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Oil In Saudi Arabia Essay

The present kingdom of Saudi Arabia came into being in 1932, after Abdul Aziz ibn Saud reclaimed a traditional homeland after defeating rival tribes. From its foundation till 1938, the Saudis were nomadic tribes living in harsh and inhospitable desert. The new kingdom was one of the poorest countries, with its main income financed by limited agricultural activities and some pilgrimage revenues. This however changed drastically in 1938 with the discovery of an oil reserve in the Al-Ahsa region (Simmons, 2011). Following which Saudi Arabia started to assume a major role in the economic activities of the world. The full scale oil pumping started in the 1940’s in collaboration with the United Stated through the company Aramco (Arabian American Oil Company). The virtually obscure and non-existent country with their nomadic lifestyles was thus done away with and new kingdom suddenly sprang up building new cities, pursuing modern lifestyles (down to these days) and playing a major role in world economic activities.

An economy based on the country’s oil reserves

It is a known fact at the moment that Saudi Arabia possess the largest oil reserves and it also remains an undeniable truth that the country’s sole commodity for livelihood is their oil reserves. Around two-thirds of the world oil reserves are located in the Middle East, among which 25.7% of the world reserves and 40% of the Middle East’s reserves are located in Saudi Arabia alone (Greiner & Semmler, 2008; Hussen, 2012). However, apart from the fact that Saudi Arabia is one of the largest producers of oil, she is also the world’s sixth largest consumer of oil (Li, 2014). Across the world, it is reported that crude oil consumption went from 79 million barrels per day in 2002 to 84.5 million barrels per day in 2009 (Ramady, 2010). Following such demand and consumption,  Saudi Arabia at present pumps 11.5 million barrels per day (Salacanin, 2015), which is much more than what she did more than a decade ago (Waldman, 2015). At this rate of pumping and consumption, the BP Statistical Review of World Energy in 2014 reports (remaining distributed reserves in Chart I) that the remaining oil reserves may run out in 53.3 years, which means that oil reserves will run out by 2057 and that the present Saudis oil Tycoons may be the last generation to possess the oil reserves. Such situation has made people to continually question as to how much oil Saudi Arabia actually has. Aramco gave an official figure of 716 billion barrels of total reserves left (Vidal, 2011), which looks woefully meager as compared to the amount pumped everyday in the country. Unfortunately for Saudi Arabia, she also remains as the only country unable to increase its oil production among its fellow OPEC countries (Algeria, Angola, Ecaudor, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the UAE and Venezuela (Rhodes, 2010). The severity of continuing oil depletion in Saudi Arabia can be attest from World Energy Outlook’s conclusion that America will surpass this country as the biggest oil producer, owing to their larger oil reserves, by 2020 (Thompson, 2012).

Source: (British Petroleum, 2014, p. 7)

Economy of Saudi Arabia after its oil reserves are exhausted

There is no doubt an apprehension as to what possibly can happen when the oil reserves get exhausted. When the ‘black gold’ runs out, Saudi Arabia’s economy is expected to go downhill. In order to avoid such an economic disaster, the country has been making an effort to become a leading world figure in innovation and technology.  Such goals are expected to be met with knowledge-based economy by 2025 (Kalan, 2013).  The main question is, how much time Saudi Arabia has in order to prepare for the exhaustion of oil to happen and what solutions are they looking for in order to maintain its economic prowess and living standard? Outside the oil reserves, Saudi Arabia’s monarchy and its administration in effect has been making some diversification efforts by focusing on setting up universities as key element in maintaining its economic standing when oil resources runs out. Saudi Arabia engages in encouraging students to become more enthusiastic towards taking up innovative projects and in setting up new enterprises. Within the country, Universities and entrepreneurship centres is also in every corner of the country – like the King Abdulla City for Atomic and Renewable Energy (Riyadh), and the Saudi Aramco Entrepreneurship Center (Dhahran) (Kalan, 2013). Graduate and PhD students are encouraged to find renewable resources and ways for treating water- cheaper ways for desalination process (Kalan, 2013).

Many Saudi students are also pursuing education in world’s leading universities, which is expected to bring in innovative human resources. In practice, the government is funding Badir, a new business incubator, in order to promote entrepreneurship and to bring in economic growth eventually (Kalan, 2013). Badir was launched in 2008 to start business incubators in five sectors including the Information and Communication Technology. At present, it supports 70 companies, including popular companies like Enwani and Yatooq (Kalan, 2013). The former is a company that links user’ addresses with their mobile phones, while the latter deals with the production of automatic Arabic coffee machine. Entrepreneurs are also building innovative and successful gaming start-ups like Na3m Games (Kalan, 2013). Other trending internet activities like Twitter, Facebook, YouTube, Instagram, Whatsapp, etc. has also been trending popularly among the Saudis, indicating that the country does not lack in innovative inclination. The country has also started to open up towards women, expecting to generate employment for women in the near future.

Saudi is also exploring other natural reserves

Saudi has also started to mine other mineral deposits, like the kingdom’s large deposits of phosphates to be utilized as fertilizer. Saudi Arabia has also been mining bauxite to be smelt and rolled into aluminum for some years now (Hussen, 2012; Waldman, 2015). With the tension of oil reserve in brink of exhaustion, Saudi Arabia has also been looking forward towards investments in Europe, Asia and the United States. The country aims for investing in equities, bonds, foreign currencies and most importantly real estate and automobile parts. In 2009 alone, the country ventured for $5.3 billion investment in auto parts and technologies in these continents (Marbazan, 2009). The Saudi Arabian Minister of Petroleum and Mineral Resources, Ali bin Ibrahim Al-Naimi  also asserts that Saudi itself in the near future aims to manufacture finished products such as ‘car parts’ in order maintain its economic standing (Waldman, 2015). As part of its investment scheme in the brink of oil reserve exhaustion, Saudi Arabia has also been a staunch supporter of Foreign Direct Investment (FDI) and the country remains as the third largest recipient of FDI in West Asia. FDI is regarded as the most effective way to secure future and provide jobs for the younger generation when oil reserves get depleted. At present, FDI’s main focus is in oil, banking, tourism, real estate, etc. Real Estate Investment Trusts (REITs) is expected to rise rapidly within the country, since this sector continues to expand owing to foreign investments (Oxford Business Group, 2009). Saudi however have rules that applies in real estate that only Saudi nationals are allowed to own properties in Mecca and Medina areas and lease only to Muslims in these regions.

References

  • British Petroleum. (2014). BP Statistical Review of World Energy.
  • Greiner, A., & Semmler, W. (2008). The Global Environment, Natural Resources, and Economic Growth. New York: Oxford University Press, USA.
  • Hussen, A. (2012). Principles of Environmental Economics and Sustainability: An Integrated Economic and Ecological Approach. Abingdon: Routledge.
  • Kalan, J. (2013, October). Saudi Arabia: Can start-ups replace oil riches? Http://www.bbc.com/. Saudi Arabia.
  • Li, M. (2014). Peak Oil, Climate Change, and the Limits to China’s Economic Growth. New Delhi: Routledge.
  • Marbazan, D. (2009, May). Saudi $5 billion investment firm eyes Europe, Asia, U.S. Reuters. Muscat.
  • Oxford Business Group. (2009). The Report: Saudi Arabia 2009. London: Oxford Business Group.
  • Ramady, M. A. (2010). The Saudi Arabian Economy: Policies, Achievements, and Challenges. New York: Springer Science & Business Media.
  • Rhodes, R. (2010). The Coming Oil Storm. Oregon: Harvest House Publishers.
  • Salacanin, S. (2015, February). Oil and Gas reserves: how long will they last? Energy, Gas, Magazine Content.
  • Simmons, M. R. (2011). Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. New Jersey: John Wiley & Sons.
  • Thompson, L. (2012, March). What Happens When America No Longer Needs Middle East Oil? -. Forbes.
  • Vidal, J. (2011, February). How much oil does Saudi Arabia actually have? The Guardian.
  • Waldman, P. (2015, April). Saudi Arabia’s Plan to Extend the Age of Oil. Bloomberg Business.

Pamkhuila Shaiza

Research analyst at Project Guru

Shaiza worked as a Lecturer inKannur University, Kerala before, but after deeming it as boring and monotonous work, she turned herself to writing. She is an enthusiastic writer on 'entomophagy'.

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The Economic Growth of Saudi Arabia Essay:

Saudi Arabia is known as the main oil producer and exporter in the world. Due to large reserves of oil, Saudi Arabia made a great progress and increased its economic strength.

To understand better the importance of oil for this country it is enough to look at the list of its export commodities. It includes only petroleum and petroleum products, which bring more than one hundred billion of dollars to the state treasury every year and make up about 75 % of the country revenues.

Oil industry arose in Saudi Arabia before World War I when petroleum deposits were discovered. The discovery of oil was a great event in the history of Saudi Arabia that changed radically its economy. Saudi Arabia turned from a poor area with desert princedoms into a developed state with high economic indicators. However, oil industry began to develop intensively only after World War II, especially in 1970s. It was Arab-Israeli war of 1973 that expedited the development of oil industry and increased Saudi Arabia revenues.

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Since that time Saudi Arabia began to progress at a rapid pace and became one of the countries with the fastest growing economy in the whole world. Though this country experienced the slump in oil demand in 1980s as a result of high petroleum prices, today the economy of Saudi Arabia is still growing and this country occupies a leading position in Organization of Petroleum Exporting Countries (OPEC). Possessing one quarter of all oil reserves in the world, Saudi Arab became the country with one of the highest per capita income, which is $15,500.

It is necessary to mention that the country has rather small territory and population. The resources of oil had not been so important without the influence of globalization that touched all corners of the world and developed due to different factors.

At first sight, the Middle East may not seem an attractive region for investment if to consider its territory and population. However, regarding its resources of oil and gas that are 62 % and 40 % of the world’s reserve respectively, it becomes clear why these countries take an active part in globalization.

Today according to its nominal gross domestic product per capita Saudi Arabia occupies the forty-first place in the world and according to its Human Development Index it is on the sixty-first place in the world.

The government of Saudi Arabia understands the importance and necessity of the development of infrastructure and of the country in the whole and tends to make investments into the development of cities in Saudi Arabia. The project of launching six Economic cities is going to be finished by the year 2020. This event will contribute much to the development of the economy of Saudi Arabia as it will diversify it and will help to increase the standard of living in the kingdom. Besides these cities are expected to add $ 150 billion to GDP. This project will also help to strengthen the private sector. “Skeptics doubt that the Kingdom is writing a new chapter in its economic history, but many analysts contend that the situation today is different from the oil boom a generation ago. They argue the pieces are in place to create sustainable private sector growth” (Ramady 156).

Undoubtedly this project can be already named very successful as nowadays due to it Saudi Arabia enters the list of ten the most attractive places for foreign investment.

Saudi Arabia is the country that is considered to be the best place in the Arab world to do business. Therefore, no wonder that this country is attractive for foreign investors.

However, to increase investors’ interest the country has much to do. The first thing is to pay much attention to the educational system in the country in order to have well-qualified people, in other words to have good human capital. Today Saudi Arabia risks to have the unemployment increased in the context of rapid developing of the economy. Being not quite prepared, young population rapidly enters the labor market. It may entail low labor productivity.

Economy of Saudi Arabia is based not only on the foreign direct investment but also on the export and import markets. If to examine its export market, one can see that among its export partners the first place is occupied by the USA where 19.3% of all Saudi Arabia’s export goes, Japan is at the second place (16.4%), South Korea is the third – 8.7%, the People’s Republic of China is the forth – 5.8%, and on the fifth place is Singapore (4.5%).

“Saudi Arabia’s economy is the proverbial “sleeping giant”. Expanding rapidly Saudi Arabia’s oil dominated economy is the largest in the Arab world. Utilizing oil revenues to finance infrastructure development and modernization programs, Saudi Arabia aims to diversify its economic base and bring an increase number of nationals into the work force” (Abbondante 25).

In the context of such rapid development Saudi Arabia can be considered as a rapidly developing country with a rather stable political situation.

To make a conclusion we can say that Saudi Arabia is a country that can has a bright example of a fast-growing economy. Today the growth continues and helps the country to enter different world organizations and play an active role in the world economy. It exports oil to the largest and the most developed countries of the world, which helps it to thrive. Undoubtedly these are oil reserves that made Saudi Arabia prosperous. However, the process of globalization, which is in full swing and has involved all the countries contributed much to the development of Saudi Arabia exports and permitted this country to provide oil for the whole world.

Analyzing its economic indexes we see that the development of the country continues and governmental projects contribute much both to the development of the country itself and to the increase of foreign investment.

Actually being based only on the oil reserves and petroleum products this country managed to achieve great results. However, it still has many challenges. The necessity to have better-qualified people, to develop technologies and to increase labor productivity is obvious. Fortunately, the government realizes all these problems and tries to find ways out.

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