Sa'udi Arabia - Economy

The economy is heavily dependent on oil production, which provided over 90% of export value and 75% of government revenues in 2001. The country has the largest reserves of petroleum in the world, 24.9% of the proven total as of the end of 2000, with its northern neighbor, Iraq, holding second place at 10.7%, and two other Arab neighbors, the UAE and Kuwait, third and fourth, at 9.3% and 9.2%, respectively. Rapidly increasing oil income after the first oil shock, 1973–74, led by the Organization of Oil Exporting Countries (OPEC) cartel, were used to increase disposable income, defense expenditures and economic development. OPEC was able to enforce a quadrupling of oil prices (from $2.50/bbl to $10/bbl) largely because of King Faisal's agreement to deploy the oil weapon in conjunction with the Yom Kippur War. Per capita income in current dollars peaked at $15,700 in 1980 after the second oil shock, 1978–79 in conduction with the Iranian Islamic revolution, sent oil prices to all-time highs, peaking at just over $40/bbl. in September 1980 at the start of the Iraq-Iran war. From there, population growth (about 350% 1973 to 2003, from 6.76 million to 24.3 million, including an estimated 5 million non-nationals), a decreasing OPEC share of world oil production (from over 50% in 1973 to less than 30% in 1985 to about 40% in 2003), oil conservation efforts among consumers, and limited success in diversifying the economy have combined to reduce per capita income more than 40% to $6,837 by 2001 (equivalent to $10,600 in purchasing power parity terms according to CIA estimates). The contribution of the oil sector (crude oil and refined products) to the overall GDP, nevertheless, has substantially decreased, from 70% in 1980 to an estimated 40% to 45% during the period 1999 to 2001.

As an oil producer, Sa'udi Arabia's economy has a rentier structure, profiting from oligopolistic ownership of a factor of production. Marginal production costs for a barrel of oil in Sa'udi Arabia are about $1.50, which, since 1973, it has generally been able to sell for between $10/bbl. and $40/bbl. largely because of cooperation within OPEC, an open producers' cartel. After the collapse of world oil prices in 1986, when benchmark Sa'udi light oil, at $28/bbl. in 1985, bottomed out at $8/bbl. (in real terms, lower than 1973 prices), the economy has been more subject to more normal operations of supply and demand. Maintenance of OPEC target prices rests heavily on Sa'udi restraint, often below its official quotas. Sa'udi restraint reduces its oil revenues as the same time that the high price encourages non-OPEC production and cheating by poorer OPEC members, which, in turn, brings down the world price, which also reduces Sa'udi oil revenues.

The government has always made economic diversification a top priority, seeking to develop industries using petroleum, such as petrochemicals, as well as to finance industrialization. By 1989 the massive Jubail and Yanbu'al-Bahr industrial complexes, combining petrochemicals and steel production had been largely completed. Diversification efforts, however, are made within the context of a number of fundamental restraints, the most pervasive being the rentier structure itself, which blunts incentives to acquire competitive skills. in favor of efforts to maintain monopolitistic advantages. Even in the capital-intensive oil industry, the Saudis have relied heavily on foreign workers who make up about 20% of the population. The Kingdom's intolerance of democratic processes, labor unions, women's participation in the work place, and foreign influences are just some of the more obvious impediments to development beyond a rentier-based economy.

There are, however, mounting pressures for economic reform, including falling per capita income, attendant social frustrations, the emergence of government deficits and a sizeable, though still manageable, external debt. In 1998 the government, led by Crown Prince Abdullah, embarked on a privatization strategy as a means of restoring per capita growth. In April 1998, the Sa'udi Telecommunications Company (STC) and the Sa'udi Electricity Company (SEC) took initial steps in privatizing telecommunications and electric power services. In September 1998 Prince Abdullah held meetings in Washington, D.C. with several leading American oil company representatives, beginning what has been called the Crown Prince's Oil Initiative, which is essentially a plan to bring private companies in to develop Sa'udi natural gas resources the way they had developed the country's oil resources.

Real growth of the GDP averaged about 2.6% between 1988 and 1998. The economy shrank by 11% in 1998 due to low world oil prices, but posted a 1% gain in 1999. Nominal GDP growth was 21.3% in 2000 and a negative 10.7% in 2001, reflecting, respectively, a sharp rise and a sharp fall in oil prices. However, the CIA estimates real growth for 2001 at 1.6%. The CIA also estimates that inflation in 2001 was 1.7%.

In 1999, the Crown Prince revitalized efforts to secure Sa'udi Arabia's acceptance in the WTO, although with no apparent intention of eliminating some of the more obvious violations of trade organization's principles, such as a strict enforcement of boycotts against Israel. In 2003, the Sa'udis hired a Texas law firm to lobby on its behalf for accession to the WTO.

The economy remains dominated by large state-owned monopolies. For 2001, the CIA estimated that the private sector accounted for about 25% of GDP, a decrease from an estimate of 35% in 1999. The government is considering privatizing the national airline, petrochemical industries, the telecommunication sector, and electricity companies to foster diversification, but no firm plans have emerged. The government encourages growth in agriculture as a means to reduce Sa'udi Arabia's net reliance on food imports, but dramatic reductions in farm subsidies resulted in a continuing decline in agricultural output.

User Contributions:

Comment about this article, ask questions, or add new information about this topic: