Saudi Arabia's Oil Impact on World Economy - Research Paper Example

?Introduction Saudi Arabia is one of the largest oil producers in the world and according to Vitalis, (2007), the country has the second largest oil reserves globally. Oil accounts the largest source of the global energy demand and hence the economic importance of Saudi Arabian oil is tremendous. The development of oil sector in Saudi Arabia and other oil producing countries has undergone numerous political and economic changes, which have affected production and the eventual prices of the commodity in the global market. This paper explores the Saudi Arabian oil and its impact on the global economy. The establishment of Saudi Arabia Historically, the development of the oil industry in Saudi Arabia has been closely associated with the political events that led to the establishment of the state. Most oil exporting countries in developing world historically entrusted their mining operations to national companies, mainly because of lack of adequate capacity to embark on the process and Saudi Arabia is not an exception. The building of Saudi Arabia state differs from other neighboring states in the region such as Iraq and Turkey. According to Huyette (1985), Saudi Arabia is a relatively new state founded in 1932 following the merger of Hejaz and Nejd kingdoms. Islam, one of the major religions in the world originated from Saudi Arabia in the early 7th century (David and Johns, 1982). One of the most distinguishing characteristics of the country is its homogenous Arab population, which has enabled development of an indigenous political system that has ruled the country for many years without significant foreign influence. According to Huyette (1985), Arabs originated from Saudi Arabia and historically, the Ottoman Empire was the only foreign influence in the country. Although most of the current Saudi Arabian territory was under the Ottoman Empire, its influence in the country remained minimal especially in the interior. For long periods of over four centuries, the control of Ottoman Empire on Saudi Arabia was not steady and the governance of the country was mostly entrusted to the sharrifs of Mecca with occasional supervision of ottoman governors (David and Johns, 1982). The indigenous Arabic rulers often challenged the administration of Ottoman Empire in the country and hence its influence was minimal, especially in the larger interior of Saudi Arabian territory. The poor control of the Saudi Arabia territory by Ottoman Empire resulted into the emergence of Wahhabism, a Saudi dynasty in the mid 18th century. The Saudi dynasty headed by the indigenous Al Saud family established the current Saudi Arabian territory and the dynastic rule that continues up to date (David and Johns 1982). Abdul Aziz a ruler of the Al Saud family established the current Saudi Arabian country after seizing the control of Nejd kingdom and Al Hasa region from the Ottoman Empire and King Al Rashid. The vast oil deposits were later discovered the in Al Hasa region, which included the Persian Gulf (Vitalis, 2007). Therefore, the formation of Saudi Arabian country resulted from a gradual process of reunification, where the local Al Saud rulers fought and defeated the indigenous rulers, and seized the conquered territories that were later united to form the current Saudi Arabia. Turkey did not enjoy indigenous political process such as Saudi Arabia. Historically, different empires, including the Hittite, Persian, Roman, and the Byzantine empires governed Turkey (Lloyd, 1999). Later in 13 century, the country fell under the Ottoman Empire. When the Ottoman Empire declined in the 17th century, involvement of European countries such as Russia, France and Britain greatly influenced the formation of the Turkish state. Turkey was formally formed in 1923 and radical reforms undertaken to modernize the new country (Lloyd, 1999). Administrative structures established by the Ottoman Empire such as ottoman sultanate and caliphate were banned and replaced with modern political and economic reforms. In addition, the country secularized its society from the dominant Arabic influence and currently, it is the only Islamic country to be a member of NATO (Lloyd 1999). Discovery of oil and its role in Saudi Arabian economy Since its foundation in 1932, Saudi Arabia economy depended on subsistence agriculture and tourism from Muslims on pilgrimage visits. Because of the arid conditions in the gulf, the country was one of the poorest in the world until the discovery of oil reserves in 1936 (Alyousef, 2011). The discovery of vast oil deposits in Al Hasa resulted to a dramatic economic transformation of the country when it commenced drilling operations in 1941 at the onset of Second World War. According to Alyousef (2011), Saudi Arabia has an approximated 267 billion barrels of proven oil reserves, which are the second largest oil deposits in the world after Venezuela. Currently, Saudi Arabia is the largest oil producer and exporter in the world. The country produces about 29% of the total oil supply produced by OPEC member countries and it accounts to about 12% of the total global oil production (Alyousef, 2011). The country plays a leading role in the Organization of the Petroleum Exporting Countries (OPEC) and it has the largest crude oil production capacity of about 12million barrels per day. The country exports its petroleum products to virtually all regions in the world and hence it is the largest net oil exporter globally (Alyousef, 2011). The oil industry is the major economic activity in the country and according to Alyousef (2011), the petroleum sector generates about 80% of the total budgetary revenues. In addition, oil accounts to about 45% of the country’s Gross Domestic Product (GDP) and over 90% of the total earnings generated from exports. Therefore, it is apparent that the country is predominantly an oil based economy and it plays a critical role in determining oil prices in the global market. Because of the critical importance of oil in the country’s economy, the sector is under serious government control. However, due to its leading crude oil producing potential, the country has the ability to alter its production capacity in response to global changes in supply and demand of the product (De Santis and Roberto, 2003). This influence has played a critical role in stabilizing the price of the commodity in the world market for the last thirty years. It is apparent that oil plays a critical role in generating revenues for Saudi Arabian economy, which are essential for economic and social development of the nation. However, the economic progress of the country remains slow, in spite of the vast foreign income generated from the sale of the petroleum products. According to the theory of rentier states, countries that regularly generate considerable foreign oil revenues from the sale of the product in the international market have a tendency of becoming autocratic, and irresponsible to their citizens (Wessing, 2011). This trend has been observed in countries with substantial oil and other valuable mineral resources where their social economic development is overtaken by countries with less mineral endowments. Gabon, Nigeria, Democratic Republic of Congo, and Chad are some of the bet examples of rentier states in Africa and in the Asian continent, Iran and virtually all countries in the Middle East are rentier states, in spite of the vast incomes generated from mineral resources. Saudi Arabia government is dynastic and al Saud family has dominated the politics of the state since its inception. However, since 1970s, the country has made considerable progress in transforming itself from a rentier state to a more democratic society that does not exclusively depend on oil for economic sustainability (Looney, 2003). Since oil became the major source of revenue in Saudi Arabia, the country’s economy has experienced various levels of growth. From 1964 to 1998 Looney (2003), noted that the gross domestic product (GDP) increased at an average annual rate of about 5.7%. During the same period, the private sector GDP and non-oil GDP increased at a rate of 6.8 percent and 6.7% percent respectively (Looney 2003). This implies that the country has made remarkable developments in developing a sustainable sector that does not exclusively rely on oil revenues. However, the investments on public and social development during the same period declined drastically. According to Looney (2003), the amount of revenue directed to public expenditure reduced by double digits from 1964 to 1980. During this period, most of these investments were directed at modernizing the country’s defense forces. In the early 1970s when global prices for oil increased dramatically, Looney (2003), notes that the investment in public sector especially in the expansion of infrastructure stagnated in Saudi Arabia experiencing an annual contraction of about 6% from 1980 to 1998. On the other hand, the investments in the private sector increased considerably in the same period. Agriculture is one of the fastest growing sectors that do not depend on oil. According to Looney (2003), agriculture grew from 8.1% in 1974 to about 14% in 1998. Other sectors that have shown significant growth include manufacturing but the contribution of none oil sector to the country’s GDP remains considerably low. Recent investigation on the country’s human development indicates that the country has made considerable improvements in the 21st century. In 2003, Wessing (2011) notes that the human development report classified the country in the medium category. However, in 2009, the county has already progressed to countries with high human development index (Wessing 2011). This implies that the country has made important progress in public and social development. According to Wessing (2011), the country has made considerable improvement by investing in development of infrastructure, education, healthcare and diversification of the economy to non-oil sectors. This is demonstrated by increasing life expectancy and drastic reduction of infant mortality rate that is better than most developing economies. In addition, the country has increased investments in human resources development especially in education of women. According to Wessing (2011), the proportion of GDP invested in education increased from 3.5% in 1970 to 9.8% in 2002. This has increased literacy levels to over 80% currently. Although human development index has improved in the country corruption and nepotism is prevalent due to lack of democracy. The monarch system of governance in the country has prevented participation of the public in running the government for many years (Wessing 2011). In comparison with other Islamic countries in the Middle East, Saudi Arabian has a neutral foreign policy. Dissent and foreign policy in Saudi Arabia According to De Santis and Roberto (2003, p157), the country’s foreign policy is founded on three main themes, which include maintaining security in the region, advancement of Arab nationalism and promoting Islamic interests. These policies have encouraged development of close relations with non-Islamic states, especially the United States. Saudi Arabia is located in a volatile region that needs high security measures to ensure the stability of the regime against radical Islamic movements and protect the sensitive petroleum industry. These security concerns have enhanced greater cooperation between the country and the United States in the recent past. In the region that has historically opposed the creation of Israel state, cooperation between United States and Saudi Arabia has created tensions with other Islamic countries in the region. The establishment of foreign military bases in Saudi Arabian territory has elicited stiff opposition from radical Islamic groups that consider the occupation as affront to the religion. In a country regarded as the cradle of Islam faith, radical Islamic groups have been conducting terror attacks to drive out the foreigners from the sacred land of the Muslims in the recent past. Recently, the country has witnessed terror attacks targeting western interests especially those associated with the Saudi oil resources. Saudi Arabia has been accused of funding terror organizations in the Middle East and other regions in the last quarter century especially through the continuous support of Palestinian movements.(CRS, 2007). Conclusion The Saudi economy depends heavily on petroleum resources and the country plays a critical role in ensuring stability of oil products in the global market. The country has made remarkable investments in development of other non- oil sectors such as human resources, education and agriculture but the contribution of these sectors to the country’s GDP remains marginal. However, the country has higher human development index than other developing countries, as demonstrated by improved life expectancy, low child mortality rate and high literacy level in the region. Lack of democratic reforms in country and terrorism are some of the most challenging factors inhibiting development of Saudi Arabia into first world economy. References Alyousef, N.(2011). The dominant role of Saudi Arabia in the oil market from 1997-2010. Retrieved from: http://www.usaee.org/usaee2011/submissions/OnlineProceedings/Saudi_Oil_Policy_Nourah_AlYousef_Aug_12.pdf]. CRS(Congressional Research Service)(2007). Saudi Arabia: Terrorism Financing Issues. CRS Report for Congress. Retrieved from http://www.fas.org/sgp/crs/terror/RL32499.pdf David, H., and Johns, R. (1982). The house of Saud. London: Pan Books. De Santis and Roberto, A. (2003). Crude oil price fluctuations and Saudi Arabia’s behavior. Energy Economics, Elsevier, 25(2): 150-174. Huyette, S.(1985). Political adaptation in Saudi Arabia: A study of the council of ministers. Boulder: Westview Press Looney, R. (2003). Saudi Arabia: Measures of transition from a rentier state. Retrieved from http://www.dtic.mil/cgi-bin/GetTRDoc?Location=U2&doc=GetTRDoc.pdf&AD=ADA525675 Lloyd, S. (1999). Ancient Turkey: A traveler’s history. California: University of California Press. Vitalis, R. (2007).America’s Kingdom: Mythmaking on the Saudi oil frontier. Stanford: Stanford University Press. Wessing, L. (2011). Discursus on rentier states: oil impedes democracy a relevant discourse for development case Saudi Arabia. WESCOGROUP. Retrieved from http://wescogroup.eu/miscellaneous/discursus-on-rentier-states/index.html Read More