social norms over to its hardline clerics, who have established a rigid social system that allows for little personal expression. This suited the Saudi royals; the less personal expression, the less politics.
The Sauds also established a generously cradle-to-grave welfare system that turned virtually every Saudi citizen into a dependent of the state. Houses were given away; jobs were established solely to give people somewhere to go all day; salaries doubled and tripled at regular intervals; personal debts were paid off.
Is it that second portion that is rapidly becoming too expensive.
Trapped by success
Saudi nation-building has been successful in numerous ways best exemplified by its population explosion. In 1950, there were approximately 3.9 million Saudi citizens. In 2015, the population is estimated to reach 34.4 million, including millions of expatriate workers who do jobs Saudi citizens won’t.
It was all well and good to give free housing when there were so few people in the Kingdom, but the Saudi government now faces a critical housing shortage with long wait lists. Finding jobs for its extremely young population is growing more difficult; its bloated government rolls are filled with yes-men who reduce government efficiency.
Derailed by shale oil
While Saudi Arabia was already having a tough enough time meeting the needs of its citizens even in the days of $100 a barrel oil, the advent of American shale oil stirred Saudi Arabia’s late King Abdullah to embark upon a concerted effort to drive oil prices so low as to drive shale oil out of business.
This strategy is bleeding Saudi Arabia’s budget. While it’s been a long-standing pillar of Saudi national strategy to ensure oil remained affordable (and therefore reduce the incentives for economies in the West to diversify to alternative fuels), today’s it’s virtually giving the black stuff away.
Riyadh calculates it can eat into its formidable sovereign wealth fund while running the shale industry into the ground. That strategy is short-sighted. While shale oil may become less attractive, invariably Saudi Arabia must reduce production and raise prices. When it does, the technology for shale oil will remain and will go right back into cutting into Saudi Arabia’s profits.
In other words, Saudi Arabia can’t count on high oil prices padding its budget again.
Unable to change the contract
Saudi Arabia’s social contract is dangerously unstable, with competing forces increasingly taking to Twitter to voice discontent and engage in debates normally banned within the Kingdom. Demands from modernizers are stymied by strong-armed conservatives, who the Saudi state needs to retain power. To maintain control, the Saudis have taken to a greater repression, including an increased pace of beheadings.
Incremental and slow changes have suited the Saudis well, with Saudi Arabia dipping its toes into electoral politics on the municipal level. The next elections are scheduled for this winter. The last elections were in 2005.
But a decade between baby steps is too long in the fast-bleeding Saudi budget.
The war in Yemen
The Saudi military adventure in Yemen is unlikely to end cleanly or cheaply. The final bill won’t be tabulated for years, and the likelihood of a Saudi victory there is remote in a country that once bled the Egyptian army to withdrawal in the 1960s.
As the bodies pile up and the bills go unpaid, how long can Saudi Arabia’s social contract last? And what effect will instability in the Kingdom have on the rest of the world economy?
Ryan Bohl was born in Phoenix, Arizona, and studied Middle Eastern modern history and politics and international relations at Arizona State University, graduating in 2007. He earned a Master’s in Education in 2009 and worked for five years in the United Arab Emirate in a government school teaching English. During that time, he carried out original research into Emirati culture, history, and politics, and carried out fact-finding missions to Egypt and Bahrain during the Arab Spring in 2011. In 2013, he moved to Qatar to work in an international school, emphasizing international relations and geopolitics and monitoring the rise of the Islamic State and participating in public political discussions in Doha. That same year, he founded Geopoliticsmadesuper.com, a website dedicated to distilling foreign policy and geopolitics in manageable chunks for the average Internet user. He’s been interviewed for Emirati political outcomes in education and cited in Stratrisks, the Atlantic Sentinel, and Occupy Corporatism. He currently lives in Brooklyn, New York, with his wife.