Table of Contents
- Introduction and Research Questions
- Importance of the research
- Research objectives
- Research Methodology
- Literature Review: Chapter 1-Criticism and Historical Background of the problem
: Chapter 2- Analysis and Discussions
: Chapter 3- Conclusion and Recommendations
Saudi Arabia has a very strong economy. The core of Saudi Arabia’s economy is the crude oil industry. Saudi Arabia specializes in activities that concern crude oil. In past Saudi Arabia had a lot of influence on matters pertaining to oil in the whole world. However, overdependence on oil has become a menace for the Saudi Arabian government. The scope of Saudi’s economic activities is narrow. Non-oil industries are dormant in Saudi Arabia. The oil industry dominates the economy of the Kingdom of Saudi Arabia. This study will analyze the economic bottlenecks in the country. In addition, the research shall examine the implications of this problem on international trade and on growth and development in Saudi Arabia.
The Saudi Arabian economy has its center on oil production. This is evident in the country’s economic activities. When the agricultural industry became unsuccessful, over-exploration of oil began (Falola & Genova, 2005). Saudi Arabia supplies almost a quarter of the planet’s oil. The economy of Saudi Arabia is eminent due to the exploration of oil. The oil industry enables Saudi Arabia to be prosperous among many nations (Forsythe, 2009). Saudi exports incorporate a high percentage of petroleum products. This is a vital endowment because it pushes the gross domestic product higher and covers the other underperforming sectors. Five years into the new millennium, Saudi Arabia had to join international trade organizations. They were to enhance their telecommunication, subsistence, and agricultural industries (Heinberg, 2005).
The countries that have an overreliance on oil do not adequately invest in education and other economic activities. In addition, these countries deny their citizens a right to a diverse form of education (Para, 2004). In the light of the evident reasons of the rich thriving resource, this study will focus on the Saudi Arabian oil industry. More intently, it will look at the growth and development implications. This brings out the aspect of an over-dependence on the oil supply to serve the country’s economy (Simmons, 2013). The study will seek to answer the following research questions:
- i) Does oil exploration assist in the diversification of the economy?
- ii) What will happen if the demand of the oil supply internationally declines?
iii) Are there employment opportunities to supplement the oil industry?
- iv) How will the fluctuation of the oil prices affect the Saudi Arabian Economy?
- v) Is oil exploration a reliable enterprise to a foreign investor?
- vi) What will be the effect on the Saudi economy if the oil exploration fails?
vii) How does the competitive environment in relation to other oil producers affect the economy of Saudi Arabia?
viii) How does the political aspect affect the Saudi Arabian Economy?
- ix) How do external interferences, such as sanctions affect the oil exploration industry in Saudi Arabia?
- x) How does the exchange rate of Saudi Riyal affect the economy?
The Importance of the Research
The importance of this study is to understand the implications of the Saudi trade agreements. This understanding pinpoints areas of development in Saudi oil exploration. The exploration will help Saudi Arabia’s oil industry to reduce its over-dependence on oil (Zuhur, 2011). This research will be using a cross-sectional survey design with a view of improving oil exploration. Oil exploration is vital to improve the other sectors of Saudi Arabia’s economy. Apart from improving the other sectors, oil exploration will streamline the trade agreements.
The objectives of this study are to:
- i) Determine the effectiveness of oil exploration to Saudi Arabia’s economy and its’ citizens.
- ii) Establish the effect of the trade agreements, which have an impact on oil exploration.
iii) Find out the effect of the industry on the development and growth of Saudi Arabia as a world exporter of oil.
- iv) To investigate the success of the oil exploration industry towards the development of Saudi Arabia’s economy.
- v) Establish the extent of politics in the Saudi oil exploration.
- vi) Establish the features of the competitive environment in the export of oil and how it affects Saudi Arabia’s economy.
vii) To investigate the fluctuation of oil prices.
viii) Determine the impact in case of failure of the oil exploration industry.
- ix) Establish the existence of employment opportunities that supplement oil exploration.
- x) To investigate the importance of the Riyal in the Saudi economy.
This section presents a detailed description of the adopted research design. It will describe in detail what is to be the result and how this is going to be an end in itself. This study will analyze the economic problem by use of research design. It will endeavor to investigate the over-dependence on oil in the Saudi Arabian economy. Such an issue will use tables, logical interpretations, and historical methods (Simmons, 2013). The design will enable the researcher to determine that oil is a variable that does not need to be a stand-alone. This will be in regards to the Saudi Arabian economy.
The economic stability of any country is of utmost importance. It is necessary for every economy to diversify its’ activities (Zuhur, 2011). Although Saudi Arabia is thriving economically, it faces a big risk. If the oil industry collapses the country’s economy will crumble in a drastic manner (Para, 2004). Diversifying economic activities in Saudi Arabia is a major challenge for the government. The agricultural sector in the country became inactive, and the country became over-dependent on a single activity (Heinberg, 2005). In addition, Saudi Arabia’s economy is prone to fluctuation in oil prices. The prices of oil keep on changing. This is a big challenge for the Saudi government, and the country’s economic security is not an assurance.
As shown in table one Saudi Arabia is very rich in oil reserves. It has numerous onshore and offshore oil fields. The country only focuses on oil exploration this is evident in table one. Moreover, the country’s economic activities are converging to crude oil resources (Forsythe, 2009). It is necessary to diversify the country’s economy. A country that prospers has to practice various economic activities. In addition, Saudi Arabia’s economy is at a big risk (Falola & Genova, 2005). As shown in table one the oil reserves are adequate but the demand might be unpredictable. In cases whereby the demand shifts, the country will be in trouble. The large oil reserves will not be of much help to Saudi’s economy. The government has to strategize on diversification procedures (Forsythe, 2009). If this is not evident, the effect might be detrimental to the economy.
As shown in table two, the gross domestic product is heavily dependent on oil. All other activities contribute about 50% of Saudi’s GDP. This shows that the oil industry contributes to the other 50% of the GDP. This is very risky, and a single industry cannot be the determinant in almost half of the economic activities (Falola & Genova, 2005). In addition, this poses a major problem to Saudi Arabia as a nation. As shown in table two, the bulk of Saudi’s revenue originates from the oil industry. In the year 2007, the revenues from oil were 87.4% of the total government revenues. This attests to the fact that overdependence on oil is a critical problem (Heinberg, 2005). From the year 2002, up to 2006, the heavy dependence on oil is evident. The oil industry holds the Saudi economy. The figures of revenue ascertain that non-oil revenue figures are meager. If Saudi Arabia were to depend on non-oil industries, it would be a poor nation (Para, 2004). The revenues confirm that the problem statement is legit and that this is a major challenge in Saudi Arabia.
Table 2 shows the figures for government expenditure. If the source of revenue were solely the non-oil industries, there would be budget deficits in each financial year (Simmons, 2013). For example in the year 2007, the budget deficit would be about 82.83%. This would be the case if the oil industry were extinct. The non-oil industries could not manage to cater for even 25% of the national budget. This shows that there is a big problem in Saudi’s economic stability. Although the country is still thriving economically, it has to think about the future (Zuhur, 2011).
Still, in table 2, the share of GDP massively depends on the oil industry. The figures show that Saudi Arabia has surplus funds. The budget is complete and surplus funds are still evident. This originates from the thriving oil industry (Simmons, 2013). Moreover, it shows that oil is Saudi Arabia’s backbone. Analyzing the dependence ratios, non-oil activities still perform poorly. There are huge deficits if one examines the non-oil industries in isolation (Zuhur, 2011). Saudi Arabia’s economy lacks diversification in all dimensions. The Saudi government has been trying to address this problem. In addition, the Saudi government has been unsuccessful in curbing the problem of overdependence on oil.
As shown in table 3, Saudi Arabia’s energy consumption is very high. Saudi Arabia comes in second after Brazil. Slovakia, South Africa, and Poland closely follow Saudi Arabia. This shows that the main form of energy in the country is crude oil (Para, 2004). This is very dangerous, and the Saudi government has to address this problem. Energy has a direct impact on the economy of a country. It is necessary for a country to establish reliable sources of energy (Heinberg, 2005). The sources of energy include wind, solar radiation, hydro sources, and nuclear. Presently these sources of energy are non-existent in Saudi Arabia. There have been plans to launch the use of nuclear energy. However, these plans have not yet been successful. The main source of energy in the country is still crude oil. This acts as a menace for the Saudi government.
Table 3 shows that Saudi Arabia has the highest demand for petroleum products. This shows that if the oil industry collapses the people will really suffer (Forsythe, 2009). The Saudi citizens are also dependent on oil. This is risky because the failure of the oil industry would imply the failure of Saudi Arabia. The features of energy are of utmost importance in any region. A stable energy supply ascertains the economic stability in a country (Fayola & Genova, 2005). In addition, The GDP and the share of oil in total primary energy demand are also high. Saudi Arabia is very dependent on the exploration of oil. No sector in the country can survive without the oil reserves. This is the trend in the Middle East region (Forsythe, 2009). In Saudi Arabia, the situation is worse because the country has very huge oil deposits. If there were a hiccup in the oil industry, the effect in Saudi Arabia would be the worst. It is necessary for the Saudi government to address the problem of excessive oil exploration.
This section will analyze the data that pertains to the research problem. The over-dependence on oil is a major problem in Saudi Arabia. The aim of this section is to examine the objectives of the study and study these objectives in detail. In addition, the historical background, analysis of data, and criticism of results shall be present in this section. This section shall also deal with the recommendations and the conclusions that pertain to the study.
Criticism and Historical Background of The Problem.
This section shall examine the features of the problem. In addition, this section will deal with the weak points of the economic situation in Saudi Arabia. The Saudi government is not doing enough to address the issue of over-dependence on oil (Falola & Genova, 2005). Lack of diversification in the economy will always harm the economy. Exploration of oil is a very risky activity. Every day the oil prices keep on changing. The Saudi government faces the risk of coming to a standstill (Heinberg, 2005). In any region or country, the economic forces determine the stability of a country. A country that is economically unstable will be unable to establish its’ future.
Presently, Saudi Arabia has a thriving economy but there is no economic security (Para, 2004). Foreign investors will find it difficult to launch new investments in the country. In order for a country to assure its’ citizens of economic prosperity, new investments are paramount (Simmons, 2013). A stable country with an inadequate investment base is likely to collapse. Investments are the driving engine of any economy. In the case of Saudi Arabia, the only investments available pertain to the oil industry. Investors in sectors like telecommunications, mining, and construction may lack opportunities in Saudi Arabia (Zuhur, 2011). The oil companies might also be afraid of investing in the country.
When launching an investment one has to consider the competitive environment. An entrepreneur will not start a business in an area where there is great competition (Simmons, 2013). There are very many investors in the crude oil industry in Saudi Arabia. In addition, entry into the crude oil industry in Saudi Arabia might be very difficult. The government of Saudi Arabia will tend to be protective of the oil industry. This is because if this industry collapses the country is in shambles (Para, 2004). The government will not be very comfortable allowing just anyone to invest in the crude oil industry. Moreover, there are cartels in Saudi Arabia that will prevent anyone from investing in the oil industry. The cartels in the country will control the oil market (Heinberg, 2005). The cartels will also discriminate against some of the investors. For example, the Saudi government views Kuwait as its’ main competitor. An investor from Kuwait may not get the chance to launch a new investment in Saudi Arabia (Forsythe, 2009). This is because the Saudi government and the various cartels will not allow this. Foreign investors will not prefer to invest in a country that is biased in any way whatsoever. Lack of foreign investments is very dangerous for any country.
One has to ask what will be the implications of the decline in the demand for crude oil. If there is a decline in the demand for crude oil, the Saudi government will have it rough (Falola & Genova, 2005). The government will not be able to meet the needs of the country. As shown in table 2, Saudi Arabia depends solely on oil to meet its’ financial obligations. A decline in the demand for oil would be very devastating to Saudi Arabia. In addition, the world is embracing alternative sources of energy (Forsythe, 2009). The United States is Saudi’s main customer. Recently, the United States began formulating new energy policies. The US government does not want to be over-dependent on petroleum products (Falola & Genova, 2005). If the US stops buying Saudi oil, then the effect on the country would be detrimental.
Other countries are taking measures to minimize the use of crude oil (Heinberg, 2005). The Organization of the Petroleum Exporting Countries has complete control over the prices of crude oil. The countries that are not members of the organization are not happy. As a result, the current trend in many countries is the use of alternative sources of energy (Para, 2004). Many regions have begun adapting to solar, wind, and hydro energy. In the end, the OPEC countries might lack the market to sell their oil. Currently, the demand for oil keeps on rising, but this might be different in the future (Simmons, 2013). Saudi Arabia is in a tricky position because the economy of the country might drastically fall in the future. The efforts by other countries to invest in alternative sources of energy are evident. The United States is the main consumer of Saudi Arabia’s petroleum products (Zuhur, 2011). The US has currently taken steps to reduce the consumption of oil in the future. The Saudi government has to be vigilant and respond appropriately to curb the issue of over-dependence on oil. Furthermore, the Saudi government has to possess a long sight. Seeing things in the present alone is very dangerous (Simmons, 2013). The Saudi government has to emulate other countries and cater to its’ future.
The aspect of employment opportunities is paramount. The Saudi government has a lot of employment opportunities but only in the crude oil industry (Para, 2004). The country’s non-oil industries cannot employ all the people in the nation. Moreover, a larger percentage of the country’s workers are foreign. There have been reports of mistreatment of foreign workers in the country. Saudi Arabia lacks an adequate working force. Secondly, there are insufficient employment opportunities in the non-oil industries of Saudi Arabia (Heinberg, 2005). The non-oil industries are unable to employ Saudi citizens. This shows that if the oil industry collapses the living standards of the country would also decline. The poverty lines will also decrease because the country will not be able to employ its citizens.
Historical Background of the Problem
The Kingdom of Saudi Arabia became existent in the 1930s. In addition, the Muslims regard Saudi Arabia as the origin of the Islamic religion (Forsythe, 2009). The country was famous because it was rich in oil reserves. The relationship between the United States and Saudi Arabia became fragile. The US had concerns that Saudi Arabia was supporting radical groups (Falola & Genova, 2005). However, this stalemate ended. The ending of this stalemate further led to the growth of the Saudi oil industry. The demand for oil was extremely high in the United States and the rest of the world. The performance of the agricultural industry in Saudi Arabia became insufficient. In the past, agriculture was the main economic activity (Forsythe, 2009). The discovery of oil in the country made a complete transformation in Saudi Arabia.
Analysis and Discussions
The oil industry might be unsafe from external interferences like sanctions (Falola & Genova, 2005). The world is very sensitive to matters of terrorism. A country with a bad reputation gets sanctions immediately. Saudi Arabia is famous for producing some of the radical groups in existence. The United Nations might decide to sanction the country. If this happens Saudi Arabia will not be able to sell its’ oil (Heinberg, 2005). The rules of international trade prohibit other countries from trading with a country that has been sanctioned. This risk is in line with over-dependence on oil. The economic stability of Saudi Arabia is very dependent on oil. If Saudi Arabia were to get sanctions, the country’s economy would crumble immediately.
Saudi Arabia is not the only country that produces oil in the world. Other countries like Kuwait, Nigeria, Sudan, and Iran are heavy oil producers (Para, 2004). This means that Saudi Arabia has competitors, and it has to be vigilant. The competitive environment might affect the performance of the oil industry in Saudi Arabia. Some of Saudi’s customers might opt to buy oil from Kuwait or Nigeria (Simmons, 2013). As a result, the Saudi government may not achieve its set target for revenues. This will adversely affect the stability of the country, and the economy might collapse.
The political aspects might also affect the oil exploration industry. In every country, politicians possess a massive influence in all the country’s operations (Zuhur, 2011). Some politicians may not have the country’s interests at heart. In addition, the defiant politicians might want the gains from the oil to benefit them alone. In the end, these politicians deprive the country of its’ growth and development (Simmons, 2013). Lack of political goodwill is a killer disease of very many industries worldwide. An industry might be very successful but if there is, no political goodwill the industry collapses. The Saudi oil exploration industry is prone to attacks from politicians. The aspect of politics affects the economy in every country.
If the oil exploration industry fails, the Saudi Arabian economy will crumble. It is evident that the Kingdom of Saudi Arabia cannot survive without oil (Zuhur, 2011). The governments’ revenue is entirely dependent on the proceeds from oil. In addition, the development projects of Saudi Arabia depend on oil. Saudi Arabia cannot improve its’ infrastructure and sanitation services if the oil industry fails (Para, 2004). The health services of the country will also worsen if the oil exploration industry fails. The entire country will crumble if the oil exploration industry collapses.
Financial crises are a very big problem in every region. Events and announcements influence the occurrence of financial crises (Heinberg, 2005). Many announcements that pertain to the exploration of oil are always evident. For example, OPEC may announce that there has been a decrease in oil prices. This announcement would adversely affect the exchange rates of the Saudi Riyal (Forsythe, 2009). Once the exchange rates are low, the country enters into a financial crisis. The oil exploration industry makes Saudi Arabia be vulnerable to financial crises. A single announcement can escalate into a financial crisis in a region very fast (Falola & Genova, 2005). Announcements that concern oil exploration is very many. This is very risky to the economy of Saudi Arabia.
The reliability of the oil exploration is not appropriate. The oil exploration industry is very unpredictable (Forsythe, 2009). An investor will avoid risky investments. Foreign investors will be very skeptical about the oil exploration industry. The effect might be adverse on the economy of Saudi Arabia. The crude oil market is not convenient. It changes at any time, there are no peak or off-peak seasons (Falola & Genova, 2005). It is very difficult for many investors to enter the oil exploration industry. The oil exploration industry is completely vulnerable to fluctuations in the market. The problem of over-dependence on oil spreads to other sectors of the economy (Heinberg, 2005). The Saudi government has to devise ways of making the economy safer and more flexible.
The various trade agreements also affect the oil exploration industry in Saudi Arabia. In the past Saudi Arabia was the decision-maker in OPEC but this is not the case today (Para, 2004). The other OPEC members have become more influential in the organization. This makes it difficult for Saudi Arabia to control the trade agreements. The trade agreements might be unfavorable to the oil exploration industry in Saudi Arabia. For example, OPEC might impose trade quotas on the member countries. This will prevent Saudi Arabia from accomplishing the set targets that pertain to revenues (Simmons, 2013). In the end, the effect on the economy becomes detrimental.
Crude oil comprises a very high percentage of Saudi exports. The collapse of the oil industry would impede the trading activities of Saudi Arabia (Zuhur, 2011). Saudi Arabia will find it difficult to trade with other countries if the oil industry fails. In addition, the country will virtually lack exports if the oil industry collapses (Simmons, 2013). The export commodities from Saudi Arabia are less. There is no export of other products in Saudi Arabia. Saudi Arabia majorly trades with only one product, and this product is oil. If there is no oil then it means Saudi Arabia cannot trade. There is no diversification of export products in Saudi Arabia. This is a major problem in the country, and the government has to deal with it.
The oil industry sustains the Saudi economy, and the government still manages to have surplus funds. The problem is the risk of the oil market (Zuhur, 2011). The market is very volatile, and the prices keep on fluctuating. Saudi Arabia is unsure of what the future bears for the country. Financial analysts predict that in the future the demand for oil might decline. If this happens, the Saudi Arabian government would be unable to manage the backlash (Para, 2004). The Saudi Arabian government should take steps to rectify the current situation in the country.
The increase in oil supply will also affect the Saudi Arabian economy. A large supply corresponds to a lower price. If the supply of oil increases, the international oil prices will decline (Heinberg, 2005). This decline will affect the Saudi Arabian economy. The Saudi Arabian economy solely depends on oil. A decline in the prices of oil will affect the economic stability in Saudi Arabia. OPEC’s decisions might be unfavorable to Saudi Arabia. This in turn hinders the economic growth and development of Saudi Arabia.
The value of monetary currencies will also affect the stability of oil industries (Para, 2004). For example, if the value of the dollar drops the economy of Saudi Arabia will destabilize. This is because the US is a major consumer of Saudi’s economy. If the value of the dollar declines, the levels of revenue in Saudi Arabia will decline. In addition, if the value of currencies in other countries declines. This effect is likely to spread into the Saudi Arabian economy. The financial aspects in one country spread to another country very fast (Zuhur, 2011).
Conclusions and Recommendations
In conclusion, Saudi Arabia has to take steps to safeguard its’ future. Currently, Saudi Arabia has thrived economically but there is very a high risk in the future. The Saudi government has to ensure that the country diversifies its’ economic activities (Para, 2004). In order for the country to ensure its’ prosperity diversification is essential. Saudi Arabia has to embrace change. Being rigid is very dangerous for any economy. A country that prospers is flexible in all the operations it does (Simmons, 2013). The Saudi Arabian government has to ensure that the country is stable at all times. In addition, the Saudi government has to take steps that aim to diversify the country’s economy.
The Saudi government can take several steps to ensure that the problem of over-dependence on oil becomes extinct. The government has to expand the agricultural industry in Saudi Arabia (Falola & Genova, 2005). Agriculture was the original economic activity in Saudi Arabia. It is necessary for the government to revive this industry. The advantages of the Agricultural industry would be many. In addition, agricultural products would diversify the export commodities of Saudi Arabia (Forsythe, 2009). The country would be able to export horticultural products, tea, coffee, and pyrethrum. These commodities enjoy the ready market in the whole world. Although oil has a high demand in the present world, the Saudi government has to expand agriculture.
Mining is another lucrative industry. Other minerals have to be available in Saudi Arabia. Minerals like copper, silver, aluminum, and gold will boost the country’s economy. The government has to allocate funds for the exploration of minerals in Saudi Arabia (Para, 2004). Geologists and surveyors should be able to launch the search for available minerals in the country. If some of these minerals are present, they will improve the economy of Saudi Arabia. In addition, the diversification of economic activities will be evident.
The service industry also improves the economy. Saudi Arabia is a very spectacular location. More campaigns are essential to market the country as an appropriate destination for tourists (Heinberg, 2005). The tourism industry will be able to supplement the government’s revenue. The Saudi government is not doing enough to promote tourism. The government needs to take extra steps to market the tourism industry. If the government addresses these recommendations, the Saudi economy will be diverse. The problem of over-dependence on oil will become extinct. Saudi Arabia will be sure of its’ future at all times.
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Parra, F. R. (2004). Oil politics: A modern history of petroleum. London [u.a.: Tauris.
Simmons, M. R. (2013). Twilight in the desert: The coming Saudi oil shock and the world economy. Hoboken, N.J: Wiley.
Zuhur, S. (2011). Saudi Arabia. Santa Barbara, Calif: ABC-
|Ghawar||Onshore||About 4.9 million bbl./d of Middle East light Crude oil|
|Safanyia||Offshore||About 1.45 million bbl./d of Middle East heavy crude oil|
|Khurais||Onshore||About 1.26 million bbl./d of Arab Light crude|
|Manifa||Offshore||Approximately 1 million bbl./d of Arab Heavy crude oil after completion. Online projections will be in 2014.|
|Shaybah||Onshore||About 0.8 million bbl./d of Arab Extra Light|
|Qatif||Onshore||Capacity 499, 995 bbl./d of Arab Light crude|
|Khursaniyah||Onshore||500,000 bbl./d Arab Light Crude|
|Zuluf||Offshore||Approximately 450,000 bbl./d of Arab Medium crude|
|Abqaiq||Offshore||400,000 bbl./d Arab Extra Light crude|
Table 1: Major Oil and Gas fields in Saudi Arabia
Table 2: GDP, petroleum and government, 2003-2007
|Non –Oil Fiscal Deficit||-195||-223-||-286||-324||-386|
|Share of GDP|
|Total Government Revenue||37||42||48||50||45|
|Total Expenditure to Non-Oil GDP||55||57||62||54||60|
|Non-Oil Deficit to Non-Oil GDP||-42||-44||-52||-45||-50|
Table 3: Key Energy Indicators for Saudi Arabia and Comparable Economies
|Total Energy Consumption (Billion barrells of oil Equivalent||Average Annual Population Growth rate 2004-2020||Total Primary Energy demand per Capita (Barrells of oil equivalent)||NP GDP Per unit of total Energy Use||Share of Oil In Total Primary Energy Demand (Percent)|