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Too Many Eggs in One Basket: Lessons Learnt From Saudi Arabia on Economic Diversity

Image credit: Ras (Creative Commons)

Five years ago, China’s demand for oil diminished as the country’s soaring rates of economic growth began to lose steam. Oil prices began to drop. Saudi Arabia, a country virtually dependent on oil export revenue, took action to hedge its losses. It looked for opportunities to diversify its sources of revenue. Meanwhile today in Australia, export revenue mostly comprises of minerals and education. Iron ore prices are high and the demand for lithium is set to excite the many of us who somehow believe a mining boom will go on forever. However, this perceived success does not negate the issue of a looming recession and the fact that China has banned Australian coal imports. Eventually, Australia will be forced to face a similar challenge to the one Saudi Arabia faced five years ago. How will we respond?

Great Crisis, Great Lesson

Saudi Arabia was not always in favour of oil independence. Since discovering oil in the 1930’s, the country focused on building considerable market share and emerged as leader of the Organisation of Petroleum Exporting Countries (OPEC). When the 2008 global recession led to a sharp decrease in oil demand, Saudi Arabia led OPEC signatories in limiting supply to keep prices high. For a country solely dependent on oil export revenue, limiting production, and trusting competitors to do the same, came at a heavy price.

Oil – once revered as the nation’s ‘black gold’ – was seen as risky and unpredictable. When oil prices began to drop again in 2014, a different approach was adopted. Instead of manipulating supply in an effort to control prices, Saudi Arabia looked outside of oil. The government released a plan called ‘Vision 2030’, which encouraged people to work in the private sector. It was announced that shares in Saudi Aramco, the state-owned oil producer, were to be released into the international market. The government bought a majority stake in a global petro-chemical company and established specific renewable energy targets.

The merits of these plans are questionable. However, it is clear that the philosophy Saudi Arabia takes towards oil is vastly different to how Australia treats, its own ‘black gold’, coal.

Doing Things Differently Down Under

The recent federal election demonstrates a great reluctance in Australia to transition away from coal dependence. The Liberal party is adamant that exporting renewable energy will devastate the economy. The Labor party is yet to address the adverse impact of the controversial Adani coal mine. This is a far cry from the efforts Saudi Arabia is taking to manifest new industries in record time.

The Australian economy is fundamentally different to Saudi Arabia in that it is not dependent on only one resource for exports. Still, Australia is unique in its reliance on the coal, iron ore and the education industry. The countries that buy minerals, notably China, are utilising them to make advanced technological goods that they send back to Australia at a profit. It is predicted that exporting education will soon have a similar affect. Countries that import education will emerge as competitors. These competitors will tap on their educated economy to create reputable institutions to rival expensive Australian tertiary education. We are already seeing the decline of Australian education standards. This parallels how the United States competed with high OPEC-driven oil prices, by utilising its own oil. By specialising in exporting raw resources, Australia is getting a bad deal.

The rationale behind coal dependence is that the Australian economy should focus on its most profitable resources. Australia cannot compete with the cheaper costs of labour in Asia. Consequently, maintaining a car manufacturing industry is not economically efficient. Problematically, this argument has been used to avoid opportunities to focus on all economic assets aside from minerals. Despite the Chinese ban on coal, demand for high quality Australian agricultural produce is growing. But, the Australian wheat industry is in danger of being shut down. Further, international companies are trying to invest $20 billion to build a Western Australian wind and solar farm to send electricity to Indonesia. Yet, international demand for Australian renewable energy goes unmet in the domestic sphere. The market argument in favour of mining specialisation does not address the reality - prioritising the coal industry is discouraging energy competition and limiting Australia’s overall export revenue yield. Saudi Arabia - a desert country – has found new assets to diversify its offerings. Why can’t a country as geographically and culturally diverse as Australia do the same?

Lesson Learned?

The Saudi Arabian story of economic growth through oil production is as remarkable as it is fragile. [CO4] A nation that puts most of its eggs in one basket is vulnerable to market volatility. Saudi Arabia has learned this lesson. Now it is time that Australia does too.

Diana Batchelor is a Juris Doctor student at Monash University interested in the economics of energy and infrastructure.

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