Saudi Arabia: Gambling
on Deep Pocket Power

Edward J. Dodson

[An analysis of the opportunities and threats involved in the Saudi decision to expand oil production in the face of falling prices. Written in partial completion of the requirements for the course Public Policy Analysis -- Dr. Sandra Featherman, Instructor, Temple University, Spring, 1986]

A Wall Street Journal report in mid-March characterized the economic impact of recent falling oil prices as follows:

After a decade of painful price increases blamed on the Organization of Petroleum Exporting Countries, the recent plunge in oil prices has come as a welcome relief to oil consuming nations.

But according to many oil economists and analysts, the price collapse could be setting the stage for another oil crisis far more severe than the ones following the 1973-1974 Arab oil embargo and the 1979 Iranian revolution.

What the Wall Street Journal and many other observers have similarly described are the complexities of a tremendous gamble being taken by those in control of national policy over oil production and sales in Saudi Arabia. Saudi decisions to increase production and direct a drop in oil prices came about because of impatience and frustration with other O.P.E.C. member nations, from whom they had attempted to secure an agreement to limit production and thus reduce the intrusion on the Saudis' share of the world's oil market. Greater production by both O.P.E.C. and other producers (particularly Britain and Norway) created an oversupply of oil in a market hit by energy conservation-consciousness in the industrialized "West" and debt-produced recession in the developing nations. While the Saudis were cutting oil production from around ten million barrels a day to two million (losing three-quarters of its income), the British increased production to near full capacity. Late in 1985 the Saudis finally made their move, increasing their own production and forcing prices down even further in an effort to recapture market share and at the same time drive out competitors whose cost of production was much higher.

The question to be analyzed is whether this was, in fact, a wise long-run decision for the Saudis. What are the immediate cots and benefits and the risks involved? Are they in a "win-win," "win now/lose later" or a "no win" situation? The strengths and weaknesses of the Saudi political economy result in a decision-making structure that is in many ways unique and have a strong impact on the course of its domestic and foreign policies; it is therefore relevant to examine Saudi society and how it functions if we are to reach any conclusions about these decisions.


The Saud family has maintained tight control over Saudi Arabia's eight million people and land, its rise to power going back to the eighteenth century and an alliance with the Islamic reformer, Mohammed ibn-Abd-al-Wahab. Surviving brief periods of domination by the Egyptians and Turks, by 1926 the Saud family under King Ibn Saud had regained control of the Arabian peninsula and expanded the nation's territory to its present boundaries. The appearance of oil as an important element in Saudi geopolitics occurred during the 1930s, when the ruling family entered into a 50-50 joint partnership with several American oil companies. By 1965 the ruling family was receiving oil royalties of $300 million annually.[2]

Within Saudi society this oil-derived revenue has historically been valuable as a source of tribute for distribution to important tribal chieftains and sheikhs in return for continued allegiance. Members of the Saud family have themselves gained reputations as lavish spenders and consumers of great amounts of wealth. Their exploits have been the subject of much media coverage and criticism during the last half century.

Until the late 1940s the Saudis were essentially isolated from the lifestyle produced by the industrialization their oil resources had fueled. Then came the recognition in 1948 of the state of Israel in the very heart of the Middle East. The Saudis broke with other members of the Arab League, who (lead by Syria, Iraq and Jordan) wanted to cut off oil production in reaction to the partitioning of Palestine and the creation of the Jewish state. Saudi loyalty to United States business interests was acquired by secret agreements "whereby the taxes formerly paid [by international companies] were transferred between the companies and the U.S. government to the treasuries of the House of Saud."[3] Oil production and Saudi revenues during these early post-war years was substantial enough to fulfill the desires of those who held power, but were nothing like that required to bring the Saudi nation into the modern world. In 1944 total oil production was only 7.8 million barrels (less than the daily production of the late 1970s) and brought the Saudi "government" $1.7 million in royalties. This grew to 174 million barrels in 1949 and a more significant inflow of $50 million in revenue. Only a year later the revenue received had more than doubled to $111.7 million and production rose and fell as the world economy experienced boom or contraction.

There were apparently two reasons why American oil companies agreed to a significant increase in royalty payments to the Saudis. The first was dictated by U.S. foreign policy designs, as expressed by George McGhee (at the time the Assistant Secretary of State for Near Eastern, South Asian, and African Affairs) in testimony before the U.S. Congress:

At this time, the principal threat to the Middle East lay in the possibility of nationalist leaders moving to upset regimes which were relatively inept and corrupt, and not attuned to the modern world.[4]

Because U.S. political strategists deemed it necessary to promote stability in this area, the corporations were permitted to deduct royalty payments not as business expenses but as direct tax credits, which brought oil company taxes paid to the U.S. Treasury to "nearly zero."

What is perhaps most amazing is that the Saudis somehow survived what in past centuries or even recent decades would have been a sure takeover attempt by the more powerful nations, whose track records for concern over rights of native people has never been a serious foreign policy consideration. The following view reflects a fairly common expression of viewpoint by Westerners:

The worldwide energy crisis is not a problem of absolute shortages of resources. It is a political crisis over who shall control these resources; who shall decide where, when, and how they are to be distributed; and who shall share in the enormous revenues. The struggle for control of the world's resources is just beginning. The emerging consciousness that the riches of the earth are not infinitely exploitable, that the cost of producing, distributing, and consuming them can no longer be set by the industrial nations, and that indeed such nations must compete with one another for natural resources to maintain their increasingly similar standards and styles of living marks a new stage in world politics. It is a time of danger because the capitalist countries may well be tempted to use military power to offset their declining economic power. But it is also a time of possibility. It is now clear that a death sentence hangs over millions unless there is a radical redistribution of the riches of the earth in this generation. It would be naïve to underestimate the power and determination of the old cartelists - the energy companies and the military establishments that protect them - or of the new cartelists -- the shahs, sheikhs, and the bankers who serve them - to preserve their hold on world resources. But it would be more naïve to underestimate the power and determination of those who struggle for survival.[5]

Saudi power seems to have survived and expanded at the expense of those who have desired to forever manipulate Middle East politics and economics for self-interest. In return for guaranteeing an uninterrupted supply of oil to Western industry, the entrenched oligarchy of the Saud family would be supported and catered to - because it was in the interest of United States national security. Perhaps. The question of where national interest and special interest begin and end has been more difficult to determine. The Saudis would not have to wait long to receive a taste of the political consequences should they decide not to play the game as the Western powers desired.

The first great shockwave in the Middle East occurred in 1956. Egypt, under Gamal Abdel Nasser had been working since 1952 to build a unified Arab nationalist movement neutral in the war of nerves between the Soviet bloc and the West. As part of this strategy, Nasser ordered Britain out of its Suez base and, when Egypt was attacked by Israel (Israel's forced backed by both Britain and France), Nasser was forced into a position of dependency on Soviet arms and assistance, when the terms of United States aid came with conditions Nasser could not accept and maintain his position as the leading Arab figure. The United States retaliated by withdrawing aid for the construction of the Aswan dam; Nasser responded by nationalizing the Suez Canal. Arab nationalism was becoming a force to be reckoned with in the geo-political struggle over oil and land.

Elsewhere, Arab workers began to strike against the oil companies. Saudi Arabia experienced its share of labor unrest, and the disruptions were put down by the use of troops (arms coming from the United States). King Saud acted swiftly, suppressing all trade union organizing and political activity.

In this volatile environment the United States President, Dwight Eisenhower, opposed military intervention against Nasser because he realized this would only enhance Nasser's power with those in the Arab nationalist movement. Thus, in a certain twist of historical trend, Eisenhower publicly opposed British and French efforts to restore colonial domination in the Suez; this political move worked well for the United States. As a result, U.S. dominated oil companies essentially inherited control from their English and French counterparts over Middle East oil.[6] As an indication that there were no consistent foreign policy principles at work, Eisenhower and his advisers would take a very different stance with regard to the crumbing French empire in Southeast Asia. United States foreign policy efforts were now shifted to the task of committing Saudi and Iraqi leaders to the struggle against international communism, which (whether real or contrived) put the Saudis in a role of dependence on the United States for arms and economic aid.

At the same time, the Israeli leadership -- faced with severe financial and economic pressures -- contemplated expansion of Israel's territory at the expense of Arab-held lands. The anticipation of a solution achieved by force of arms was growing stronger on both sides. In 1958 Nasser engineered the formation of the United Arab Republic, further increasing Arab nationalist prestige; and, in 1960, the finance ministers of the oil-producing countries met in Baghdad to discuss common problems and to develop a common Arab foreign policy. Although the meeting proved that none of the Arab leaders were willing to subordinate their own authority to Nasser or anyone else, one result of the meeting was the creation of the Organization of Petroleum Exporting Countries (O.P.E.C.).[7]

The Arab nations, and the Saudis in particular, were at the dawn of a new era in which freedom from foreign domination would come with a growing core of Arab technical experts who were receiving engineering, economics and finance educations in the West. One of the most able was Abdullah Tariki, who, after an education in the United States at the University of Texas, returned to Saudi Arabia in 1954 to become the first Director General of Petroleum Affairs. In his case, one man certainly made a tremendous difference in the course of events:

As the person responsible for government relations with Aramco, Tariki's dedication to work - to educating the public about oil affairs, to improving the terms of the concessions and opening up positions for Saudis in the company management, to using the country's wealth for the benefit of all the people - made him stand out in the Saudi regime, where venality and corruption were the rule, where no administrative structure existed, and where power and influence depended on one's lineage in the Royal House of Saud.[8]

Tariki was instrumental in the early formation of O.P.E.C. and was an ardent supporter of total nationalizaton of Saudi Arabia's natural resources. Under Tariki's direction during the 1960s, the method of determining revenue sharing was gradually revised to the benefit of the Saudi government. Saudi Arabia then experienced a struggle for political power between brothers Saud and Faisal; with U.S. backing, Faisal staged a successful coup and became prime minister. Tariki was soon dismissed and then exiled from his country (eventually settling in Lebanon to work as an oil consultant). As far as U.S. corporate interests were concerned, the Saudi nation was back in comparatively safe hands.

Faisal's immediate task was to diffuse his opposition. He began by sharply reducing the royal household budget, which had historically consumed most of the nation's oil revenues. His method of consolidating his power included public beheadings of political opponents and the purging of the army and air force. He also took steps to build up a modern police state designed to control all political activity. A U.S. House of Representatives Foreign Affairs Committee report of 1965 looked upon Faisal's activities with considerable satisfaction:

After a generation in which oil revenues were not turned to proper account, Saudi Arabia now appears to be assuming a responsible attitude toward economic development. Strenuous efforts are being made to diversify the economy.[9]

Then came the 1967 Arab-Israeli War. A strike occurred against Aramco on 25 June, 1967. In an effort to control the dissent, a large number of Palestinian workers were deported from Saudi Arabia. Still, a show of Arab unity was required, so all oil shipments were suspended for a time and an embargo placed on shipments to the United States and Britain. The Saudis quickly became worried about the loss of oil revenue and negotiated an end to the embargo, obtaining concurrence from Egypt after agreeing to a $400 million annual aid program for Egypt in return for Nasser's support.

Pressure within all the Arab states to nationalize oil production increased with the Israeli victory. Saudi Arabia pushed hard for a different course of action, negotiating an equity interest in Aramco. This was the beginning of Saudi plans to make major improvements in its own infrastructure and to become a net exporter of manufactured goods as well as of oil. In the meantime, the Saudis would channel surplus revenues into profitable foreign investments.

In mid-1972, the Saudi finance minister, Sheikh Zaki al-Yamani, went public with this plan in an address before the Middle East Institute, proposing that "the United States give tariff preference for Saudi oil imports, direct investments in refining, and other oil industry activities," in return for which the Saudi nation would "commit itself to a production level of at least 20 million barrels per day" - a level equivalent to all Middle East production in 1972. The U.S. companies signed the agreement in October and it was ratified by the Saudis in December.

A number of globally-significant events then occurred that brought chaos to the oil market in 1973. Early in the year prices began to climb because of rising demand for low-polluting (i.e., low sulphur) crude oil, particularly in the increasingly environmentally-conscious United States. The Saudis continued their policy of accommodation because, as Faisal stated:

We are thinking in terms of economic cooperation and shared interests in the financial sphere. As is always the case in international relations, whenever mutual interests exist between two countries in the economic field very strong political relations immediately develop.[10]

On the other hand, the natural temptation to control markes and, hence, prices has always been a fundamental desire of suppliers and producers. Adam Smith, in The Wealth of Nations, warned: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." The Saudis were being accommodating; however, in their relatively brief exposure to international business and geopolitics, they had learned the value of tough negotiation. And so, in May of 1973 the Saudis entered into an informal agreement with the United States that encouraged Saudi investments in the United States and promised reciprocal assistance from the U.S. in developing the Saudi domestic economy.


Under the new arrangement, increases in Saudi production were to be tied to "large-scale technical assistance to help industrialize the Saudi economy."[11] Controversy occurred, however, when the United States leadership could not prevent Saudi involvement in the Arab-Israeli conflict. The Saudis responded to overtures for a new Arab unification by Egypt's new leader, Anwar Sadat. In April 1973, Yamani, the Saudi oil minister, visited the United States in an effort to convince U.S. policymakers not to continue shipping arms to Israel. Yamani let the Americans know that oil production might be used as the Saudi foreign policy weapon.

On 6 October, 1973, Egypt and Syria launched a combined attack against Irsaeli forced in the Sinai Peninsula. Sadat and the Palestine Liberation Organization (PLO) increased pressure on Faisal to initiate an embargo against the United States. The result was an initiative, tentative 5 percent cut in production, almost immediately increased to 10 percent. Following the announcement by the United States of a $2.2 billion aid bill to Israel, the Saudis joined other Arab nations in the embargo against the United States. To do otherwise might have meant political suicide for Faisal among his Arab neighbors.

The cease fire between the Egyptian and Israeli forces in November brought the problem of oil production and export to the negotiating table. The price of O.P.E.C. oil on 1 January, 1974 had risen to over $11 a barrel, a 470 percent increase in just one year. In the United States, oil stocks kept moving upward, non-energy consumer spending began to fall precipitously, and the world economy slipped toward recession. O.P.E.C. members then met in March to discuss lifting the embargo and the raising of prices even higher. At this meeting Yamini expressed his view that "prices were already too high and that they should be reduced so as not to jeopardize the economic and political stability of the industrialized capitalist countries."[12] One reason for the Saudi stance was that the United States government was pressing U.S. corporate leaders to assist the Saudis in their economic development program. More and more of Saudi oil revenues was also flowing into the U.S. securities markets, so that Saudi self-interest was very much at stake. These oil revenues totaled around $17 billion in 1974. While this number is certainly large, a breakdown in the distribution of revenue generated from oil products is revealing:

1974 1973
Producing Country 40% 17%
Consuming Country (taxes) 36% 54%
Oil Companies 24% 29%

One immediate impact on the Saudi people was a doubling of food imports from the United States between 1973-74. Up until 1974, however, the distribution of oil wealth had resulted in only minor improvements in the life of the average Saudi citizen. Military and internal security budgets had continually expanded, but the Saudi infrastructure was not yet equipped to undertake large development projects. Strange as this sounds, Saudi economic development was being managed by the Stanford Research Institute.

Saudi society has undergone a rapid rate of change during the last decade. Industrialization and a greatly increased standard of well-being for the Saudi citizen have been very real results. From another perspective, however, the Saudi advances are diminished by the fact that most of the technical and manual work has been performed by some 2.6 million workers brought into the country rather than by Saudi citizens.

During the years 1981-84 the Saudis allocated $550 billion for infrastructure and industrialization development. At the same time they retained $100 billion in foreign reserves. A substantial portion of these financial resources were utilized for the creation of two new industrial cities forecasted to create 144,000 new jobs for Saudi citizens by the year 2000. The emphasis on domestic industrial expansion is reflected in restrictions on foreign investment which no longer permits companies to come in for a quick profit and then leave. Foreign companies must now make long-term commitments of time, resources and technology transfer. One result of these efforts has been to generate an average per capita income in Saudi Arabia of $14,000.

A five-year development plan for 1985-90 has been adopted with a projected cost of $277 billion. Around $190 billion is to be allocated to civilian spending, with the remainder dedicated to defense expenditures. This plan also calls for the reduction of government involvement in the economy, replacement of foreign workers with Saudi citizens and absorption of Saudi women into the workforce. Faced with a continuing decline in oil revenues during 1984-85 the Saudi government took various measures to reduce expenditures, including a reduction in the number of subsidies on consumer goods, salary cuts for government employees and the removal or reduction of housing, medical and travel allowances.

The government has also moved to increase the domestic content of business contracts. In early October of 1984 it was announced that 30 percent of the value of any single contract has to be subcontracted to companies which were wholly Saudi-owned. A decree issued by King Fahd in mid-June of 1985 subsequently rule that all non-construction contracts would be awarded to Saudi firms. Tariffs on durable imports were increased from 4 percent to 7 percent beginning with the start of the fiscal 1986 year.[13] These measures seem to reflect an economy in trouble and a government concerned about deficits. An evaluation of the Saudi economy by Daniel Yergin and Martin Hillenbrand a few years ago reached an opposite conclusion:

Because of low demand for foreign goods compared to earnings, Saudi Arabia is able to scale down its oil production without hurting its own growth.[14]

This seems to be supported by a Business America report concluding that "declining Gross Domestic Product growth is less meaningful in the current Saudi context than it would be elsewhere in the world because Saudi Arabia's roads, communications, and basic infrastructure are now largely in place."[15] That is a tremendous achievement within the span of only a decade.

Net foreign assets held by the Saudis rose from $4.2 billion in 1973 to $67.3 billion in 1978, to $118.2 billion in 1980 and were at $161.6 billion by the end of 1981.[16] In fact, the Saudis held 40 percent of the total net asset position of all the O.P.E.C. oil countries combined. Yergin and Hillenbrand have concluded, therefore:

The different demand patterns of the OPEC countries are important for their investment objectives and strategies. The first objective is always to maintain the country's international liquidity under circumstances of fluctuating foreign exchange revenues and expenditures. This is the typical purpose for keeping foreign exchange reserves.

Saudi Arabia will, as a rule, devote only pat of its total financial surpluses to monetary reserves. The rest, perhaps the greater part, will be invested with a view to spending the money in the future to import goods and services and/or to secure a continuous stream of income in the face of depleting oil reserves. The actual investment strategy depends on the development strategy pursued. Priority is always given to the development of the domestic economy. Saudi Arabia considers the accumulated foreign assets as a kind of deferred expenditure, to be spent developing their country. With this fairly defined time period, the preference will be towards fixed income instruments.[17]

A number of investments in existing businesses seem to go against the above investment strategy until one understands that many individual Saudis are extremely wealthy. Saudi interests have acquired three Hilton Hotels in North Carolina and the brokerage firm of Smith Barney. The Saudi nation's investments are managed by the Saudi Arabian Monetary Agency, which (unlike its Kuwait neighbor) has made minimal investments in European or North American real estate, preferring to keep its equity participations in United States forms below 5 percent. Although not significant to the Saudi portfolio, a number of other investment choices are interesting because of their diversity:

Industrial Park (Salt Lake City, Utah) $750 million
Arizona Land & Cattle Co. (Phoenix, Arizona) $250 million
First National Bank of San Jose, CA (33%) $14 million
Security National Bank of Walnut Creek, CA (96%) $12 million
Bank of Contra Costa, CA $14 million
Source: Saturday Review, January 25, 1975

As the above details demonstrate, Saudi strategy for at least the last decade has been to strive for independence from its oil clients by an accelerated development of infrastructure, diversification of its domestic economy and the minimization risk in foreign investments. There are now two scenarios to pursue. The first is to look at what did not occur and what the probable consequences might have been had the Saudis followed a path of least resistance. The second is to forecast the future based on the path the Saudis have taken.


From late 1981 until late October of 1985 the price of crude oil settled down at around $28 per barrel. Increased production by Britain, Norway, the United States and other producers was exerting downward pressure on the price. The Saudis were pumping around 2.2 million barrels per day, which -- at $28 per barrel -- would have generated $22.5 billion in annual revenue. Assuming the primay goal of the Saudis would be to sustain this revenue at the lowest production level required, and that the weighted average price of oil would drop by $2 per barrel each year after 1986, the adjustments to production would be roughly as follows:

Total Revenue ( R ) = $22.5 billion, or $22,500 million
Variables: ( X ) = millions of barrels per day; ( Y ) = price per barrel

Both ( R ) and ( Y ) are knowns; we are seeking to determine how many barrels must be produced each day to maintain a constant revenue inflow.

The formula to find ( X ) in the base year is:

[Total Revenue ( R ) divided by 365, the result of which is the daily revenue figure, divided by the current price per barrel
( Y ).

Thus, for 1986, the calculation would be as follows: ( X )o = $22,500 / 365 / $28 = 2.2 million barrels per day.

From the 1986 base year figures, subsequent production levels can be determined by simply substituting the present year weighted average price per barrel. Given our assumptions, this results in a 1987 price of $26, a 1988 price of $24, and so on. By the year 1995 the annual production level would need to rise to 6.16 million barrels per day to generate the same level of revenue in nominal dollars. Adjusted for inflation, production would have to be even greater.

Only a few short months ago the suggestion that crude oil prices might drop from around $30 per barrel to as low as $10 by 1995 would have been given a near zero probability. In hindsight, however, the situation was far too volatile to permit oil prices to continue to climb. First, other producers were investing heavily in exploration and expanding output from other sources (e.g., the North Sea). The high prices and threats of supply shortages heightened the movement for energy conservation and improved efficiency of automobiles and other types of machinery. The high prices also enhanced the economic viability of alternative fuel sources, attracting financial resources into these investment areas. The Saudis were keenly aware of the situation. Moreover, they provided they were fully capable of pumping well over six million barrels of oil a day if necessary to meet their revenue needs in an atmosphere of lower prices.

There are several other key variables to be considered in this analysis. At issue is whether the Saudis would be able to generate sufficient revenues to finance their national budget without incurring a deficit (and, hence, eating away existing financial reserves). Again, a number of critical assumptions must be made based on current reported Saudi assets, budget estimates and income from both oil and non-oil related output. For 1986, the Saudis have reported a $55 billion budget, which they acknowledge is forecasted to create a $12 billion deficit. Total foreign investments are estimated to be worth $106 billion, plus a reserve of $60 billion in liquid assts (U.S. government securities, etc.) held by the government. The non-oil related sector of the Saudi economy has forecasted revenues of $7.2 billion.

For purposes of estimating cash flow into the Saudi government, it is assumed that the market value of foreign investments in real estate, ownership of other companies, stocks, bonds, etc. will average an 8 percent rate of return, while increasing in value by 10 percent each year. Although the latest five year plan looks for an average increase in domestic productivity of 5.9 percent, I will use 3 percent in this analysis as being more realistic. At the same time, based on the reduction in the requirements for new infrastructure and the level of private sector expansion, I include a constant 3 percent reduction in the national budget (predicting that the Saudis will curtail spending rather than experience a deteriorating financial position, the government not overly concerned with public opinion and not faced with the pressures of having to stand for election). For purposes of simplicity all figures are assumed to be adjusted for inflation.

REVENUE SOURCE 1986 1987 1988 1989 1990 1991 1992 1993 1994
Oil $22.5 $22.5 $22.5 $22.5 $22.5 $22.5 $22.5 $22.5 $22.5
Foreign Investment 8.5 9.3 10.3 11.3 12.5 13.7 15.1 16.6 18.3
Financial Reserves 4.8 3.8 3.0 2.3 1.8 1.5 1.6 1.9 2.4
Domestic Revenue 7.2 7.4 7.6 7.8 8.0 10.0 10.3 10.6 10.9
TOTAL REVENUE 43.0 43.0 43.4 43.9 44.8 47.7 49.5 51.6 54.1
Budget -55.0 -53.4 -51.8 -50.2 -48.7 -47.2 -45.8 -44.4 -43.1
Net +/- -12.0 -10.4 -8.4 -6.3 -3.9 +.5 +3.7 +7.2 +11.0

As the above data suggests, the Saudis would have experienced a gradual loss of financial reserves as a result of five straight years of budget deficits. By the end of 1995, however, reserves would have climbed back to $56.7 billion. The Saudi cash flow and financial reserves / physical capital at year end 1995 would have appeared as below (billions of dollars):

Oil Production $22.5 Oil Reserves $1,600*
Foreign Investments 20.1 Foreign Investments 277
Financial Reserves 3.3 Financial Reserves 57
Non-Oil Domestic Inc. 11.2 Domestic Capital 373
Budget Expenditures -41.8

*Saudi Arabia possesses approximately 25 percent of the world's known oil reserves (640 billion barrels), or 160 billion barrels. At the forecasted 1995 price of $10 per barrel, these reserves would have a market value of $1,600 billion.

What this analysis also suggests is that Saudi economic development is now broadly established. Because of this, drastic cuts in the government's domestic programs were not required to ensure long-term expansion. Lower crude oil prices, gradually obtained as a result of adjustment in supply to demand were offset by higher oil production and market share. At the same time, the lower energy costs stimulated worldwide economic activity and stabilized the return on foreign capital investments realized by the Saudis. Had they followed this course of action, the Saudis would have experienced a win-win situation by both preserving oil-generating revenues and maintaining growth elsewhere.

The course actually followed is much more difficult to forecast into the future or to evaluate because of the intense political ramifications involved. Saudi Arabia has very quickly influenced by the price of oil by its increase in production from the 2.2 million barrels per day used in the above analysis to around 4.5 million barrels per day presently (April 1986). Moreover, the rapid drop in oil prices has had a complex effect on the global economy. The large money center banks with loans outstanding to Mexican and other international oil firms are threatened as oil prices continue to fall. Moreover, oil revenues have been a primary source of foreign currency for Mexico, and the Mexican economy is now at a standstill. All around the globe, oil and gas industries expanded production, refining and exploration on the assumption that increased costs would be covered by higher revenues. Now, these same firms are being forced to curtail activities and reduce their workforces by thousands of employees. As unemployment rise in the oil belt regions of the United States and other countries, real estate (i.e., land) values are collapsing. Newly-constructed office buildings remain empty and existing buildings drop rents or lose tenants to competitors. In areas where the economic base is highly diversified, there is considerable optimism and economic activity. Thus, depending on where you sit, the signs look either mighty good or downright terrible. With the rise and flal of O.P.E.C., we have probably seen the end of the national economy. The global economy has flexed its muscles and shown us its might. At this point, whatever assumptions are to be made about the Saudi economy are fraught with pitfalls. What my research has shown is that Saudi Arabia is far better positioned to weather the storm than many other nations, particularly those that have not had the benefit of sitting on an ocean of oil.


[1] James Tanner. "Falling Oil Prices Relieve Consumers But May Set State for Future Shortgage," Wall Street Journal, March 14, 1986, p.11.
[2] Paul T. Walty. Man's Cultural Heritage [New York: J.B. Lippincott Co., 1965], pp.221-222.
[3] Joe Stork. Middle East Oil and the Energy Crisis [London: Monthly Review Press, 1975], p.46.
[4] Ibid., p.47.
[5] Ibid., pp. ix-x. From the Introduction, written by Richard J. Barnet.
[6] In March of 1957, the U.S. Congress passed legislation authorizing up to $200 million for economic and military aid and a commitment of United States troops to any nation in the Middle East that requested U.S. support against "armed aggression" from "any country controlled by international Communism." The major impact of U.S. foreign policy initiatives was, however, felt by the U.S. NATO allies -- Britain and France. See: Blanche Cook. The Declassified Eisenhower [New York: Doubleday & Co., 1981], p.188.
[7] The original members of the new Organization of Petroleum Exporting Countries included Saudi Arabia, Kuwait, Iran, Iraq and Venezuela.
[8] Joe Stork, pp.89-90.
[9] Ibid., p.110.
[10] Ibid., p.207.
[11] Ibid., p.209.
[12] Ibid., p.243.
[13] Kessing's Contemporary Archives [Harlow, England: Longman Group, Ltd., 1985. Vol.XXXI, No.11], p.34013.
[14] Daniel Yergin and Martin Hillenbrand. Global Insecurity [boston: Houghton Mifflin Co., 1982], p.313.
[15] Elise Kleinwaks. "Saudi Arabia: Services and Technology in Demand as Market Matures," Business America [Washington: U.s. Department of Commerce, Vol.9, No.6, March 17, 1985], p.34.
[16] Susan Bluff. "OPEC's $350 Billion Balance sheet," Euromoney, September 1980.
[17] Yergin and Hillenbrand, p.314. The authors refer to the Saudi state as a "low absorber" because of its contorlled spending during the last decade. They also note that under this investment strategy "fixed income securities of longer maturity are used, the liquidity less important than yield. Other non-financial assets, such as property or precious metals, have also been considered as areas of invesment.