Assessing Saudi Arabia’s Challenges

Saudi Arabia is one of the most dominant players in the Middle East. We wonder: Which of the following statements about Saudi Arabia are true?

A. Saudi Arabia is the top oil producer in the world.
B. Saudi Arabia has a budget deficit.
C. Its education system is struggling.

A. “Saudi Arabia is the top oil producer in the world” is false.

Saudi Arabia produced 11.6 million barrels of oil a day in 2014, according to the U.S. Energy Information Agency. That puts it in second place globally, behind the United States (almost 14 million barrels daily). It was the second year in a row that U.S. oil production topped Saudi Arabia’s output.

Before 2013, U.S. production had not exceeded Saudi output since 2002, when the Kingdom sharply curtailed production because of low prices following 9/11.

Saudi Arabia covers only about 0.4% of the world’s surface, even though it is the world’s 13th largest country by land area. Yet, underneath its sandy surface lies an estimated 266 million billion barrels of oil, or 16% of the world’s proved reserves. Only Venezuela’s proved reserves (at 298 billion barrels, or 18% of the global total) are larger.

The revenues earned from oil exports are key to the Kingdom’s past and current prosperity.

B. “Saudi Arabia has a budget deficit” is true.

The Saudi 2015 budget deficit is projected to be $38.6 billion — or about 5% of GDP.

Like many other Gulf region countries, Saudi Arabia finances most of its domestic spending programs through oil revenues. These programs are vital to maintaining public order and stability in the kingdom.

Falling oil prices globally — mainly due to reduced demand from the United States and competition from other oil-exporting nations — puts the country’s budget at risk. If that trend persists, it also forces the Saudi government to draw down its surpluses accumulated during oil’s boom years.

At current spending levels, Saudi Arabia requires crude oil prices to be at or higher than $106 per barrel for its government budget to be balanced. Such a price last seen in August 2014. As of April 30, 2015, crude oil was priced at $66.78 a barrel, and it had dipped as low as $46 in January 2015.

In comparison, the United Arab Emirates’ budget requires a price of $77.30 per barrel. Only Kuwait’s budget, which runs smoothly on oil prices as low as $54, is still in good shape at current prices.

Saudi Arabia is not the only country facing budget problems due to low oil prices. Russia has announced that it would face a $46 billion deficit this year at $50/barrel crude prices. Venezuela said it would face a $117.7 billion deficit at $60/barrel. Nigeria’s estimated deficit would be at least $28 billion at $65/barrel.

If Saudi Arabia does not make spending cuts and if crude oil prices do not rebound to $106 per barrel, the surplus funds — currently estimated at $736 billion in foreign reserves — could be exhausted within eight years, if not sooner.

C. “Saudi Arabia’s education system is struggling” is true.

Saudi Arabia has used its oil wealth to build a social safety net. But despite ample resources, the country is struggling to provide its young people with productive futures.

Like many countries in the Middle East and North Africa, Saudi Arabia has experienced a youth bulge. Two in three Saudis are younger than 30 years old.

However, most Saudi youth are graduating with basic skills that are only useful in menial jobs they will never perform, particularly with the country’s reliance on foreign labor for basic jobs.

Higher-skill private sector jobs, which could keep more of the workforce productively employed, require higher quality education than many Saudis receive. Even degree-holders often hold irrelevant degrees.

There are currently about 100,000 Saudi students enrolled in universities in other countries, under the King Abdullah Scholarship Program. Altogether, fewer than 1.3 million Saudis are currently enrolled in university at home or abroad.

Nearly 1 million Saudis work as civil servants, but the government has been unable to fill more than 100,000 more vacancies. All but the biggest private sector enterprises are unable to find and retain Saudi workers, despite legal quotas.

Youth unemployment has reached 29%. Possibly more than half the adult population is jobless, but supported by family and not actively seeking work. The secondary effect of this has been the emergence of a large sub-population of idle young men, who are materially relatively secure, but bored on a daily basis and unable to advance in life.

These conditions are typically associated with risky behaviors, some of which have already begun manifesting themselves in Saudi Arabia, from drug abuse to car stunts to petty violence. This can also be a gateway into more serious unrest or jihadist recruitment.

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