The Gulf’s Evolving Energy Landscape: Saudi Arabia’s Energy Policy and a Transition to the Post-Oil Era

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Executive Summary

Saudi Arabia controls the world’s second-largest recoverable oil reserves and is the largest economy by GDP in the Middle East. For years, the country’s immense oil wealth, coupled with its geostrategic location at the crossroads of Europe, Asia, and Africa, enabled the ruling Al-Saud dynasty in Riyadh to exert tremendous religious, economic, and military influence over its neighbors. The oil age of the twentieth century brought the country to the forefront of geo-economics, not only contributing significantly to its GDP, export revenues, and government income, but also making it a key actor in ensuring the stability of the global economy. However, the Kingdom’s preeminence has been challenged by the United States, which deployed cutting-edge shale oil extraction technology and became a net exporter in 2019. The volatility of oil prices and the finite nature of fossil fuel reserves have enabled Riyadh to begin a strategic push to diversify its economy.

Oil price wars, pandemic-induced economic downturn, the war in Ukraine, and shifts in the global balance of power have prompted the Saudi government to press forward with its “Vision 2030” transformation program to enact much-needed reforms, reduce the share of oil and gas revenues in the nation’s budget, and kickstart the transition toward a greener and more responsive economy. Central to Vision 2030 is the goal of preparing the Saudi economy for a post-oil era, ensuring long-term prosperity and stability. However, since the program itself depends on oil and gas revenues for finance, price volatility and global economic trends present serious obstacles to overcome—both on the demand and supply sides in the marketplace. Saudi Arabia also relies almost exclusively on oil and gas for power generation, another major challenge to its efforts to move away from hydrocarbons.

Transitioning from an oil-dependent economy poses significant challenges for the Kingdom’s foreign policy, as well. Saudi Arabia finds itself in various push-and-pull relationships across the wider Middle East, all of which are complicated by heightened tensions, proxy wars, and shifting alliances. This report provides an overview of the main challenges ahead for the Saudi government and offers recommendations to maintain a healthy course in the changing energy landscape of a volatile region. Taking the reader through a journey from the role of oil in the Saudi economy to renewable energy outlook and geopolitical challenges, the following pages provide a comprehensive approach to economic diversification and energy transition in the Kingdom. The report explores Saudi strategic initiatives under Vision 2030, the country’s pivotal role in the geopolitics of global energy markets, and its forward-looking energy roadmap that collectively aim to secure a prosperous, sustainable future in the post-oil era. 

What follows presents several key findings based on a thorough evaluation of Vision 2030’s track record in the energy realm over the past seven years. It is generally accepted that transitioning away from hydrocarbons will be an arduous task. This presents the need for an enhanced, more detailed action plan for Saudi Arabia’s net-zero emissions target by 2060. However, the Kingdom currently lacks a set of consistent strategies, policies, and measures for the upcoming energy transition, coupled with the absence of a dedicated institutional mechanism for coordination and implementation. Challenges remain in localization of equipment and technologies, resistance from domestic interest groups, and insufficient government subsidies for innovation. The deteriorating geopolitical environment in the Middle East also makes it difficult to maintain a stable course that will support economic diversification. Amid a shifting geopolitical landscape, Saudi Arabia must also balance strategic priorities while diversifying its partnerships on the global stage.

The report finds that Vision 2030 is the most systematic response yet to calls for diversification and has been accompanied by cuts in government spending and plans for growth in non-oil sectors. However, the plan will nonetheless be difficult to implement, as it will require deep structural reforms, transparency, job creation in the private sector and balanced regional development. Somewhat ironically, Vision 2030 comes at a time when the Kingdom has boasted growing production and technological advancements in oil extraction, ensuring reserves for generations despite the global trend towards clean energy sources. Government support is mostly granted to industries that are dependent on oil, and there is difficulty in adopting renewables in hard-to-abate sectors like transport and construction. The need for fostering innovation and creativity in the energy sector, and the reallocation of subsidies to knowledge-based private sector companies, have not been greater. But the difficulty of meeting strategic requirements in the short-term and the resistance of the oil industry’s large interest groups exacerbates uncertainty about the comparative advantages of the clean energy sector. Based on secondary research, this report offers several policy recommendations to improve Saudi Arabia’s approach to energy transition as part of its Vision 2030 program.

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This report is a product of the inaugural Gulf Studies Symposium. The Gulf Studies Symposium (GSS) stands as an annual gathering committed to advancing the depth of knowledge about the Gulf region. Our overarching mission revolves around the promotion of high-caliber scholarship and the facilitation of insightful analysis. We achieve this by meticulously orchestrating a series of workshops, with the ultimate aim of bringing forth publications that contribute to the academic discourse on the Gulf.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.