Who produces oil in Saudi Arabia

Saudi Arabia, the pandemic and the oil

At the first signs that the Covid-19 pandemic had also reached the Middle East, the Saudi Arabian government responded with swift and far-reaching measures to contain the virus in an aggressive manner. She benefited from the fact that it first spread to Iran in February and only from there to other Middle Eastern countries, so that she had more time than her big rival, who was hopelessly overwhelmed by the epidemic.

It became clear early on that the main source of infection in Iran was the religious center in Qom, with its shrine to the Shiite saint Fatima al ‑ Ma‘suma (sister of the eighth Twelve Shiite Imam Reza) and its numerous religious educational establishments. Since Saudi Arabia is home to two much larger and more important pilgrimage sites with Mecca and Medina, the first Saudi Arabian measures came several days before the first case of infection in the country became known on March 2nd. The "little pilgrimage" ("Umra"), during which Muslims arrive outside the pilgrimage season, was suspended, and the shrines in Mecca and Medina were closed. Above all, the cancellation of the »Umra« was important because in the fasting month of Ramadan, which lasted from April 24th to May 23rd this year, a particularly large number of believers traditionally make a pilgrimage to Mecca and Medina. The measures taken in the first few days also included the complete cordoning off of the Shiite city of Qatif in the Saudi Arabian eastern province at the beginning of March. The first Covid 19 cases occurred there. Those concerned got infected during visits to Iran and Iraq.

Despite Saudi Arabia's strong religious character, the experts dealing with the crisis seem to have asserted themselves in the government without any problems. Among other things, this is a consequence of the takeover of power by Crown Prince Muhammad Bin Salman, who pushed back the influence of the still powerful religious scholars further than his predecessors. Although it can be assumed that many of them opposed the measures in Mecca and Medina, no objections were raised. In addition, the government, and primarily the Ministry of Pilgrimage - which has long been considered a particularly powerful agency for Saudi Arabia - has a lot of experience in disease management and is aware of the dangers that an outbreak of an epidemic harbors among pilgrims. In recent years, she has been able to prevent the spread of MERS, Ebola and Rift Valley fever, which also occurs in Saudi Arabia. Measures that Riyadh took against the respiratory disease MERS in 2012 and 2013 also helped prepare for Covid-19.

In parallel with the first cases, the government imposed a full curfew in most cities. Travel between the provinces was prohibited. Schools, universities, shopping malls, restaurants, mosques and other public buildings have been closed. International and domestic air traffic was almost completely discontinued. Until shortly before the start of Ramadan, the number of infections remained at around 1,200 per day, which the government must have considered tolerable, because King Salman announced easing for the month of fasting. The consequences were quickly seen: within a month, the number of new infections doubled each day, and the total number of cases quadrupled to 60,000.

Although the government decided shortly before the end of Ramadan to tighten the exit restrictions, several more easing steps followed between the end of May and the end of June. Among other things, the mosques were reopened after three months. At the beginning of July 2020, over 200,000 people were infected, more than 2,000 died, and the number of cases rose by 3,000–4,000 every day. The health system, which is good by comparison with the Middle East, was apparently approaching the limits of its capacities, because despite the dangerous symptoms, the first patients were turned away. One reason for the renewed outbreak was that Saudi Arabia tested less than countries that were able to (initially) prevent a second wave. The fact that the death rate was low is due to the relatively good equipment of many hospitals that were prepared for respiratory diseases because of MERS. In addition, the first few months often affected foreign workers who were relatively young and healthy so that they did not die of the disease.

Slump in oil revenues

The economic consequences of the pandemic in Saudi Arabia have so far been far more serious than the health ones. While this is true almost worldwide, the kingdom has been hit particularly hard because of its economic structure. Almost 90 percent of its income comes from oil exports, and oil prices have fallen to their lowest level in decades since March.

Saudi Arabia needs a price level of $ 75 to $ 90 a barrel to support its budget. Between 2005 and 2014 the prices were mostly higher, so that the kingdom was even able to build reserves. But the end of the high price phase, when the price fell to around 50 dollars and did not recover from then on, led to financial bottlenecks. The ambitious regional policy of the new King Salman and his Crown Prince Muhammad, large-scale economic reforms, arms purchases and the war in Yemen were so expensive that they shrank the reserves from around 750 to 500 billion dollars between 2015 and early 2020. The Saudi leadership responded by cutting subsidies for gasoline, water and electricity and introducing a value added tax of 5 percent for the first time in early 2018.

The outbreak of the Covid-19 pandemic caused the demand for oil to drop significantly. The result was an unprecedented drop in prices in spring 2020. In March and April the oil price was well below $ 20 per barrel several times. While the average price was around $ 64 in 2019, most forecasts for 2020 are talking about $ 30-40. The fact that prices fell so low was also due to the Saudi Arabian policy, which expanded oil production shortly after the crisis began. The reason for this apparently absurd measure was a conflict with Russia that broke out in early March. In talks with OPEC + - a format created in 2016 in which OPEC included Russia in its deliberations - Saudi Arabia demanded that Russia participate in production cuts. The leadership in Riyadh was convinced that they had reduced their production too often in recent years and therefore lost market share to other oil exporters who refused to follow suit. This time, too, the Russian government refused, so that a short but dramatic price war began.

The dispute not only harmed the immediate opponents, but also the USA, where almost only unconventional oil is produced, the production of which is significantly more expensive. The price war between Saudi Arabia and Russia affected the US oil industry so much that the Trump administration put pressure on Riyadh to reconsider its position. In April, Saudi Arabia and Russia agreed to cut production by 9.7 million barrels a day, supported by both parties. That was almost a tenth of global production before the Covid 19 crisis. This agreement initially applied to May and June and was later extended to the end of July 2020. The new agreement between the two most important producers in OPEC + calmed the markets and stabilized prices, but there are no signs of a recovery. Rather, OPEC itself expects that demand will fall by an annual average of nine million barrels per day. As the economic recovery hoped for in June stalled in many countries, the oil price remained under pressure. It is completely uncertain whether and when it will again reach the level of over $ 80 targeted by Saudi Arabia. Many analysts are also assuming prices between 50 and a maximum of 60 dollars for the years after the pandemic has subsided and the global economy has recovered. Some observers are already of the opinion that demand will never be as high as in 2019.

The low oil prices meant a severe crisis for Saudi Arabia, which responded with a double strategy. On the one hand, the kingdom tried to mitigate the economic and social consequences by means of a stimulus package. It guaranteed 60 percent of their income to citizens employed in the private sector who were released during the crisis and deferred the payment of VAT, trade and income tax to entrepreneurs for three months. The government also pledged billions in direct aid payments. In order to make this expenditure possible, Riyadh increased the self-imposed debt limit from 30 to 50 percent of the gross domestic product. It also used its reserves, which continued to shrink rapidly - by 20 to 25 billion per month since February.

In order to cushion the dramatic financial consequences, the Saudi Arabian government opted for an austerity program running parallel to the stimulus package. It announced that it would triple sales tax to 15 percent from July 1, 2020, and in June it would discontinue the special payment of $ 260 a month that it had previously granted to employees in the public sector. In addition, already planned or ongoing construction projects of all kinds have been stopped or postponed. Finance Minister Muhammad al-Jadaan stated that it was a "reallocation" of the expenditure, because these measures were intended to save $ 26 billion and free up for the Crown Prince's stimulus package and the "Vision 2030" reform program. Still, the minister could not prevent Saudi Arabia from coming under fire for drastically increasing taxes while other governments did everything in their power to get their economies running in the billions.

»Vision 2030« under pressure

The statements of the finance minister and his reasons for higher taxes, subsidy cuts and austerity measures shed light on the government's strategy. They are a clear indication that the Crown Prince is determined to continue the “Vision 2030” program - although he should be aware that the huge follow-up costs of the pandemic and the low oil prices are jeopardizing its success.

Bin Salman took over de facto control of economic policy shortly after his father's accession to the throne in January 2015, after being appointed chairman of the newly established Economic and Development Council. This replaced the Supreme Economic Council and became the central decision-making body for Saudi Arabia's economic and financial policy. Subordinate to him are the line ministries, which were also successively filled with highly dependent followers of the Crown Prince. In April 2016 it announced large-scale economic reforms under the title »Vision 2030«. The reason for this step was the drop in oil prices in 2014, which had a dramatic effect in 2015. At that time, the consequences of the country's enormous dependence on oil became apparent once again, because when the annual average price of a barrel of crude oil fell to around $ 50, the Saudi Arabian budget deficit rose to almost $ 100 billion in 2015. As a result, the reserves accumulated in the high price phase from 2005 to 2014 threatened to melt away quickly. The 2015 economic crisis forced the government to stall many public contracts, introduce VAT and cut subsidies.

The underlying cause of the reforms, however, was the insight that dependency on oil was becoming more and more of a problem against the background of persistently high population growth. While the kingdom was able to cope with periods of low prices in the past because its population was low, this no longer applies today. Saudi Arabia now has a population of over 34 million, and with a population growth of two percent annually, this number will continue to rise rapidly. Around 60 percent of the population is under 30 years of age, and every year young people push their way into a stagnating labor market with high expectations. It is estimated that unemployment in this age cohort is up to 30 percent. In addition, oil is likely to lose its role as the most important energy source in just a few decades, which would dry up the income from the export of resources. Without far-reaching economic and social reforms, Saudi Arabia would be left with almost no income.

»Vision 2030« should reduce the dependence on oil. The starting point for the reform should be the partial privatization of the state oil company Aramco, which is still the most important oil company in the world today. The initially expected proceeds of more than $ 100 billion should flow into the Public Investment Fund (PIF), which would invest about half of the new income abroad to generate dividends. The other half was to be used for industrial restructuring of the kingdom and the promotion of the private sector. In this way, Bin Salman promised, he would create over a million jobs for Saudis in the private sector. The "Saudization" of economic life was particularly important to the Crown Prince because 80 percent of the approximately 10 million workers in the private sector are foreigners who transfer a large part of their wages to their home countries. Most citizens prefer the public sector as a field of activity, because it is by far the most important employer in the country and attracted - at least before the era of the Crown Prince - with high salaries and little work.

The Saudi Arabian state fund PIF was chosen to be the engine of development. Logically, the Crown Prince already took control of the institution in spring 2015 and installed loyal followers, led by Yasir al-Rumayyan, who became director of the PIF and in 2019 also chairman of Aramco. Previously managed very conservatively, the fund will in future lead the Saudi projects of »Vision 2030«, found new industries and invest money internationally. With $ 320 billion in fixed assets, he immediately went global with the goal of growing assets to $ 2 trillion by 2030. Although the oil company Aramco became the largest publicly listed company in the world when it went public in December 2019, the project to bring Aramco to the New York Stock Exchange was abandoned, so that one had to switch to Riyadh. Few foreign investors were found because Aramco's revenues had declined since 2014. Many fear that climate change will soon depress demand for oil and gas. In addition, an Iranian attack on the Saudi oil plants of Abqaiq and Khurais in September 2019 raised doubts about the security of the Persian Gulf.

Under Bin Salman, the state fund invested in entertainment, tourism and energy to an unprecedented extent. The lighthouse project of the new Saudi Arabia was to be the futuristic test-tube city Neom, which is to be built on the Saudi Arabian side at the southern end of the Gulf of Aqaba and is planned to cost 500 billion dollars. The city should obtain its energy needs exclusively from solar and wind energy, offer robotic services and promote the economic diversification of the country in an attached technology park. Bin Salman hopes to build the future economic powerhouse of Saudi Arabia in Neom. With this plan and its reform project, the Saudi Arabian government is following the example of the United Arab Emirates (UAE). There, Dubai has established itself as the trading and financial center of the Middle East within just a few decades. Perhaps even more important for Bin Salman is the Abu Dhabi model, where Crown Prince Muhammad Bin Zayid has been focusing on diversifying the oil-rich emirate's economy since the mid-2000s and using several state funds for this purpose.

When the Covid 19 crisis also hit Saudi Arabia, doubts about this development model became louder and louder. But the kingdom remains steadfastly on course. A clear sign of this is above all that the PIF invested billions in investments in international entertainment, tourism and energy companies and in the digital economy, especially during the crisis.The fact that the megaprojects of “Vision 2030” will also be pursued can be seen from statements by the finance minister that the construction of Neom will only be delayed slightly due to the Covid 19 crisis. The Crown Prince's ambitions are unbroken, but it is hard to see where the money for projects like Neom will come from in the future if oil prices do not rise over the long term. If the current trend continues for a few years, the still high foreign exchange reserves will quickly be used up.

Ruinous war in Yemen

Saudi Arabia's financial problems can also be traced back to the Crown Prince's aggressive regional policy, which, however, became apparent even before his ascent. Since 2011/12, the conflict between the Kingdom and Iran has intensified dramatically and has taken on the features of a regional "Cold War". The leadership in Riyadh opposed the Iranian expansion first in Syria and then in Yemen because they feared encirclement and believed they had to counter an Iranian claim to hegemony in the Middle East. Since 2015, Yemen has become the main venue for the conflict between the two regional powers. The enormously high costs for Saudi Arabia turned out to be a problem for the first time since spring 2020.

At the beginning of its Yemen intervention in March 2015, the Saudi Arabian government did not seem to have a precise idea of ​​how long the war would last. The declared aim was to drive the Houthi rebels, who had taken power in Sanaa in September 2014 and were also in Aden in spring 2015, out of the capital and to reinstate the internationally recognized government of President Abdrabbuh Mansur Hadi. Since the coalition with Saudi Arabia at the top lacked ground troops from the outset, a stalemate arose despite its superior weaponry that lasted until 2018. Only when Saudi Arabia, the UAE and Yemeni units and militias launched a joint offensive on the port city of Hudaida on the west coast of Yemen did Riyadh hope for a victorious end to the war. The North Yemeni highlands are supplied via Hudaida. Therefore, the allies believed that after taking the city, they would be able to force the Houthis to negotiate and ideally to withdraw from Sanaa. That this did not succeed was primarily due to pressure from the US Congress, which pushed for an end to the war and a negotiated solution after the murder of the Saudi Arabian journalist Jamal Khashoggi in October 2018. At the end of the year, Saudi Arabia and the UAE called off the attack after taking control of parts of the city.

From a Saudi Arabian perspective, the situation worsened because the UAE announced a rapid withdrawal from Yemen in July 2019. Apparently the leadership in Abu Dhabi saw no way to beat the Houthis. In addition, she relied on relaxation in the conflict with Iran after the situation had escalated dramatically since spring 2019. Attacks with sticky mines on oil tankers in the Gulf of Oman near the Emirate coast in May and June were particularly dangerous for the UAE. Iran was the only possible cause, and the attacks were apparently intended to demonstrate to the Abu Dhabi leadership how vulnerable the UAE's oil exports were. The calculation worked, and the withdrawal from Yemen was the first signal to Tehran that the Emirates were changing their policies and were now trying to detente.

The U-turn in the UAE was particularly dangerous for Saudi Arabia because the Houthis had been attacking Saudi Arabian territory as far as Riyadh with rockets since 2017 and the shelling intensified from spring 2019. In June, the Houthis attacked Abha airport in the south-west of the Kingdom using drones and cruise missiles supplied by Iran. In August it hit an oil field near the Emirati border. The incidents made it clear to all that the Houthis had become a threat to the security of Saudi Arabia and could hit targets far beyond the Yemeni border. Now the Saudi Arabian leadership was faced with a dilemma: with the withdrawal of the UAE, all hope of victory vanished. It would have been a serious defeat if Riyadh had ended the conflict in the 2019 situation. In previous years, the Saudi leadership had repeated like a mantelpiece that it was about preventing the creation of a "Yemeni Hezbollah" on its southern border. What was meant was an opposing organization under Iranian influence which, like the Lebanese group against Israel, was able to threaten its powerful neighbors with rockets, cruise missiles and drones. After more than four years of war, the Houthis had developed into just such an organization. If Saudi Arabia did not end the war, the attacks on Saudi Arabia threatened to wreak havoc on oil facilities and in major population centers, without the Saudi Arabian military having any effective countermeasures.

Therefore, the Saudi Arabian leadership began indirect talks with the Houthis in Oman in November 2019, which continued during the Corona crisis. From spring 2020, the high costs of war also became a problem. In previous years, Saudi Arabia had shown no interest in ending the conflict quickly. Apparently, the leadership in Riyadh believed that it would be able to finance a longer military conflict by 2019. The Kingdom's expenditures for the Yemen war were enormous: According to estimates, it amounted to 60 billion dollars and more annually. This had to influence the cost-benefit calculation of the Crown Prince in the crisis. The number of Saudi Arabian air strikes fell significantly as early as 2019, but there was no sign of a solution to the conflict. Until June 2020 it was unclear whether the crisis would force the Crown Prince to adopt a new, more cautious security policy. News of unabated continued arms purchases in the US spoke against it.

Continuity impossible

The first reactions of the Saudi Arabian leadership to the Covid-19 crisis indicate that Riyadh is relying on continuity as far as possible. The Crown Prince is continuing his economic reform program, as is the aggressive regional policy, which is primarily directed against Iran, but which finds its most visible expression in the Yemen war. The first measures, such as the postponement of projects in the context of »Vision 2030«, and numerous reports of canceled orders in the construction sector show that the government is ready to slow down the pace of change. On the other hand, the numerous investments show that Riyadh continues to drive diversification, even if the costs appear very high in view of growing debts and dwindling reserves. The picture in security policy is similarly ambivalent. On the one hand, the Yemen negotiations are an indication that the Crown Prince is pursuing a policy of détente towards the Houthis and Iran. On the other hand, the continued purchases of arms and ammunition suggest that Bin Salman sees the kingdom's security under permanent threat.

The cancellation of the pilgrimage at the end of July 2020 should also make it clear to the most optimistic planners in Riyadh that the kingdom's economic and financial crisis will force the government to set priorities. Religious tourism is the kingdom's most important source of income after oil. If the Yemen war does not end soon, there will be too little money available for "Vision 2030". However, it is to be expected that Saudi Arabia will continue its rearmament in recent years even after the fighting has ended. This is supported by the fact that Iran, with its attacks on the Saudi oil infrastructure in September 2019, made public how vulnerable the kingdom is. For these reasons, Saudi Arabia is likely to generate high budget deficits in the next few years, so that its reserves could also be used up quickly.

During the crisis it turns out that the reforms of the Crown Prince come too late and are based too one-sidedly on state intervention. It has been known since the 1980s that oil revenues alone would not be enough to create enough jobs for the population of Saudi Arabia, which was growing faster than today. In the high price phase from 2005 to 2014, the incentives for reforms were too weak, but the structural problems worsened as the population continued to grow. It was only Bin Salman's rise and the fall in the oil price in 2015 that made targeted changes possible. But the room for maneuver was much smaller than in earlier times because population growth continued and the crises that had smoldered in the region since 2011 cost a lot of money - for example support payments for beleaguered allies such as Egypt, Morocco, Jordan and Bahrain or the war in Yemen. Furthermore, Bin Salman focused too much on state intervention. As in the UAE, he wanted to invest billions in creating a private sector that was independent of oil revenues. That may have been somewhat successful in the UAE, but diversification there began decades earlier and the population is much smaller, just under 10 million, of which around one million are citizens. The economic consequences of the Covid 19 crisis reveal that the money will probably not be enough for the envisaged economic restructuring of Saudi Arabia (with its 34 million inhabitants, including around 26 million citizens).

However, it is not yet possible to predict whether the economic problems of 2020 will affect the country's stability. During periods of low oil prices during the 1980s and 1990s, a strong Islamist opposition developed in Saudi Arabia. Even now it is to be expected that many Saudis will react with displeasure to the high unemployment and the cut in subsidies. But since the rise of Bin Salman, the scope for opposition has shrunk considerably. The Crown Prince enforces ruthless repression, so that it is hardly possible to express dissenting opinions publicly. He also has sole control of all security forces, so a coup is unlikely - at least there is no sign of discontent among their ranks. There is only a threat to the regime if Bin Salman fails as a central actor. In fact, he has become the sole ruler and will become king as soon as his father dies or voluntarily gives up the throne. The Crown Prince's uncles and cousins ​​are far from happy with this situation, but have not played a political role since 2017 - because they have lost their offices and are sometimes even under house arrest.

The economic crisis in Saudi Arabia is also a problem for Germany. Not only is the country the most important export market in the Middle East alongside the United Arab Emirates. It is also by far the most important leading power in the Arab world, without which a solution to many regional and global problems is not possible - just think of energy and climate policy, the fight against Islamic terrorism and the Israeli-Palestinian conflict. The Crown Prince's aggressive foreign policy between 2015 and 2019 may have made cooperation difficult. But this does not change the fact that the country has a pro-western orientation and is a partner of Germany.

Dr. Guido Steinberg is a scientist in the Near / Middle East and Africa research group.

© Science and Politics Foundation, 2020

All rights reserved

The current reflects the author's opinion.

SWP-Aktuell are subjected to an internal review process, a fact check and a proofreading. Further information on quality assurance of the SWP can be found on the SWP website at https: // www. swp-berlin.org/ueber-uns/ qualitaetssicherung /

SWP

Foundation Science and Politics

German Institute for International Politics and Security

Ludwigkirchplatz 3-4
10719 Berlin
Phone +49 30 880 07-0
Fax +49 30 880 07-100
www.swp-berlin.org
[email protected]

ISSN 1611-6364

doi: 10.18449 / 2020A64