Saudis prepare for post-petroleum era

MEDINA, Saudi Arabia - Yellow dust clouds swirled as tractors moved back and forth, leveling a huge, barren piece of land dotted by billboards that announced the city that will rise here.

Over the next few years, Saudi officials say, this stretch of desert will be transformed into a hub of research and development, with cutting-edge universities, hospitals and housing for more than 130,000 people attracted to living in the city where Islam's prophet Muhammad is buried.

The project, called Knowledge Economic City, represents a first serious step by Saudi Arabia toward building a post-petroleum economy. It is one of six industrial centers planned to rise over the next 15 years. At a cost of more than $100 billion, the sites are expected to provide housing and jobs for the country's fast-growing population; half are younger than 21.

Cities-from-scratch are the most ambitious projects to date launched by a kingdom enriched almost entirely by oil since its disparate regions were unified more than seven decades ago. In beginning to construct an economy to survive the end of its natural resources, the Saudi government is drawing on lessons learned during a previous oil boom when profits were squandered in part by spendthrift princes and short-term planning that emphasized infrastructure over education.

"The ruling dynasty is under pressure to show its population that the oil money is being reinvested for the good of the people. The al-Sauds have suffered from the image of a ruling family as corrupt and spending lavishly," said Rochdi Younsi, an analyst with the Eurasia Group, a consulting firm that provides political risk analysis of countries around the world.

With oil prices peaking above $145 a barrel in recent weeks, the kingdom is reaping an unprecedented windfall from its vast reservoirs, which represent a quarter of the world's proven reserves. Saudi Arabia reported oil income of $200 billion last year and projects $700 billion in revenue over the next two years. The kingdom earned an average of $43 billion annually throughout the 1990s.

But Saudi officials have long feared that oil prices too high would push the world toward alternative fuels, a concern captured by one former oil minister's tart reminder that "the Stone Age did not end for lack of stone."

To meet rising demand, as well as to slow the world's rush to develop alternative energy sources, Saudi officials have raised oil production by 500,000 barrels a day since May.

Though increased production means the Saudi reserves will be depleted faster, the government is using a burst of additional capital to develop an economy it hopes eventually will be untethered from the price of oil.

The new cities "are part of a broader effort to diversify the economy away from oil and away from its reliance on the public sector. The cities are intended to develop more of a non-oil economy, well before the oil runs out," said Jane Kinninmont, an analyst at the Economist Intelligence Unit, a research and advisory company that provides industry and management analysis of countries around the world.

Based on economic zones around the world, the cities aim to trade Saudi assets - plentiful and cheap oil and vast open spaces - for foreign expertise and training. But the cities also have social aims, analysts said, including creating jobs to stave off political unrest.

"When there was money, it was easy to absorb young Saudis into public jobs, but the population kept growing and the local education system did not produce enough candidates for the local job market. That caused resentment and allowed militant groups to launch against the local dynasty," said Younsi, referring to a spate of al-Qaeda-related attacks in 2003.

Saudi Arabia's ambitious economic program calls for the kingdom to be among the world's top 10 economies in terms of ease of doing business by 2010. It is 23d now.

Saudi officials said they were working on easing the lifestyle and visa restrictions that have kept foreigners from investing and living in the kingdom. One side effect of that probably will be an easing of rules that ban men and women from mingling in public unless they are close relatives.

"We're not anymore an isolated island. We realize the challenge today in order for us to be more competitive means more transparency and more gender equality," said Abdullah Hameedadin, head of the Economic Cities Agency at the Saudi Arabian General Investment Authority, the government body overseeing the projects.

Hameedadin said that 30 percent of his staff was female and that he expected women to be allowed to drive in the new cities. Women are banned from driving in the kingdom.

Partly to bypass the bureaucracy and inefficiency of government ministries, and partly to buffer itself against the volatility of oil prices, the government will oversee the projects but leave the financing and management to the private sector, a mix of Saudi companies and investors from the Gulf region, Japan, Malaysia and China, among others.

King Abdullah, who ascended to the throne three years ago, has pushed hard to reform the country's economy, speeding the kingdom's entry into the World Trade Organization months after he became king. One of the cities, planned to rise along the Red Sea with canals running between high-rise apartment buildings, is named for him.