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Saudi Arabia's King Abdullah (seated) is greeted by a Saudi officer on his arrival at Riyadh airport in this February 23, 2011 file photo.HO/Reuters

Ground Zero of Saudi Arabia's race to end its overwhelming dependence on one product – oil – looks like the opening phase of a resort development. Palm trees line the beach, a canal has been dredged and a luxury hotel and a few condos have popped up between empty spaces filled with earth-moving machinery.

But divert your eyes away from the brilliant blue-green Red Sea and look north, and you will spot the outline of gigantic cranes and container ships. It is the new deep-water harbour attached to King Abdullah Economic City (KAEC), the world's only city that is publicly traded. Extensions to the harbour will make it one of the world's 10 largest container ports. Nearby is a cluster of low-slung buildings, one of which is a $200-million (U.S.) factory pumping out Galaxy chocolate bars made by the American confectionery giant Mars.

By local standards, KAEC is a revolution, an economic experiment that is the equivalent of a Saudi moon shot. No non-oil investment of this scale – a city the size of Washington – has ever been attempted in Saudi Arabia. The investment cost over the next 25 years or so is estimated at $100-billion, with absolutely every component, from the port and the high-speed rail connection to the regulatory and governance systems, being built from the ground up.

In an interview with The Globe and Mail at the Cityquest new cities conference this week at KAEC, Abdullatif Al-Othman, the former Saudi Aramco executive who is governor of the Saudi Arabian General Investment Authority, said the recent plunge in oil prices gives the economic diversification plans more urgency.

"Oil has been a good source of income, but we all know it is a depleting resource," he said. "The cyclicality of that resource reinforces our strategy and our commitment to diversifying the economy."

It is impossible to overstate Saudi Arabia's reliance on oil – the kingdom is a one-product wonder. About 80 per cent of government income is reliant on oil, and 90 per cent of export earnings. The country is responsible for about one-third of the Organization of Petroleum Exporting Countries' output and is the cartel's "swing producer," meaning its ability to open or tighten the spigot can send prices soaring or plunging.

At last month's OPEC meeting in Vienna, the decision by the Saudi-dominated cartel not to reduce the 30-million-barrel-a-day production quota sent prices to a five-year low. In June, Brent crude, the effective international benchmark, was trading at about $110 a barrel. By Wednesday, it was trading at $66. In 2008, when oil peaked at $147, Saudi Arabia was swimming in cash and became the 19th-largest economy.

Today, the picture could not be more different. The International Monetary Fund, Deutsche Bank and other sources estimate that Saudi Arabia needs about $93 oil to balance its budget as it ramps up post-Arab Spring social spending. (Iran at $140 and Qatar at $65 represent the budget-clearing extremes.) While the country appears to have ample financial flexibility – its debt to gross domestic product is about 3 per cent, a small fraction of the euro zone's 90 per cent – there is no doubt that extended low prices will hurt is ability to spend and might even unleash growth-crunching austerity.

Last year, even before prices began to fall, the Saudi monarchy was on the receiving end of warnings about the perils of overreliance on oil. The highest-profile criticism came from billionaire Prince al-Waleed bin Talal, owner of Kingdom Holding, whose investments include the Four Seasons and Fairmont hotel groups, and nephew of Saudi King Abdullah. "We are still a nation on oil and this is wrong and dangerous. We've been talking about diversifying Saudi Arabia's revenue … for almost 30 years and not relying on oil. You know, Eisenhower said plans have no value, implementation does."

His warning came when oil was well above $100. Last month, in an open letter posted on his website, he said Saudi Arabia's apparent tolerance for low prices would be "catastrophic" for the Saudi economy.

Saudi Arabia is diversifying the economy, just not nearly as quickly as some would like. KAEC is one of four new "economic" cities scattered around the country. The Saudi stock market company controlling the development is called Emaar Economic City, whose chairman is Mohamed Alabbar of Abu Dhabi. He is the founder and chairman of Emaar Properties, one of the world's biggest developers, best known for Dubai's Burj Khalifa, the world's tallest tower. Its initial public offering was the biggest in Saudi history.

At the Cityquest conference, Mr. Alabbar said he was confident KAEC would succeed. "The potential for growth in this country is huge, the market opportunity is huge," he said, noting that the Middle East in general was his company's most profitable global market.

KAEC was launched in 2005, ground to a halt during the financial crisis, when its future came into doubt, and is now building momentum again. It is no more than 10 per cent built, but already its basic outline and components are visible. It is located about 100 kilometres north of Jeddah, the country's commercial capital, and smack in the middle of the Red Sea shipping route that, through the Suez Canal, connects Asia to the Mediterranean and Europe. KAEC will eventually be home to two million residents.

It has been redesigned several times, the last time when Fahd Al-Rasheed, Emaar Economic City's CEO, found himself trapped in New York during Hurricane Sandy. The hurricane's water deluge convinced him to eliminate the network of canals and move the city well back from the Red Sea. "Creating a city from scratch is not easy," he said.

The project is vast and the low-density planning ensures seemingly endless sprawl, raising questions about its sustainability, since high-density cities tend to be more energy efficient. But Saudi Arabia has cheap energy and vast open spaces, so constructing a tight city that discourages cars was not a priority. Solar-panel installations are not part of the master plan. High-speed rail lines that will connect KAEC to Jeddah and the holy cities of Medina and Mecca – with some components of the trains coming from Canada's Bombardier.

Commercially, KAEC will be anchored by the port, light manufacturing connected to the national rail and road network, and the downtown centre that will cater to tourists and the services industry. The coastal area will be largely residential. In effect, it will become one of the new breed of city states that are being built in the hundreds all over the world as urbanization lures hundreds of million of people into cities. London's Llewellyn Consulting says the population of cities will rise to five billion in 2030 from 3.9 billion today.

Will KAEC work? Barring a total and prolonged collapse in the oil price, which might push Saudi Arabia into recession, the Saudi government is counting on it. "We want to have a multicylinder economy," said Mr. Al-Otham, the Saudi investment boss, with the caveat that leaving the project largely to the private sector "requires patient capital."

Follow Eric Reguly on Twitter: @eregulyOpens in a new window

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