The Saudi Arabian economy is fueled almost entirely by the production and distribution of petroleum and its derivative products. Over the past decade oil sales have generated, on average, 90 percent of the country's yearly export earnings, 35 percent of annual gross domestic product (GDP), and 75 percent of all budget revenues. High oil prices in the 1970s led to rapid economic expansion, with GDP growing over the course of the decade by 10 percent per year. As oil prices dropped in the 1980s, GDP growth slowed, averaging just 1.3 percent per year between 1980 and 1998. Rising oil prices beginning in 1999 again boded well for the economy.
Oil was discovered in Saudi Arabia by American geologists in the 1930s, but high level production did not begin until after World War II (1939-45). In the 1960s, the Saudi oil industry began to mature, resulting in a massive accumulation of wealth, fast paced economic growth, and rapid urban development. However, it was not until the 1970s that Saudi Arabia emerged as one of the Middle East's preeminent political and economic powers.
Two events in the 1970s were crucial to Saudi Arabia's economic development. One was the Arab oil embargo of 1973, during which time Arab countries withheld oil from the world market, raising world oil prices dramatically. The other was the 1979 Iranian Revolution, when Shiites overthrew the western-backed monarchy in Iran and assumed control of the country. Both events disrupted oil supplies, causing the commodity's cost to rise. Throughout the 1970s, Saudi Arabia was able to export oil at substantially elevated prices, leading it to become one of the fastest growing economies in the world. The massive inflow of revenue allowed the kingdom to increase import levels and still maintain a favorable balance of trade . Spending on defense and infrastructure rose, and Saudi Arabia became a benefactor nation to the rest of the Arab world, supplying large amounts of financial aid. (Aid has averaged 4 percent of GDP per year over the past 25 years, making Saudi Arabia's average aid-to-GDP ratio the highest in the world.) In a matter of decades, Saudi Arabia transformed itself from a desert kingdom populated by nomadic tribes to a modern economic entity which controls over a quarter of the world's oil.
While petroleum exports are indeed lucrative, Saudi Arabia's dependence on oil as its primary source of revenue is potentially problematic. In the near term, the Saudi economy is left vulnerable to shifts in the price of oil, lowered demand, or disrupted production due to any number of factors, including regional conflicts and the Organization of Petroleum Exporting Countries (OPEC) shifting oil production quotas. In the long term there is the problem of dwindling supplies. While the Saudis maintain over a quarter of the world's known oil reserves (about 263 billion barrels at the end of 1999), these reserves, at the current rate of production, will last only 87.5 years. If, in that time, Saudi Arabia fails to sufficiently diversify its economy or discover new sources of oil, the country will be faced with a serious shortfall in revenues. And even if the kingdom does discover new reserves (as will likely be the case—some estimates put undiscovered reserves in Saudi Arabia at nearly a trillion barrels) the price of oil will probably steadily drop in the coming years as supplies and production efficiency increase.
The need to begin generating alternative sources of income was recognized as early as 1970, when the government issued the first in an ongoing series of 5 year plans aimed at expanding the non-oil sectors of the economy. While infrastructure expansion and urban develop-ment—both natural outgrowths of the oil industry—have proceeded at an impressive pace, attempts to diversify the economy have produced limited results. Similarly, efforts to decentralize the state run economy through broad privatization schemes have been largely unsuccessful.