Low oil prices pushes Saudi Arabia into economic reform - Prince Salman declares an end to reliance on oil and outlines Vision 2030 plan to diversify the economy

Annabelle Williams
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The Saudi Kingdom's under stress and will seek to end its reliance on oil (Source: Getty)

Saudi Arabia is to kick its “dangerous addiction” to oil as the country's cabinet agreed on plans to diversify the economy away from the black stuff.

The country is hooked on fossil fuels but “by 2020 we'll be able to live without oil,” said deputy crown prince Mohammed bin Salman, author behind new economic plan, Saudi Vision 2030. “The vision is not a dream. It's a reality that will come true.”

It's a sign of how pressured oil-reliant economies have been during the last two years, as black gold is still priced around 60 per cent lower than it was in early 2014. With prices staying lower, for longer, than anyone thought they would, Saudi Arabia's having to adjust.

This week the IMF released a report outlining the staggering impact low oil prices have had on the Middle East. It believes the region's economies have lost $390bn in revenue. “It's putting immense pressure on policymakers to implement economic reforms,” says Mihir Kapadia of Sun Global Investments.

Read more: Saudi Arabia under stress from cheap oil

Rumblings of reform have begun in Kuwait, Qatar and United Arab Emirates, although the Saudi proposals are the boldest for an economy that depends on oil for 70 per cent of its revenues.

State coffers need oil prices at around $105 a barrel to remain balanced, says the IMF, but they're currently around $40, and have been lower recently. It calculates the Saudis barely have cash reserves to last five years at current prices.

Read more: Is the age of oil coming to a close?

Saudi Arabia's faced a widening budget deficit, which clocked in at around 15 per cent of GDP, and received a blow when both Standard & Poor's and Fitch downgraded its credit rating, with the latter citing “major negative implications” from cut-price oil.

“The vision doesn't need high oil prices,” Prince Salman insisted, adding the economy could be transformed regardless of fluctuations in prices, and could even happen with oil at $30.

Saudi Arabia's adapting to lower oil revenues, but some argue the country has deliberately kept oil prices high - not to squeeze out competition from the US, but because it knows the days of high oil prices are numbered.

Renewable energy has become profitable and more efficient than ever, and some say we'll never run out of oil - only the need for it.

They say Saudi Arabia's pumping out as much oil as it can, while there's still need for it. It runs contrary to the theory, popularised in the 1970s, that the world would reach "peak oil" when there was more demand for oil than reserves could possibly fill.

Read more: Isis fight sends Iraq to the debt markets

Prince Salman confirmed plans to part-privatise state oil giant Aramco, which he values at $2 trillion to $3 trillion. On that basis, the 5 per cent state which will be sold off to shareholders will be worth $150 billion. These figures make Aramco one of the world's most valuable companies, more valuable than Apple, Microsoft and Google's owner Alphabet.

Ownership of Aramco will transfer to the country's sovereign wealth fund, which will become the world's largest and dwarf Norway's, which at $825bn reigns as the largest.

Locals will also be able to buy shares in the country's hospitals, mining and tourism will also be prioritised, while authorities will launch a “green card” to allow expats to keep their cash in Saudi and invest it.