Saudi Arabia Economic Issue
Oil Sector and its Challenges
Saudi Arabia’s economy is oil driven where the oil revenues account for 45% of the gross domestic product and 90% of the export earnings (Ashwin, 2012). The nation is a major exporter of oil in the world market and thus in the past have experienced a big influence as a world player in the oil market (Ahmad, 2012). Its influence in the world market is sponsored by several factors such as a long-standing and complex oil industry, a very strong financial position, a wide and high-quality petroleum base in addition to strong geopolitical relationships. Its oil reserves have an approximate 264 million barrels making the economy the world’s largest reserve in terms of oil. The leadership in world oil exportation is also attributed to its spare capacity, where it's able to produce in turbulent times to meet the demand and respond to a crisis appropriately.
Its complex oil industry is enhanced by the national oil company referred to as the Saudi Aramco, which is very secretive. However, the oil company can assess its petroleum resources to be in the forefront compared to its competitors in the OPEC membership. In addition, the oil revenues have given Saudi Arabia the financial muscle in terms of large cash reserves, enabling it to withstand periods of lower prices that tend to affect smaller oil producers (Ergo, 2012). However, this dominance that is influenced by its capacity to produce oil has received challenges of late. This is because; the country is experiencing a maturing resource base whereby, the oil fields are ageing and hence the scarcity of light crude oil. The oil fields have become of poor quality with a lot of technical difficulties. These challenges will be eased by the country’s ability to apply the enhanced oil recovery technology where existing oil fields are revisited. As a result of this aging, the spare capacity is also dwindling, and any other mechanism such as revisiting of the oil fields comes at a high cost. Oil revenues will decline, and some activities of economic growth that are supported by the oil revenues will thus decrease or remain unsatisfactorily met.
In addition to the threat of maturing oil base, there is also pressure for the growing and demanding population. The population is expected to hit 30million by 2016 from 28 million meaning there will be constraints in resources (Ashwin, 2012). This will adversely impact the economic dominance of Saudi Arabia in the world front in diverse ways. Also, the increasing population has led to increased demand in electricity that consumes up to 56% of current generation uses of oil as a fuel source. As such, increasing the supply of electricity will mean more consumption of oil domestically, threatening the supply to the outside world and hence reduced economic dominance (Ergo, 2012).
Moreover, the increase in population also comprise of some discontented groups who feel that they have been marginalized. To quell any threat that may arise as a consequence of marginalization, the government invests in social spending programs leading it to become more expensive. Such initiatives for larger budgets will alter economic programs in terms of expenditures. In addition to address dissent voices, the economy faces tightening finances since it depends on high prices of oil and additional revenues that are earned as a result of turbulent times such as in Libya. The budgets are bound to expand with time due to the various programs undertaken by the government and will require increased oil prices. The ability to reduce its budget is greatly hindered by the amount of spending it has to undertake to address various issues as indicated above yet these expenditures depend on the oil revenues.
Iraq’s improved production will also be a threat to Saudi Arabia economic dominance in the oil sector. Though Iraq is rehabilitating its oils fields, it targets to have a large-scale production by 2020 that will mark a shift in the world supply of oil. Saudi Arabia has been able to influence other OPEC members in leveraging the oil prices. However, If Iraq steps up its production efforts, this will alter the price of oil affecting Saudi Arabia that projects oil prices per barrel to be high at around $100 in the coming years. If the prices drop, then the effect will be adverse on Saudi Arabia since it highly depends on high price oil to finance its expenditures such as social initiatives.
In addition, the domestic subsidies for Saudi industries have driven up demand for high energy intensity activities in the country. And due to the dissent voices, it’s difficult for the country to reduce or do away with these subsidies unless the government wants social unrest. This has increased the financial constraints from many aspects. Whereas the country seeks to meet its growing energy demand through natural gas development, the process has been poorly implemented and remains behind schedule (Ashwin, 2012). Thus, it will need to use more crude oil to meet the increasing demand as it seeks to transform the natural gas sector reducing its economic dominance in the oil industry.
References
Ahmad, M, Khatib, 2012. Oil and infrastructure expenditures in Saudi Arabia. Journal of Business studies Quarterly, 2012, Vol.4, No.2, pp. 72-76
Ashwin, M. 2012. Country report, Saudi Arabia. Economic research Department, Rabobank, Nederland.
Ergo,2012. The Waning Era of Saudi Oil Dominance: current challenges and future threats to Saudi’s Arabia influence over oil markets.
Independent Statistics and Analysis, U.S. Energy and Information and Administration. Country Analysis Brief: Saudi Arabia. September 2014.
