9 questions that show why Saudi Arabia has a radical plan to ditch oil

1. Why is oil so crucial to Saudi Arabia? 

The discovery of oil in Saudi Arabia in the 1930s transformed the country. It helped to lift millions of people, many of whom were nomads, traders and subsistence farmers, out of poverty.

2. Why does Saudi Arabia's dependence on oil spell trouble for its economy?

With the world's second-largest proven reserves, 90 percent of Saudi Arabia's government revenues are derived from oil, despite efforts in recent years to diversify. This means volatility in the price of oil can play havoc with its coffers.

Taking a longer view, fossil fuels may no longer be a reliable way to ensure economic growth — renewable sources of energy might be the answer. So it makes sense for Saudi Arabia to move away from oil.

3. What's happened to oil prices over the past two years?

The price of crude has fluctuated wildly in the last two years. From a high of more than $100 a barrel in mid-2014, the price of oil plunged to a low of $29 by January 2016.

It's now recovered slightly to around the $55 mark.

On November 30, OPEC, the oil cartel of which Saudi is a dominant member, agreed to the first global oil production cut since 2008. The Saudi government is now trying to boost oil prices and revenues to bridge a large budget shortfall. 

4. What was the immediate impact of the oil price crash in Saudi? 

The steep drop in oil revenues resulted in a record budget deficit of $98 billion in 2015, the equivalent of 15 percent of its GDP. As a result, foreign workers who make up a third of the Saudi population were among the first to feel the brunt. Many were not paid; some found it hard to even feed themselves.

The government also brought in belt-tightening measures such as banning ministries from making official purchases of cars and furniture.

And it cut ministers' pay by 20 percent, slashing bonuses for private sector employees and reducing travel budgets. Some major infrastructure projects, such as oilfield expansion and investments in high speed rail, were reportedly halted.

5. Why is the price of oil so crucial for Saudi citizens?

The nub of the Kingdom's challenge is that 70 percent of its citizens are employed in the public sector or in various government-linked entities that offer generous salaries and benefits.

But with a record budget deficit, it has become difficult for the government to maintain that same level of spending.

The country'smiddle class has struggled with rising inflation and is being squeezed. And the gap between the rich and the poor has widened significantly over the past decade or so.

6. Why did the price of oil plunge?

In November 2014, the Saudis decided to abandon a decades-old strategy of controlling crude prices. By pumping record levels of oil, they let prices fall, making it harder for other producers such as US shale companies to explore, drill and produce.

Their new aim was to maintain their dominant globalmarket share. And with worldwide demand for oil already weak, their strategy worked. In fact, it worked too well.

7. What did the Saudis do next?

Deputy Crown Prince Mohammad bin Salman, 31 and the second-in-line to the throne has been shaking up the Kingdom with policies aimed at overhauling the economy and breaking with tradition. In April this year, he launched Saudi Vision 2030, an ambitious blueprint to overhaul the economy.

The plan's main policy platforms are reducing its dependence on oil, ploughing the country's huge oil-related reserves into massive state investments, cutting the budget deficit, jump-starting the private sector, and creating hundreds of thousands of jobs.

8. How will the new Saudi plan, Vision 2030 restructure the economy? 

Cost-saving measures:

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  Reduce 2016 budget deficit to $87 billion from $98 billion in 2015
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  Reduce subsidies for fuel and water
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  Reduce public sector pay
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  Services such as education, healthcare, airports to be privatised.

Raising more capital:

• The government intends to sell less than five percent of shares in Saudi Aramco, the country's main oil company. The IPO, expected in 2018, would raise an estimated $100B-$200B for the government and create the world's most valuable company. At an estimated market capitalisation of more than $2 trillion, Saudi Aramco would be bigger than Apple, Google and Microsoft combined.
• 
  Profits from Saudi Aramco's sell-off to be ploughed into a public investment fund
• 
  Has issued $17.5 billion of debt, the world's largest emerging market bond sale

"IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil," Prince Salman told Bloomberg.

"What is left now is to diversify investments. So within 20 years, we will be an economy or state that doesn't depend mainly on oil."

Other measures:

• 
  Diversifying the economy, with a focus on renewable energy, telecommunications, natural gas exploration and petrochemicals.
• 
  Encouraging more women to work
• 
  Boosting its small defence sector
• 
  A "green card" system will be introduced for expats within the next five years.
• 
  "Saudization" of the work force - ie locals to replace foreigners.
• 
  Increasing tourism: 82 million tourists targeted by 2020
• Revamping the education system to equip Saudi youth for work in the private sector.

9. Will the plan work?

Many of these reforms could be painful for the nation, but even more so for the ruling class and conservative Muslim clerics.

For ordinary Saudis, the plan involves rewriting the old social contract, which gives generous state handouts in exchange for limits to civil liberties. Giving its people less with the same restricted freedoms may be a recipe for social instability.

"The resistance to change this implies is likely to increase before it recedes as social and economic losses accumulate and reform fatigue sets in," Simon Williams, HSBC's chief economist for the Middle East has said.

But senior Saudi officials disagree.

"My government never does anything without measuring the attitude of people. We respect the values and the religious limitation and the ideological commitment of my people," Abdul Rahman Abdullah al Zamil, president of the Council of Saudi Chambers of Commerce, chairman of one of Saudi Arabia's oldest industrial conglomerates and an adviser to the government told TRT World in April.

He added that none of the proposed economic changes would affect the country's social stability.

For its youthful workforce — 70 percent of Saudis are under age 30 — finding them private sector jobs won't be easy. Many lack the right education and skills. Youth unemployment is at 29.5 percent, according to 2014World Bank figures.

Changing decades-old habits will be similarly difficult. In a 2016 King Saud University study, 80 percent of Saudis preferred government jobs to working in the private sector. While the 2015 official unemployment rate for Saudis is 11.4 percent according to Index Mundi, some press estimates suggest it could be higher.

Its corporations, including Saudi Aramco, may need to open themselves to greater scrutiny if they want more foreign investment. This could entail an overhaul in the country's regulatory and legal frameworks.

But the Kingdom also weathered a drop in prices in 1986, when oil fell to below $10 per barrel. And even though what it faces today is a much bigger challenge for both its nation and its economy, Saudi's vast oil-derived wealth is being ploughed into a wide range of projects at home and abroad. If invested wisely, into areas such as education and social development, this could well see the country riding out this storm.