Summary: as COVID recedes from the kingdom and oil prices stay steady at US$80, Saudi Arabia’s economy is responding with strong signs of positive growth.
Emerging from COVID and with the tailwind of oil prices holding at levels not seen since 2014, the Saudi economy is showing signs of real strength heading into 2022. London-based Capital Economics (subscription only) gives the kingdom high marks noting “the Saudi economy expanded by 5.8% q/q in Q3, the fastest pace of growth in over a decade, as the ramping up of oil production drove the recovery.”
With prices remaining steady at a little over US$80 a barrel at least until the end of this year, Capital Economics sees the economy gaining momentum and has pencilled in GDP growth of 7.3% for 2022, which it says is well above consensus expectations of 5%. Part of their optimism is based on the kingdom’s rigorous management of the pandemic. 62.4% of the population is now fully vaccinated (that compares with 67% in the UK and 58% in the US) and cases and deaths have fallen significantly. At the end of July there were 11,000 cases a day. The figure on 6 November stood at 2300 with deaths dropping from 15 a day to just 2.
As the Public Investment Fund (PIF) swells its coffers with oil wealth the country’s de facto leader Crown Prince Mohammed bin Salman continues his relentless campaign to diversify the economy. And the tourism and entertainment sectors, as we have noted in the past, are big drivers of his Vision 2030. His latest effort is called The Rig. It will be built in the Gulf on existing oil platforms and promises “three hotels, world-class restaurants, helipads, and a range of adventurous activities, including extreme sports.” It is aimed at drawing visitors from other Gulf states, a discreet way of saying that MbS is going after a chunk of the tourism market now dominated by Dubai. The Rig will be bankrolled by the PIF who in their 16 October press release declined to put a figure on what it will cost. The release did however make a commitment that the project will “ensure the sustainable preservation of the environment in the project’s vicinity, (and) will follow leading global standards and best practices, further supporting the Kingdom’s broader efforts on environmental protection,” a claim that might strike some as a trifle incongruous insofar as the resort is being built atop an oil rig.
Meanwhile work is at a fever pitch to complete the course for Saudi Arabia’s inaugural F1 in Jeddah in December. Tickets for the race don’t come cheap, beginning at US$533 with a top price of US$9333. Organisers say they expect a big turnout from F1 aficionados in the United States and Europe, clearly well-heeled ones. With wide-ranging subsidy cuts and wages in the private sector still struggling to catch up to what’s on offer in the public sector, ordinary Saudis may be forced to catch the spectacle online.
Another high stakes venture, announced in the summer was MbS’s decision to create a new carrier, one that would take on the giants of the Gulf, Qatar Air and Emirates. Rather than attempt to ramp up the existing state-owned Saudia (ranked 21st in the 40 worst airlines in the world tables) the crown prince wants a spanking new carrier one that will allow him to dramatically increase the number of air route destinations from the current 80 to 250.
Amongst other pledges in the Vision 2030 mandate are calls for tourism visits to reach 100 million by the end of the decade (about five times what it was in 2019). Another is to create more than a quarter of a million jobs in the tourism and entertainment sectors by 2025. Building high-end tourism attractions like The Rig and the Red Sea project, to say nothing of the entertainment city Qiddiya and the US$500 billion NEOM AI city and having visitors carried on a five star airline coming to enjoy them is an attractive but also very expensive and risky undertaking.
But MbS who, contrary to what the Premier League would have us believe, presides over and controls the PIF as his own personal cash vehicle to realise Vision 2030, has little concerns on the spending front. And he has been emboldened by the 4 November OPEC+ decision to stare down the Biden administration request to lower the price of oil at the pump by putting more of it on the global market. Biden and the Democrats have already paid a price at the polls but the crown prince, whom the president has thus far declined to meet or speak with, doesn’t appear bothered.
The Saudis together with the UAE and Russia reiterated their determination at the meeting to hold to gradually bringing another 400,000 bpd onto the market despite Biden’s entreaties to open the taps much more and quickly. The Emirati energy minister Suhail al-Mazrouei noted the rampant increase in the price of natural gas and coal compared to the rather modest increases of oil as proof of responsible behaviour.
“You look at the gas market, you look at the coal, the lack of having a governor of the market makes it so difficult for the consuming nations when it comes to a huge increase in the commodity prices,” al-Mazrouei said. “We haven’t seen that happening to oil in the same magnitude because of this group.”
He has a point. Natural gas prices in the EU have rocketed right through the roof running at increases above 600%. Coal in the EU markets is up by 300%. In the UK, the price of natural gas increased by 8 times what it was in July. Oil, on the other hand has increased by 36%.
As al-Mazrouei’s Saudi counterpart Prince Abdulaziz bin Salman opined “Oil is not the problem, what is the problem is the energy complex is going through havoc and hell.” So OPEC+, appearances to the contrary, is not a cartel but, in a chaotic energy market, a regulator and an effective one. At least that is how the bosses of OPEC+ see it. Joe Biden would beg to differ.
Capital Economics predicts that the price of oil will slump gradually back to US$60 a barrel by the end of 2023. That, with another less impetuous leader, might be a cause for a trimming of ambitions. But Mohammed bin Salman shows no interest or inclination in applying the handbrake. Like an F1 driver he is roaring through the track at top speed, no rear view mirror to trouble him.