Saudi Arabia: Oil for Water

Abstract

In 2014, the Kingdom of Saudi Arabia faced a freshwater shortage. Despite the global financial crisis, Saudi Arabia experienced modest economic expansion and increasing stress on its water infrastructure due to expanding agricultural production. The major investments in desalinization plants that the country expected to see had not yet materialized, furthering the strain on resources. This case, used in Darden's Economics of elective, examines what policy reforms should be explored in bringing Saudi Arabia's water use and agricultural production into balance. Excerpt UVA-GEM-0129 Rev. May 29, 2015 Saudi Arabia: Oil for Water Saudi Arabia was facing a chronic water crisis. A desert country in the Middle East with virtually no permanent rivers or lakes and an average of 59 millimeters (mm) of rain annually, Saudi Arabia was in terms of natural renewable water resources one of the poorest countries in the world. To quell its thirst for water, the kingdom was banking on a vast and growing desalination infrastructure. It was, however, an open question whether building more desalination plants would suffice. According to many experts, Saudi Arabia had tough policy choices to make. International investors were following the situation closely, albeit with some skepticism, especially in the aftermath of the Arab Spring. In the words of Global Water Intelligence (GWI), a water expert group from the United Kingdom: “Saudi Arabia is in many ways a very mature market for water and wastewater services—in particular for desalination. In other ways, there is a huge amount of development still to be done…What remains to be seen is whether the opportunities for investors and operators will develop as much as hoped for.” The Saudi Society and Economy The Kingdom of Saudi Arabia was the largest country in the Arabian Peninsula, roughly one-quarter the size of the United States. It bordered Egypt, Jordan, Iraq, Kuwait, the United Emirates, Yemen, and Oman (see Exhibit 1). Founded in 1932 after a long struggle to unite local tribes, Saudi Arabia had experienced dramatic changes, especially since the 1960s. It had become a well-off nation whose per capita income in 2013—the equivalent of $ 25,000—was comparable to that of the European Union average (see Exhibit 2). Reflecting its climb up the income ladder, life expectancy had steadily increased from barely more than 50 years in 1960 to around 75 in 2013; child mortality had also dropped significantly. Saudi Arabia was a country of young people; its median age was 25 years. Its population had increased about seven times since the 1960s and reached 30 million in 2013, which amounted to an average annual population growth rate of around 3.4%. Driving this rapid growth was, on one hand, the high fertility rate (seven children per woman in 2006, and still three per woman in 2011) and, on the other hand, immigration. Saudi Arabia had been a magnet for citizens from other countries: in 2013, no less than 32% of its population was non-Saudi. . . .