Govt urged to accelerate economic diversification

Economists in the Kingdom have warned that falling oil prices would severely affect Saudi Arabia’s economy and urged the government to accelerate measures to diversify its sources of income.
Saudi Arabia is the world’s largest producer of oil, and therefore benefits the most from high prices. The Kingdom produces 10 million barrels a day, according to official figures, and is an important source of energy for many large economies.
Economist Issam Alzamel said he expects the decline in oil prices to have a big impact on the Saudi economy because more than 90 percent of the government’s revenues come from oil exports. “Our economy basically depends on government’s expenditure on projects to create jobs. The decline in oil prices will surely mean cutting down on expenses,” he said.
He said the continuing drop in oil prices would increase unemployment in the country. “The lower demand for conventional oil is due to the rise in shale oil production over the past five years. The United States now produces more than 50 percent of its needs from shale. In just a few years it may stop importing oil and start exporting this strategic commodity,” he said. Alzamel said that if the price continues to fall for another three years the Kingdom would be severely affected, despite the huge surpluses accumulated when the price was high. “The International Monetary Fund has said that such surpluses might be drained within five years.”
Fadl bin Saad Al-Buainain, an economic expert and author, said the Kingdom has succeeded in building huge financial reserves as a buffer against fluctuating prices. “This might mitigate the impact of declining oil prices on the Saudi economy,” he said.
Al-Buainain said that the drop in prices would lead to lower growth in the Saudi economy and other Gulf states. “Since prices dropped 40 percent this means a sharp decline in the revenues of these states, but the negative impact will vary, depending on the diversification of income sources and financial reserves of these countries.”
He said the Kingdom could cut government spending to deal with this situation. “All this must ring alarm bells for the Gulf states. The Saudi and other Gulf governments must set out strategies to restructure their economies, diversify their production base and income sources to face future changes.”
Khaled Alshunaiber, chief executive officer of Econsult and member of the human resources committee at the Eastern Province Chamber of Commerce and Industry, said the decline in oil prices would affect the national economy in the short run. “But that does not mean our economy will collapse. Despite the negatives from the drop in oil prices, there are more positives.”
He said that investments in shale oil would not be feasible if oil prices continue to drop from its current levels.