Widely assumed to be a fabulously wealthy welfare state, Saudi Arabia is in fact an economic basket case waiting to happen.
In 1935, an oilman visiting the Middle East reported back to his headquarters, "The future leaves them cold. They want money now." Although the temptation of overspending has repeatedly undermined oil-rich governments from Caracas to Tehran, Saudi Arabia avoided this trap over the last decade through fiscal discipline that has kept its expenditures below its swelling oil receipts.
But in a recent report striking for the candor of its unpalatable conclusions, Saudi investment bank Jadwa laid out the kingdom's inexorable fiscal challenge: how to balance soaring government spending, rapidly rising domestic oil demand, and a world oil market that gives little room for further revenue increases. And that was before the recent economic turmoil knocked $20 per barrel off oil prices.
Saudi Arabia's government spending, flat since the last oil boom in the 1970s, is now rising at 10 percent or more annually. And it will rise faster still: The House of Saud's survival instinct in the wake of the initial Arab revolutions led King Abdullah to announce $130 billion of largesse in February and March. The resulting increases in government employment and salaries can be cut only at the cost of more discontent.
And that's only what the kingdom is spending on its "counterrevolution" at home. Saudi Arabia will pay the lion's share of the pledged $25 billion of Gulf Cooperation Council aid to Bahrain, Egypt, Jordan, and Oman. With Iraq, Syria, and Yemen likely flashpoints yet to come, the bill will only increase. Already, nearly a third of the Saudi budget goes toward defense, a proportion that could rise in the face of a perceived Iranian threat.
Meanwhile, fast-growing domestic demand poses a serious threat to oil-export revenues. The kingdom is one of the world's least energy-efficient economies: With prices fixed at $3 per barrel for power generation and $0.60 per gallon of gasoline, Saudi Arabia needs 10 times more energy than the global average to generate a dollar of output. Subsidized natural gas, too, is in short supply, undermining an economic diversification drive focused on petrochemicals. As much as 1.2 million barrels per day (bpd) of oil are burned for electricity to meet summer air-conditioning demand, yet Jeddah, Saudi Arabia's second-largest city, still suffers frequent power cuts. By around 2026, Jadwa projects that domestic consumption will be over 5 million bpd, exceeding exports, which will never again reach their 2005 peak.
http://www.foreignpolicy.com/articles/2011/08/25/the_kingdom_of_magical_thinking
