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Saudi Arabia: an economic profile.





In this paper, we provide a detailed outlook of Saudi Arabia and its economy. We will analyze its GDP trends and its balance of payments. A simple regression will once again demonstrate the heavy dependence of the Kingdom’s economy on oil. This dependence calls for immediate action as the need for diversification is vital for a country whose population will double in 30 years.

Keywords: Rentier State; Oil dependence; GDP.

1. Introduction
The aim of this essay is to provide a detailed outlook of Saudi Arabia and its economy. Since 2000, oil prices are reaching incredible heights. A lot of economic analyses stress the possible consequences on global economy and on advanced countries such as the US and the EU (Hamilton 2005, Rogoff 2006). Still, the weight of oil on their GDP is on average below 4%. Little attention is paid to producers; this is due to the fact that they are obviously benefiting from high oil prices. On the one hand this is true; but on the other, we must analyze their economy in order to better assess the consequences of world oil dynamics. This paper will then study the main oil producer, also known as the “swing producer1”.
Saudi Arabia is well-known all over the world both for its religious importance and for its pivotal role in the oil industry. As we will not analyze further its religious significance, still we must highlight that, since Saudi Arabia is the holy land for more than a billion Muslims, the Kingdom has constant official and unofficial relations with all Muslim countries. These close relationships give the Saudis a great influence and an even bigger role both among MENA2 countries and in the OPEC. Its well recognized religious importance has not always given the Saudis the possibility to have a key role in the region. The area was divided up to 1927, when the treaty of Jeddah gave birth to the Kingdom of Saudi Arabia, named so after the Al-Saud royal family. Before that treaty, the Peninsula was divided into small kingdoms, under the influence of the Turkish Empire before WWI and Egypt after. Only Mecca and Medina regions were prosperous, thanks to commerce and pilgrimage. Even after the unification, Saudi Arabia was a poor country without political, physical and social infrastructures. This demonstrates that the region immense religious value was not enough to create a stable and powerful State.
Something else was needed, and it came in the form of oil. Oil was discovered in 1938, but due to WWII, production started in 1949. That was the date that changed Saudi Arabia. Thanks to increasing oil revenues, the Kingdom earned the money needed to develop all the infrastructures required. Moreover, the role of the State changed radically over the years: from a minimal and quasi predatory State, it became the engine of all social and economic changes in the country (Niblock 2007), thus adopting the state-aided capitalism model3.
Of course, the purpose of this essay is not to write the history of Saudi oil production; anyway, few stylized facts can be useful for the comprehension of the dynamics of the Kingdom’s economy. Aramco has always been the company in charge of oil extraction. What changed through the years was its ownership. It was created by Standard Oil of California (known today as Chevron) in 1933 and then parts of its shares were acquired by Texaco, Exxon and Mobil, between the late 30ies and the late 50ies. As oil became more and more important for the World economy, the Kingdom became more and more interested in the industry. The first measures taken were about taxes and royalties: during the 60ies, the government changed upward the percentages of the taxes levied on oil production. Then, after 1973, Saudi Arabia started the nationalization of Aramco, which became completely state-owned in 1980. The complete control over the oil industry was (and still is) of vital importance, because the oil industry has always accounted for almost 40% of Saudi GDP. Because of this high percentage, Saudi Arabia is classified among the rentier States4.
It is also worth remembering that Saudi Arabia is one of the funding member of OPEC, and due to its immense oil reserves (260 billion barrels, 24% of World’s proven reserves), it is the biggest producer, with a daily average of more than 10% of global production (years 2000-2007).
The paper is organized as follows: in section 2 we will analyze Saudi Arabia GDP trends; section three will be devoted to international trade; in section four we will present a short term scenario; we will then add some concluding remarks.

2. GDP trends

2.1 Key Figures and Public Finances

In this subsection we are analyzing some key data regarding Saudi Arabia. First of all, we must highlight the rapid growth of its population. The US census bureau estimates that Saudi Arabia’s population will double between today and 2050, rising from 25 million to 50 million: today, 70% of the population is below 30.

Table 1: Saudi Arabia’s key figures 2006.


25.2 million

Pop growth rate

2.7% per annum


346.4 billion

GDP per capita PPP

16,620 USD

Source: SAMA

This growth rate puts strong pressure over the government and over the economy, because it can reduce the per capita income level. In fact, if we compare 2006 figures with the GDP per capita of 1981 (almost 22,000 USD), we see that population growth is a big concern for economic welfare. This is even more evident if we analyze the composition of Saudi Arabia’s labour market. The most recent official data put unemployment among Saudi nationals at 12%. This is due to the fact that the Saudi economy has generated plenty of unskilled jobs, which are filled by foreign labours, while there is less demand for qualified workers. This has led to a situation where more than a half of the work force comes from abroad. Foreign workers, in fact, are willing to accept lower salaries for the same job. On the other hand, Saudis aim to work in the public sector, which is well paid thanks to oil revenue.
As for public finances, we can say that they are highly dependent on oil revenue (90% of the government budget). Fitch estimates say that a 1 USD/bl rise in the oil price sustained for one year rises fiscal revenue by 0,4% of the GDP. Recent years were of paramount importance for the government, because, thanks to oil, it was able to reduce its general debt below 8% of its GDP. This has strengthened Saudi Arabia’s creditor position, since it has a net debt of -160% of it GDP. At the same time, this high dependence on oil creates some difficulties in budget-making, since oil prices have a really high volatility. As for government expenditures, it should be stressed that the most significant one is wages and salaries, which account almost 25% of the governmental revenues.

2.2 GDP analysis
Let’s now take a look at the evolution of Saudi GDP, as shown in figure 1. As we can clearly see, GDP fell constantly during the 80ies and it recovered its 1981 level only in 2000. There are several causes to explain such phenomenon. First of all, in the 80ies oil prices dropped continuously, thus forcing Saudi Arabia to cut its production in order to try to stabilize the price. In 1986 though, the Saudis abandoned their role as swing producers and, as soon as they augmented their production, prices fell . At the same time, the government reduced its expenditures and its investments: this was not only due to reduced oil earnings, but it was also a consequence of the ending of the previous five year plans. During the seventies, in fact, two five year development plans were put into practice in order to foster economic growth and to build infrastructures which were lacking. As the goals were reached, there were less government procurements to sustain GDP.
Just after the first Gulf war (1991), the GDP started to steadily grow again and it has never stopped up to now. In the 90ies the growth was sustained by enhanced oil production and by the developing of a strong private sector, which accounted, on average, about 40% of the GDP. The Saudis augmented oil production because demand was quickly growing and oil flows from other countries (particularly Russia) were reducing. So, this enhanced production was not detrimental to its economy as it had been in the 80ies, because this time Saudi oil was needed. At the same time, production growth rates were particularly controlled: in fact, only in 2005 Saudi Arabia reached its 1980 level of production, that is to say 9 million barrels a day. As for the private sector, the infrastructures built during the seventies and in the first part of the 80ies were fundamental for its development. In particular, Saudi Arabia gave birth to a strong and competitive petrochemical sector that has gained even more from the accession of the Kingdom to the WTO in 2005.


Fig.1: Saudi Arabia GDP in constant million US dollar. Source: SAMA

In the new millennium, Saudi Arabia was forced to implement lots of reforms. In order to become a WTO member, the government had to create an efficient legal environment. Three reforms were of particular importance: the law on foreign direct investments, which allows foreigners to hold majority stakes in Saudi companies; the real estate law, which allows foreigners to buy properties in the Kingdom; the capital market law, which introduced a stock exchange and strengthened the banking system. These reforms, mixed with high oil prices, have led GDP to its maximum level.
As we have seen GDP trend, we will now run a simple regression to test its dependence on oil. This is very important since all these planned reforms have the clear goal to reduce the importance of oil production in Saudi economy.
Generally, there are two ways of testing oil impact on GDP: one is comparing GDP trends with oil prices (Hamilton 2005); the other is to compare it with production (Killian 2006). From this graph below we can clearly see that from the 90ies price volatility is much higher than production volatility6. This volatility could clearly interfere with the model. At the same time, production already carries the information contained in prices7. That is why, in our basic regression, we will exclude prices8.


Fig.2: Price variation and production variation trends. Source: SAMA

The equation is as follows:


Where yt stands for GDP at time t; xt stands for oil production at time t; α and β are parameters to be estimated. The results are presented in table 1.

Table 2: regression parameters

Parameters Coefficient Std. Error t-Statistic
α 11.06 0.12 91.93
β 0.43 0.06 7.01


Adjusted R2 0.66    
F-statistic 49.1    

Source: author’s elaboration.

As one could expect (see also Dibooglu and Aleisa 2004), Saudi Arabia is heavily dependent on oil. The adjusted R2 indicates that oil has a heavier impact than its percentage contribution to GDP. Moreover, the elasticity of GDP to oil production is statistically consistent: a 10% variation in production would lead to a 4% variation of the GDP (of course we are talking about long term adjustments). The figure below shows how well our model works. At the same time we can see that the model fails to predict the growth of the last few years: this is due to oil prices, which are particularly high and not related to industry fundamentals, as claimed by many.
This high reliance on oil is of course easily explained by the fact that the private petrochemical sector works with oil as well as government expenditures are planned on forecasted oil revenue. So, from this point of view, Saudi Arabia has a long way to go before reaching is objective to diversify its revenues.


Fig 3: regression estimation output. Source: author’s elaboration.

3. International Trade

3.1 Balance of payments
First of all, let’s take a look at the recent trends of Saudi balance of payments presented in table 2, which includes also a short term forecast. As we can see, oil (and oil products) represents almost all the exports: on average, it accounts for 87% of the goods sold abroad. At the same time we can observe that as oil exports grow, imports literary explode. In fact, in the period considered (2003-2009), oil exports will grow from 82 billion dollars to 167 billion dollars (+67%), while imported goods will almost triple (169%). Anyway, this will not erode a significant trade balance surplus which will be used by the Saudis to pay back debts as shown by the balance of services. Overall, current account balance will remain positive, even though current transfers will remain negative. This is due to the fact that Saudi Arabia relies heavily on foreign labour, which accounts for almost half of its working force (SAMA 2005): their remittances explain almost all the current transfers.
As for the capital account, we can see that the Saudis will continue to lend money abroad, with a peak experienced in 2006 (94 billion dollar). This led to a temporary deficit in the balance of payments, the first one since 2000.
The overall balance will thus continue to increase, leading to a significant growth in reserves: if we exclude gold, the stock of international reserves owned by Saudi Arabia will grow from 26.5 billion dollars in 2005 to 32.4 billion dollars in 2009, with an overall increase of more than 22%.
Before deepening our analysis on Saudi Arabia’s trade, we must highlight that, thanks to all these surpluses, both the government and the private sector hold significant foreign asset, with a net position of more than 230 billion dollars, which will probably grow up to 322 billion dollars by 2009.


Table 3: Saudi Arabia’s Balance of payments


2003 2004 2005 2006 2007e 2008f 2009f

Current account balance

28,049 51,927 90,331 9,502  67,325 40,456 29,577

% of GDP    

13% 21% 29% 27% 20% 12% 9%

Trade balance

59,376 84,948 126,946 148,500 115,905 87,699 76,101


93,244 125,998 181,450 209,200 188,745 170,737 167,442

O/w oil      

82,269 110,896 162,445 188,600 165,467 144,433 137,718


33,868 41,050 54,504 60,700 72,840 83,038 91,341

Services, net     

-15,144 -19,844 -22,234 -39,700 -38,250 -39,000 -39,700

Services, credit

5,713 5,852 6,378 6,500 6,750 7,000 7,300

Services, debit

20,857  25,696 28,612 46,200 45,000 46,000 47,000

Income, net     

-1,300 478 37  720 5,170 8,757 10,176

Income, credit

2,977 4,278 4,996 6,900  11,689 15,364 16,966

Income, debt     

4,277 3,800 4,959 6,180 6,519 6,608 6,790

O/w: Interest payments

402 591 1,521 2,742 3,081 3,169 3,351

Current transfers, net

-14,883 -13,655 -14,418 -14,500 -15,500 -17,000 -17,000

Non-debt creating flows, net

-587 -334 -2,351 0,000 0,000 0,000 0,000

External borrowing, net

-783 1,516 5,149 -2,000 3,500 3,500 3,500

Net lending abroad

-25,071 -48,609 -92,433 -94,240 -70,000 -42,000 -31,000

Overall balance9

-1,608 -4,500 -696 1,220 -825 -1,956 -2,077

Source: IMF, SAMA and Fitch estimates.

3.2 Trade movements
We will now focus our analysis on some of the Saudi Arabia’s trade movements. As for its exports we will refer to oil and refined products, since they account for almost 90% of its exported goods. On the other hand, for its imported products, we will refer mainly to its commercial partnership with the EU, since it is its most important partner.
As for oil exports, first of all we must say that oil production is around 9 million barrels per day. It is expected to go up to 11 million by 2010, but there is a lot of uncertainty whether Saudi Arabia can reach this goal. Saudi Arabia has exported more than 76% of its production in the form of crude oil. The other 24% is refined both for the internal market and for the export of oil products.
Let’s now take a look at table 4. As for crude oil, we can see that more than a half of its production is absorbed by Asia and the Far East (in 2006, it was 56%). North America (20.8%) and Western Europe (14.6%) import far less and their quotas are stable or even declining. On the other hand, we can see that Saudi Arabia has a very important role in refined products. MENA and the Far East are the regions that import the most: together they account for almost two thirds of Saudi exports.

Table 4: Saudi Arabia’s exports of oil and oil products (millions of barrels).


2004 2005 2006

Exports to:

Crude Refined Crude Refined Crude Refined

North America

558.38 22.25 530.93 18.55 534.50 13.23

South America

22.32 13.77 23.79 12.12 23.78 7.23

Western Europe

459.56 49.11 440.67 55.57 374.80 49.64

Middle East

95.45 51.76 112.87 56.75 109.48 72.01


88.74 36.91 86.02 41.40 79.01 45.17


1,251.06 309.57 1,435.34 317.22 1,440.63 275.92


11.26  3.70 1.62 4.06 3.52 3.11


2,486.77 487.07 2,631.24 505.67 2,565.72 466.31

Source: SAMA

Moreover, Saudi Arabia is expanding both its refinery capacity and its petrochemical sector, since they would like to shift their exports to more value-added products. By 2009, there will be at least 6 new plants for the processing of hydrocarbons for a total investment of more than 26 billion USD.
In the table hereunder, there are the major partners from which Saudi Arabia imports. First of all, we can see that the EU is by far the first partner with respect to imports. It accounts for more than one third of its imported goods. Imports from US, China and Japan put together worth less than the imports from EU.


Table 5: Saudi Arabia’s import partners

Partners Mln Euro %            
EU 19.148 34,5            
USA 6.817 12,3            
China 4.413 7,9            
Japan 4.050 7,3            
Korea 2.128 3,8            
Rest of the World 13.604 24.5%            
Total 55.508 100,0            

Source: EU commission.

If we analyze more in detail the types of imported goods from the EU (table 6), we can see that almost 85% is composed by manufactured goods. Among the machinery (which account for almost 40% of all imports), automobiles are of particular importance, since they account for 6.5% of the total. At the same time we can see that, while import of automobiles is constant, there is an upward trend for other machineries: this indicates that Saudi Arabia is investing heavily on industrial diversification. In fact, if we look at the specification of imported machineries, we can verify that the most important ones are those classified as TDC XVI Ch.84-85, that is to say: machinery, mechanical appliances and electrical equipment.
So the situation is quite clear: with respect to the EU, Saudi Arabia exports raw materials and imports manufactured goods. This is a typical Ricardian situation. Anyway, if we look at the balance between imports and exports with the EU, we can see that, thanks to oil prices, Saudi Arabia is benefiting from an important surplus: it has grown from 1.8 billion in 2002 to 6.1 billion in 2006. Moreover, the Saudis are trying to build an economy that can diversify its revenue, thanks to the import of machinery needed for the development of other sectors.

Table 6: Saudi Arabia’s import from EU (millions of Euro)


2002 % 2004 % 2006 %

Primary Products

1.878 13,2 1.558 12,4 2.082 11,9

of which:


Agricultural prod.

1.554 10,9 1.221 9,7 1.452 8,3


31 0,2 32 0,3 157 0,9

Manuf. Products   

12.120 85,1 10.847 86,2 14.865 85,3

of which:



4.467 31,4 4.263 33,9 6.807 39,0

Transport equipm

1.999 14,0 1.343 10,7 1.401 8,0

of which:


Automotive prod.

937 6,6 844 6,7 1.129 6,5


1.927 13,5 2.043 16,2 2.298 13,2

Textiles and cloth.

600 4,2 466 3,7 485 2,8


14.246 100 12.588 100 17.434 100

Source: EU commission.

In the end, if we sum up import and export flows, we can see that EU is the most important trade partner for Saudi Arabia. This also explains why the Kingdom is suffering from the weakness of the US dollar: in fact, it earns dollars and purchases in euros. A recent statement from the OPEC secretariat (July 2007) laments the reduction of purchasing power of all exporting countries, in particular for GCC10 members.

Short-Term Scenario

For this short term scenario, we will refer to Standard and Poor’s forecast of some Saudi key figures, which are summarized in the table hereunder.

Table 7: Saudi Arabia selected indicators





GDP per capita (USD)




Real GDP growth (% of GDP)




Government revenues (% of GDP)




Government expenditures (% of GDP)




Source: Standard and Poor’s.

As we can see, the stable outlook reflects the prospects of sustained high oil prices, which will be the key driver for real GDP growth. On the other hand, GDP per capita growth will be lower due to the forecasted population increase at an annual rate of more than 2% a year. Government revenues will be stable at about 50% of the GDP. Still, oil revenues will account for more than 85% of total government income, thus leaving some uncertainties over these estimations. At the same time, the budgeted expenditures are considerably lower than the forecasted revenues, thus minimizing the risk of oil price volatility. As we have already seen, current account balance will be positive both in 2008 and in 2009. Again, high oil prices will sustain such a surplus.
More controversial is the possibility of augmenting production. Some analysts say that Saudi Arabia has a spare capacity of more than 3 million barrels per day, which would lead to the possibility that the Saudis could produce 12 million bb/d by 2012. At the same time, Saudi Arabia has reached its highest level of production ever and it is not so straightforward that it has both the willingness and the technical capacity to meet that goal (Banks 2007). The question over Saudi Arabia’s production capacity will become more and more relevant as the demand for oil is expected to increase, notwithstanding a global economic slowdown.

Concluding Remarks

Today, Saudi Arabia is all about oil. Its fortunes and misfortunes are linked to the black gold. It is often demanded if oil is a blessing or a curse. Well, it depends. Some countries have shown that natural resources can be an incredible foundation for a sustained and diversified development, while others have become addicted to their resources, thus developing the famous Dutch disease.
As we have seen, Saudi economy relies totally on oil. As claimed by Dibooglu and Aleisa (2004), monetary shocks in the short run and real oil prices in the long run explain almost the total variance of Saudis GDP. This means that there is urgent need for diversification. But the battle for diversification is difficult; and it gets even tougher every time oil prices rise, because sudden wealth is not the best fuel for creativity. Anyway, the government is trying to diversify the Saudi production paradigm. The problem is that, unlike its very small neighbours, Saudi Arabia has a considerable population. This obliges the Kingdom to adopt serious development plans, since it cannot imagine to just rivaling Qatar or the Emirates as a major financial and touristic centre.
Of course, there is no easy solution. Plenty of analysts push and demand for reforms, that is to say liberalization, transparency, openness and so on. These standardized patterns, though, are not easy to implement, nor always the best solution. As claimed by Stiglitz (2002), when we talk about economic development, we should never mistake the means for the goal.
In the end, oil shocks can be more dangerous for oil exporting countries. As reckoned by many (Rogoff 2006), we are experiencing a period that can be named “the Great Moderation”, because global macroeconomic volatility is declining. Still, the countries who benefit the most from this new economic environment are the ones with diversified risks. These countries can consequently better support a crisis in a particular industry. This in turn, reduces the effects of that particular crisis on the GDP and, at the same time, it reduces the scope for drastic measures in order to sustain the sector affected. Seen from this perspective, it would be optimal also for advanced economies to help oil exporting countries to diversify their economy.


Banks, F. 2007. The Architecture of World Oil. Politiche Energetiche e Ambiente.
Dibooglu, S. and E. Aleisa. 2004. Oil Prices, Terms of Trade Shocks, and Macroeconomic Fluctuations in Saudi Arabia. Contemporary Economic Policy, 22-1:50-62.
Hamilton, J. 2005. Oil and the Macroeconomy, in P. Newman, J. Eatwell and M. Millgate, eds, Palgrave Dictionary of Economics, New York : Palgrave.
Killian, L. 2006. Exogenous oil Supply Shocks: How big are They and how Much do They Matter for the US Economy? Mimeo, Michigan.
Niblock, T. 2007. The Political Economy of Saudi Arabia. New York: Routledge.
Rogoff, K. 2006. Oil and Global Economy. Prepared for the International Energy Forum Secretariat Meeting, Riyadh.
Stiglitz, J. 2002. Globalization and its Discontents. New York: Norton and Company.



1 Swing producer: this definition reflects the possibility of Saudi Arabia to vary quickly its production on order to meet the demand. In particular, Saudi Arabia has the possibility, given by its spare capacity, to balance 1 supply and demand in order to stabilize prices.
2 Anagram for Middle East and North Africa.
3 A theoretical recall is needed: theory classifies three different level of state involvement in the economy (Niblock 2007). The first one is the minimal state, which should provide maximum freedom for its citizens. It should only be involved in military defence, foreign relations and the defence of private property rights. The second one is the state-aided capitalism, where the state support and facilitate the economy, via the maintenance of macroeconomic stability, via the construction of an appropriate legal framework ( antitrust regulation, industry authorities etc…) and the provision of physical and social infrastructure. The third model is the state-sponsored capitalism, where the state is the primary engine of growth, thus directly controlling some of the key industries of the country.
4 A rentier State is a term used in political science to classify those states which derive all or a substantial portion of their national revenues from the rent of indigenous resources sold to external clients.
5 Before 1986, the Saudis cut their production of almost 60%: in 1980 they were producing almost 9 million barrels a day; in 1985 production was little more than 3 millions bb/day.
6 2004 jump was a consequence of the Second Gulf war.
7 This graph also shows what happened in the late 80ies: as Saudi Arabia augmented its production prices fell considerably.
8 Of course we are comforted by a multiple series of tests which confirm the choice.
9 A minus indicates an increment.
10 Gulf Cooperating Council, which is composed by: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.