Does the economy rely too much on Saudi Arabian oil?

Jodie Humphries

Saudi Arabia is the world's leading petroleum exporter, with the Saudi Arabian oil exports fueling the Saudi economy. Oil accounts for more than 90 percent of exports, and nearly 75 percent of government revenues, facilitating the creation of a welfare state, which the government has found difficult to fund during the periods of low oil prices.

Officially, Saudi Arabia has around 260 billion barrels of oil reserves, comprising of about 24 percent of the world's proven total petroleum reserves.

History

The combination of relatively high oil prices and exports led to a revenues windfall for Saudi Arabia during 2004 and early 2005. For 2004 as a whole, Saudi Arabia earned around US$116 billion in net oil export revenues, up 35 percent from 2003 revenue levels. Saudi net oil export revenues are forecast to increase in 2005 and 2006, to US$150 billion and US$154 billion, respectively, mainly due to higher oil prices.

The economy

Saudi Arabia, the Arab world's largest economy, is drawing on foreign assets to fund a US$400 billion spending program over five years to boost oil production capacity and complete large development projects.

Yet is the economy to reliant on Saudi Arabian oil, saying that the oil industry is very unstable due to the price of a barrel going up and down.

In a recent report, 'Saudi Arabia Economics: Unlocking the Kingdom's Potential', Morgan Stanley's senior GCC economist, Mohamed Jaber, believes that the country's real output will recover in 2010, catalyzed by higher oil production levels; stronger domestic demand on the back of the government's expansionary fiscal and monetary stance; and a gradual resumption of credit growth. As a result, Morgan Stanley expects Saudi Arabia's total output to grow by 3.6 percent in 2010 and 4.7 percent in 2011.

"The near-term economic outlook for Saudi Arabia is positive. In addition to strong growth in real overall output, we also project headline inflation to continue trending downward as the tightness in the housing market is gradually eased over time. Based on our assumption of higher oil prices over the near term, the country's fiscal and external balances are likely to improve," said Jaber.

Despite the positivity of this report in terms of the economy, it does suggest that there are significant challenges facing the Saudi economy in the near future, including a need to diversify away from a continued dependence on a volatile oil sector and a relatively large public sector for growth.

According to the report, another challenge to be faced is the need to address rising unemployment levels if the country is to achieve its full economic potential. Saudi Arabia possesses a young population, with close to 48 percent of Saudi nationals under the age of 20. Jaber believes that pressures in the labour market, where unemployment currently stands at around 10 percent, may rise further as an estimated 500,000 - 600,000 new graduates join the workforce over the next five years, AMEinfo states.

Present day

As the price of oil turns around, and high state spending returns, the world's top oil-producing region is finding its feet again as the global credit crunch pushedSaudia Arabia into a downturn earlier in the year. Yet it is still a concern that one economy relies so much on oil, the 'black gold' so to speak.