Saudi Arabia Economy

March 17, 2010Saudi Arabiaby EW World Economy Team



Saudi Arabia has the 19th largest economy in the world by nominal gross domestic product (GDP) at $745.273 billion and 11th by purchasing power parity (PPP) at $906.8 billion. The nation also has one of the better growth rates in the world, at about 5.13 percent.

Saudi Arabia's economy is deeply rooted in its petroleum production. The nation has roughly 18 percent of the world's confirmed oil supplies and is the number one oil exporter in the world. Oil production accounts for virtually all of Saudi Arabia's government revenues and export earnings.

Saudi Arabia is a member of the Organization of Petroleum Exporting Countries (OPEC), the World Trade Organization (WTO), G-20, the World Bank, the International Monetary Fund (IMF), and a number of other international and regional economic organizations.

Economic History

A Middle Eastern nation, Saudi Arabia is largely arid land with only a small area suitable for agricultural production. As such, for most of its history Saudi Arabia's economy consisted of subsistence agriculture. Although the area served as an important trade center, most of its population was largely nomadic and very poor.

Around 610, Muhammad, the founder of Islam, received a message from God prompting him to found the Muslim faith. After a series of military victories, Islam spread through the region and began to dominate all aspects of the local culture. In less than 100 years, the Islamic Empire extended from Spain to parts of India and China, with the area now known as Saudi Arabia at its heart. Although the political center of power moved out of the Arabian Peninsula, it remained an important crossroad and trade center.

Pilgrims also began visiting the area, to see the cities of Mecca and Medina. Thus, tourism became an important part of the local economy. This condition persisted until well into the 17th century, when the Islamic Empire fell apart and broke into multiple smaller kingdoms.

In 1745, religious reformer Muhammad Abd Al-Wahhab allied with a local ruler named Muhammad bin Saud, beginning a military and religious campaign to unite the Arabian Peninsula under a strict new version of Islamic law. They and their followers came to be "Saudis," after Muhammad bin Saud.

The struggle to unite the peninsula lasted decades. By 1801, the Saudis had captured the city of Mecca, and by 1805, their grasp extended to Medina. This helped to legitimize the Saudis' religious claims but also drew the attention of the Ottoman Turks who ruled the region at this time and commanded one of the most powerful standing armies in the world. By 1818, the Saudis had lost virtually all of their holdings and ended up in the region now known as Kuwait.

Defeated, but not beaten, the Saudis continued their efforts to unify the Arabian Peninsula throughout the 19th century. Finally, in 1902, King Abdul Aziz Al Saud—later known as Ibn Saud—took control of the key city of Riyadh. After establishing Riyadh as his headquarters, Abdul Aziz captured most of the Arabian Peninsula, including Mecca and Medina in 1924 and 1925 respectively. This helped to unify the many tribes of Saudi Arabia into a coherent nation.

On September 23, 1932, the country established a theocratic monarchy and took the name the Kingdom of Saudi Arabia. The timely discovery of vast oil fields in 1930 helped create the financial cornerstone that would fund the nation for the rest of the 20th century until the modern day.

In an effort to improve oil prices and maximize profits, Saudi Arabia and several other major petroleum exporters, founded the Organization of the Petroleum Exporting Countries (OPEC). OPEC helped to fix prices and regulate production by establishing five-year development plans. The first of these plans came in 1970, and successive plans continue to this day.

From one of the poorest nations in the world, Saudi Arabia became one of the fastest-growing economies and wealthiest nations by the end of the 20th century. Thanks to its abundant oil supply, Saudi Arabia enjoyed decades of surplus trade. In 1980, regional wars between Iran and Iraq—two other major oil producing counties—catapulted Saudi Arabia to the highest point in its economic development.

Higher oil prices caused by this situation led to the development of new oil fields around the world and a drive to reduce global consumption through technology and social programs. This caused a drop in oil prices that made the Saudi government aware of its economic vulnerability. Since then, the nation has more closely regulated its economy and taken steps to insulate itself from economic risk.

Since the 1980s, the Saudi government has followed programs designed to use petroleum income to pay for its relatively underdeveloped infrastructure. Although the nation has not met all of its goals, economic development has progressed rapidly. Oil wealth has increased the standard of living considerably, yet the rapid growth of population accompanying this boom has significantly strained the nation's infrastructural and other resources.

Current Economic Situation

Saudi Arabia faces a number of unique challenges. While its oil reserves are the second largest in the world, and Saudi Arabia is the world's leading oil exporter and second largest producer, petroleum makes up approximately 92.5 percent of Saudi budget revenues, 90 percent of export earnings, and 55 percent of annual GDP. Only 40 percent of GDP comes from the private sector. The government has encouraged private sector growth in an effort to reduce dependence on oil revenues, but oil undeniably remains the biggest part of the kingdom's economy. As a result, GDP can fluctuate wildly depending on global demand for oil.

Aside from oil production, Saudi Arabia has natural resources that include gold, silver, iron copper, zinc, manganese, tungsten, lead, sulfur, phosphate, soapstone, and feldspar. Saudi Arabia also has a small agricultural sector, and the nation is one of the world's largest producers of dates. Tourism is also an important industry thanks to the millions of pilgrims who flock to Mecca and Medina each year. In fact, although oil revenues hugely dwarf tourism's contribution to the economy, tourism actually employs more people than the oil industry.

The government remains a monarchy, which is highly anachronistic to many investors and foreign powers. The feudal system relies on custom, religion, and class status in an intricate manner that most outsiders find bewildering. It creates a system with overlapping, conflicting, and unclear legal standards.

Economic Forecast

Saudi Arabia has found itself at odds with ISIS/ISIL. This has led to some investor uncertainty and a shaking of domestic consumer confidence. However, Saudi oil fields continue to produce at record levels, and the global oil industry has experienced an uptick in prices.

As a result, economists expect the Saudi economy to expand by 2.5 percent by the end of 2015, and to grow slightly to 2.6 percent in 2016.

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