Saudi Arabia: Gambling
on Deep Pocket Power
Edward J. Dodson
[An analysis of the opportunities and threats
involved in the Saudi decision to expand oil production in the face of
falling prices. Written in partial completion of the requirements for
the course Public Policy Analysis -- Dr. Sandra Featherman,
Instructor, Temple University, Spring, 1986]
A Wall Street Journal report in mid-March characterized the
economic impact of recent falling oil prices as follows:
After a decade of painful price
increases blamed on the Organization of Petroleum Exporting
Countries, the recent plunge in oil prices has come as a welcome
relief to oil consuming nations.
But according to many oil economists and analysts, the price
collapse could be setting the stage for another oil crisis far more
severe than the ones following the 1973-1974 Arab oil embargo and
the 1979 Iranian revolution.
What the Wall Street Journal and many other observers have
similarly described are the complexities of a tremendous gamble being
taken by those in control of national policy over oil production and
sales in Saudi Arabia. Saudi decisions to increase production and
direct a drop in oil prices came about because of impatience and
frustration with other O.P.E.C. member nations, from whom they had
attempted to secure an agreement to limit production and thus reduce
the intrusion on the Saudis' share of the world's oil market. Greater
production by both O.P.E.C. and other producers (particularly Britain
and Norway) created an oversupply of oil in a market hit by energy
conservation-consciousness in the industrialized "West" and
debt-produced recession in the developing nations. While the Saudis
were cutting oil production from around ten million barrels a day to
two million (losing three-quarters of its income), the British
increased production to near full capacity. Late in 1985 the Saudis
finally made their move, increasing their own production and forcing
prices down even further in an effort to recapture market share and at
the same time drive out competitors whose cost of production was much
The question to be analyzed is whether this was, in fact, a wise
long-run decision for the Saudis. What are the immediate cots and
benefits and the risks involved? Are they in a "win-win," "win
now/lose later" or a "no win" situation? The strengths
and weaknesses of the Saudi political economy result in a
decision-making structure that is in many ways unique and have a
strong impact on the course of its domestic and foreign policies; it
is therefore relevant to examine Saudi society and how it functions if
we are to reach any conclusions about these decisions.
GEOPOLITICAL POWER IN THE DESERT
The Saud family has maintained tight control over Saudi Arabia's
eight million people and land, its rise to power going back to the
eighteenth century and an alliance with the Islamic reformer, Mohammed
ibn-Abd-al-Wahab. Surviving brief periods of domination by the
Egyptians and Turks, by 1926 the Saud family under King Ibn Saud had
regained control of the Arabian peninsula and expanded the nation's
territory to its present boundaries. The appearance of oil as an
important element in Saudi geopolitics occurred during the 1930s, when
the ruling family entered into a 50-50 joint partnership with several
American oil companies. By 1965 the ruling family was receiving oil
royalties of $300 million annually.
Within Saudi society this oil-derived revenue has historically been
valuable as a source of tribute for distribution to important tribal
chieftains and sheikhs in return for continued allegiance. Members of
the Saud family have themselves gained reputations as lavish spenders
and consumers of great amounts of wealth. Their exploits have been the
subject of much media coverage and criticism during the last half
Until the late 1940s the Saudis were essentially isolated from the
lifestyle produced by the industrialization their oil resources had
fueled. Then came the recognition in 1948 of the state of Israel in
the very heart of the Middle East. The Saudis broke with other members
of the Arab League, who (lead by Syria, Iraq and Jordan) wanted to cut
off oil production in reaction to the partitioning of Palestine and
the creation of the Jewish state. Saudi loyalty to United States
business interests was acquired by secret agreements "whereby the
taxes formerly paid [by international companies] were transferred
between the companies and the U.S. government to the treasuries of the
House of Saud." Oil production and
Saudi revenues during these early post-war years was substantial
enough to fulfill the desires of those who held power, but were
nothing like that required to bring the Saudi nation into the modern
world. In 1944 total oil production was only 7.8 million barrels (less
than the daily production of the late 1970s) and brought the Saudi "government"
$1.7 million in royalties. This grew to 174 million barrels in 1949
and a more significant inflow of $50 million in revenue. Only a year
later the revenue received had more than doubled to $111.7 million and
production rose and fell as the world economy experienced boom or
There were apparently two reasons why American oil companies agreed
to a significant increase in royalty payments to the Saudis. The first
was dictated by U.S. foreign policy designs, as expressed by George
McGhee (at the time the Assistant Secretary of State for Near Eastern,
South Asian, and African Affairs) in testimony before the U.S.
At this time, the principal threat
to the Middle East lay in the possibility of nationalist leaders
moving to upset regimes which were relatively inept and corrupt, and
not attuned to the modern world.
Because U.S. political strategists deemed it necessary to promote
stability in this area, the corporations were permitted to deduct
royalty payments not as business expenses but as direct tax credits,
which brought oil company taxes paid to the U.S. Treasury to "nearly
What is perhaps most amazing is that the Saudis somehow survived what
in past centuries or even recent decades would have been a sure
takeover attempt by the more powerful nations, whose track records for
concern over rights of native people has never been a serious foreign
policy consideration. The following view reflects a fairly common
expression of viewpoint by Westerners:
The worldwide energy crisis is not
a problem of absolute shortages of resources. It is a political
crisis over who shall control these resources; who shall decide
where, when, and how they are to be distributed; and who shall share
in the enormous revenues. The struggle for control of the world's
resources is just beginning. The emerging consciousness that the
riches of the earth are not infinitely exploitable, that the cost of
producing, distributing, and consuming them can no longer be set by
the industrial nations, and that indeed such nations must compete
with one another for natural resources to maintain their
increasingly similar standards and styles of living marks a new
stage in world politics. It is a time of danger because the
capitalist countries may well be tempted to use military power to
offset their declining economic power. But it is also a time of
possibility. It is now clear that a death sentence hangs over
millions unless there is a radical redistribution of the riches of
the earth in this generation. It would be naïve to
underestimate the power and determination of the old cartelists -
the energy companies and the military establishments that protect
them - or of the new cartelists -- the shahs, sheikhs, and the
bankers who serve them - to preserve their hold on world resources.
But it would be more naïve to underestimate the power and
determination of those who struggle for survival.
Saudi power seems to have survived and expanded at the expense of
those who have desired to forever manipulate Middle East politics and
economics for self-interest. In return for guaranteeing an
uninterrupted supply of oil to Western industry, the entrenched
oligarchy of the Saud family would be supported and catered to -
because it was in the interest of United States national security.
Perhaps. The question of where national interest and special interest
begin and end has been more difficult to determine. The Saudis would
not have to wait long to receive a taste of the political consequences
should they decide not to play the game as the Western powers desired.
The first great shockwave in the Middle East occurred in 1956. Egypt,
under Gamal Abdel Nasser had been working since 1952 to build a
unified Arab nationalist movement neutral in the war of nerves between
the Soviet bloc and the West. As part of this strategy, Nasser ordered
Britain out of its Suez base and, when Egypt was attacked by Israel
(Israel's forced backed by both Britain and France), Nasser was forced
into a position of dependency on Soviet arms and assistance, when the
terms of United States aid came with conditions Nasser could not
accept and maintain his position as the leading Arab figure. The
United States retaliated by withdrawing aid for the construction of
the Aswan dam; Nasser responded by nationalizing the Suez Canal. Arab
nationalism was becoming a force to be reckoned with in the
geo-political struggle over oil and land.
Elsewhere, Arab workers began to strike against the oil companies.
Saudi Arabia experienced its share of labor unrest, and the
disruptions were put down by the use of troops (arms coming from the
United States). King Saud acted swiftly, suppressing all trade union
organizing and political activity.
In this volatile environment the United States President, Dwight
Eisenhower, opposed military intervention against Nasser because he
realized this would only enhance Nasser's power with those in the Arab
nationalist movement. Thus, in a certain twist of historical trend,
Eisenhower publicly opposed British and French efforts to restore
colonial domination in the Suez; this political move worked well for
the United States. As a result, U.S. dominated oil companies
essentially inherited control from their English and French
counterparts over Middle East oil. As an
indication that there were no consistent foreign policy principles at
work, Eisenhower and his advisers would take a very different stance
with regard to the crumbing French empire in Southeast Asia. United
States foreign policy efforts were now shifted to the task of
committing Saudi and Iraqi leaders to the struggle against
international communism, which (whether real or contrived) put the
Saudis in a role of dependence on the United States for arms and
At the same time, the Israeli leadership -- faced with severe
financial and economic pressures -- contemplated expansion of Israel's
territory at the expense of Arab-held lands. The anticipation of a
solution achieved by force of arms was growing stronger on both sides.
In 1958 Nasser engineered the formation of the United Arab Republic,
further increasing Arab nationalist prestige; and, in 1960, the
finance ministers of the oil-producing countries met in Baghdad to
discuss common problems and to develop a common Arab foreign policy.
Although the meeting proved that none of the Arab leaders were willing
to subordinate their own authority to Nasser or anyone else, one
result of the meeting was the creation of the Organization of
Petroleum Exporting Countries (O.P.E.C.).
The Arab nations, and the Saudis in particular, were at the dawn of a
new era in which freedom from foreign domination would come with a
growing core of Arab technical experts who were receiving engineering,
economics and finance educations in the West. One of the most able was
Abdullah Tariki, who, after an education in the United States at the
University of Texas, returned to Saudi Arabia in 1954 to become the
first Director General of Petroleum Affairs. In his case, one man
certainly made a tremendous difference in the course of events:
As the person responsible for
government relations with Aramco, Tariki's dedication to work - to
educating the public about oil affairs, to improving the terms of
the concessions and opening up positions for Saudis in the company
management, to using the country's wealth for the benefit of all the
people - made him stand out in the Saudi regime, where venality and
corruption were the rule, where no administrative structure existed,
and where power and influence depended on one's lineage in the
Royal House of Saud.
Tariki was instrumental in the early formation of O.P.E.C. and was an
ardent supporter of total nationalizaton of Saudi Arabia's natural
resources. Under Tariki's direction during the 1960s, the method of
determining revenue sharing was gradually revised to the benefit of
the Saudi government. Saudi Arabia then experienced a struggle for
political power between brothers Saud and Faisal; with U.S. backing,
Faisal staged a successful coup and became prime minister. Tariki was
soon dismissed and then exiled from his country (eventually settling
in Lebanon to work as an oil consultant). As far as U.S. corporate
interests were concerned, the Saudi nation was back in comparatively
Faisal's immediate task was to diffuse his opposition. He began by
sharply reducing the royal household budget, which had historically
consumed most of the nation's oil revenues. His method of
consolidating his power included public beheadings of political
opponents and the purging of the army and air force. He also took
steps to build up a modern police state designed to control all
political activity. A U.S. House of Representatives Foreign Affairs
Committee report of 1965 looked upon Faisal's activities with
After a generation in which oil
revenues were not turned to proper account, Saudi Arabia now appears
to be assuming a responsible attitude toward economic development.
Strenuous efforts are being made to diversify the economy.
Then came the 1967 Arab-Israeli War. A strike occurred against Aramco
on 25 June, 1967. In an effort to control the dissent, a large number
of Palestinian workers were deported from Saudi Arabia. Still, a show
of Arab unity was required, so all oil shipments were suspended for a
time and an embargo placed on shipments to the United States and
Britain. The Saudis quickly became worried about the loss of oil
revenue and negotiated an end to the embargo, obtaining concurrence
from Egypt after agreeing to a $400 million annual aid program for
Egypt in return for Nasser's support.
Pressure within all the Arab states to nationalize oil production
increased with the Israeli victory. Saudi Arabia pushed hard for a
different course of action, negotiating an equity interest in Aramco.
This was the beginning of Saudi plans to make major improvements in
its own infrastructure and to become a net exporter of manufactured
goods as well as of oil. In the meantime, the Saudis would channel
surplus revenues into profitable foreign investments.
In mid-1972, the Saudi finance minister, Sheikh Zaki al-Yamani, went
public with this plan in an address before the Middle East Institute,
proposing that "the United States give tariff preference for
Saudi oil imports, direct investments in refining, and other oil
industry activities," in return for which the Saudi nation would "commit
itself to a production level of at least 20 million barrels per day"
- a level equivalent to all Middle East production in 1972. The U.S.
companies signed the agreement in October and it was ratified by the
Saudis in December.
A number of globally-significant events then occurred that brought
chaos to the oil market in 1973. Early in the year prices began to
climb because of rising demand for low-polluting (i.e., low sulphur)
crude oil, particularly in the increasingly environmentally-conscious
United States. The Saudis continued their policy of accommodation
because, as Faisal stated:
We are thinking in terms of
economic cooperation and shared interests in the financial sphere.
As is always the case in international relations, whenever mutual
interests exist between two countries in the economic field very
strong political relations immediately develop.
On the other hand, the natural temptation to control markes and,
hence, prices has always been a fundamental desire of suppliers and
producers. Adam Smith, in The Wealth of Nations, warned: "People
of the same trade seldom meet together, even for merriment and
diversion, but the conversation ends in a conspiracy against the
public, or in some contrivance to raise prices." The Saudis were
being accommodating; however, in their relatively brief exposure to
international business and geopolitics, they had learned the value of
tough negotiation. And so, in May of 1973 the Saudis entered into an
informal agreement with the United States that encouraged Saudi
investments in the United States and promised reciprocal assistance
from the U.S. in developing the Saudi domestic economy.
Under the new arrangement, increases in Saudi production were to be
tied to "large-scale technical assistance to help industrialize
the Saudi economy." Controversy
occurred, however, when the United States leadership could not prevent
Saudi involvement in the Arab-Israeli conflict. The Saudis responded
to overtures for a new Arab unification by Egypt's new leader, Anwar
Sadat. In April 1973, Yamani, the Saudi oil minister, visited the
United States in an effort to convince U.S. policymakers not to
continue shipping arms to Israel. Yamani let the Americans know that
oil production might be used as the Saudi foreign policy weapon.
On 6 October, 1973, Egypt and Syria launched a combined attack
against Irsaeli forced in the Sinai Peninsula. Sadat and the Palestine
Liberation Organization (PLO) increased pressure on Faisal to initiate
an embargo against the United States. The result was an initiative,
tentative 5 percent cut in production, almost immediately increased to
10 percent. Following the announcement by the United States of a $2.2
billion aid bill to Israel, the Saudis joined other Arab nations in
the embargo against the United States. To do otherwise might have
meant political suicide for Faisal among his Arab neighbors.
The cease fire between the Egyptian and Israeli forces in November
brought the problem of oil production and export to the negotiating
table. The price of O.P.E.C. oil on 1 January, 1974 had risen to over
$11 a barrel, a 470 percent increase in just one year. In the United
States, oil stocks kept moving upward, non-energy consumer spending
began to fall precipitously, and the world economy slipped toward
recession. O.P.E.C. members then met in March to discuss lifting the
embargo and the raising of prices even higher. At this meeting Yamini
expressed his view that "prices were already too high and that
they should be reduced so as not to jeopardize the economic and
political stability of the industrialized capitalist countries."
One reason for the Saudi stance was that the United States government
was pressing U.S. corporate leaders to assist the Saudis in their
economic development program. More and more of Saudi oil revenues was
also flowing into the U.S. securities markets, so that Saudi
self-interest was very much at stake. These oil revenues totaled
around $17 billion in 1974. While this number is certainly large, a
breakdown in the distribution of revenue generated from oil products
|Consuming Country (taxes)
One immediate impact on the Saudi people was a doubling of food
imports from the United States between 1973-74. Up until 1974,
however, the distribution of oil wealth had resulted in only minor
improvements in the life of the average Saudi citizen. Military and
internal security budgets had continually expanded, but the Saudi
infrastructure was not yet equipped to undertake large development
projects. Strange as this sounds, Saudi economic development was being
managed by the Stanford Research Institute.
Saudi society has undergone a rapid rate of change during the last
decade. Industrialization and a greatly increased standard of
well-being for the Saudi citizen have been very real results. From
another perspective, however, the Saudi advances are diminished by the
fact that most of the technical and manual work has been performed by
some 2.6 million workers brought into the country rather than by Saudi
During the years 1981-84 the Saudis allocated $550 billion for
infrastructure and industrialization development. At the same time
they retained $100 billion in foreign reserves. A substantial portion
of these financial resources were utilized for the creation of two new
industrial cities forecasted to create 144,000 new jobs for Saudi
citizens by the year 2000. The emphasis on domestic industrial
expansion is reflected in restrictions on foreign investment which no
longer permits companies to come in for a quick profit and then leave.
Foreign companies must now make long-term commitments of time,
resources and technology transfer. One result of these efforts
has been to generate an average per capita income in Saudi Arabia of
A five-year development plan for 1985-90 has been adopted with a
projected cost of $277 billion. Around $190 billion is to be allocated
to civilian spending, with the remainder dedicated to defense
expenditures. This plan also calls for the reduction of government
involvement in the economy, replacement of foreign workers with Saudi
citizens and absorption of Saudi women into the workforce. Faced with
a continuing decline in oil revenues during 1984-85 the Saudi
government took various measures to reduce expenditures, including a
reduction in the number of subsidies on consumer goods, salary cuts
for government employees and the removal or reduction of housing,
medical and travel allowances.
The government has also moved to increase the domestic content of
business contracts. In early October of 1984 it was announced that 30
percent of the value of any single contract has to be subcontracted to
companies which were wholly Saudi-owned. A decree issued by King Fahd
in mid-June of 1985 subsequently rule that all non-construction
contracts would be awarded to Saudi firms. Tariffs on durable imports
were increased from 4 percent to 7 percent beginning with the start of
the fiscal 1986 year. These measures seem
to reflect an economy in trouble and a government concerned about
deficits. An evaluation of the Saudi economy by Daniel Yergin and
Martin Hillenbrand a few years ago reached an opposite conclusion:
Because of low demand for foreign
goods compared to earnings, Saudi Arabia is able to scale down its
oil production without hurting its own growth.
This seems to be supported by a Business America report
concluding that "declining Gross Domestic Product growth is less
meaningful in the current Saudi context than it would be elsewhere in
the world because Saudi Arabia's roads, communications, and basic
infrastructure are now largely in place."
That is a tremendous achievement within the span of only a decade.
Net foreign assets held by the Saudis rose from $4.2 billion in 1973
to $67.3 billion in 1978, to $118.2 billion in 1980 and were at $161.6
billion by the end of 1981. In fact, the Saudis held 40 percent of
the total net asset position of all the O.P.E.C. oil countries
combined. Yergin and Hillenbrand have concluded, therefore:
The different demand patterns of
the OPEC countries are important for their investment objectives and
strategies. The first objective is always to maintain the country's
international liquidity under circumstances of fluctuating foreign
exchange revenues and expenditures. This is the typical purpose for
keeping foreign exchange reserves.
Saudi Arabia will, as a rule, devote only pat
of its total financial surpluses to monetary reserves. The rest,
perhaps the greater part, will be invested with a view to spending
the money in the future to import goods and services and/or to
secure a continuous stream of income in the face of depleting oil
reserves. The actual investment strategy depends on the development
strategy pursued. Priority is always given to the development of the
domestic economy. Saudi Arabia considers the accumulated foreign
assets as a kind of deferred expenditure, to be spent developing
their country. With this fairly defined time period, the preference
will be towards fixed income instruments.
A number of investments in existing businesses seem to go against the
above investment strategy until one understands that many individual
Saudis are extremely wealthy. Saudi interests have acquired three
Hilton Hotels in North Carolina and the brokerage firm of Smith
Barney. The Saudi nation's investments are managed by the Saudi
Arabian Monetary Agency, which (unlike its Kuwait neighbor) has made
minimal investments in European or North American real estate,
preferring to keep its equity participations in United States forms
below 5 percent. Although not significant to the Saudi portfolio, a
number of other investment choices are interesting because of their
Source: Saturday Review, January
|Industrial Park (Salt Lake City, Utah)
|Arizona Land & Cattle Co. (Phoenix, Arizona)
|First National Bank of San Jose, CA (33%)
|Security National Bank of Walnut Creek, CA (96%)
|Bank of Contra Costa, CA
As the above details demonstrate, Saudi strategy for at least the
last decade has been to strive for independence from its oil clients
by an accelerated development of infrastructure, diversification of
its domestic economy and the minimization risk in foreign investments.
There are now two scenarios to pursue. The first is to look at what
did not occur and what the probable consequences might have been had
the Saudis followed a path of least resistance. The second is to
forecast the future based on the path the Saudis have taken.
THE PATH OF LEAST RESISTANCE
From late 1981 until late October of 1985 the price of crude oil
settled down at around $28 per barrel. Increased production by
Britain, Norway, the United States and other producers was exerting
downward pressure on the price. The Saudis were pumping around 2.2
million barrels per day, which -- at $28 per barrel -- would have
generated $22.5 billion in annual revenue. Assuming the primay goal of
the Saudis would be to sustain this revenue at the lowest production
level required, and that the weighted average price of oil would drop
by $2 per barrel each year after 1986, the adjustments to production
would be roughly as follows:
Total Revenue ( R ) = $22.5 billion, or $22,500
Variables: ( X ) = millions of barrels per day; ( Y ) = price per
Both ( R ) and ( Y ) are knowns; we are seeking
to determine how many barrels must be produced each day to maintain a
constant revenue inflow.
The formula to find ( X ) in the base year is:
[Total Revenue ( R ) divided by 365, the result of which is the daily
revenue figure, divided by the current price per barrel
( Y ).
Thus, for 1986, the calculation would be as follows: ( X )o = $22,500
/ 365 / $28 = 2.2 million barrels per day.
From the 1986 base year figures, subsequent production levels can be
determined by simply substituting the present year weighted average
price per barrel. Given our assumptions, this results in a 1987 price
of $26, a 1988 price of $24, and so on. By the year 1995 the annual
production level would need to rise to 6.16 million barrels per day to
generate the same level of revenue in nominal dollars. Adjusted for
inflation, production would have to be even greater.
Only a few short months ago the suggestion that crude oil prices
might drop from around $30 per barrel to as low as $10 by 1995 would
have been given a near zero probability. In hindsight, however, the
situation was far too volatile to permit oil prices to continue to
climb. First, other producers were investing heavily in exploration
and expanding output from other sources (e.g., the North Sea). The
high prices and threats of supply shortages heightened the movement
for energy conservation and improved efficiency of automobiles and
other types of machinery. The high prices also enhanced the economic
viability of alternative fuel sources, attracting financial resources
into these investment areas. The Saudis were keenly aware of the
situation. Moreover, they provided they were fully capable of pumping
well over six million barrels of oil a day if necessary to meet their
revenue needs in an atmosphere of lower prices.
There are several other key variables to be considered in this
analysis. At issue is whether the Saudis would be able to generate
sufficient revenues to finance their national budget without incurring
a deficit (and, hence, eating away existing financial reserves).
Again, a number of critical assumptions must be made based on current
reported Saudi assets, budget estimates and income from both oil and
non-oil related output. For 1986, the Saudis have reported a $55
billion budget, which they acknowledge is forecasted to create a $12
billion deficit. Total foreign investments are estimated to be worth
$106 billion, plus a reserve of $60 billion in liquid assts (U.S.
government securities, etc.) held by the government. The non-oil
related sector of the Saudi economy has forecasted revenues of $7.2
For purposes of estimating cash flow into the Saudi government, it is
assumed that the market value of foreign investments in real estate,
ownership of other companies, stocks, bonds, etc. will average an 8
percent rate of return, while increasing in value by 10 percent each
year. Although the latest five year plan looks for an average
increase in domestic productivity of 5.9 percent, I will use 3 percent
in this analysis as being more realistic. At the same time, based on
the reduction in the requirements for new infrastructure and the level
of private sector expansion, I include a constant 3 percent reduction
in the national budget (predicting that the Saudis will curtail
spending rather than experience a deteriorating financial position,
the government not overly concerned with public opinion and not faced
with the pressures of having to stand for election). For purposes of
simplicity all figures are assumed to be adjusted for inflation.
As the above data suggests, the Saudis would have experienced a
gradual loss of financial reserves as a result of five straight years
of budget deficits. By the end of 1995, however, reserves would have
climbed back to $56.7 billion. The Saudi cash flow and financial
reserves / physical capital at year end 1995 would have appeared as
below (billions of dollars):
|Non-Oil Domestic Inc.
*Saudi Arabia possesses
approximately 25 percent of the world's known oil reserves (640
billion barrels), or 160 billion barrels. At the forecasted 1995
price of $10 per barrel, these reserves would have a market value of
What this analysis also suggests is that Saudi economic development
is now broadly established. Because of this, drastic cuts in the
government's domestic programs were not required to ensure long-term
expansion. Lower crude oil prices, gradually obtained as a result of
adjustment in supply to demand were offset by higher oil production
and market share. At the same time, the lower energy costs stimulated
worldwide economic activity and stabilized the return on foreign
capital investments realized by the Saudis. Had they followed this
course of action, the Saudis would have experienced a win-win
situation by both preserving oil-generating revenues and maintaining
The course actually followed is much more difficult to forecast into
the future or to evaluate because of the intense political
ramifications involved. Saudi Arabia has very quickly influenced by
the price of oil by its increase in production from the 2.2 million
barrels per day used in the above analysis to around 4.5 million
barrels per day presently (April 1986). Moreover, the rapid drop in
oil prices has had a complex effect on the global economy. The large
money center banks with loans outstanding to Mexican and other
international oil firms are threatened as oil prices continue to fall.
Moreover, oil revenues have been a primary source of foreign currency
for Mexico, and the Mexican economy is now at a standstill. All around
the globe, oil and gas industries expanded production, refining and
exploration on the assumption that increased costs would be covered by
higher revenues. Now, these same firms are being forced to curtail
activities and reduce their workforces by thousands of employees. As
unemployment rise in the oil belt regions of the United States
and other countries, real estate (i.e., land) values are collapsing.
Newly-constructed office buildings remain empty and existing buildings
drop rents or lose tenants to competitors. In areas where the economic
base is highly diversified, there is considerable optimism and
economic activity. Thus, depending on where you sit, the signs look
either mighty good or downright terrible. With the rise and flal of
O.P.E.C., we have probably seen the end of the national economy.
The global economy has flexed its muscles and shown us its might. At
this point, whatever assumptions are to be made about the Saudi
economy are fraught with pitfalls. What my research has shown is that
Saudi Arabia is far better positioned to weather the storm than many
other nations, particularly those that have not had the benefit of
sitting on an ocean of oil.
| James Tanner. "Falling
Oil Prices Relieve Consumers But May Set State for Future
Shortgage," Wall Street Journal, March 14, 1986,
 Paul T. Walty. Man's Cultural Heritage [New York:
J.B. Lippincott Co., 1965], pp.221-222.
 Joe Stork. Middle East Oil and the Energy Crisis
[London: Monthly Review Press, 1975], p.46.
 Ibid., p.47.
 Ibid., pp. ix-x. From the Introduction, written by
Richard J. Barnet.
 In March of 1957, the U.S. Congress passed legislation
authorizing up to $200 million for economic and military aid and a
commitment of United States troops to any nation in the Middle
East that requested U.S. support against "armed aggression"
from "any country controlled by international Communism."
The major impact of U.S. foreign policy initiatives was, however,
felt by the U.S. NATO allies -- Britain and France. See: Blanche
Cook. The Declassified Eisenhower [New York: Doubleday &
Co., 1981], p.188.
 The original members of the new Organization of Petroleum
Exporting Countries included Saudi Arabia, Kuwait, Iran, Iraq and
 Joe Stork, pp.89-90.
 Ibid., p.110.
 Ibid., p.207.
 Ibid., p.209.
 Ibid., p.243.
 Kessing's Contemporary Archives [Harlow, England:
Longman Group, Ltd., 1985. Vol.XXXI, No.11], p.34013.
 Daniel Yergin and Martin Hillenbrand. Global Insecurity
[boston: Houghton Mifflin Co., 1982], p.313.
 Elise Kleinwaks. "Saudi Arabia: Services and Technology
in Demand as Market Matures," Business America
[Washington: U.s. Department of Commerce, Vol.9, No.6, March 17,
 Susan Bluff. "OPEC's $350 Billion Balance sheet,"
Euromoney, September 1980.
 Yergin and Hillenbrand, p.314. The authors refer to the
Saudi state as a "low absorber" because of its
contorlled spending during the last decade. They also note that
under this investment strategy "fixed income securities of
longer maturity are used, the liquidity less important than yield.
Other non-financial assets, such as property or precious metals,
have also been considered as areas of invesment.