The “Saudi” Oil – Diversification – Where is the Money?

Written by: Mystique  

Energy is a necessary and inevitable input to economic activity throughout the world. Oil plays a key role in this regard. In addition, today’s crude oil is one of the most highly valued commodities in international trade. The sharp increase in oil price to 67$/barrel (13 June 2006), as well as OPEC decision to raise oil production level, illustrates the Kingdom’s petroleum sector future, considering that Saudi Arabia has a comparative advantage in the low production cost of oil compared to other high cost energy producers.

Other economies like the US are diversified while Saudi Arabia’s is not. All of Saudi Arabia’s economic reform efforts and development plans to date centre around the fact that its economy is essentially oil driven. Recently the Saudi Government is trying to diversify, in order to develop

The performance of the Saudi economy has been heavily influenced by two major factors: first, the level and growth of oil revenue and second, by government budgetary policies.

Oil and the GDP per capita (Standard of living):

The oil plays a very critical role in the Saudi economy and it is reflected in so many factors, the GDP, the growth of the economy, and wealth of people.
I have collected data to show the correlation between oil prices and the per capita GDP; the results were that there was a strong positive relationship between the two variables.
Pearson correlation of GDP per Capita and Oil Prices = 0.869

The GDP per capita has reached its highest level at 1980 and 1981 at prices 90.39 and 78.27 respectively (according to historical oil prices), which was at the oil boom cycle. after that from 1983 till the late 90’s prices were decreasing and fluctuating, which of course affected the GDP per capita, and from 2000 till 2004 prices are increasing again, leading to an increase in the per capita GDP.
There is a strong positive correlation between per capita income and oil prices ( oil sector), when oil prices were low, per capita GDP fell dramatically.

The Saudi dependence on oil revenue is of great concern to many economists. Saudi Arabia’s oil production is expected to peak in the early 21st century and decline thereafter as the reserves are depleted. In addition, the population of Saudi Arabia is increasing rapidly which means that the revenues from oil production are divided among an increasing population.

There are many tangible signs of troubles that were listed by the observer Kim Murphy
“In Riyadh the capital, Beggars hawk bottles of water at intersections. Penniless women huddle in strips of shade outside their crumbling mud-brick houses, begging for money. Many families in the capital are so poor they cannot afford electricity. Raw sewage runs through parts of Jeddah, and the country’s national debt is already over 100 percent of GDP. Even with an improved oil picture, the Saudi government may simply not be able to finance the diversification of the economy without extensive private sector participation”

The government expenditures must be refocused on activities that directly support direct private sector; according to a study there is a tremendous waste in government expenditures especially in the ministries, a recent study found that 69 percent of civil servants in the Kingdom stay away from work without a good reason while 54 percent come to work late.

Finally, I would like to say that increasing the existence of Financial Institutions as Investment banks and institutions is very important to finance new projects, the infrastructure, to enable public to access new equity funds and more, in addition to developing the capital market is crucial for the Saudi Economy’s prosperity.

Sources:
Mohammed A Ramady, The Saudi Arabian Economy
http://www.ccc.nps.navy.mil/si/2004/jan/looneyJan04.asp
http://www.traveldocs.com/sa/economy.htm
http://biz.yahoo.com/ifc/sa.html
www.sama.gov.sa
www.planning.gov.sa
www.worldbank.org
A Study on Money, Finance and Economic growth the case of Saudi Arabia, Abdullah Albatel

Copy Right
Prepared by: Mystique

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21 comments so far

  1. -OT- on

    Brava Mystique!!! Nice little study there… Anyway, something not mentioned here which I would like to know is how much of the estimated budgets put forth for sectors and projects each year are actually used in what they’re planned for?! I have no idea really, but seeing the mind boggling figures each year, and seeing what actually gets done, I would say definitely less than 50% of the budget is directly injected towards its cause… I might be close to the accurate fiugre but then again I may be way off the pace here…

  2. Anonymous on

    Thank you Mystique for this study. I think that the kingdom has already started, too late is better then never, the kingdom will have a better economy in 2010, I feel very strongly about that as long as the new king is in power. I wish that the Saudis would show him more support. I can say truly that I know how he thinks; I had the opportunity to hear him speak in privet. This is a great guy over here!! But he has so many enemies.

    ahmadaattar@gmail.com

  3. Fouad Alfarhan on

    Thanks Mystique, short but Informative post. As soon as Iraq becomes stable, I don’t think we will be having the “lowest cost” privilege any longer.

    Ahmad,
    You’ve got no other ways to express your support for him than the typical Saudi way which is publishing paid poetries in local newspapers!
    I totally agree that he has so many enemies. I think the maximum reform policies this country will face are in the days of Abdullah. We will not even know what does the word “reform” means after him!

  4. ahmed on

    Very interesting read.

    Mystique, check on this:
    Ramady’s book, chapter 3, page 43. “from oil wealth to oil poverty”.

  5. Anonymous on

    Foud Alfaran
    Yes we do have more then poetries!!! How about supporting
    Our country now as Arab newspapers are accusing us of supporting Israel in Lebanon!!
    How about supporting his ministry of labor in his fight!?
    How about supporting clean handed ppl, like Adil faqee in Jeddah, who the king shows him self!!

    We can do all of that thru Blogging and thru talking to the ppl that we meet, everyone in his own why

  6. tara on

    Where is the money? You really don’t wanna know… not only is the oil income divided unto a globally incompetent growing population but also a growing ” family”.
    plus this whole diversification and private sector involvement… don’t think so. UNTIL… people get hired for “what” they know not “who” they know and fired for what they “didn’t” do not what they “did!” When the whole saudization doesn’t pressure the private sectors into hiring ingrate losers who get the job just for being saudi and not for anything else. Sighhh…

  7. Mystique on

    Well the kingdom has started to some how (slightly) improve, note that;2006 Q1 economic outlook was quite promising, but as OT said we’d rather see the budgeted and the actual figures, which will speak more.. and please note that, a lot of these figures do not reflect reality..
    We’ve all seen how the population census takes place in Saudi Arabia, which of course gives us a clear idea of the accuracy of the figures..
    There is a lot of unproductivity, deficiency, and corruption..
    As for the economic boom we are living now, it is just part of any economic cycle, soon we will be sliding down again..
    Mind me if I ask, how promising is the King’s Economic City?
    Thank you all for your comments..

  8. -OT- on

    The Economic figures are one thing but the standard of living is another thing… Although hypothetically they’re supposed to be interrelated, sadly in this country, due to corruption, trade deficits, population growth, etc… one does not necessarily see improvement in the standard of living moving along the economic growth curve… In a way, the standard of living now and back when oil prices were in the 40s is almost identical… Actually, taking a more realistic view, unemployment and poverty rates are slightly growing… Unemployment stands at around 20%, and that’s not taking into account the female population! If u include both genders, the rate will be shocking to say the least… Despite everyone’s joy regarding the oil prices continually growing, and projects such as King Abdullah and Prince Majed? Economic cities, the future is not that bright for the country if the situation does not change… Another issue in this country is related to inflation… Although publicly, the Govt claims that there is no inflation in Saudi, an actual comparison shows that there is slight inflation of around 3% on average every year… Now taking that into account, when employees get 3% promotions at year end, they are realistically not getting much of a pay raise… The country is very raw in its Economic knowledge! We need more Economists who can provide better awareness and more realistic forecasts as opposed to the typical “We’re heading towards a great future” that u hear every day…

  9. Mystique on

    OT,
    As for inflation, no inflation is not a favorable economic trend, there must be a very slight inflation in the economy.. as you know inflation influences comsumer’s behavior as well as the stock market..
    Now regarding Saudi Arabia, There hasn’t been any alarming increase in inflation rate, since the basic goods consumer’s need are still in the same price range i.e. bread,wheat,oil,etc.. ( the necessary products)
    And this is what they call in economics a “Market Basket”. Which differs from a country to another and from a year to year.
    the Consumer Price Index or CPI is an important element in measuring inflation. in the U.S. The Labor Department has surveyed the purchasing patterns of consumers to determine a group of about 400 items that buyers typically use. This shopping list of 400 items makes up a “market basket.”
    I totally agree with every word you’ve said OT, I just cross my fingers for our resources – when will they be depleted-

    Cheers.

  10. -OT- on

    If by sources ur referring to crude oil, then u shouldn’t be worried… The availablity for the next 70-100 years is just the pure crude oil available… After that, there’s so much more oil (Estimated to cover demand for the next 200 years there after), but which will need different extracting technology to purify it from the elements its mixed with… Basically think if it as if u have a bucket which has sand and stones in the bottom half, and if filled up with water to the very top.. The top half of water is easy to pull out. On the other hand, once the top half is used up, u’d still have the bottom half which is mixed into the stones and sand.. Although much harder to extract, u would still have the specified supply to ultimately use…

  11. ahmad78 on

    I’m optimistic. If things remain the same as they are now, our economy would improve more and more.

  12. -OT- on

    http://www.cnn.com/2006/US/07/12/bandar.home.ap/index.html
    and u ask where the money is going to…

  13. sunrunner on

    Very interesting article Mystique.

    Transparency is essential for any kind of healthy human development. Because without it, there can be no accountablity — to ourselves and others.

    I am adding a link to my blog!

  14. fida on

    salaam

    …..just to let you know the price of petrol in south africa is going UP^ againnnnnnnnnnnnnnnnnnnn,……………..third time in three weeks!!!!!!!!!!!!!…..SHOW ME THE MONEY!@#$%^&*

    fida . . .

  15. Mystique on

    ahmad,
    Honestly i am not that optimistic, but we’ll see..

    OT,
    I checked the link, surprising isn’t it, and we ask where!?!

    SunRunner,
    Thank you & Welcome to our blog, and I agree that transparency is important, and that is what is lacking here, trancparency in figures, in transactions, in the stock market, in everything around us..

  16. Entertained on

    Hey Girl,

    In you correlation between GDP/capita and oil prices, did you take into account the correlation between GDP and oil due to general inflation?

    I would suspect that you will still find an interesting relationship, but 0.89 seems very high.

    Best regards, and keep it up!

  17. quranbible on

    The Oil Revenues are going back into US economy as investments instead of getting invested into Saudi economy. This is what I have the general understanding of Oil Revenues. I may be wrong because did not have enough information about Saudi Arabia current situation.

  18. Sally D on

    The leap in energy prices in general is disgusting, the amount of profit these companies are earning should be capped when supplying water and energy.

  19. athenee on

    Hi , can you get me some information about KSA attractions(some cites like jeddah,medina and mecca)

    thanks alot and bye

  20. wii on

    Oil prices need to be sorted, we already pay far too much there must be alternatives.

  21. ameCink on

    I should notify you about this.


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