RIYADH—Saudi Arabia’s leadership has taken up the challenge of weaning the kingdom from its dependence on oil. Ahmed Ameen is just trying to keep his mobile-phone store open.  Mr. Ameen hired a foreign worker to operate the shop in Saudi Arabia’s capital four months ago, but the worker left the kingdom after learning that a key part of the government’s economic strategy is to replace foreign workers with Saudis.  “My shop is now closed and every day I’m losing money,” said Mr. Ameen, who has a day job and can’t run it himself.  The lofty goal of the kingdom’s leadership—which is being rolled out in phases with a vision statement in April and a more-detailed plan expected within days—might seem far removed from Mr. Ameen’s small-business struggles. But they are part of the same daunting challenge: dismantling the world’s biggest petrostate.  King Salman bin Abdulaziz al Saud, an octogenarian who will be the last son of the modern kingdom’s founder to rule the country, has concentrated unprecedented power in his own 30-year-old son, Prince Mohammed bin Salman. The deputy crown prince, second in line to the throne, runs all economic and domestic policy, as well as the country’s military. Prince Mohammed has in turn launched a historic effort to remake the conservative, change-averse kingdom—in a hurry.  “The younger generation is really taking over,” said Jean François Seznac, a professor at Georgetown University who studies Arab Gulf economies. “He’s their representative.”  The challenge is immense. Since crude was first discovered there in 1938, the kingdom has developed into one of the quintessential economic constructs of the oil age. The billions of barrels of crude oil it has pumped and sold to the world have forged its politics and economy—indeed the very essence of its society—in ways that could prove deeply painful to undo.  Saudi citizens enjoy deeply discounted gasoline, water and electricity. Housing is subsidized. Their health care is paid for by the government, as is their education, including stints studying abroad. They aren’t taxed. Businesses have depended on cheap energy and ready access to cheap foreign labor.  In return, the country’s royal family has expected a pliant population that follows its leadership.  But the social compact is breaking down—and not just because of declining oil prices. Demographics are overwhelming the petrostate. By 2030, the number of Saudis over the age of 15 will likely increase by about six million, bringing at least 4.5 million new eligible workers into the labor force, and even more if women begin working in larger numbers, according to a study by the McKinsey Global Institute. The independent think tank is affiliated with McKinsey & Co., the management consultancy the Saudi government has hired to help guide the economic overhaul.  That will more than double the size of the adult population, simultaneously stretching the kingdom’s cradle-to-grave system of handouts and subsidies to the breaking point while requiring the creation of almost three times as many jobs as the country generated during the height of the recent oil boom between 2003-2013, McKinsey concluded.  In response, the government envisions a broad diversification of the economy beyond crude exports. Saudi Arabia’s new leadership plans to privatize chunks of many government companies, starting with a stake of up to 5% of the Saudi Arabian Oil Co., the country’s colossal national oil company better known as Aramco. Also on the table: expanding more aggressively into higher-value refined products such as gasoline and petrochemicals, developing a tourist industry and building a manufacturing base.  Senior government officials declined interview requests.  As the outlines emerge publicly, segments of Saudi society are expressing unease. The kingdom’s arch-conservative clerical class, long assuaged by a flood of oil funds to finance their privileged place in Saudi society, chafe over the government’s efforts to expand women’s participation in the public workplace. “We are sad to see a female employee among men,” Abdullah al-Dawood, a conservative writer, said on Twitter in March.  Businesses, underpinned for decades by the wholesale importation of millions of cheap foreign workers and government-subsidized inputs like energy, reel from new requirements that they replace those laborers with expensive Saudi workers and confront a more-competitive market.  Even parts of the royal family—a sprawling network that has swollen to some 5,000 princes over the decades—are uneasy with the plan’s focus on creating a competitive market-based economy to replace the connections and cronyism that have been pillars of the petrostate, according to insiders. Last fall, two anonymous open letters attributed to a Saudi prince circulated publicly expressing displeasure with recent changes and calling for the king to step down.  “It’s a new paradigm. We’re entering uncharted territory,” Hossein Shobokshi, a Jeddah-based businessman and commentator, told a gathering of financiers and business leaders at a recent conference sponsored by Euromoney.  One of the major challenges isn’t just to create more private-sector jobs, but also to convince young citizens to take these jobs.  That is particularly important, but also especially difficult, in areas like retail. Jobs in sales, repair and low-level management have long been filled by foreign workers who are inexpensive and willing to work long hours. Now the Saudi government is sending those workers home, and trying to entice Saudi citizens to assume their place.  The Ministry of Labor and Social Development decided in March to replace all foreigners who work in shops for sales and maintenance of mobile phones with Saudi nationals by the beginning of September. The government figures this new ban on foreign workers will create more than 20,000 job opportunities for locals.  The government is adamant about the latest drive—commonly known as “Saudization”—despite difficulties in the past when they tried to replace foreigners with locals in vegetable markets and jewelry shops. Since announcing the decision, the ministry has launched a nationwide media campaign. It even converted a bus into a mobile branch to visit different parts of the country to promote the plan. The bus, with two large monitors running promotional videos instead of windows, made several stops near mobile-phone shops in Riyadh in May. Inside, officials with laptops took down hundreds of names of Saudi job seekers.  The Technical and Vocational Training Corp., one of the government’s arms spearheading the program, said in late May that 19,084 men and women have been trained and are ready to take jobs in the sales, customer service and basic maintenance of mobile phones.  Mr. Ameen, the mobile-phone store owner, remains skeptical that the government will be able to train enough people in time to make the plan work within the deadline set by the ministry.  “It’s a very big mess. They have to give us at least two years to do this. The sector has been controlled by foreigners for many years,” Mr. Ameen said. He added that he wouldn’t consider opening another business in the country if the government continues to enforce policies like that.  “I will move my business to Dubai or somewhere else,” he said.  Young Saudis have over the years acquired a reputation of looking down on manual work. But Abdulaziz al-Buti, 23, who recently entered the training program, says attitudes have changed as the job market has become more competitive and expectations of support from the government diminished.  “What is important is your acceptance of the job and not what society thinks,” said Mr. al-Buti, who dropped out of college and worked as a supermarket cashier. He noted that he enjoys tinkering with electronics and gadgets. “Success will come from your resilience. If you love the work then nothing can stop you.”  Another measure that authorities have been considering is to force most retail outlets to close by 9 p.m. instead of 11 p.m. or midnight. But this proposal has proved to be polarizing. Supporters say it would make retail jobs more attractive to Saudis because it will allow them to finish work early enough to return home to spend time with their families. Most foreign workers in retail now are single men, or if married don’t have their families with them in the kingdom. They aren’t able to switch jobs easily, either, as Saudi workers can, if a better offer comes up.  Opponents argue that limits on store hours are impractical in a country where all businesses are already forced to close five times a day for prayer and where temperatures are often blazing hot during the day. Most people prefer to shop and run errands in the evening.  Those critics say if the government wants shops to close by 9 p.m., they shouldn’t be forced to close for prayers. Yet that would draw the ire of religious conservatives, who view the enforced break for prayers as part of the country’s Islamic identity.  Tourism is another area leaders are keen to develop as part of the new plan. But it, too, is an industry the government has struggled with as the society’s deep religious conservatism has found common cause with a powerful construction industry fed by government oil revenues.  The holy city of Mecca draws tens of millions of visitors annually during the hajj pilgrimage. That suits huge Saudi construction companies controlled by powerful, connected families, which have made fortunes building new luxury hotels and shopping malls there.  Muslim holy cities remain off limits to non-Muslims, though some religious scholars recently argued that the ban should be limited to Mecca and not Medina, where the prophet Mohammad is buried. The kingdom still doesn’t issue tourist visas, but the government says it plans to start soon.  Some tourism boosters would like to turn the country into a year-round destination that would welcome visitors from all over, capitalizing on archeological treasures and scuba diving. But the country’s clerical class has frequently lobbied for the destruction of ancient Islamic monuments and historical sites, which their austere brand of Wahabbi Islam views as distractions from God and his prophet.  Some residents of the ancient trading city of Jeddah, a port on the Red Sea, are trying to change that. The city’s historic quarter was largely abandoned by Saudi residents who moved into more spacious suburbs as the oil money flowed into the country in the 1960s and 1970s. A movement to revitalize the old city is now taking hold, with a variety of government-supported efforts to restore historic homes. New projects teach restoration and carpentry skills needed to renovate crumbling old homes in a district that Unesco named a World Heritage site in 2014.  “The vision now is to mix the old with the new,” said Ali Khormi, a 42-year-old Jeddah native who works as a guide. “Tourism depends on that vision.”  The biggest challenge for the kingdom’s overhaul of the petrostate, however, will likely be its hopes of building a diversified manufacturing base. That is particularly difficult to do in an economy where the flood of oil dollars tends to drive up the price for Saudi labor, making other exports too costly to compete in foreign markets.  The kingdom’s tightly controlled labor market featuring foreign workers had been a way to sidestep that problem. To the extent Saudi Arabia has succeeded in building globally competitive export businesses beyond oil—in petrochemicals, for example, and aluminum production—it has leaned heavily on the advantage cheap energy has provided.  Those two business models, both highly subsidized by the state, have been “about wealth creation” for business owners, not “economic value creation,” said Iyad al Zaharnah, director of the Innovation Center at King Fahd University for Petroleum and Minerals. “Neither encouraged innovation. We knew that would have to change.”  Now the center sees itself at the cutting edge of a suddenly energized Saudi Arabia. It recently opened a business incubator, complete with an open floor layout where various student business startups work side-by-side. Cubicle walls are plastered with can-do slogans from Silicon Valley entrepreneurs and Chinese philosophers.  The center has forged tie-ups with multinational companies such as General Electric Co. and China’s Sinopec to work jointly on research and developing businesses. It has developed dozens of new patents and 90 new products, including a water purification process that is being used in some U.S. shale oil fields.  The government recently scored a win when GE announced it would invest at least $1.4 billion and double its workforce in the kingdom to 4,000 by 2020. The conglomerate plans to team up with two partners, including Aramco, to build a $400 million manufacturing facility for the energy and marine sector.  Now the university’s business incubator is developing case studies in Arabic, and trying to tap into the youngest members of some of the kingdom’s prominent merchant families.  “It’s all about the mind-set,” said Wail Moussa, head of the incubator, known as the Entrepreneurship Institute.  Write to Bill Spindle at bill.spindle@wsj.com and Ahmed al Omran at Ahmed.AlOmran@wsj.com
An urgent plan by the deputy crown prince, Prince Mohammed bin Salman, to wean Saudi Arabia from petroleum will mean deep changes in a conservative society long accustomed to handouts.