The long-awaited Saudi Aramco IPO is finally here. No, Aramco will not be on the New York, London, or Tokyo stock exchanges. No, Aramco probably will not hit the arbitrary 2 trillion dollar valuation number. And no, the Saudi government will not do anything remotely productive with the tens of billions of dollars it will reap with its IPO.
Saudi Arabia, more specifically Mohammed Bin Salman, has been vocal in expressing their desire to diversify the Saudi economy. Oil and natural gas comprise around half of Saudi Arabia’s GDP, and 90% of its exports. While the petrochemical industry will grow in the future, it only comprises 10% of current oil demand, the growth in the petrochemical sector will be offset by declines in oil demand for transportation and electricity generation. McKinsey estimates that oil demand will peak around 2030, and with growth in American and Russian oil/gas production, the future is grim for Saudi Arabia’s oil based economy. MBS is right – Saudi Arabia needs to diversify.
But Saudi Arabia’s plans for diversification do not appear to be grounded in reality. Instead, they are expensive boondoggles – white elephants with no practical purpose. The crown jewel of Saudi Arabia’s plan to move off of oil is a planned city known as NEOM, which will span across northeastern Saudi Arabia as well as Egypt and Jordan. NEOM will cover 26,000 square kilometers, and cost 500 billion dollars. The funding comes from a number of sources – the sale of Saudi assets, purging of wealthy elite, as well as foreign investors such as Masayoshi Son and Softbank. NEOM is planned to be a solar powered, high-tech hub located on a vital trade route. With 16 key sectors – ranging from manufacturing, AI and biotech to entertainment and culture – NEOM is an expansive, ambitious project. Unfortunately, these ambitions range from the impractical to the physically impossible.
Firstly, Saudi Arabia’s previous experience with enormous planned cities has been an abject failure. The King Abdullah Economic City (2005) – which was intended to help the Kingdom diversify itself off of oil, cost 100 billion dollars to build, had a planned population of two million, and had an expected completion time of five years. In 2019, it is 40% complete, has a population of 10,000. The only successful aspect of King Abdullah Economic City has been its port, the second fastest growing port on Earth, but this is largely a function of geography – situated on the Red Sea, with few competing ports – rather than expertise Saudi planning. NEOM may suffer from a similar disparity between Saudi-hype and execution. The Saudis want flying cars – which would have incredibly short flight times and create massive amounts of noise pollution – and an energy hungry, completely pointless artificial moon.
NEOM may not even properly address the solutions which currently grip the Kingdom. Youth unemployment is at a whopping 26% – NEOM’s focus on automation will not help any of these youth find jobs. Often touted is the fact that NEOM will have more Michelin-starred restaurants per capita than any other city – a fact which is completely irrelevant to diversifying off of oil or providing jobs. The Saudis want advanced manufacturing to take place in NEOM, but Saudi Arabia has little previous manufacturing experience, and will be competing against places like Shenzhen – the electronics manufacturing capital of the world, backed by the full might of the People’s Republic of China.
Perhaps it is time for the United States to pick more competent, well-governed, and less flashy ally in the Middle East. Perhaps it is time for America to cut off a murderous, terrorist-supporting country in favor of better allies. Perhaps it is time for America to recognize that the era of oil is over, and that the Middle East’s geopolitical importance will drop significantly in the next 30 years. But, as an American, I guess I can only hope.