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.