Tags: ML | Saudi | Cheap Oil Impact

As Oil Wealth Dwindles, Saudi Arabia Faces Change

As Oil Wealth Dwindles, Saudi Arabia Faces Change

Thursday, 01 October 2015 11:03 AM EDT

JIDDAH, Saudi Arabia (AP) — At a gas station in Saudi Arabia's second largest city of Jiddah, drivers are fueling up their cars at just 45 cents a gallon — four times less than the price of water.

To make that possible, the kingdom spends up to $10.7 billion per year on gasoline subsidies. It also offers a range of perks and welfare support to its citizens such as free healthcare and education, including thousands of scholarships to expensive Western universities.

Such largesse, however, is likely to be rolled back as the world's largest oil exporter looks to curb spending for the first time in years due to a plunge in the price of crude, which accounts for 90 percent of government revenue.

While the country's $656 billion in currency reserves will help it avoid a brutal shift in lifestyles and policies, the kingdom is starting to be more careful with its finances. That will likely mean less investment in new infrastructure projects but also possibly, down the line, less welfare spending, smaller wage increases, and less construction of much-needed housing and roads.

"It's not an absolute crisis, but it is a question of planning for the future," said Karen Young, a senior resident scholar at the Arab Gulf States Institute in Washington D.C.

Saudi Arabia starts losing money when the price of oil drops below $70 a barrel, experts say. If the price hovers around the current level of about $50 a barrel, the country can continue spending at its current pace until 2020. "That's when things get bad," said Young.

Alternatively, it can start cutting spending on infrastructure now to free up money for social welfare for another 30 years or so.

The impact on the population would vary due to disparities in wealth.

"We are not feeling any anxiety," Saeed al-Ghamdi, 40, said as a South Asian gas attendant fueled up his car in Jiddah. He estimates that even if the government raised gas prices by 50 percent, he'd still end up only paying a few Saudi riyals, or a dollar or two, more.

Yet many Saudis are already complaining on social media that salaries, which sometimes average just $300 a month, are not enough to cover basic costs of living. The Internet is one of the few spaces where people can discuss sensitive issues since there are no political parties and protests are banned.

Housing is out of reach for many. Rents for middle income households are about $1,040 a month, according to real estate adviser Jones Lang LaSalle. By contrast, middle income households earn $1,600-$5,400 a month, meaning many on the lower end are squeezed out of the market and have to live with family members.

Young couples are also finding it harder to marry due to the high cost of dowries and apartments, both prerequisites for a traditional marriage. Dowries and wedding celebrations can cost tens of thousands of dollars.

Said Al-Shaikh, a member of the country's Shura Council that recommends policies to the Cabinet and king, says these are some of the reasons why the government is not preparing to cut subsidies for fuel. "I believe that the Shura would not be in favor at this point in time in removing the subsidies... especially as it relates to households," he told The Associated Press.

He says that if the government gradually lifted energy subsidies, it would first target businesses and manufacturing so as to "not necessarily affect the welfare of the citizens."

The general view is that the Saudi government will not change the price of fuel at gas stations until large public transportations projects, like the metro system under construction in the capital Riyadh, are completed.

One sign that times are changing is the largely debt-free Saudi government is issuing bonds to ensure it has a steady supply of cash. Fahad Alturki, chief economist at Saudi-based Jadwa Investment, estimates the kingdom will issue as much as $53.5 billion in debt through next year.

For Gulf countries like Saudi Arabia, financial strength is crucial to domestic stability.

They have relied on vast underground oil reserves to develop their societies from impoverished desert tribes into modern cities that attract foreign workers and investment. The money has also been used to secure political patronage for the sheikhs, emirs and kings who have inherited the post.

Young says Gulf countries have also used revenue from natural resources to make politics quiet by giving their populations financial perks. She warns, though, the situation emerging now in the Gulf states, which include Saudi Arabia, the United Arab Emirates, Oman, Bahrain, Kuwait and Qatar, is more complicated than just money. She says there is a mobilization of political identity among people that has nothing to do with the amount of money their governments spend on providing services for them.

"If the leaders want to be smart, they'll see it as an end" to the golden years of high oil prices, she said. "This is the time to change."

One thing that Saudi Arabia will not roll back on is foreign policy and defense, seen as necessary for stability, says Al-Sheikh.

Saudi Arabia has used its oil wealth to throw its weight around the region, propping up friendly governments in Bahrain and Egypt, supporting allies in Lebanon, arming Sunni Syrian rebels and leading an Arab coalition into war in Yemen to fight Shiite rebels.

Because of this, any spending cuts by Saudi Arabia will likely be made at home.

To prepare for a period of weaker oil revenue and to keep creating jobs for the country's growing population, the government is looking to diversify its revenue away from oil.

So far, the government has plans to build the Gulf's largest sea port, rivaling ports in nearby Dubai, and is expanding the King Abdullah Economic City, where 100 percent foreign ownership of companies is allowed and where foreigners can live in cushy compounds not far from the Red Sea city of Jiddah.

Mega construction projects, like the Kingdom Tower in Jiddah are also steaming ahead. The tower aims to eclipse Dubai's Burj Khalifa, currently the world's tallest tower, by jutting out a kilometer, or roughly 3,300 feet, into the sky.

Back at the pump, driver al-Ghamdi waves off suggestions that the government could be doing more. He says that when someone's financial situation changes, challenges are to be expected.

"In the beginning, a person has to struggle a bit," he says. "But after you pass this stage, you relax."

© Copyright 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

At a gas station in Saudi Arabia's second largest city of Jiddah, drivers are fueling up their cars at just 45 cents a gallon - four times less than the price of water.To make that possible, the kingdom spends up to $10.7 billion per year on gasoline subsidies. It also...
ML,Saudi,Cheap Oil Impact
Thursday, 01 October 2015 11:03 AM
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