Saudi Arabia, Where Even Milk Depends on Oil, Struggles to Remake Its Economy
Low crude prices and the war in Yemen have sent a shock through the kingdom’s budget and forced it to revise its social contract even as it seeks to diversify its businesses.
By NICHOLAS KULISHOCT. 13, 2016
AL KHARJ, Saudi Arabia — This is what it takes to run a mega-dairy in the scorching desert here: 180,000 Holstein cows, precisely cooled cowsheds, water pumped from deep underground, feed from Argentina and a state-of-the-art refrigeration system. To transport chilled milk and other products all over the Arabian Peninsula, add 9,000 vehicles.
None other than the Saudi king’s favored son, Deputy Crown Prince Mohammed bin Salman, has held up the dairy, Almarai, as a model for a country trying to wean itself from oil dependence. But even companies like Almarai, with no apparent connection to petroleum, rely on the cheap energy provided by the kingdom.
That is coming to an end. Low oil prices and an increasingly costly war in Yemen have torn a yawning hole in the Saudi budget and created a crisis that has led to cuts in public spending, reductions in take-home pay and benefits for government workers and a host of new fees and fines. Huge subsidies for fuel, water and electricity that encourage overconsumption are being curtailed. For Almarai, one of the top brands in the Middle East, that will mean $133 million from the bottom line this year, company officials said.
Prince Mohammed’s plan for an economic overhaul has sent tremors through a nation whose citizens have long enjoyed a cosseted lifestyle underwritten by the state. “The government is moving very fast at reforming things in Saudi Arabia, while the people are finding themselves left behind,” said Lama Alsulaiman, a businesswoman and board member of the Jidda Chamber of Commerce and Industry. “Life as usual and business as usual can no longer continue.”
Rewriting the social contract carries high risks for the 31-year-old deputy crown prince, who has staked his reputation on transforming the economy. “People are looking to see if he can do it,” said Ibrahim Alnahas, a political-science professor at King Saud University in Riyadh, the capital. “If so, his future would be king. If not, his future would be lost.”
The vast subterranean seas of petroleum here have seeped into almost every part of the Saudi economy. Crude oil does more than deliver billions of dollars in profits to Saudi Aramco, the state oil company, and Sabic, the chemical giant; it also buttresses energy-intensive sectors like cement production and aluminum smelting.
Saudi Arabia burns barrel after barrel of crude oil for electricity, one of the few countries to do so in large quantities. Commercial air-conditioners cool shopping malls as temperatures outside soar past 100 degrees in the summer, and children go sledding at Snow City, a frigid new recreation center in the capital. Much of the drinking water needed to keep this desert nation alive comes from energy-draining desalination. And the S.U.V.s idling in Riyadh’s enormous traffic snarls drain gasoline.
“It is striking the extent to which every major industry relies on cheap energy, whether directly or indirectly,” said Glada Lahn, co-author of a study for Chatham House, a London think tank, that warned that the kingdom could become a net importer of oil within a few decades if it did not make significant changes.
Saudi Arabia’s about-face last month at a meeting of the Organization of the Petroleum Exporting Countries in Algeria, agreeing to cut production to raise the price of crude, showed the urgency policy makers here are feeling. Prince Mohammed announced plans this year to sell off a small piece of the country’s economic crown jewel, Saudi Aramco, to free up money for investment.
The budget deficit was nearly $100 billion last year. The country’s foreign reserves have dropped by a quarter since oil prices started falling in 2014. The government has taken loans from foreign banks and will try to borrow more from the global bond market.
Hedge funds are wagering that the Saudi central bank will be forced to revalue its currency, the riyal. Zach Schreiber, the head of PointState Capital, which made $1 billion betting that oil would fall, told investors in May that the Saudi riyal was “massively overvalued” and that the country had only “two to three years of runway before it hits a wall.”
The government has abruptly cut construction projects, forcing contractors to lay off workers. This year, foreign laborers set fire to buses in protests demanding months of back pay. The sudden jump in water bills this spring led to such an outcry on social media that the minister for water and electricity was fired after telling customers to dig their own wells if they were unhappy with prices.
“If you’re a Saudi, you’ve grown up with that expectation of the financial largess that’s dished out,” said Adel Hamaizia, the vice chairman of the Oxford Gulf and Arabian Peninsula Studies Forum. “Things are likely to get more difficult for the government in terms of managing frustration from the everyday people.”
Adding to the pressure, the kingdom’s population has nearly doubled since 1990. With half of all Saudis younger than 25, the private sector does not offer enough good opportunities for the estimated 300,000 young people entering the work force each year, especially women. Fewer of the public sinecures that have sustained earlier generations are available, with plans for deeper cuts
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