Continuous challenge

It looks like more than a satisfactory report card, or that is what one gets from reading the latest International Monetary Fund (IMF) report on the Saudi economy released last week. The economy is growing "strong," the outlook is "positive," risks are broadly "balanced" and Saudi Arabia has been one of the best performing economies within the G20 that was created following the financial crisis over the past few years that has already compounded into economic and energy crises, as well as of high food prices that have thrown most leading economies worldwide struggling at various degrees.
However, there are two weak spots — the rising inflation and the inability of the private sector to provide the much needed job opportunities to absorb the growing number of the youth entering the labor market every day.
On the inflation front, the worrying sign is that though it has declined to 2.5 percent in February 2012, it went up to 3.8 percent last May because of increase in food and housing costs. According to the IMF report there was a labor force survey that recorded a 2 million increase in employment between 2009 and 2012, but three-quarters of these jobs have gone to non-Saudis. The overall unemployment rate is 5.8 percent, but among Saudis it is measured at 12 percent and is much higher for youth (30 percent) and women (35 percent). While still very low, female participation has increased in recent years.
Moreover, the IMF report thinks that the overall GDP growth is expected to slow from 5.1 percent last year to 4 percent this year.
The first point to make is that the basic tenets of the Saudi economy are strong and within that strong foundation any weak factors could be handled. Besides, unemployment is a worldwide phenomenon that poses a challenge to even more mature and well established economies in the developed world and Saudi Arabia is no exception though it has a growing young population. How countries face up to this issue varies, but those with better economic foundation are well suited to perform well.
It was interesting that the IMF report coincided with another report by the US Energy Information Administration (EIA). It estimated that the Organization of the Petroleum Exporting Countries (OPEC), not including Iran, could earn up to $940 billion this year, declining to $ 903 billion next year in nominal terms. That of course is less than the $982 billion of net oil revenue earned last year, which was in itself a 5 percent increase from 2011. That also is the largest over the period 1975-2012. The Kingdom’s share of this amounts to one third of that income, or $311 billion.
The drop is attributed mainly to the changes taking place in the oil market due to increase in supplies from non-OPEC producers, mainly the United States with its newly released shale oil, where the fracking technology is breaking new grounds. That is in fact the biggest challenge facing the Kingdom’s oil industry. That industry has survived other challenges in the past from lack of agreements within other OPEC members on issues related to pricing and production policies. And at one point Riyadh was forced to undercut prevailing prices to lessen the impact on world economy and eventually on demand. On another point it opted to engineer a glut also to moderate prices. Equally it shouldered in a number of cases the responsibility of cutting down its production to help prop up prices that went so low or compensate for the loss of supplies from one producer for one reason or another.
Such measures usually come with a price. Maintaining a spare capacity for instance involves huge financial burden that even leading oil exporters like Russia or world-class firms like ExxonMobil refrained from taking.
All those challenges were met as they come within the known conventional oil market, where the main issue was how to balance supply and demand for the benefit of both consumers and producers. The emergence of the shale oil is still surrounded by many question marks related to its durability. Yet, it represents a serious challenge that needs to be addressed now. It is better to assume that the fracking technology is opening the way for more developments in the arena that may impact negatively on the conventional oil market.
If that is the conclusion, then issue is how to make use of the growing young population through education, better training and improve chances to compete globally as the labor market is going into that direction.
In fact, none of the issues related to providing job opportunities, or competitiveness or growing globalization with all its ramifications is not new. What is new is that unlike what has been practiced so far, relying on oil as the source for the Kingdom’s wealth should not be taken for granted.

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