Monday, August 24, 2015

Is Saudi Arabia facing a bleak future? If true, India -- and Modi's plans -- may be hurt

Narendra Modi's visit to the UAE acquired interesting diplomatic nuances because he did not pick Saudi Arabia, the recognised Big Boy of the Arab region, for his first state visit. Plans are said to be ready for a trip soon. But it won't be the same as the warm Abu Dhabi-Dubai visit for two reasons: One, Saudi Arabia is organically different from the Emirates. Two, the oil economy of the Gulf is under threat.

The Saudi ruling family follows the fundamentalist Wahabi Islam and has been spending millions of dollars for many years to propagate its extremism in other countries including Islamic countries. This is like the American-funded Born Again Christian sects whose first target for conversion are other Christians. Only in Saudi Arabia do they have a police unit with the macabre name Commission for the Promotion of Virtue and the Prevention of Vice; they patrol the streets checking dress code and ensuring strict separation of men and women. The UAE has its rigid rules: Criticism of the government is not allowed. For the rest, though, it is liberal enough to sustain the biggest tourist industry in the Gulf.

The prosperity of the Gulf countries and their becoming a magnet for Indians are of course related to the wealth made from oil. To describe that wealth as enormous would be an understatement. It enabled the Gulf countries to be ostentatious. Deserts were converted to verdant gardens, boulevards came up that could be called majestic and architectural monuments rose that set world records of various kinds. There were no taxes on citizens. On the contrary, the state paid for most expenses, from education to house plots.

This dream life was expected to be perpetual because the world's thirst for oil was expected to grow and grow. But in the last few years, unknown to the public and closely watched by experts, equations have been changing. Saudi Arabia's dominant position in the world's oil supplies is gone. For the first time since the country was founded, it has been facing budgetary problems. In fact some experts have made the sensational claim that the Saudis could go bankrupt in the next five years.

They put the blame largely on Saudi shoulders. The argument is that the Saudis kept international oil prices high for too long. This forced other countries, especially the US, to look for alternative sources of supply. Enter, shale oil. This is oil made by converting organic matter inside shale rock. Known from the early 14th century and in production from the late 19th century in Europe, the US, Australia-New Zealand and China, nobody had pursued this in earnest because the discovery of crude oil in the Gulf made things easier. When the Saudi-led oil monopoly raised the prices, shale producers woke up. North America began production in such large quantities that their need for Gulf oil spiralled down. Later, Iranian oil started flowing, too. The Gulf countries were no longer masters of the market.

This meant serious trouble. As much as 90 percent of Saudi Arabia's budget revenue is from oil. It has no other industry, no other source of income. At the same time it has taken on expensive political tasks, such as a war against the Houthis in Yemen and a diplomatic-military manoeuvre against Iran. Ominously the US, Saudi Arabia's traditional supporter, has been moving away in the last one year.

The Saudis don't have many options. Disenchanted with America's strategic shift, they tried to get close to Russia. But Russia finds Iran more attractive. Raising oil prices is not an option because America and others will increase shale oil production and neutralise the Saudis. Eventually the Saudi government may be forced to overhaul its economy. But how? Impose taxes? Stop evangelical missions abroad? Stop importing war material at high prices and forget hot-spots such as Yemen? Turn to Israel for help and face ultimate humiliation?

What is certain is that the world's dependence on Arab oil will never again be what it has been. To that extent the entire political-economic scenario in West Asia will change. It will directly -- and devastatingly -- impact the economy and sociology of India with tens of thousands of Indians, currently employed in the Gulf, returning home. Modi's expectations of Gulf countries investing in India may also be adversely affected. The only good thing is that the Commission for the Promotion of Virtue and Prevention of Vice will have less arduous duties to perform. The Lord giveth and the Lord taketh.