How Saudi Arabia can avoid an energy crisis

By Maha Hosain Aziz, Special to CNN

Editor’s note: Maha Hosain Aziz is a professor of politics (adjunct) in NYU's Graduate School of Arts and Sciences and a senior analyst at geopolitical consultancy Wikistrat. The views expressed are her own.

Ask most Americans which country is the world’s largest oil producer is, and you will likely hear some familiar names – Saudi Arabia, Iran and Iraq. Some might suggest Russia, which produces more than 10 million barrels a day. Yet according to recent numbers from the International Energy Agency and Bank of America, it’s another country has taken the lead in global production – the United States. And this new reality raises an interesting question: Is this the beginning of the end of former number one Saudi Arabia’s global oil dominance?

In recent years, everyone from Citigroup to Chatham House has suggested Saudi Arabia – the world’s biggest oil exporter – could face oil shortages in the next 10 to 15 years, prompting many to ask whether the country and its heavily oil-dependent economy are prepared for the potential crisis.

The answer is yes, and no. Local energy demand has skyrocketed, and could increase by 250 percent by 2028, largely due to a population boom that has seen the Kingdom’s population jump from six million in 1970 to over 29 million today. This in turn has prompted the state to explore oil alternatives for domestic energy use. Indeed, in June, Saudi Arabia and the United Arab Emirates reportedly signed an accord to jointly develop renewable energy and clean technology. In addition, Saudi Arabia has indicated it hopes to become a key market for renewable energy by 2032, with a projected third of the country’s power to come from this source.

That’s a start. But it probably won’t be enough. The reality is that if the energy crisis happens at any point in the next 15 years, the state – which, according to U.S. figures, currently derives over 45 percent of the country’s GDP, 80 percent of its budget revenue and 90 percent of its export earnings from oil – won’t be in a position to provide the same level of social welfare that it has historically. If this is the case, it is hard to imagine it won’t spark bursts of unrest in a way the country has not yet experienced. In particular, ongoing social tensions involving groups that have felt excluded from the state’s policies – i.e. many women, unemployed youth and the Shia minority – will likely resurface.

So, how can this potentially unstable future be managed? Three state-led steps could help the country tackle its expected oil shortage and related instability in the coming years.

Diversify the Economy. The good news is that this has already started to happen. There have been legitimate efforts to develop the private sector, including telecommunications, entrepreneurship and power generation to reduce the economy’s oil dependence. Several economic cities, entrepreneurship centers and universities have been set up by the state specifically to cultivate non-oil industries and entrepreneurs. In February, a new mineral industrial city in Waad al-Shamal, worth an estimated $9.5 billion, was announced, while in June, it was reported that the government and Riyad Capital will launch a venture capital fund worth $270 million specifically for new technology startups. Saudi Arabia even experienced a five-month high in the growth of its nonoil business activity in June. But following through in a sustained and large scale way will be key in helping the economy, and society, shift toward a greater emphasis on new industries and entrepreneurship.

Create Jobs. Saudi Arabia’s unemployment numbers speak for themselves – some 43 percent of young people with a tertiary education and 34 percent of women are jobless. A quarter of the population are reportedly living in poverty. True, the state has noted the need to create jobs for youth and women, especially in the private sector, and has had some success.

For example, the country was the leader in job creation in the Gulf in 2013, while workforce numbers in the nonoil private sector accelerated this year. Yet the unemployment rate has remained stubbornly high. If there is not a direct link between these new industries and employment for these sensitive groups, an oil shortage will lead to even more discontent.

Publicize these Policies. A policy needs more than just state support – it needs to be seen as legitimate by citizens so they will be in a position to take advantage of it. In Saudi Arabia’s case, the government would need to communicate with unemployed young people and women (and hopefully the Shias) and steer them towards the jobs that are being created in new industries. But more broadly, the state would have to educate all of its citizens about this shift in policy – a much-needed psychological shift.

Of course, none of this will be straightforward – conservatives can be expected to oppose the idea of women having more employment opportunities. The same for the Shia minority. But if Saudi Arabia wants to have any hope of easing itself off its oil dependence, it will need to transform its economy – and it will need all of its citizens’ help to pull this off.​