(2) The Saudi Arabian Economy: The Oil Industry, Economic Diversification, and the Money and Banking System

This image represents how the "Saudi Arabian world" changed
 throughout the use of oil for economic use

            Prior to the discovery of oil in Saudi Arabia, the economy was not as wealthy, or a key component of the global economy, as it is today. The traditional ways of living basically compromised the pre-Saudi Arabian economy. Saudi Arabia had therefore depended on agriculture, trade, and the Islamic pilgrimage, or the hajj, to the holy cities of Mecca and Medina.

            After the discovery of oil however, Saudi Arabia owes much of its affluence to its advantageous location that supplies its oil industry. Since oil and natural gas are the key drivers of Saudi economy, their “petroleum sector accounts for approximately 90% of export earnings, 75% of budget revenues, and 45% of GDP.” Its massive oil assets have also brought on the attention of the Western and European nations that were also hungry for the power and wealth that oil could bring to a nation. The flow of oil from Saudi Arabia is not only necessary for its own economic stability and prosperity, but also for the global economy, as “Saudi oil production and investment policies have assumed paramount importance to the industrialized world.”

Due to an increase in oil, more money was circulating
throughout the Saudi Arabian economy 

            After the Persian Gulf War, which had greatly showed the world the importance of oil, Saudi Arabia had increased its standing in the world oil market because it “was the only major oil producing country that had significant excess capacity of crude oil production and thereby a strong influence on international oil supplies and production.” So far, maintaining this powerful position in the oil markets in the number one goal on Saudi Arabia’s list of economic musts. However, there had been some push to also “diversify the economy”, but it ended up being more difficult than originally thought. Since economic growth lies in the hands of government spending, which depends on oil income, it would be rather absurd to neglect its successful oil industry for economic diversity, but small movements of it are being put into effect.

            Even though Saudi Arabia’s oil industry is by far the most prominent and valuable of all of its economic activities, Saudi Arabia has created other ways to grow their economy, possibly as  a way to lessen their dangerous dependence on the unpredictable oil industry.

Economic city of Rabigh

            One of these ways to promote economic growth in Saudi Arabia was by establishing “economic cities”, such as Rabigh, Jizan, Hail, and Medina, which are designed to promote foreign investment and create jobs for the people, which could help the 13% unemployment rate among males in 2004. These “economic cities” are expected “to draw $80 billion in investment and employ more than 1 million Saudis in coming years.”

            Other factors that are deemed essential to accomplish economic growth and success include economic reform and privatization, or the transfer of governmentally owned property to private enterprises. The theme of privatization goes back to the economic philosophies of laissez faire, or a hand’s of approach to the government’s interaction with the economy. Privatization was seen when Saudi Arabia’s government declared its plans of privatizing state controlled assets, which included hotels, telecommunications, and municipal services, along with Saudi Arabia’s airline and mining companies. This liberal, but slow and restricted, step that Saudi Arabia is taking in order for economic reform allows the world to see that the conservative and traditional country is trying to reach a modernized and sophisticated economy, a necessary step to Saudi Arabia’s reign on worldwide power.

            In addition, the government had been pursuing to carry out its “Saudization” plan, in which it required Saudi Arabian to make up 30% of the workers of companies by 2003. This plan was brought to life when Saudi Arabia realized that many foreigner, unlike the Saudis; reluctant to work in manual labor, were more than happy to work for small sums of cash. So the governments’ “Saudization” was purposed to increase the number of Saudi Arabians working in society. However, this plan has received little success due to the low number of Saudi Arabian actually employed, so it did not significantly contribute to the economic growth as was slightly anticipated.

            For their future stability, Saudi Arabia is planning expansion plans for its affluent oil industry. Its plans include pushing "sustainable domestic crude oil production capacity by 1995 to between 20.5 million and 11 million barrels per day (bpd) from 8.4 million bpd in 1992.” In addition, the Saudi Arabian Marketing and Refining Company (Samarec) “planned to upgrade its refineries to meet the new environmental standards in the West and growing domestic demands”, which will attract many to buy oil from Saudi Arabia versus the other countries in the Arabian Peninsula that also supply oil.

Arabian Peninsula

            During the years of the 1970s and the 1980s, the increase in oil prices might have been unpleasant for the consumers, but it “relieved the chronic financial constraints that had plagued the Saudi state since its inception”, adding financial surpluses both in the individual and government sections of the economy.

            However, in 1982, Saudi Arabia’s “government authorities were obliged to change their emphasis from managing surpluses to coping with growing budgetary and balance-of-payments shortfalls.” The decrease in oil prices also reduced the money input from their oil industry. This forced the Saudi Arabian government to “finance large budget and current account deficits of the external balance of payments through foreign asset drawdowns.” Later, Saudi Arabia, being a member of the Organization of the Petroleum Exporting Countries (OPEC), was required to reduce the amount of oil being exported from the country. Now, things looked back for Saudi Arabia, both with the reduced oil prices and reduced oil exports. In 1985, as a way for Saudi Arabia to regain its market share, it increased its oil exports. Unfortunately, this led to the 1986 oil price crash.

            After replacing its Minister of Petroleum and Mineral Resources, the King, Fahd Ibn Abd al Aziz Al Saud, decided to involve himself a little more in Saudi Arabia’s oil affairs, and led to a commercialized way to exporting oil in order to maintain its world market share. An increase in both the world’s demand for oil, and OPEC discipline, the world's oil markets were beginning to help themselves stay afloat after 1986. However, the oil revenues were still low, remaining at 25% to 30%, proving not to be enough to cover government spending, which caused budget deficits. Saudi Arabia’s dependency on oil and natural gas to fuel its economy may cause trouble for it in the future, and it may provide initative to find different ways to stimulate the economy.

            Ever since the year 1993, Saudi Arabia was negotiating for a membership in the World Trade Organization (WTO) and its wishes were fulfilled in the year of 2005 when Saudi Arabia joined the WTO. This membership though, asked Saudi Arabia to change its trade policies in coordination with the rules of WTO. These changes brought “commercial tribunals into conformity with international stands, eliminating export subsidies on agricultural products, and revising the fees charged for authentication of trade documents.” Overall, the reforms that Saudi Arabia made to raise its chances of obtaining membership with the WTO have had a wholesome effect on its “economic activity, foreign investments, and the kingdom’s competiveness.” Saudi Arabia had ranked 16^th in its global competiveness in 2008 and 13^th in 2009, putting it ahead of all Middle Eastern countries and a few European ones too. If Saudi Arabia keeps up its global competiveness and takes even more action to reform its economy, the image of seeing Saudi Arabia as a world power may not be that far away.

            The development of a Saudi Arabian currency and banking system was not done until the mid twentieth century, due to the prohibition of baking by the Koran in the kingdom.

            By the 1950s, as Saudi Arabia’s economy was starting to take shape in the global economy, along with its government spending, foreign oil company spending, and the development of baking institutions led to the need for more control in Saudi Arabia’s economic policies. So, with the help from the United States, the Saudi Arabian Monetary Agency (SAMA) was created in 1952, its purpose to “serve as the central bank within the confines of Islamic law.”

            The base of Saudi Arabia’s financial system was SAMA, which determined Saudi Arabia’s monetary policies. SAMA was also purposed to stabilize the value of the country’s currency, the Saudi Riyal, paying close attention to “exchange transactions and capital flows.” The central bank also determined the “interest rates for commercial banks”, the “managements of foreign assets, and the introduction of short and medium term government paper for budgetary and balance of payments purposes and to smooth fluctuations in domestic liquidity.”

            However, there were many things that SAMA was prohibited from doing because it still follows Islamic laws and principles. Therefore, SAMA is a non-profit institution that does pay or receive interest. At one point, SAMA was also prohibited from “extending credit to the government”, but this was policy was later abandoned in 1955 because the government needed the funds that SAMA provided when it was in a debt crisis in the late 1950s.

            As Saudi Arabia’s leaders hoped to see more economic growth for the nation, many thought it would be best to “strengthen SAMA’s role in regulating the banking system.” This include the “applications for bank licenses [to be] submitted to SAMA”, who, in turn reviewed the applications prior to sending it off to the Ministry of Finance and National Economy. Even though Saudi Arabia was trying to reach new economical and political heights through SAMA, its strict adherence to Islam still held SAMA back from modernizing itself to achieve more success as a result of its monetary policies.

            The growing number of commercial banks in Saudi Arabia caused their preferences for “short term lending to established firms and individuals” to quickly prompt the government to create institutions that had the power to provide financial services in order to increase the flow of money into different aspects of the Saudi Arabian economy.

            In 1963, the Saudi Arabian Agricultural Bank was created with the purpose of developed finances and subsidies, or assisted pay, to the agricultural sector of the economy. Later, in 1971, the Saudi Credit Bank was created “to provide interest free loans to low income Saudis who could not obtain credit from commercial banks.” The Public Investment Fund was established in 1973 to aid the financing of business enterprises, along with many others designed to increase the flow of income to specific sectors of Saudi Arabia’s economy.

Oil Pipes within the Saudi Arabian territory

            As Saudi Arabia gains more wealth and influence in the global economy through its further development of its already vital oil industry, along with the value of its oil reserves supplying Saudi Arabia with great financial security in the future, mainly economic success is expected for Saudi Arabia in the coming years. However, Saudi Arabia’s economic society is not perfect, and still yearns for many other reforms that will improve the nation.

This image shows the amount of oil within Saudi Arabia
 compared to other countries

First off, Saudi Arabia needs to realize that constant government spending is not going to solve the high unemployment rates among the high populations of Saudi Arabia’s youth. And more importantly, they need to provide those youth with a better education that includes the teaching of skills that can help them to success when they are off competing in the complex global economy. Going back to Saudi Arabia’s oil industry, they also need to strive more towards reforms that not only develop their oil industry, but also their reforms to find other economic sources to rake in more sums of cash into the nation. However, Saudi Arabia’s dependence on oil may prove to be deadly for the country through its limited natural resources, and the day that Saudi Arabia runs out of its precious oil, it may also run out of all of its money and power that it collected through all the years, leading to the collapse of the nation.  

King Abdullah Economic City - Saudi Arabia and Diversification - 27th IAC meeting