Saudi Arabia approved an ambitious $72b plan in order to reduce its dependency on hydrocarbons. The reductions are a pillar of the National Transformation Program (NTP) the Saudi cabinet approved on Monday.
This program suggests the creation of 450 000 jobs in the private sector by 2020. Moreover, the “Vision 2030” states that around 5% of Saudi Aramco will go public with an IPO. In addition, it suggests a 40% cut in public expenditures.The target is to create the largest investing fund of around 2 trillion dollars in order to restructure the economy of the Kingdom.
The prince of Saudi Arabia stated that the plan is to transform Saudi Aramco from an oil company into an energy and industrial conglomerate. Furthermore, the Public Investment Fund will also be part of the comprehensive vision to reform the economy and invest in different sectors.
This plan comes in a time where the oil industry looks to rebalance. Prices after a long time started to increase. Demand from Asia is increasing again and many competitors of Saudi’s oil were shut down after this long price war between them. Half of shale gas industries were closed in the USA; North Sea oil companies and others announced losses, staff cuts and production reductions.
Why now?
The price war was, in general, considered as a statement from Saudi that they can still control the oil market. They forced many companies to shut down and reconsider their strategy. This price war hurt Saudi Arabia’s economy as well. Last year’s national reserves shrank by 13%. It seems that the oil price war is over, but is it really?
Many believe that the upward pressure in oil prices came by factors that were not expected. Canadian forest fires forced production cuts, Nigerian attacks in oil production areas and the sudden increase in demand for oil from Asian countries are some of the events that drove prices up.
Nevertheless, the increase in prices may bring back the shale industry in the USA. If not now then soon. Will this mean a new price war? It looks unlikely. The potential costs that may rise again will be severe even for Saudi’s economy.
Saudi is planning its future moves early before it is too late. After this plan was introduced, many thought that the price war was a necessary evil to gain time for Saudi to achieve their plans. They forced many suppliers to go out from the market, reducing competition and gaining more time to plan the restructuring of their economy. Saudi Arabia showed that it is not willing to give up its share in the oil market unless they want to. But their moves show one thing:
As any era (copper, iron, coal) ends so it will happen to oil. Not because the world will run out of oil but because new technologies will be invented. Renewable energy production is increasing and new projects are approved worldwide to enhance the production even further. Resource efficiency is improving day by day to achieve better allocation and use of resources.
Saudi Arabia is heading ahead to the new era of no oil dependency. Their moves are based on the principle of getting ready before it is too late. Whether these moves will affect the oil industry is yet to be seen. But the certainty is that Saudi Arabia is getting ready to leave the oil industry in the next 20 to 30 years.
http://capital.sigmalive.com/story/12668946#sthash.MtLTgr1t.dpuf
http://www.bloomberg.com/news/articles/2016-06-06/saudi-arabia-approves-plan-to-bolster-non-oil-economy