"If something cannot go on forever, it will stop," as the noted economist Herbert Stein said. This epigram applies very well to Saudi Arabia's perilous long-term fiscal situation, analysed in a recent report from the investment bank Jadwa.
Jadwa identifies three converging, unsustainable trends. Government spending, essentially flat from the late 1970s to the early 2000s, is now soaring at 10 per cent or more a year, and was further boosted by King Abdullah's recent US$130 billion (Dh477.45bn) package. The large part of the budget devoted to government salaries is hard to cut without triggering discontent.
As well as domestic spending, Saudi Arabia is also absorbing the lion's share of GCC aid to various neighbours following the Arab Spring: 3 million barrels of oil to Yemen (worth some $300 million); $10bn promised to each of Bahrain and Oman; $4bn to Egypt; and $400m to Jordan.
Second, Saudi oil production capacity, about 10 million barrels per day (bpd) for the past 30 years, is unlikely to rise significantly. This may be pessimistic, given the giant reserves base, but Saudi Aramco has few near-term projects once the giant Manifa heavy oilfield is developed.
Opec faces growing competition from Brazilian deepwater fields, unconventional sources such as Canadian oil sands and US shales, and cheap, abundant natural gas. Demand in developed countries is shrinking; vehicles becoming more efficient. The producers' organisation will probably maintain its share of the global market but not increase it much.
Growing expenditures have led Saudi Arabia to favour a higher price than the $70 to $80 per barrel its oil minister described as "fair" as recently as June last year.
Yet the Saudis will have to balance their Opec quota against a resurgent Iraq, and perhaps a returning Libya and post-Chavez Venezuela. They could burn off some competition only by stepping up their own production substantially and lowering prices.
Third, domestic oil consumption is soaring because of low, government-fixed prices: less than $3 per barrel for power generation, and $0.16 per litre of petrol, compared with the UAE's (also subsidised) $0.47. Up to 1 million bpd is burnt for electricity and water desalination during the summer because of gas shortages.
With dramatically improved energy efficiency elsewhere, it takes Saudi Arabia 10 times more oil than the rest of the world to generate $1 of output. The result is that oil export revenues, some 90 per cent of the budget, will increase only modestly.
There is no immediate danger. Oil prices remain high, and the kingdom has virtually no debt and $562bn of foreign assets. But Jadwa forecasts the budget will be in deficit by 2014; by 2024, foreign assets would be essentially depleted and government spending would need to be financed with debt.
The obvious conclusion is that an oil-dependent economy is not sustainable: not because reserves run out, but because relying on petroleum alone raises a population's aspirations while generating only anaemic long-term growth.
What can the Saudi government do?
Costs for new gasfields are above current US prices. This implies that Saudi petrochemical plants, a key pillar of the government's economic diversification strategy, would not be competitive without subsidised inputs.
The same is true of electricity. Despite negligible progress to date, the King Abdullah City for Atomic and Renewable Energy plans ambitiously for solar and nuclear power to be the vast majority of the kingdom's energy supply by 2050.
But even if it delivers, Saudi Arabia has no competitive advantage over other countries in alternative energy. Solar, in particular, is much more expensive than gas-fired generation. And replacing most oil for transport implies that most vehicles would be electric - so who will be buying Saudi oil exports?
The missing piece of the puzzle is energy efficiency. Raising prices gradually to world levels would tame the explosive growth in consumption, reduce the strain on the budget, and lead Saudi industries to rely on technology and capabilities rather than government largesse.
Money saved in subsidies can be redistributed in targeted payments to low-income groups, or to all Saudi citizens; Brazil and Alaska have examples of such schemes.
Or rather than making government more bloated and expensive, private-sector employment of Saudis can receive incentives. Combined with a far-reaching reform of the education system, the country might start the slow march to an economy not dependent on petroleum, or its close relatives such as chemicals.
Yet the prospects for such visionary moves seem dim. The crisis is still too far off; the lure of easy oil spending too strong; the required changes too radical, demanding deft execution untypical of the Saudi state.
Although the current system cannot last forever, Machiavelli cautioned that: "There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things."
Robin Mills is an energy economist based in Dubai, and the author of The Myth of the Oil Crisis and Capturing Carbon
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Thanksgiving meals to try
World Cut Steakhouse, Habtoor Palace Hotel, Dubai. On Thursday evening, head chef Diego Solis will be serving a high-end sounding four-course meal that features chestnut veloute with smoked duck breast, turkey roulade accompanied by winter vegetables and foie gras and pecan pie, cranberry compote and popcorn ice cream.
Jones the Grocer, various locations across the UAE. Jones’s take-home holiday menu delivers on the favourites: whole roast turkeys, an array of accompaniments (duck fat roast potatoes, sausages wrapped in beef bacon, honey-glazed parsnips and carrots) and more, as well as festive food platters, canapes and both apple and pumpkin pies.
Ruth’s Chris Steakhouse, The Address Hotel, Dubai. This New Orleans-style restaurant is keen to take the stress out of entertaining, so until December 25 you can order a full seasonal meal from its Takeaway Turkey Feast menu, which features turkey, homemade gravy and a selection of sides – think green beans with almond flakes, roasted Brussels sprouts, sweet potato casserole and bread stuffing – to pick up and eat at home.
The Mattar Farm Kitchen, Dubai. From now until Christmas, Hattem Mattar and his team will be producing game- changing smoked turkeys that you can enjoy at home over the festive period.
Nolu’s, The Galleria Mall, Maryah Island Abu Dhabi. With much of the menu focused on a California inspired “farm to table” approach (with Afghani influence), it only seems right that Nolu’s will be serving their take on the Thanksgiving spread, with a brunch at the Downtown location from 12pm to 4pm on Friday.
TRAP
Starring: Josh Hartnett, Saleka Shyamalan, Ariel Donaghue
Director: M Night Shyamalan
Rating: 3/5
Living in...
This article is part of a guide on where to live in the UAE. Our reporters will profile some of the country’s most desirable districts, provide an estimate of rental prices and introduce you to some of the residents who call each area home.
How to protect yourself when air quality drops
Install an air filter in your home.
Close your windows and turn on the AC.
Shower or bath after being outside.
Wear a face mask.
Stay indoors when conditions are particularly poor.
If driving, turn your engine off when stationary.
Profile box
Company name: baraka
Started: July 2020
Founders: Feras Jalbout and Kunal Taneja
Based: Dubai and Bahrain
Sector: FinTech
Initial investment: $150,000
Current staff: 12
Stage: Pre-seed capital raising of $1 million
Investors: Class 5 Global, FJ Labs, IMO Ventures, The Community Fund, VentureSouq, Fox Ventures, Dr Abdulla Elyas (private investment)
What is graphene?
Graphene is extracted from graphite and is made up of pure carbon.
It is 200 times more resistant than steel and five times lighter than aluminum.
It conducts electricity better than any other material at room temperature.
It is thought that graphene could boost the useful life of batteries by 10 per cent.
Graphene can also detect cancer cells in the early stages of the disease.
The material was first discovered when Andre Geim and Konstantin Novoselov were 'playing' with graphite at the University of Manchester in 2004.
Company%20Profile
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Stage results
1. Julian Alaphilippe (FRA) Deceuninck-QuickStep 4:39:05
2. Michael Matthews (AUS) Team BikeExchange 0:00:08
3. Primoz Roglic (SLV) Jumbo-Visma same time
4. Jack Haig (AUS) Bahrain Victorious s.t
5. Wilco Kelderman (NED) Bora-Hansgrohe s.t
6. Tadej Pogacar (SLV) UAE Team Emirates s.t
7. David Gaudu (FRA) Groupama-FDJ s.t
8. Sergio Higuita Garcia (COL) EF Education-Nippo s.t
9. Bauke Mollema (NED) Trek-Segafredo s.t
10. Geraint Thomas (GBR) Ineos Grenadiers s.t
DEADPOOL & WOLVERINE
Starring: Ryan Reynolds, Hugh Jackman, Emma Corrin
Director: Shawn Levy
Rating: 3/5
Need to know
The flights: Flydubai flies from Dubai to Kilimanjaro airport via Dar es Salaam from Dh1,619 return including taxes. The trip takes 8 hours.
The trek: Make sure that whatever tour company you select to climb Kilimanjaro, that it is a reputable one. The way to climb successfully would be with experienced guides and porters, from a company committed to quality, safety and an ethical approach to the mountain and its staff. Sonia Nazareth booked a VIP package through Safari Africa. The tour works out to $4,775 (Dh17,538) per person, based on a 4-person booking scheme, for 9 nights on the mountain (including one night before and after the trek at Arusha). The price includes all meals, a head guide, an assistant guide for every 2 trekkers, porters to carry the luggage, a cook and kitchen staff, a dining and mess tent, a sleeping tent set up for 2 persons, a chemical toilet and park entrance fees. The tiny ration of heated water provided for our bath in our makeshift private bathroom stall was the greatest luxury. A standard package, also based on a 4-person booking, works out to $3,050 (Dh11,202) per person.
When to go: You can climb Kili at any time of year, but the best months to ascend are January-February and September-October. Also good are July and August, if you’re tolerant of the colder weather that winter brings.
Do not underestimate the importance of kit. Even if you’re travelling at a relatively pleasant time, be geared up for the cold and the rain.
The specs
Engine: 2.0-litre 4-cylturbo
Transmission: seven-speed DSG automatic
Power: 242bhp
Torque: 370Nm
Price: Dh136,814
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The biog
Born: near Sialkot, Pakistan, 1981
Profession: Driver
Family: wife, son (11), daughter (8)
Favourite drink: chai karak
Favourite place in Dubai: The neighbourhood of Khawaneej. “When I see the old houses over there, near the date palms, I can be reminded of my old times. If I don’t go down I cannot recall my old times.”
PROFILE OF SWVL
Started: April 2017
Founders: Mostafa Kandil, Ahmed Sabbah and Mahmoud Nouh
Based: Cairo, Egypt
Sector: transport
Size: 450 employees
Investment: approximately $80 million
Investors include: Dubai’s Beco Capital, US’s Endeavor Catalyst, China’s MSA, Egypt’s Sawari Ventures, Sweden’s Vostok New Ventures, Property Finder CEO Michael Lahyani