Saudi Arabia Economy

Saudi Arabia Economy

In this article, we shall discuss the Saudi Arabian economy. We will analyze the makeup of the economy, with particular attention to the role of oil in Saudi Arabia. We will then discuss the effects of the more recent drops in oil prices on the Saudi economy, and the impact that this has had on their expenditures and savings. We will then examine plans (and the 2016 announcement) by the Saudi government to diversify their economy away from oil. This discussion is very important for international relations, since Saudi domestic politics clearly affects its foreign relations and interactions with other countries as actors in the world. 

Oil and Saudi Arabia

Oil is the centerpiece of the Saudi Arabian economy. The vast majority of Saudi Arabia’s economy (upwards of 90 percent) is based on the oil sector. The Saudi Arabian government has been heavily reliant on oil for decades, with continued production of oil since 1938 (Cappelen, & Choudhury, 2000).

For example, Saudi Arabia was producing 3.8 millions of barrels per day in 1970. This increased to 8.5 million barrels of oil in 1974. Then, in the mid 1970s (following a drop in 1974-1975), oil increased to 9.2 million barrels per day (Cappelen, & Choudhury, 2000). And while there were periods of oil production cutback (due to heavy supply and economic challenges in the 1980s) (Cappelen & Choudhury, 2000), this went back up in later decades. Currently, the Saudi Arabian government produces about 10 million barrels of oil per day.

In addition to the high production of oil, it must be understood that more than just large outputs, the primary reason that Saudi Arabia’s economy has been able to grow has been because of oil; the ability to use oil profits have led to a series of economic development projects throughout the decades.

But the dependence on oil poses a series of challenges for the Saudi Arabian government. Saudi Arabia has been spending much more than the current levels of oil profits, which is causing serious strains on their economy. This has led to an increase in financial borrowing of money, as well as taking money from reserves (O’Brien, 2016). However, this sort of plan cannot go on forever without serious problems arising. As we already see, Saudi Arabia’s “deficit has swollen to such size–some 15 percent of gross domestic product–that it can’t keep this up if it thinks there’s any chance it’s wrong about oil prices” (possibly going back up).

This has led many to suggest options that Saudi Arabia has in order to remedy their current economic situation. For example, scholars at the IMF (Al-Darwish, et. al., 2015) point out, “The reliance of the Saudi Arabian economy on oil revenues raises two key challenges for policymakers. The first is how they should best manage the country’s current heavy dependence on oil revenues and ensure that the domestic economy is insulated to the extent possible from volatility in the global oil market. The second is how they can help the economy to diversify so that the current reliance on oil revenues is reduced over time.”

Falling Oil Prices and the Saudi Economy

The price of oil has dropped greatly in the past couple of years, with oil currently at around 40 dollars per barrel. However, as the price of oil continues to fall, this greatly hurts the overall income of Saudi Arabia. It has been said that “[f]or every USD 1 drop in the oil price, the Kingdom wave goodbye to USD 2.5 billions a year in revenue” (Cappelen, & Choudhury, 2000: 10).

One of the primary reasons for falling oil prices is the actions of the Saudi Arabian government itself. The Saudi Arabian government has found many reasons as to why it has wanted to keep oil prices low, even at the economic costs that this would come to them. One of the primary reasons why Saudi Arabia has wanted to keep oil supplies high has to do with competition from places like Canada and the United States. Canada is one of the top countries when it comes to oil reserves. However, given the cost to extract, refine, and ship the oil, a lower sales prices of oil per barrel makes it less financially attractive for Canada to produce this oil. The United States’ companies are also effected when international oil prices are lower.

It has been for this reason that Saudi Arabia has been willing to keep prices lower, to drive away any competition, which could hurt their long term oil profits. But there are some problems with this approach. As O’Brien (2016) explains, “Saudi Arabia, you see, has been flooding the market with cheap crude to try to drive its high-cost competitors out of business, but that isn’t as easy as it used to be. Shale drillers can stay profitable at lower prices than before, and, more importantly, can turn production on or off as needed for relatively little. So even if the Saudis succeed in forcing them into hibernation, they should still be able to wake up in time to keep prices from rising to much more than $50-a-barrel. And that, in turn, means that Riyadh can’t continue to spend so much money that it’d need oil to be at $80-a-barrel to pay for it.”

Oil and the Iran-Saudi Arabia Tensions

Another reason why Saudi Arabia does not want to cut back oil production has to do with the rising power of Iran. Due to a nuclear deal with the United States and others in the West, sanctions have been lifted off of Iran, which is expected to help their economy. Specifically, they are now able to trade their oil on the international market. This has brought in billions of dollars of income that they did not have access to in years past. 

This is quite troubling to Saudi Arabia. They see Iran trying to increase their influence in the Middle East, whether it is in the Syrian conflict, in Yemen, Lebanon with Hezbollah, in Iraq, or elsewhere. 

Therefore, in attempts to ensure that Iran’s economy does not improve, Saudi Arabia is attempting to get their allies in the Organization of Petroleum Exporting Countries (OPEC) to keep producing high levels of oil. While there have been calls for the KSA to reduce oil output, “Saudi Arabia will not accept any constraints on its output, even freezing at record levels, unless Iran agrees to similar controls, which it has rejected until production has reached pre-sanctions levels” (Kent, 2016). More specifically, “Iran plans to boost output to 4 million barrels a day in the Iranian year through March 2017, Oil Minister Bijan Namdar Zanganeh said April 6. That would be an increase of about 800,000 barrels a day from March production. Its crude shipments have risen by more than 600,000 barrels a day this month, according to shipping data compiled by Bloomberg” (Smith, 2016).

Iran now has the ability to sell their oil, so they are attempting to make up for lost time (and lost income) by increasing production. In turn, Saudi Arabia has also threatened to increase their oil production further (from 11.5 million, to upwards of 20 million barrels of oil a day) (Kent, 2016).

In fact, it was this point of Iran that led Saudi Arabia to move away from a possible late April 2016 agreement among OPEC states to guarantee no output increases for six months (Kemp, 2016).

However, while this might be a political move that Saudi Arabia wants to make in order to counter Iran, the continued low price of oil has in fact had a negative effect on the Saudi economy, and on Saudi spending. For example, as we wrote on here, the International Monetary Fund has issued warnings with regards to the financial problems oil-rich countries like Saudi Arabia could be facing in the upcoming years.

In addition, this decreased revenue on account of lower oil profits has also effected Saudi politics in the region. Not only are oil prices lower, but Saudi Arabia is continuing to spend a great amount of resources to fighting the Houthi rebels in Yemen. They are worried about Iran’s influence in the region, and fighting the rebels in Yemen is one place where they can challenge Iran. However, with lower income, this is becoming increasingly difficult, which is allowing Iran towards more gains–without Saudi Arabia being able to effectively check them (Hubbard & Kulish, 2016).

Diversification of the Saudi Arabian Economy

In 2016, the Saudi Arabian leadership spoke about the importance of moving away form reliance on oil and fossil fuels. They recognized that a sharp downturn of oil prices have hurt the Saudi economy, and that focusing so much of the economy on oil could continue to hurt the state. However, the Saudi government has been talking about doing this for decades (Cappelen, & Choudhury, 2000). But it seems that the economic pressure is much stronger now.

Saudi Arabia is spending much more than it is bringing in (in terms of oil wealth). And they are continued to accrue debt because of this. Recognizing the economic challenges that Saudi Arabia is facing, the current leadership is attempting to introduce a set of policies in hopes to become less oil dependent.

For example, on April 25th, 2016, the Saudi Government spoke about a new economic diversification program that is expected to shift attention to a series of other economic programs. This initiative has been called the “Vision for the Kingdom of Saudi Arabia”, or the Vision 2030 (BBC, 2016), and is intended to establish a series of programs aimed at improving the Saudi economy, and also helping with regards to socio-economic programs with the KSA. In the interview, he spoke about the need to move away from a high reliance on oil, saying “We will not allow our country ever to be at the mercy of commodity price volatility or external markets” (Nakhoul, Maclean, & Rashad, 2016). We went on to also say, “We have developed a case of oil addiction in Saudi Arabia” (Nakhoul, Maclean, & Rashad, 2016) (We have embedded the Al Arabyia interview with Saudi Deputy Crown Prince Mohammed bin Salman bin Abdeulaziz below).

Because the Saudi government is looking to move away from their significant reliance on oil, one of the elements within the program–the National Transformation Program (which is set to begin in late May or early June of 2016) is looking into shifting Saudi Arabia from a primarily oil-based economy to one that also has non-oil income. For example, Prince Mohammed Bin Salman, who is said to be the heir to King Salman, said that the goal was to increasing the state’s revenue from non-oil sources by 100 billion dollars in just under four years (by 2020).

He also has called for the expansion of a Public Investment Fund that Saudi Arabia currently has. The hope is to make this fund “the world’s largest sovereign wealth fund” where they hope to increase foreign investments from 5 percent (current levels) to 50 percent (Hamade & Shahine, 2016), with a goal of the fund reaching 2 trillion dollars (Nakhoul, Maclean, & Rashad, 2016). He also suggested the possibility of having a greater role for women in Saudi Arabia’s economy, and also discussed a program to increase Muslim and Arabs working in Saudi Arabia, and also discussed allowing less than 5 percent of the ARAMCO (the state owned oil company) to be sold on the public stock markets (Nakhoul, Maclean, & Rashad, 2016). Prince Salman pointed out that an even 1 percent shares of ARAMCO would be the world’s biggest IPO ever. He said that allowing a percent of ARAMCO stocks to be traded would allow for transparency (and additional scrutiny), as well as allow part of the shift from the reliance on oil in the Saudi economy. 

Saudi Arabia: Cutting Back of Social Spending

One other consequence of reduced oil prices is the need for the Saudi Government to cut back on social spending within the state. While basic subsidies may not get reduced (or see a tax increase), they could be looking elsewhere to increase revenue. For example, “Saudi authorities are weighing measures that include more steps to restructure subsidies, imposing a value-added tax, and a levy on energy and sugary drinks as well as luxury items” (Hamade & Shahine, 2016). In addition, the Saudi Arabian government has also taken on additional austerity measures that include cutting subsidies on fuel prices, increasing taxes on electricity, as well as a the increase of the price of water, all in the hopes that it can cut its deficit by four points (O’Brien, 2016).

While these sorts of actions may increase the non-oil revenue for the state, they are are not being considered without serious thought. The reason? Increasing taxes, or decreasing subsidies could be dangerous for the survival of the regime, particularly if they began to go after staple products, or other areas that could lead to citizen frustration. Interestingly, “Past rulers have avoided relying on the public for additional revenue for fear of triggering a backlash from one of the world’s most conservative societies. Government spending, jobs and subsidies have typically been the engine of economic growth” (Hamadae & Shaine, 2016). Plus, the Saudi Government is very controlling, oppressive, and non-democratic regime. But, they have hoped that by providing economic securities to their population, that they in turn will be less critical of the political makeup of the state.

O’Brien (2016) explains the Saudi Arabian economic problems in the following way:

“Saudi Arabia has what Paul Krugman calls the St. Augustine problem. It needs fiscal chastity and continence, but not yet — at least not without a cheaper currency. In other words, Riyadh really can’t afford to keep spending 13 percent of the country’s GDP on energy subsidies, but it also can’t afford to hurt the economy any more than low oil prices already have. The simple story is that less government spending means less spending in the economy overall unless you do something to offset the cuts.”

However, if the Saudi government cannot provide these sorts of economic support, it would not be surprising if those in civil society increased their pressure on the Saudi Government to not only provide subsidies, but they might also demand democratization. If oil prices continue to be low, and the population’s day to day lives are affected, this could increase the likelihood of pressures for political reform.

Looking at the history of Saudi Arabia, one can see that leaders used oil to help buy support within the Kingdom. As _ writes, “Money could also be used to settle tensions within the royal family by allowing each senior prince to be given their own vast and essentially autonomous bureaucratic fiefdom. Oil wealth enabled the state to avoid levying income and other taxes and to subsidize the provision of basic services including water, electricity and gasoline”” (Kemp, 2016b).

Now, with a shift away from oil, Saudi rabia may face increased pressure by individuals that may no longer see the same economic benefits provided under by a regime highly dependent on oil wealth. 

Reducing Unemployment in Saudi Arabia

Because of the heavily rentier state that is centered on oil, the Saudi Arabian government has not been very concerned about either unemployment, nor heavy employment in the oil sectors. However, because of attempts to diversify the economy, and move it away from oil, issues of unemployment are become of greater concern to the state. Recent 2015 figures suggest that Saudi Arabia unemployment is at 11.4 percent (CIA World Factbook, 2015) to 11.6 percent (Rashad & Paul, 2016). The Saudi Arabian government hopes that they will be able to reduce the unemployment rate to 7 percent with less than 15 years. In addition to this, the Saudi leaders are also working to increase “women’s participation in the labor force to 30 percent from 22 percent” (Rashad & Paul, 2016).

The Saudi government has tried to improve the employment rate before. For example, “Under a government program called Nitaquat (“Categories”), launched in 2011, companies are already encouraged to hire Saudis rather than cheaper foreign workers. Firms employing high ratios of Saudis receive preferential treatment from the labor ministry in processing work permits” (Rashad & Paul, 2016). However, the program was not very successful, particularly because companies continue to hire foreign workers for many of these jobs, jobs that are very dangerous, and ones that locals frequently do not want to take (Rashad & Paul, 2016). There will be a new emphasis on Nitaquat in order to improve these employment figures, even though the numbers of Saudis hired in each employment category is said to differ (with construction-based jobs having much less percentage expectations than other areas, such as retail) (Rashad & Paul, 2016).

Reshuffling of the Saudi Arabia Government

One of the results of the 2016 economic reform announcements in Saudi Arabia has been a changing many top positions within the the Saudi government. Among the most noted of changes of the Prince’s new economic plan was the replacement of Ali al-Naimi, who has served as the Saudi oil minister since 1995 (Hubbard & Krauss, 2016). In addition, “the Ministry of Petroleum and Mineral Resources was renamed the Ministry of Energy, Industry and Natural Resources, a semantic shift meant to indicate the country’s commitment to diversifying away from oil” (Hubbard & Krauss, 2016).

According to many analysts, what is happening is a strong shift of power within the highest ranks of the Saudi monarchy. Prince Salman’s increase in power and influence has allowed him to not only push a series of initiatives (such as the Saudi economic initiative he outlined), but it has also allowed him to influence political structures within the KSA (Hubbard & Krauss, 2016).

Al-Naimi’s policies of high oil production despite a drop in prices have helped them fight off rising companies (a number of whom were in the United States and Canada, and who were looking to increase their oil sales). However, the low oil prices have greatly impacted Saudi reserves. Due to continued high spending, the budget deficits have been a problem for the Saudi Arabia economy. Thus, “[s]ome energy experts viewed the appointment of Falih as a signal to both the Saudi power structure and international oil markets that Prince Mohammed was pushing forward with plans to transform Saudi Aramco into an energy conglomerate that could invest in projects with less interference from the royal family” (Hubbard & Krauss, 2016).


Given the 2016 announcement of Saudi Arabia’s Vision 2030, and the continued fluctuation of oil prices, it will be interesting to see whether Saudi Arabia will move itself away from heavy reliance on oil, and towards a diversification of their economy. In addition, it will also be interesting to examine how citizens might respond to the decrease in social services that might come from this shift away from oil.


Saudi Arabia Economy References

Al-Darwish, A., Alghaith, N., Behar, A., Callen, T., Deb, P., Hegazy, A., Khandelwal, P., Pant, M., and Qu, H (2015). Saudi Arabia: Tackling Emerging Economic Challenges to Sustain Growth. International Monetary Fund Middle East and Central Asia Department Paper Series. Available Online:

BBC (2016). Saudi Arabia agrees plans to move away from oil profits. April 25th, 2016. Available Online:

Cappelen, Å, & Choudhury, R. (2000). The Future of the Saudi Arabian Economy: Possible Effects on the World Oil Market. Statistics Norway, April 2000. Available Online:

CIA The World Factbook (2015). CIA The World Factbook. Available Online: 

Hamade, R. & Shahine, A. (2016). Saudi Arabia’ Post Oil Plan Starts April 25, Prince says. Bloomberg. April 16, 2016. Available Online:

Hubbard, B. & Krauss, C. (2016). Tension rising, Saudi monarch outs ministers. New York Times. In The Boston Globe. May 8th, 2016. Available Online:

Hubbard, B. & Kulish, N. (2016). Obama to Visit A Saudi Arabia Deep in Turmoil. New York Times, April 18th, 2016.

Kemp, J. (2016). Saudi Arabia turns oil weapon on Iran: Kemp. Reuters, April 18, 2016. Available Online:

Kemp, J. (2016b). Saudi Arabia will struggle to kick its oil addiction. Reuters, in Yahoo Finance. April 28, 2016. Available Online:–business.html 

Nakhoul, S., Maclean, W., & Rashad, M. (2016). Saudi prince unveils sweeping plans to end ‘addiction’ to oil. Yahoo Finance Canada. April 25th, 2016. Available Online:–sector.html 

O’Brien, M. (2016). Saudi Arabia has a giant mess on its hands. Washington Post. January 4, 2016. Available Online:

Rashad, M. & Paul, K. (2016). Saudi plans new labor to cut unemployment. Reuters; Yahoo Finance. May 3rd, 2016. Available Online:–business.html

Smith, G. (2016). It is Saudi Arabia’s other warning that is making oil traders sweat after the Doha failure. Bloomberg News, April 19, 2016. Available Online: 

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