David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Saudi Arabia may seem a very different country to China, but they have similar problems.

The world's two largest non-democratic economies  both grew spectacularly over the past decade. China's economy surged to five times its 2004 size by 2014. That in turn helped stoke energy demand that swelled Saudi Arabia's economic output almost threefold.

Dollar GDP of China and Saudi Arabia, rebased
Source: World Bank
Note: 2004 calendar year=100.

Both now face titanic battles to remake their economies before the models that served them so well in the past run out of control. The prognosis doesn't look good in either case.

Saudi Arabia's Deputy Crown Prince Mohammed bin Salman has a dramatic vision for his country. Under a plan unveiled Monday, he wants small and medium-sized businesses to account for 35 percent of the economy by 2030; to sell a stake in the state oil monopoly Saudi Aramco; and to spin off state assets into the world's largest sovereign wealth fund.

``In 2020, I think we will be able to live without oil," he said at a press conference broadcast on state television. ``We will need it, but we can live without it."

That's a heroic bet. Weaning Saudi Arabia off oil will make China's rebalancing look like a walk in the park.

Take the poster-child for a modern economy struggling through the hangover of a commodities boom. Dutch geologists discovered one of the world's largest gas fields under the farmlands of Groningen in 1959, and started tapping the well four years later. You'd think that was good news, but the result was mixed: While money flowed into the Dutch petroleum sector, manufacturing suffered a two-decade downturn that helped wipe out 25 percent of jobs.

Demand for Dutch gas drove up the value of the currency, making domestically produced goods and services expensive in export markets. Capital found better returns in the booming gas industry than elsewhere, compounding the problem. While the Netherlands' petroleum sector thrived, other industries shriveled. The phenomenon has since been dubbed ``Dutch Disease."

Saudi Arabia's problems are an order of magnitude more severe. The Netherlands had a well-established non-resource economy by the late 1950s, having helped invent modern capitalism a full three centuries before Dutch Disease started to bite.

Saudi Arabia, by contrast, was founded just six years before the discovery of massive oil reserves near the Persian Gulf coast in 1938. To describe the nation as addicted to oil is almost an understatement. Oil is its lifeblood. Resource industries, and government services largely paid for with oil revenues, made up more than half of gross domestic product even last year, amid the biggest slump in oil prices since the 19th century:

What chance does the private sector have to pick up the slack? About as good as you'd expect in a country which, even aside from the resource curse, is held back by its subjugation of women and dependence on patronage, not to mention wars on its northern and southern borders and domestic security risks.

Of 151 Saudi Arabian companies for which Bloomberg has data, 119 have returns on invested capital below Bloomberg's estimate of their cost of capital. Revenues at the remaining 32 companies that are producing an economic profit for their investors came to just $35.5 billion over the past 12 months, a little bit more than 5 percent of the country's 2.45 trillion riyals ($653 billion) of GDP in 2015. The entire group of 151 companies produced $157 billion in revenues, almost certainly less than Saudi Aramco on its own .

The problem with Dutch Disease is that the hard economic facts of resource dependence tend to act as a brake on attempts to diversify the economy, regardless of the will of the government and the private sector. While oil prices are now too low for Riyadh to break even on its government budget or external balance of payments, oil is still likely to remain the most productive part of the economy for decades to come. Over the past 15 years, the non-oil sector has grown faster than the oil or government portions in just four years:

Breaking the Habit
Growth rates of sectors of the Saudi economy

The Groningen field has produced about 1.7 trillion cubic meters of gas since 1963, equivalent to about 11.22 billion barrels of oil. That's about as many barrels as Saudi Arabia produces every three years.

If the Saudis really do face the end of the oil era, weaning themselves off eight decades of dependence on the black gold will make Dutch Disease look like a sniffle.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Measured by purchasing-power parity.

  2. Aramco doesn't publish financial statements, but with output of about 10 million barrels a day over 365 days and an average price for Arab Light Crude of $50.52 during 2015, revenue numbers in the region of $184 billion look plausible.

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