Daily Times

LONDON: “King Abdulaziz and the men who worked with him for the establishment of the state did not depend on oil and they established the kingdom without oil, and they ran this state without oil, and they lived in this state without oil,” Saudi Deputy Crown Prince Mohammed bin Salman said in an televised interview on Monday.

The deputy crown prince criticized the kingdom’s subsequent “addiction” to oil which has “disrupted the development of many sectors in the past years” implying this was a relatively recent problem.

The prince claimed his national transformation program would enable the kingdom to “live without oil” as early as 2020 (“Transcript of Prince Mohammed bin Salman’s Interview”, Al Arabiya, April 25). But if modern Saudi Arabia was founded by conquest and the skilful statesmanship of Abdulaziz, it has been held together by the revenue from oil, even more than conservative religion. Distribution of oil revenue to client groups has formed the foundation of the state from its earliest years and shaped the contours of the economy and society.

Sharing oil wealth in exchange for popular submission to absolute monarchical rule has always been central to the social contract between the ruling Al Saud and the kingdom’s population.

Transforming that contract so that it does not center on oil is an enormously ambitious undertaking fraught with considerable risks and with an uncertain chance of success.

Before the discovery of oil, Saudi Arabia was a desperately poor country, with a largely subsistence economy and depending on the annual pilgrimage to Mecca and Medina.

The modern state was assembled through a series of conquests between 1902 and 1926 and proclaimed as the unified Kingdom of Saudi Arabia in 1932. At the time, the only government revenue came from customs duties, pilgrimage taxes and tithes. From the start, the state was short of money and desperately looking for additional sources of income.

One reason the kingdom granted a concession in 1933 to prospect for oil to the US company Socal rather than Britain’s Iraq Petroleum Company was that Socal was prepared to offer more cash up front and loans to be repaid from future production (“A king and a concession”, Aramco, 1984).

In 1938, the government’s revenue amounted to just $7 million, according to Arthur Young, the US financial expert sent out after World War Two to help set up the Saudi Arabian Monetary Agency.

The first commercial oil discovery was made the same year and the kingdom received $340,000 in oil royalties (“Saudi Arabia: the making of a financial giant”, Young, 1983).

Hopes of an immediate bonanza were delayed by the world war, which led to the postponement of exploration and development work. But once the war ended, production and oil revenue began to ramp up.

The kingdom’s annual oil revenue surged from $340,000 in 1938 to $10 million in 1946, $57 million in 1950, $334 in 1960, $1.2 billion in 1970 and $84 billion in 1980.

Even before oil, gift-giving was an important element of the compact between the ruler and his subjects, and the need to demonstrate generosity frequently strained royal finances (“Two kings in Arabia”, Bullard, 1993). Once the gusher of oil revenue arrived, it provided the scope to co-opt almost all social groups and make them clients of the state.

Tribal groups were granted generous state subsidies and recruited into the national guard. Hundreds of thousands of other citizens have been put on the payrolls of the armed forces and various ministries.

Money could also be used to settle tensions within the royal family by allowing each senior prince to be given their own vast and essentially autonomous bureaucratic fiefdom. Oil wealth enabled the state to avoid levying income and other taxes and to subsidize the provision of basic services including water, electricity and gasoline.

Oil wealth enables Saudi Arabia to maintain more than 250,000 men under arms and run the world’s third-largest defense budget (“Princes, brokers and bureaucrats: oil and the state in Saudi Arabia”, Hertog, 2010). More or less everything in modern Saudi Arabia depends directly or indirectly on oil.

From the very beginning, however, expenditure tended to run ahead of receipts. “When oil production and spending grew after the war, spending grew even faster”, according to Young.

“Governments, like individuals, have the urge to spend more whenever income suddenly increases.”

In 1949, despite oil revenue amounting to $39 million, the government was struggling to pay its bills, the first of several budget crises in the subsequent decades. The kingdom’s history from the 1950s to the 2010s has been a series of oil-fueled booms followed by painful adjustments when oil prices fell and revenue shrank. Periodic crashes in the oil price and state revenue have brought periodic calls to adjust the social compact between the state and its citizens.

Prince Mohammed,
effectively the kingdom’s top economic policymaker, is not the first ruler to complain about the country’s addiction to oil (“Saudi reform efforts wax and wane with oil prices,” Reuters, February 2016).