Wednesday, May 4, 2016

The Post Oil Era Economy of Saudi Arabia: Insights from Top B.Com Colleges in Delhi NCR

The top B.Com Colleges in Delhi NCR have had some exciting times in the last month. Students of B.Com program have been mailing questions to academicians demanding replies on the post oil era of Saudi Arabia. The dramatic collapse in oil prices have been a watershed development in the global economy. Countries like India that are gross importers of oil and petroleum have had it easy and have found a way to cushion their foreign exchange reserves generating huge savings on their current account. The picture has been far from rosy for the kingdom of Saudi Arabia. As such Saudi Arabia it seems is finally coming to terms with the bitter realities of an export promotion policy led economy whose only bragging right is the abundance of oil. At Ishan Institute of Management & Technology, one of the top B.Com colleges in Greater Noida, the academicians have been collaborating on data collection and analyses drives to understand the background of the Saudi Arabian economy, the importance of oil, the demerits of an oil export dependent economy and the big bang economic reforms being engineered by Prince Muhammad bin Salman of Saudi Arabia.

The Slippery Oil Crisis and the Global Economy

In the year 2008 at the height of the sub-prime crisis, oil prices skyrocketed to U.S. $ 145. In the year 2016, the global economy has witnessed paradise burn to ashes with oil prices plummeting to a range between U.S. $ 27 and U.S. $45. On February 16, some of the leading oil producing countries initiated diplomatic efforts to engineer a strategic framework for dialogue on joint profit maximization and thus decided to curtail oil production to give a push to oil prices for the better. Consequently oil prices jumped by 5% the next day only to be pushed back to $30 later. An article published in the Harvard Business Review by authors Bernhard Hartmann and Saji Sam forecasts oil prices to fluctuate around the expected value of $50. In fact the authors also diagnose that the current prices are just about the average price of oil for the last 150 years when measured at the value of U.S dollar with 2014 as base year. The consistent patterns of oil based business cycles were shattered by productivity shocks form shale oil producers from United States of America.

Real Business Cycle Theory at Play in the Oil Industry: Courtesy U.S.A

During the past decade the United States of America has revitalized the oil production technology with shale oil producers improving their drilling and fracturing technology massively to produce massive increases in productivity. Drilling and fracturing technology has enabled U.S. based shale oil procuring companies to increase production in just six months at a minute capital investment relative to their competitors. The result has been that U.S based oil companies are now producing 4 million barrels of additional oil relative to what they produced in the year 2008. This is a major positive supply side shock that has disrupted the equilibrium prices and production of oil for the entire global economy. While these are still early days, academicians of Ishan Institute of Management & Technology, one of the top B.Com colleges in Greater Noida are in the process of engaging in data collection to assess and validate the hypothesis of a disruptive innovation in this case. On top of that this year the American government lifted the VER (voluntary export restraint) that had been in place for the last 40 years thereby allowing U.S. based oil producing companies to aggressively engage in export promotions.

Argentina and China are in the process of developing similar technologies for oil production increases. In fact the Xinhua news agency has confirmed that it is working on R&D efforts on its unique coal gasification technology. Saudi Arabia always had the advantage of excess capacity and hence used to act as a swing producer that had the capability to inflate or deflate oil prices by expanding or contracting supplies of oil. That competitive advantage has been destroyed.

Oil Everywhere but no Oil to Sell: The Challenges of the Saudi Arabia Economy

Last year Saudi Arabia’s foreign exchange reserves fell to historic lows with reserves being sufficient for only two years. It was rather starring at insolvency to be precise. Traditionally oil has contributed to more than 50% of the GDP of Saudi Arabia and more than 90% of the welfare state expenditure. The falling oil prices have only produced a budget deficit of U.S. $ 200 billion. While these are just aspects of the fiscal impact of the over dependence on oil, there is to more to the picture than meets the eye. The Saudi Arabian economy is plagued by a largely unskilled labour force, the partial or in some cases complete exclusion of women from the job and product markets, a lackluster work culture and precisely a total absence of vision to steer the economy away from oil.

The New Vision of Prince Muhammad bin Salman for Post Carbon Saudi Arabia

Prince Salman the new engineer of the Saudi economy has a great tight rope walk to do by balancing his vision for a modernized and revamped free market economy in Saudi Arabia and the historically conservative social and religions fabric of the country. On April 25, the Prince released his ambitious new vision document that would initiate far reaching economic reforms for the country’s economy. To begin with it includes the creation of the world’s largest sovereign wealth fund that will hold more than U.S. $2 trillion in assets. The wealth fund would be large enough to buy the four business giants in the world- Apple, Microsoft, Berkshire Hathaway and Google. Second, there is a well structure plan to disinvest 5% stake in the state owned oil company Saudi Armaco through an IPO. This shall transform the company into the world’s largest industrial conglomerate, streamline corporate governance, increase market capitalization and improve corporate strategy for productivity. Capital procured from the IPO shall be used to diversify investments into non-oil business verticals to hedge the security of the Saudi Arabic government’s portfolio of investment holdings. On the front of fiscal policy the Prince has introduced economic reforms to cut costs by reducing subsidies on water, electricity and gasoline. He may also introduce a value added tax on luxury goods and soft drinks. The combined effect is expected to generate a revenue of U.S. $ 100 billion a year by the year 2020.

At Ishan Institute of Management & Technology, the best B.Com college in Greater Noida, we deliberate upon these issues in the lectures of business environment and engage in productive discussions on resolving these challenges in the academic context.