The oil-rich nation is aware of an urgent need to diversify, but it still has a long way to go

On 2 March 1938, Saudi Arabia was a largely nomadic society with a sideline in the tourism generated by pilgrimages to Mecca. The following day, oil was discovered at Dharam and the country’s prospects were transformed for ever.

It took time for the full extent of Saudi Arabia’s crude reserves to become known, not least because in early 1938 the world had other things on its mind. But by the time the second world war was over, it was clear that beneath the desert sands there was an abundance of oil that could be easily brought out of the ground. Cheap Saudi oil was a vital component of the world economy’s long post-war boom and the revenues from petroleum exports paid for roads, bridges, apartment blocks and western-style living standards.

But there was a downside. The economy of Saudi Arabia was and is dangerously dependent on oil, which accounts for 87% of its budget revenues, more than 40% of its GDP and 90% of its export earnings.

For the Saudi economy to work, the oil fields had to keep pumping and the global price of crude needed to stay high. When the cost of crude was more than $100 a barrel, Saudi’s rulers could keep taxes low and welfare spending high, while investing more in infrastructure spending. They could spend heavily on defence and compete with Iran to be a regional superpower. The go-ahead for the kilometre-high Jeddah tower, which will be the world’s tallest building when it is opened next year, was given when oil prices hit $120 a barrel.

But then two things happened. The first was that the price of oil fell below $100 a barrel in 2014 and has not recovered since. By early 2016, a barrel of crude was changing hands for less than $30 a barrel – a price crash that resulted in a recession and a ballooning budget deficit.

The second was that the world started to get more serious about cutting greenhouse gas emissions. At the Paris climate change conference in 2015, an agreement was signed committing the international community to steps that would limit the increase in global temperature to well below 2C above pre-industrial levels

For the Saudis, the implications of the Paris agreement were obvious: the drive to decarbonise the world economy would mean that a considerable part of their oil reserves would have to stay in the ground. This made a warning at the turn of the millennium by the former Saudi energy minister Sheikh Ahmed Zaki Yamani, seem suddenly urgent.

“Thirty years from now, there will be a huge amount of oil – and no buyers”, Yamani said. “Oil will be left in the ground. The stone age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.”

It was not long before Saudi’s rulers responded to this twin challenge. In the short term, they sought to persuade fellow oil producing nations to agree production curbs that would limit supply, drive up crude prices and so ease the pressures on the public finances. At the current oil price of around $70 a barrel, the Saudis can make their budget arithmetic stack up.

Oil giant Aramco's $2tn flotation is still on, says Saudi Arabia Read more

In the longer term, there was a plan to diversify the economy away from oil. Saudi Vision 2030 was announced by Crown Prince Mohammed bin Salman in April 2016, shortly after the oil price reached its trough. The idea was to make Saudi Arabia a global investment giant, to turn the country into a hub linking the three continents of Europe, Asia and Africa and to be the heart of the Arab and Islamic worlds.

The proposed sale of part of the state-owned oil company - Saudi Aramco - was a key part of this attempt to transform and modernise the economy. Proceeds were earmarked for the country’s sovereign wealth fund so it could continue investing in companies such as the electric car company Tesla and the ride-hailing app Uber.

Vision 2030 is strongly supported by the International Monetary Fund, which has praised the plan for its boldness. Yet there is far to go. The economy is dependent on 6 million foreign workers and female participation in the labour market is weak, despite the recent lifting of the ban on women driving. Riyadh is under pressure over its crackdown on dissent and the civilian casualties in Yemen, where it is fighting a proxy war with Iran.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

The postponement of the Saudi Aramco float – although the government said it remained committed to an IPO at some point – may have less to do with the state of financial markets than the unwillingness of the Saudis to come clean about the state of the company and the extent of oil reserves. Saudi Arabia remains a deeply conservative country. Just as with an oil supertanker, changing course will take time.