Saudi Arabia is one of the most oil-rich countries in the world and the largest oil
producer (see Figure 4-1 for the daily crude oil production (average) of OPEC7
members for the last six decades). Compared with other members of OPEC, Saudi
Arabia has been considered the largest producer since 1970s. The country took
advantage of the competitiveness of the international market for oil and received
extremely high revenues for over 40 years. As such, the oil industry is considered
the main driver of the country’s economic development (Albassam, 2015). Since
the 1970s, the oil sector has contributed significantly to total GDP (see Figure 4-2
for different sector contributions to GDP in Saudi Arabia from 1970-2015). In
addition, the Saudi government has relied mainly on oil revenues to cover all
government expenditure, namely on developing human and economic resources,
health and social infrastructure, transport and communication since the 1980s (see
Figure 4-3 Government revenues and expenditures).
Figure 4-1 Daily Crude Oil Production (average) of OPEC Members
Source: OPEC Annual Statistical Bulletin Report, 2016.
Figure 4-2 Contribution of different Sectors in Saudi Arabia (1970-2015)
Source: Saudi Arabian Monetary Authority (SAMA), Annual Statistics (SAMA, 2016).
Figure 4-3 Government Revenues and Expenditures
0 500 1000 1500 2000 2500 3000 Con trib u tio n to GDP in t h o u san d s Year
Oil sector Private sector Government sector 0 2000 4000 6000 8000 10000 12000 1960 1970 1980 1990 2000 2015
Source: Saudi Arabian Monetary Authority (SAMA), Annual Statistics (SAMA, 2016). Note: data for 1989, 1990 and 1991 are not available.
Although the oil industry has contributed significantly to the economic development
in Saudi since, by funding significantly GDP and covering all government
expenditure, relying on it has created a major problem for the non-diversified
economy that has emerged, resulting in unsustainable development. This means
that any changes in the oil prices would influence directly the Saudi economy,
which is what happened recently in 2015 and resulted in major changes in the
economy and policy. To explain further, when oil prices fell significantly in 2015 to
US $ 46.47 per barrel (see Table 4-1 changes in oil prices), oil revenues decreased
along with GDP (see Figures 4-2 and 4-3).
0 500000 1000000 1500000 2000000 2500000 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Exp en d itu re s a n d Rev en u es in Tho u san d s Year
Table 4-1 Changes in Oil prices (Arabian Light), Nominal and Real Prices
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Oil Prices for Arabian Light
Nominal Price (*) 61.10 68.75 95.16 61.38 77.82 107.82 110.22 106.53 97.18 49.85
Real Price (*) 59.94 62.59 80.38 53.89 68.60 88.79 93.06 88.95 80.34 46.47
Source: the Saudi Arabian Monetary Authority (SAMA), Annual Statistics (SAMA, 2016). (*) Base year 2005 and prices in US$ per barrel.
Theoretically, changes in oil prices are expected to have two contradictory effects
on the private sector and the manufacturing sector, since production costs will
reduce. However, this is not the case in Saudi Arabia, where the government plays
an important role in supporting the manufacturing and private sectors and relies on
oil export revenues to support them. Therefore, lower oil prices will reduce export
revenues and the government may not be able to provide the same level of support
to the private and manufacturing sectors as it used to do (Mahboub and Ahmad,
2017). This has led to changes in the Saudi economy and policies, such as
decreasing government expenditure for 2016 in the education and military sectors,
as well as announcing the Saudi Vision 2030 during an interview with Prince
Mohammed Bin Salman (2016) and explained further in another interview (Salman,
2017), which will be explained in more detail later on.
In terms of diversification, Saudi Arabia needs economic change for numerous
reasons. First, since the government relies significantly on oil sector revenues to
cover expenditure and support different sectors, diversifying the economy would
minimise the risk of uncertainty amidst the volatility of oil prices. Second,
generating more job opportunities and thus decreasing unemployment rates,
especially among the younger generation, as well as increase productivity and
ensure sustainable growth and non-oil revenues (Al-Darwish et al., 2015a). As
seen in Figure 4-2, illustrating the contributions of different sectors to GDP, further
diversification is important, to avoid the risk of one-sided, heavy reliance on
production and exports. Figure 4-4 indicates this heavy reliance on oil exports at
almost 90% in 2005, which decreased slightly during the following years to around
73% in 2015.
Figure 4-4 Oil and Non-Oil Exports Percentages in Saudi Arabia (2005-2015)
Source: Saudi Arabian Monetary Authority (SAMA), Annual Statistics (SAMA, 2016).
Comparing the business indicators of Saudi Arabia with other countries, the
kingdom is doing well regarding infrastructure, promoting exports, regulating the
labour market and training and education, and yet further changes and
enhancements need to be made in terms of business regulations (Al-Darwish et
al., 2015a). To explain, according to the Global Competitiveness Index8 2016-
8 This index involves 114 measurements representing the productivity and prosperity of a
nation. 0 20 40 60 80 100 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 % O il an d N o n -o il E xp o rts Year
2017, among 138 countries, Saudi Arabia was ranked 29th, losing four places due
to decreasing oil prices that impacted negatively on the economic environment
(Schwab, 2017). For basic requirements, the macroeconomic environment has the
lowest rank (68), in terms of efficiency-driven economies the lowest rank was in
labour market efficiency, and in innovation-driven economies innovation was
ranked lowest. Therefore, achieving higher diversification will require enhancing
the macroeconomic environment in terms of basic requirements, and building
capacities in innovative industries and service sectors to enhance innovation and
sophistication factors. In addition, augmenting labour regulations and making them
more flexible, as well as strengthening education, will be necessary in this regard
(Schwab, 2017; Jeddah-Chamber, 2016). To achieve this goal, understanding the
challenges of the labour market and the main features of the entrepreneurship
ecosystem will help tackle the fundamental issues in the Saudi economy. Figure
4-5 shows the global competitiveness rank in three Gulf Cooperation Council
(GCC)9 nations, namely United Arab Emirates, Qatar and Saudi Arabia. The
following sections discuss the main challenges in the labour market and then the
main features of the entrepreneurship ecosystem in Saudi Arabia.
Figure 4-5 Global Competitive Rank in Saudi Arabia, United Arab Emirates and Qatar, 2016-2017
Source: Global Competitiveness Report, 2016-2017.