Saudi Arabia managing regional instability

by Paolo von Schirach —

June 22,2026

WASHINGTON – As the custodian of Islamic Holy Sites, Saudi Arabia enjoys enormous prestige and influence in the Arab world and beyond. Furthermore, the Kingdom is OPEC’s leading member. As the biggest oil producer and exporter within the fossil fuel cartel, Saudi Arabia can influence key decisions on oil production quotas within OPEC, and therefore also influence global oil prices, this way giving Riyadh the ability to shape or at least affect the world economy.

Beyond oil

That said, it is well known that the current Saudi government, led by its de facto ruler Crown Prince and Prime Minister Mohammed bin Salman (MbS),  is looking well beyond the oil economy for its future development strategies and wealth generation tools. MbS is determined to force his country into a process of rapid diversification and modernization, with the determination of creating new Saudi non-oil economic foundations, so that his country will still be rich in a future world in which there will be different and truly cost effective alternatives to hydrocarbons. In other words, the plan is to get ready for a new world economy in which Saudi oil, while still important, will be far less valuable.

Indeed, in this new world with abundant and cheaper energy alternatives, oil demand and therefore Saudi oil exports will continue, at least for a while. As a low cost producer, Saudi Arabia will remain a major player. But overtime global demand for oil will shrink. Therefore, it is a foregone conclusion that 15 or 20 years from now oil will no longer bring to the Kingdom the vast amount of revenue necessary to sustain the wellbeing of a country of 35 million people.

The road ahead for Saudi Arabia

Hence various economic development initiatives aggressively pursued by Riyadh at this time, aimed at achieving this ambitious transformation goal. Make sure that Saudi Arabia will continue to be a relevant global economic actor, even without the significant advantage of the enormous revenue derived from its unique role as key supplier of an indispensable commodity. In order to achieve this ambitious goal of creating a self-sustaining, high value non-oil economy, MbS and his advisors developed a multipronged development strategy focused on sectors other than oil. Let’s review the main components.

Government-led construction and infrastructure

Construction projects (mostly funded by the state) are a major part of this plan. Key  projects include: NEOM,  the Line, the Red Sea Project, Qiddiya City, as well as massive airport, rail, housing, and logistics projects. In as much as these projects create jobs and stimulate domestic demand, they add to GDP. As highly ambitious, futuristic projects, they also attract foreign contractors. They also support the construction, engineering, and financial services sectors within the Kingdom. However, the problem is that for the time being they depend very heavily on state funding, and this means the current oil economy. So while construction business is “non-oil GDP,” it is made possible mostly by the country’s oil wealth.

Tourism

Saudi Arabia has become one of the fastest-growing tourism markets in the world. There are three main components. Religious tourism has been and will continue to be a significant source of revenue, since millions of practicing Muslims from all over the world travel to the Kingdom to visit Mecca and Medina, this way fulfilling their religious obligations. Leisure tourism is more recent but already quite significant. It is now easy to obtain tourist visas to visit Saudi Arabia. The country is successfully marketing its pristine landscapes, the desert, its beaches, many archaeological sites, and entertainment venues. And finally we have business tourism fueled by marketing the country as the ideal venue for international conferences, exhibitions, and also forums aimed at attracting foreign investors. Tourism is now an important driver of new employment, and therefore the growth of the now more robust services-sector.

Logistics and transportation

Following the successful example of the UAE, Saudi leaders plan to make their country into another global hub for logistics and transportation. Saudi Arabia’s geographic location is a major advantage, as it sits at the intersection of Africa, Asia and Europe. Success of this effort hinges on the expansion of King Abdulaziz International Airport, and King Khalid International, combined with the growth of Saudia, the country’s national flag carrier, and also of the recently launched Riyadh Air. Maritime connectivity will be enhanced through the modernization of ports on both the Persian Gulf and the Red Sea. Saudi leaders hope to make the country attractive to world travelers in order to compete successfully with the logistics role long played by the UAE, especially Dubai.

Financial services

And then we have financial services, now a promising growth sector, with Riyadh emerging as a regional financial center. The incentive here consists in dangling in front of multinational financial services conglomerates the prospect of competing for lucrative government sectors once they have established a large presence, in Saudi Arabia. The government is encouraging multinational companies to establish their regional headquarters in Riyadh in order to enhance the chances of winning major government contracts. This successful marketing effort has boosted the growth of banking, legal services, asset management, various consulting and professional services. As a result, today Saudi capital markets have reached a significant size within the Middle East.

Manufacturing

Manufacturing, practically nonexistent a few decades, ago has grown significantly. Key sectors like chemicals and plastics are tied to the oil industry. But you also have food processing, pharmaceuticals, defense goods, and fertilizers. Saudi Arabia advertises its energy abundance and therefore low energy costs as a major incentive for inbound investments in energy intensive manufacturing.

Mining

Then we have mining. This is a sector with important long term expansion potential. Saudi Arabia has large deposits of rare minerals, phosphate, gold, zinc and copper. If estimates about the size of mineral deposits are accurate, Saudi Arabia’s mining could become a major revenue generator, as is the case in Australia.

Digital economy

Contingent on Saudi Arabia’s ability to develop the necessary human capital via high quality, specialized IT education, there are plans to make the Kingdom into a major hub for the digital economy and high tech in general. Efforts are underway to develop cloud computing, artificial intelligence and related data centers. In these areas Saudi Arabia enjoys the advantage of abundant, reliable and affordable energy, a key factor for the optimal operation of large data centers that consume enormous amounts of electricity. Assuming the creation of adequate infrastructure and the ability to educate an adequate number of  competent professionals, Saudi Arabia may be poised to become a global player in e-commerce, fintech and AI.

Entertainment and sports

And then we have a big boost from the top for the entertainment and sports industries. These sectors did not exist when Saudi Arabia was still under the influence of very conservative religious customs. Now, the scenario is totally different. They have practically everything. From professional sports events to festivals and concerts, from theme parks to film production, Saudi Arabia has all of them. Obviously events like the Formula One Saudi Arabian Grand Prix are opportunities to boost the country’s global prestige. But they also support the tourism, leisure and hospitality industries.

How to evaluate these changes?

What do we make of these strong efforts to diversify the Saudi economy? For sure, we can say that there is a real economic development strategy in place, with diversification as the key objective. However, this is a long term effort. For the time being, Saudi Arabia is still predominantly an oil and oil products economy in which crude revenue is used to fund investments and growth in some of the promising non-oil sectors. This strategy can work, assuming sustained oil demand at reasonably high prices for at least 10 or 15 years, the time necessary for the non oil sectors to grow strong and resilient. Only a world economy with continuing dependence on fossil fuels, at least for a number years, will guarantee Saudi Arabia’s the funds to be invested in the new sectors.

Should there be dramatic energy technology innovations in the medium term that will make it truly cost effective to rapidly switch away from oil and into renewables on a massive scale, then Saudi Arabia could be in serious economic trouble. Global demand for oil would collapse. Therefore the Kingdom would lack the financial resources to boost the development and consolidation of a still fragile non-oil economy. From this perspective, Saudi Arabia’s chances to successfully develop viable non-oil sectors may appear good or not so good depending on projections regarding the actual pace of technological innovation (and subsequent adoption) in the new energy sectors.

To all this we have to add the difficulties stemming from geopolitics. Saudi Arabia is uncomfortably close to Iran, a dangerous rival and to Israel, a country that is still viewed by many of its Arab neighbors as illegitimate, or at the very least a pariah state, responsible for massive human rights violations.

The Iran war lessons

Right now, in the light of the disruptive, yet inconclusive conflict with Iran started on February 28 with the joint Israel-U.S. bombing campaign, it appears that Saudi Arabia is re-evaluating its position, in an effort of regaining some maneuvering space. Sure enough, the Kingdom wants to retain close ties with the United States. Still, the conflict with Iran demonstrated that total alignment with the U.S. does not guarantee real security for the Gulf countries, Saudi Arabia included. American bases and air defense systems could not prevent Iranian attacks and the ensuing damage caused to oil facilities by Iranian ballistic missiles and drones.

Until the recent US-Israeli war against Iran, Saudi Arabia and the other Gulf states believed that strong relations with Washington, augmented by new ties with a militarily sophisticated Israel, would increase their security posture against Iran, their most significant rival, and source of regional instability. The war demonstrated that this hope was misplaced. The notion that strong ties with Washington in exchange for U.S.-provided security would work out well for the Kingdom proved to be an illusion. Indeed, with all its military might, aided by a considerable Israeli effort, America could not destroy Iran’s offensive capabilities. While the bombing campaign degraded Iran’s capabilities, Washington could not render them totally ineffective.

The emergence of a new strategy

Going forward, it appears that Riyadh would like the continuation of security ties with the United States, but also the expansion of trade relations with China, including the purchase of Chinese military equipment, combined with reduced confrontation levels with Iran, and stable relations with the other Gulf states. In other words, Saudi Arabia’s rulers understand perfectly well that sizable foreign investments, a buoyant tourism industry, and the creation of viable financial and logistics hubs require peace and security in the region.

The problem is that Saudi Arabia, while retaining its significant place in the Arab and Muslim world and its enviable position as a leading oil and oil products exporter, does not have the resources to shape the region’s security environment to its liking, all by itself. This being the case, it can at least work towards the creation of a less confrontational environment.

We can call this policy “deliberate hedging.”

In practice, this means cultivating its relations with the U.S. but also in parallel increased trade with China, (without becoming dependent on Chinese technology). At the same time, Riyadh is looking at future ways to normalize relations with Israel without, however, any open commitments, while managing its difficult relations with Iran with the goal of avoiding new conflicts.

Hence a more circumspect Saudi approach to its relations with Washington. Of course, Saudi Arabia still wants U.S. air defense systems, technology, weapons, intelligence, and a continuing security dialogue with the Americans. But it will do so while resisting the role of Washington’s regional subordinate.

On relations with Israel, the picture is also very complicated. Prior to the October 7, 2023 massive Hamas attack against Israeli civilians, it appeared that the Saudis and the Israelis were on the verge of some major announcement regarding the normalizations of relations. Needless to say, this would have been a real inflection point, an epochal shift. Given Saudi’s role in the Arab and Muslim world, Riyadh’s joining the Abraham Accords, or something to that effect, would have been a historic milestone that could have radically transformed the region.

Now, none of this is possible. The Saudis would need meaningful political cover for any open connection with Israel, in the form of concrete reassurances about a credible path to Palestinian statehood. The current Israeli government cannot and will not provide them. Therefore, most likely Saudi Arabia will do its best to preserve off the record, informal intelligence and security channels with the Jewish state, on Iran and other matters. However, real normalization with Israel cannot be openly discussed, let alone achieved.

This is where Saudi Arabia and the UAE differ. Abu Dhabi boldly chose open normalization, deep economic links on energy and AI with the U.S. and close U.S.-Israel strategic alignment. Saudi Arabia cannot do this. As the custodian of Mecca and Medina, Saudi Arabia is a key leader in the Arab and Muslim world. As such, it cannot overlook the plight of the Palestinian people without losing its credibility and prestige.

Saudi policies promoting increased ties with China matter. But they should not be construed as an alternative to the U.S. on security issues. The relationship is and will be on trade, including defense goods. But the main focus will be on economics rather than strategic partnerships.

So the Saudi answer to the current geopolitical confrontation in the region is probably something like this. “Yes to continuing ties with the US. Yes to increased business with China, back channels with Israel and lowering of tensions with Iran. But no path to joining the Abraham Accords without any credible road map for peace between Israel and the Palestinians.”

Bottom line, unlike the UAE, Saudi Arabia is trying to retain its position as the essential regional balancer, capable of supporting stability, without however undermining its special relationship with Washington.

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