. . . this is only the beginning.
"Mohammed Idrees used to travel to London once or twice a year, but these days the Saudi civil servant is asking his wife and children to cut back on using the family car to save fuel and has installed a solar panel for the kitchen to reduce electricity costs.
For decades, Saudi nationals such as Mr. Idrees enjoyed a cozy lifestyle in the desert kingdom as its rulers spent hundreds of billions of dollars of its oil revenue to subsidize essentials such as fuel, water and electricity.
But a sharp drop in the price of oil, Saudi Arabia’s main revenue source, has forced the government to withdraw some benefits this year—raising the cost of living in the kingdom and hurting its middle class, a part of society long insulated from such problems."
The problem is deep. Not only is the problem the kingdom's subsidies of energy, food, water, and other prices, but the kingdom has long been employing far too many civil servants. Worse yet, the kingdom requires that private employers hire a specific percentage of Saudi nationals. It is a drag on the local economy, these employees have little interest in actually working, many simply want the additional money, and so the employers look at these employees as Saudi Sea Anchors.
The drop in oil prices is deeply damaging, and there is simply no good news on the horizon, near, or distant.
The House of Saud has declared it will create a real economy in Saudi out of whole cloth. This is the kingdom's plan for resolving this burgeoning crisis. But it is not apparent how they will do this using Saudis as the workforce. Hiring foreign workers does not resolve the problem.
"Saudi Arabia heads into next week’s meeting of major oil producers in a tight spot. With a slowing economy and shrinking foreign reserves, the kingdom is coming under pressure to take steps that support the price of oil, as it did this month with an accord it struck with Russia.
The sharp price drop is mainly because of a glut in the market, in part caused by Saudi Arabia itself. The world’s top oil producer continues to pump crude at record levels to defend its market share.
One option to lift prices that could work, some analysts say, is to freeze output at a certain level and exempt Iran from such a deal, given that its push to increase production to pre-sanction levels appears to have stalled in recent months. Saudi Arabia has previously refused to sign any deal that exempts arch-rival Iran.
As its people start feeling the pain, that could change."
This is wishful thinking writ grand. The House of Saud is stuck between two positions, it must sell oil to maintain social benefits at the highest level possible, to fail this is to see serious social unrest. But it is also stuck with low oil prices because of how much it pumps. So, it should reduce supply driving up prices, but it can't. Further, arch-rival Iran is not just a rival, but is locked in an existential proxy war of Iran Shia against Saud Wahhabi/Salafi. Cutting production would only mean Iran reaps more of the benefit, the House of Saud cannot accept this outcome. Last, none of the other oil players will step forward to cut production, Russia is in dire straits, its economy in collapse, and so needs to sell as much energy as possible, most of the other nondemocratic oil nations are in a similar boat, Venezuela, is in total collapse, for example.
While the House of Saud has some reserves which it is surviving off today, those will only last perhaps 3 or 4 more years, and that is if all goes well, Iran does not ramp up its proxy wars, there is no Saudi internal strife, and if Iran does not stir the pot in the Shia majority Saudi oil lands. If any of these things does not hold, the money will run out much sooner. Cutting subsidies, trimming payrolls, and other cost saving measures might make the petrodollars go further, but probably not much.
"Most people are ordering less food or they change their orders to more affordable options,” she said.
To boost state finances, Saudi Arabia cut fuel, electricity and water subsidies in December, after posting a record budget deficit last year. It also plans to cut the amount of money it spends on public wages and raise more non-oil revenue by introducing taxes."
These changes will shrink the economy, and simply transfer money from the individual to the kingdom. It is not clear how the kingdom thinks it can do all of this, and make this system work. This is not a real economy, it is a false economy based nearly solely on oil revenue. Giving a worker wages out of oil profits, then taxing them on those wages just creates losses, and inefficiencies, not savings.
The House is clearly in panic.
Here is the problem nutshelled:
"The government doesn’t have much choice. Saudi Arabia’s real growth in gross domestic product slowed to 1.5% in the first quarter from the year-earlier period, according to its statistics office, and Capital Economics says data suggest it may have contracted by more than 2% in the second quarter. Much of that slowdown is related to consumer-facing sectors, which have struggled since the start of 2016 as rising inflation has eroded household incomes."
The House must expand the pie, not contract the pie, but there is no model for this in Saudi, no history, no experience, and no willing Saudi workers, or entrepreneurs.
"The political stakes for managing this slowdown are high. Saudi Arabia survived the Arab Spring unrest that toppled several autocratic leaders across the region and forced some others to change, largely by offering cash handouts and more government jobs to placate its people. About two thirds of Saudi workers are employed by government related entities.
Besides cushy jobs, such middle-class Saudis also received substantial overtime payments and regular bonuses. At the time of his ascension to the throne early last year, King Salman ordered a hefty bonus payment to government employees.
Such largess is looking like a thing of the past.
Besides cutting state handouts such as subsidized electricity and water, the government also plans to reduce money it spends on public wages to 40% of the budget by 2020 from 45% as part of its ambitious plan to transform the oil-dependent economy. It aims to cut one-fifth of its civil service as well."
Again, I cannot see how this works without building a real non oil, non government economy, and in Saudi I cannot see this happening in the next decade let alone few years.
"I have become more diligent about spending because my view of the future is pessimistic,” he said. “There is a lot of talk about diversifying the economy, but the focus seems to be solely on increasing taxes.”
Taxes here are not the same as taxes there. Because all the money comes out of the oil pot, what is really happening is people are simply being offered pay cuts, and soon job cuts, while the kingdom slowly, but continually reduces the benefits it provides. This is a recipe for what we see in the back story of the movie Soylent Green, not an expansive growing economy.