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Economic Diversification: Saudi Arabian Oil example

Economic Diversification: Saudi Arabian Oil example

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Author: Tessa Gonzales
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12.1  Students understand common economic terms and concepts and economic reasoning (Klingensmith, 1).

High School seniors will be studying the affects of economic diversification. This will be done by examing another country and by learning how lack of diversification can possibly affect a country's economic stability. Economic vocabulary words will be addressed and students will be able to understand how a market economy can be more effective when it is diversified. 

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Tutorial

ARAMCO Oil Refinery

Saudi Arabia's main oil pipeline

 

Source: "Mid-East Contagion Fears for Saudi Oil Fields." The Telegraph. Telegraph Media Group, n.d. Web. 12 May 2015 "What the Saudi Royal Reshuffle Means for Oil." CNBC. N.p., 29 Apr. 2015. Web. 12 May 2015

Diversification Video

Click on the Link below watch the video explaining the importance of diversification. When you are finished do a quick write of why you think a country should have a diversified economy, and what risks they face if they "put all their eggs in one basket"

http://www.investopedia.com/terms/d/diversification.asp 

Source: "Diversification Definition | Investopedia." Investopedia. N.p., 25 Nov. 2003. Web. 12 May 2015.

Saudi Arabia: An Oil-Based Economy, Threatened

 

Read the following critique on the Saudi Arabian economy. While you read, click on the blue words to get more information, and definitions on certain topics. Make note of the definitions, for these are the vocabulary words for this lesson. Jot down any questions you have, and take notes on interesting things you read. There will be a short quiz that will ask you about some of the vocabulary words so pay close attention. This will be the only reading that you will be required to do for this web tutorial. 

 

The Kingdom of Saudi Arabia is among the richest countries in the world; but where it makes up for its foreign exchange rankings and oil production it falls behind in other important areas.  Saudi Arabia has been transformed by the discovery of oil within its borders, but it has failed to diversify its economy, and has become over reliant on that oil. In order to keep up with the rest of the world and to begin to compete, the Kingdom of Saudi Arabia needs to move away from their reliance on oil, and move towards a more balanced economy that promotes growth and contribution in the private sector and away from frivolous spending. The Kingdom of Saudi Arabia is a country that has transformed from one with very little, to one of the richest in the world when it comes to oil, but in order to maintain that status, the country needs to move past just oil and towards a more diversification of their economy. 

The Kingdom of Saudi Arabia is a nation that has struggled with its rather quick transition to an oil-based market economy from a subsistence economy when extensive fossil fuel reserves were discovered in the 1930’s (National Geographic, 1). Since then, the petroleum reserves in the Kingdom of Saudi Arabia became the largest petroleum reserves in the world, which accounts for over 85% of the Kingdom’s export earnings, and 50 % of their GDP (OPEC, 1). 

Saudi Arabia struggles to diversify their economy and this can prove quite badly if anything were to happened to any of their refineries, oil fields, or if they exhaust their resources. Oil is a very lucrative market, as the Saudi’s have gone to prove, but it is only lucrative while there is a market for it and while resources are still available. The country has not done much outside of the petroleum industry; only 10% of the Saudi Arabian GDP is from contributions from industries outside of petroleum (Ramady, 32). Another point that raises concern for more diversification in the Saudi Arabian economy is the “rising global demand for clean and alternative energy sources” (Ramady, 16). Saudi Arabia is faced with the drive for renewable energy; without its ability to diversify its economy from a market that is scrutinized for its non-renewability and its negative impacts on the environment, it will certainly suffer. 

The Kingdom has tried to advocate for the contribution of private sectors to the economy, but unlike western countries where “wealth is generated by the private sector and taxed by the government”, “in Saudi Arabia, wealth is generated by government-owned industries and flows to the private sector, which depends on government contracts and subsidies to sustain production” (House, 163). It becomes hard for the private sector to emerge as something that effectively helps to create more jobs and contribute to the economy. In order to “transform this subsidized economy into a productive one that creates jobs, the government will have to allow a more competitive industrial base to develop that leverages both foreign technology and investment” (House, 164).  

The Kingdom was in a rush to build their economy and did not take the time to ruminate the pro’s and con’s of oil reliance. With the overwhelmingly ostensible positive factors of focusing mostly on their oil production, “there were few lengthy discussions or in-depth analyses on potential negative consequences of one strategic development objective or another, although some commentators did raise early concerns” (Ramady, 21). The damaging impacts of such an overreliance went disregarded; impacts such as “international and domestic inflation, rapid consumption of non-renewable national resources, world oil shortages, [and] strong incentives to find crude oil substitutes and suppliers” (Ramady, 20).  Saudi Arabia has been left blinded by their advances in one market, and will not be able to convalesce if that market takes a turn for the worst. 

For example the Kingdom was met with some misfortune in the late 1990’s and early 2000’s when their spending practices did not adjust with the oil market. When the oil market fluctuates as much as it does, the Kingdom of Saudi Arabia fails to compensate with their spending when oil prices fall. When oil prices per barrel hit a high in 1981 only to be followed by incredibly low prices in 1986, Saudi spending practices did not change with the fluctuations of oil prices (Gause, 1). This showed that “the Saudi government budget was not linked to the price of oil, even though oil has consistently supplied more than 75% of state revenue” (Gause, 1). The Saudi Arabian government had not changed their spending practices even though they were not bringing in as much as they used to, instead of reforming their spending practices and coming up with ways to diversify their economy, they continuously put their country further into debt. This raises concern; however, Saudi Arabia has since then climbed out of their shockingly high domestic debt of 103% their GDP in 2003 to an incredibly low domestic debt of 2.68% in 2013 (Trading Economics, 1). There is still some concern though when it comes to their spending practices, because it is hard to say if the country will maintain this low debt rate or it they will revert back to their old spending practices. 

Discussion Questions:

You can either do a quick write in your journal about one of these questions or discuss your opinions and answers with a classmate.

1. Why do you think Saudi Arabia is not making progress on diversifying their economy?

2. Predict what you believe is going to happen to the economy of Saudi Arabia by weighing the following possibilities; exhaustion of natural resources, less demand of petroleum, the drop in oil prices, and environmental degradation. 

3. Explain why you think a country should rely on more than one industry for the main contribution to their GDP. 

 

 

Works Cited

Gause, Gregory, III. "Saudi Arabia: Over a Barrel." Foreign Affairs. N.p., 01 May 2000. Web. 04 May 2015.

House, Karen Elliott. On Saudi Arabia: Its People, Past, Religion, Fault Lines--and Future. New York: Alfred A. Knopf, 2012. Print.

"Oil Discovered in Saudi Arabia." National Geographic Education. N.p., n.d. Web. 2 May 2015.

Ramady, Mohamed. "The Saudi Arabian Economy." Google Books. N.p., n.d. Web. 4 May 2015.

"Saudi Arabia Government Debt to GDP | 1999-2015 | Data | Chart | Calendar." Saudi Arabia Government Debt to GDP | 1999-2015 | Data | Chart | Calendar. N.p., n.d. Web. 05 May 2015.

The Oil Kingdom: Part 1

Watch these video's to learn more about Saudi Arabia's oil industry, and their reliance on oil to support their economy.

Source: "The Oil Kingdom: Part One." YouTube. YouTube, n.d. Web. 12 May 2015

The Oil Kingdom: Part 2

Source: "The Oil Kingdom: Part Two." YouTube. YouTube, n.d. Web. 11 May 2015.