Saudi Arabia - ECONOMY

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Saudi Arabia - The Economy

THE DEVELOPMENT OF THE SAUDI ARABIAN ECONOMY has gone hand in hand with the establishment and expansion of the Saudi state during the last fifty years. The process of building the state, fortified by oil revenues distributed through the modern institutions of bureaucracy, worked to unify this economically diverse country. So pervasive has been the influence of these relatively young institutions that few vestiges of the old economy survive unchanged.

Before the discovery of oil in the Arabian Peninsula, it would be difficult to speak of a unified entity such as the Saudi Arabian economy. Before the 1930s, the region that would later come under the control of the Saudi state was composed of several regions that lived off specific resources and differentiated human activities. The western province, the Hijaz, for example, depended chiefly on subsistence agriculture, some long-distance trade, and the provision of services to pilgrims traveling to the holy cities of Mecca and Medina. A plantation economy that grew dates and other cash crops dominated the Eastern Province (also known as Al Ahsa, Al Hasa, and Ash Sharqiyah). An extremely hostile environment determined geographical separation of peoples. Because permanent habitation could exist only where there was water--at natural springs and wells--the long distances between water sources isolated clusters of people and hampered travel. The difficulty of travel also discouraged penetration from the outside, as did the lack of readily exploitable natural resources.

The discovery of oil in the Eastern Province in 1938 came just six years after another major development: the establishment of the Kingdom of Saudi Arabia, which unified a number of diverse areas of the peninsula under one ruler. Moreover, the rebuilding of Europe after World War II and its need for cheap, reliable sources of oil greatly enhanced the position of the newly established Saudi Arabian oil industry. The combination of these three events formed the basis of the current structure of the Saudi economy.

The quantum jump in revenues that flowed into the treasury of Abd al Aziz Al ibn Abd as Rahman Saud (ruled 1932-53) fortified his position and allowed the king to exert greater political and economic control over the territories he had conquered. At the apex of the economy was the state with all the mechanisms needed to ensure the rule of the Saud family (Al Saud). The state became the widespread agent of economic change, replacing the traditional economy with one that depended primarily on the state's outlays.

The conjuncture of these events also thrust Saudi Arabia, by virtue of its location and its enormous oil assets, into the center of the West's strategic concerns. At first the issue was the reconstruction of Europe; later, however, the steady flow of oil from the kingdom would be regarded as essential for international economic stability. In this sense, Saudi oil production and investment policies have assumed paramount importance to the industrialized world and, more recently, the developing world. This importance of oil to the West, particularly to the United States, could not have been more clearly underscored than it was by the Iraqi invasion of Kuwait in August 1990 and may have been a key reason for the massive military effort marshaled to expel Iraq from Kuwait. After the Persian Gulf War (1991), Saudi Arabia's standing in the world oil market increased, because it was the only major oil-producing country that had significant excess capacity of crude oil production and thereby a strong influence on international oil supplies and prices.

Maintaining this position in the international oil market has been the basis of Saudi economic policy in the early 1990s and was likely to remain so in the near future. Despite attempts to diversify the economy, developing a self-perpetuating nonoil sector has proved more difficult than earlier Saudi planners had envisioned. This is not to say that the government has not raised the average Saudi citizen's standard of living to one of the highest levels in the world and established for most of its inhabitants world-class infrastructural and social services. But sustaining real income growth still depended primarily on government spending, which was largely facilitated by oil revenues. Therefore, the government could not afford to neglect the oil sector, the primary engine of economic growth.

Developing the oil sector was crucial to domestic political stability, and it was the kingdom's importance as an oil producer that guaranteed its protection during the gulf crisis. During the early 1990s, it was becoming clear that with the expected decline of oil production from the republics of the former Soviet Union, combined with the stagnating output in other debt-ridden and geologically constrained Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil producers, Saudi Arabia had the chance to obtain a disproportionate share of any net increment of crude oil demand over the coming years.

Saudi Arabia had set out to meet this challenge with a major capacity expansion plan for its oil industry. First, the Saudi Arabian Oil Company (Saudi Aramco, the national oil company) accelerated plans to push sustainable domestic crude oil production capacity by 1995 to between 10.5 million and 11 million barrels per day (bpd) from 8.4 million bpd in 1992, with an increased share of lighter grades of crude oil produced. Second, the Saudi Arabian Marketing and Refining Company (Samarec) planned to upgrade its refineries to meet the new environmental standards in the West and growing domestic demand. Third, following its acquisition of downstream assets in the United States and the Republic of Korea (South Korea), the kingdom planned to purchase refining capacity closer to key consuming markets. Although shrouded in secrecy that made details observer, this strategy seemed designed to obtain or increase Saudi Arabia's market share.

During the 1970s and early 1980s, the sharp increase in oil prices relieved the chronic financial constraints that had plagued the Saudi state since its inception. Massive oil revenues, combined with delays in using the funds and the Saudi economy's limited absorptive capacity, created large financial surpluses in both the private and government sectors of the economy. The vast majority of these assets were invested in international financial institutions and in Western government securities.

After 1982 government authorities were obliged to change their emphasis from managing surpluses to coping with growing budgetary and balance-of-payments shortfalls. With the downturn in oil prices beginning in 1982, oil revenues to the kingdom began to recede. Given the huge investment expenditures to which it was already committed, the government was forced to finance large budget and current account deficits of the external balance of payments through foreign asset drawdowns. At first, the small decline in oil prices was considered a necessary "cooling off" period and a chance to review the investment program begun fifteen years earlier. Facing an ever-worsening international oil supply glut, the burden of reducing oil output under OPEC's newly installed quota system fell largely on Saudi Arabia. The kingdom's oil revenues therefore took a double blow--reduced prices and reduced exports--not to mention the devaluation of the United States dollar, the currency in which oil is sold on international markets. By late 1985, responding to domestic concerns, Saudi Arabia sharply boosted oil output in an attempt to regain its market share and to impose production discipline on other OPEC members. This policy led directly to the oil price crash of 1986.

The replacement in 1986 of well-known Minister of Petroleum and Mineral Resources Ahmad Zaki Yamani by Hisham Muhi ad Din Nazir, and King Fahd ibn Abd al Aziz Al Saud's personal intervention in the kingdom's oil affairs, were followed by a more commercial approach to oil exports that was designed to maintain Saudi Arabia's world market share. Greater OPEC discipline and a revival in world demand, stimulated by lower oil prices and rapid economic growth in Asia, helped return some buoyancy to the oil markets after 1986. Nonetheless, oil revenues in the late 1980s remained at 25 percent to 30 percent of levels during the early 1980s and proved insufficient to cover government expenditures and offset imports, thus perpetuating budget and external payment deficits. The authorities further reduced foreign assets and attempted to stanch capital flight (aggravated by the short-lived Iranian military thrusts into Iraq in 1986 and 1987 and the "tanker was" of 1987) and to induce the repatriation of private capital through the sale of government bonds. This strategy stemmed the hemorrhage. By early 1990, following the end of the Iran-Iraq War two years earlier, increased oil output and higher oil prices combined with improving private sector confidence to revive an economy that had contracted for several years in a row.

In the two months following the Iraqi invasion of Kuwait in 1990, all government efforts at restoring confidence in the economy since the 1986 price crash evaporated, precipitating another large outflow of private capital and a virtual standstill in domestic investment. But as oil prices and Saudi output soared to replace embargoed Iraqi and Kuwaiti oil, and with the arrival of the United Nation (UN) coalition forces, calm returned to the economy, helped no doubt by substantial expenditures related to the war effort. After the war, the repatriation of private funds and renewed economic confidence created what some journalists called a "miniboom." Despite budgetary problems at home and international economic problems, promising regional trade prospects emerged. Such prospects consisted of new markets in Iran, Central Asia, and South Asia, as well as the reconstruction of Kuwait, that opened new opportunities for Saudi businessmen.

The Persian Gulf War was disastrous for government finances, however. Higher oil revenues were insufficient to cover the estimated US$60 billion that the war cost the Saudi government. The authorities had to deplete the last of the financial reserves remaining from the oil-boom days of the early 1980s. In mid-1992, official external assets stood at the minimum needed for ensuring confidence in the Saudi currency, the riyal, and for maintaining prudent reserves. Although budgetary and external deficits have been sharply reduced, the government was forced to borrow on the international market and to reduce subventions to government enterprises, such as Saudi Basic Industries Corporation (Sabic) and Saudi Aramco, forcing such firms to seek capital overseas.

The status of government accounts in the aftermath of the Persian Gulf War clouded the prospects for smooth financing of the three major expenditure categories on the ruling family's priority list for the 1990s: the oil-sector capacity-expansion plan, major increases in defense and arms purchases, and the maintenance of public investments to sustain the domestic standard of living. The options faced by the government to alleviate its financial constraints were limited, especially on the oil revenue front, and debt financing would be clearly unsustainable over the medium term. During the 1990s, therefore, the government will probably strive for financial maneuverability by reducing the dependence of the private sector on government funds and by attempting to diversify budget revenue sources.

<> Factors that Transformed the Economy
<> Economic Policy Making
<> Five-Year Plans
<> Changing Structure of the Economy
<> LABOR
<> OIL INDUSTRY
<> NON-OIL INDUSTRIAL SECTOR
<> AGRICULTURE
<> MONEY AND BANKING

Saudi Arabia

Saudi Arabia - Factors that Transformed the Economy

For thousands of years, the economy of the Arabian Peninsula was determined by autonomous clusters of people living near wells and oases. Most of the population was engaged in agriculture, including nomads who raised livestock by moving their animals to the limited forage produced by infrequent rains. However, the inability of pastoral nomads to provide for their communities solely on the basis of pastoral activities forced them to create multiple resource systems. Such systems took the form of protection services for merchant caravans and pilgrims, control over small oases, and, to a lesser extent, direct cultivation. In the settled areas, local craftsmen produced a few items needed by those living near or visiting the scattered sources of water. Production was limited to serve very small markets and existed essentially on a subsistence level. Trade was limited primarily to camel caravans and the annual influx of pilgrims visiting the holy places in the Hijaz. In the principal cities, such as Jiddah and Mecca, several large merchant families settled permanently and prospered, especially after the late nineteenth-century development of the Hejaz Railway. The growth in international trade associated with European colonial expansion also benefited these merchants and attracted numerous families from as far away as the Eastern Province of Arabia, Iran, the Levant, and Turkey.

The most profound agent of change for the economy of Saudi Arabia was the discovery of huge reserves of oil by a United States company in 1938. Initially, the newly established oil industry had only an indirect impact on this primitive economy. The establishment of the Arabian American Oil Company (Aramco, predecessor of Saudi Aramco) and the oil towns around the oil fields triggered major changes in the economy of the kingdom, especially in the Eastern Province. Development of the oil fields required ancillary construction of modern ports, roads, housing, power plants, and water systems. Saudi workers had to be trained in new skills. In addition, the concentration of oil field employees and the range of services the oil company and employees needed opened new economic opportunities on a scale previously unseen by local merchants, contractors, and others. Aramco provided technical, financial, and logistical support to local entrepreneurs to shed the many support activities it had initially assumed. The discovery of oil ended the kingdom's isolation and introduced new ways to organize the production and distribution of goods and services.

Although the oil industry's creation produced a profound impression on the kingdom's economy, economic structural change was well under way before oil was discovered. Abd al Aziz Al Saud's quest to consolidate his family's control over the territories by establishing a modern state had begun to transform the traditional economy. One of the pivotal policies pursued by the king was sedentarization of the beduin, largely for political and security reasons. As part of the creation of the Ikhwan movement, Abd al Aziz encouraged the establishment of a series of agricultural communities (hujra), designed to relieve the beduin groups comprising this unified military force of providing for their livelihoods. The hujra never succeeded in becoming self-sufficient, however, requiring the government to supplement basic necessities. Once the Ikhwan movement was disbanded, some tribesmen returned to their original occupations, but a significant number joined the White Army, which later became the Saudi Arabian National Guard, or moved to the cities to seek employment. Moreover, in 1925 the government abolished the exclusive rights of tribes to their dira (tribal grazing land) and further accelerated the transformation. The final blow to the traditional tribal economy was dealt many years later. A law adopted in 1968 distributed swaths of land in various parts of the country to individuals, thereby breaking the centuries-old communal control over land. Inevitably, this distribution of lands led to land ownership patterns that mainly benefited tribal leaders and, finally, to the growth in land sales to nontribal members.

Saudi Arabia

Saudi Arabia - Economic Policy Making

The economic philosophy of the Saudi Arabian royal family has not changed since the reign of Abd al Aziz, but the economic role of the government has grown tremendously. The stated goal of Saudi rulers has been to improve the economic conditions of the country's citizens while retaining the society's Islamic values. Imbedded in this social contract, however, is the issue of political control. The Al Saud recognized that the key to political power in the kingdom lay in replacing the old economy with lucrative new economic opportunities for the country's citizenry.

In the early stages of the kingdom, the only nontraditional economic opportunities for Saudi citizens were linked to employment in the military, distribution of land, and some modest contracts and commissions. Abd al Aziz had limited means. His revenue was adequate to allow only minimal government functions, not, to undertake economic and social projects. Development of the country's oil resources resulted in some wage payments to Saudis and local purchases of goods and services by foreign oil companies, but the impact on the Saudi economy was initially minor. The main beneficiary of oil exports was the ruling family and its tribal allies. Until the 1970s, oil income increased slowly, and the government usually operated under financial constraint. The government's economic decisions were largely those of determining priorities among alternative uses of limited resources. Government structure and subsidiary economic organizations also evolved slowly. In 1952 the Saudi Arabian Monetary Agency (SAMA) was created to serve as the central bank, and in 1962 the General Petroleum and Mineral Organization (Petromin) was formed.

Economic Policy During the Oil Boom, 1974-85

In the early 1970s, the economic situation changed dramatically. Oil exports expanded substantially, royalty payments and taxes on foreign oil companies increased sharply, and oil-exporting governments, including the kingdom, began setting and raising oil export prices. Saudi Arabia's revenues per barrel of oil (averaged from total production and oil revenues) quadrupled from US$0.22 in 1948 to US$0.89 in 1970. By 1973, the price had reached US$1.56 and soared to US$10 and higher in 1974 following the Arab oil embargo introduced to pressure Western supporters of Israel during the October 1973 War. In 1982 the average export price per barrel of oil reached well above US$30. Between 1973 and 1980, government oil revenues jumped from US$4.3 billion to US$101.8 billion. At last the higher oil revenues gave Saudi officials the means to make major structural changes in the economy.

The society encompassed factions eager to promote the modernization program, as well as some elements within the royal family and the religious community who feared the social consequences of rapid economic transformation. Others, mainly from the technocratic elite, were concerned about the economic consequences of such a rapid expansion in expenditures. One choice facing policymakers in the early 1970s was whether to restrict oil production to a level that was adequate to finance limited economic and social development or to allow production at a level that would meet world demand for crude oil. Choosing a relatively high production level would force a decision on whether to use resulting revenues for rapid domestic economic and social development or long-term investments abroad. There were other policy choices. Those people who wanted to keep oil in the ground, except for that needed for limited development, argued strongly that this policy would best preserve the country's resources for future generations.

The choices appear to have been made by 1974 at the latest, although the decision-making process was not always clear or discernible. One issue was clear, however: domestic economic policy did not drive oil production and export policies. The Al Saud pledged to keep oil flowing at moderate prices, commensurate with world needs, arguing that the kingdom was as dependent on the stability and prosperity of consuming nations as those nations were on Saudi oil. Moreover, if Saudi Arabia wanted to ensure that oil would remain the energy source of choice, moderate prices were essential. In addition to framing the issue in purely economic terms, the decision had a geopolitical dimension: since World War II the kingdom had linked itself with the West and was eager to honor its pledge as a loyal ally on the international and regional level. This position was also reflected in its relations with Aramco. Saudi officials argued that the kingdom had avoided nationalization, opting instead for a gradual takeover of foreign oil companies operating within Saudi borders. Despite these attempts to moderate oil prices, the supply-and-demand fundamentals of the international oil market combined with the changes in ownership of downstream assets to raise international oil prices, creating enormous pressures on the domestic front to invest rising oil revenues in developing the country's economic and social infrastructure.

By the mid-1970s, the government had decided to use most of the growing oil revenues for a massive development effort. An important part of that effort was to industrialize, largely by investing in processing plants that used the country's hydrocarbon resources. This policy meant at least a decade of very large investments to build the plants and the necessary infrastructure. It meant financing and building the gas-gathering system, the pipelines for gas and crude oil to bring the raw material to the two chosen main industrial sites--Al Jubayl (or Jubail) and Yanbu al Bahr (known as Yanbu)--and building the industrial sites themselves. The development effort also included many other projects, such as the huge and costly airports at Riyadh and Jiddah, hospitals, schools, industrial and plants, roads and ports. By the mid-1980s the massive expenditures totaled US$500 billion.

The decision to increase the country's oil and gas resource development through downstream investments in refineries and petrochemical plants was logical considering the country's resource endowment. Three factors motivated such a strategy. First, downstream investments were capital-intensive, which fitted Saudi Arabia's small population and large oil revenues. Second, more value-added income would be extracted and retained, thereby maximizing Saudi revenues through the export of more refined petroleum products instead of crude oil. Moreover, the natural gas that had been largely wasted before the 1980s would be processed and used.

Third, some Saudi planners saw industrialization as another opportunity to widen the sphere of economic activity for foreign and domestic private firms. Participation of foreign private sector firms was crucial from the outset. Saudi Arabia invited several international oil companies to invest in joint ventures in the new export refineries built in the kingdom during the late 1970s and early 1980s. Furthermore, participation by international petrochemical companies was necessary to obtain the technology needed. There was also the issue of access to the markets of the West: Saudi planners anticipated regulatory and trade problems by exporting petrochemicals to markets that already had made substantial investments in the petrochemical industry. Saudi planners therefore hoped that, with the help of foreign multinationals, they could fit Saudi petrochemical output into international distribution networks.

On the domestic front, the state would build the basic industries, the crucial first step in the chain of industrial processing. Through loans and other incentives, the state would foster the growth of specific private sector industries that would be at the lower end of the industrial process. Over a period, the planners anticipated that the state-owned conglomerates might be partially privatized.

A large part of the funds spent on development programs were intended to promote private sector investment and to support future consumption. Starting in the mid-1970s, the government decided that an adequate infrastructure was essential to the kingdom's future development. Providing this infrastructure included revamping and building electricity, water, sewerage, desalination, and telecommunication systems. Moreover, it entailed creating airports and ports and laying a vast network of roads. In terms of generating and distributing electric power, the government assisted private companies building and operating its electricity network through concessionary capital loans and continuing operating subsidies. Apart from upgrading distribution facilities for water, the government built several desalination plants and drilled wells, built dams, and installed pumps. Telecommunications were quickly brought to international standards, allowing Saudi Arabia to handle all its communication needs in local and international telephone, telegraph, maritime, and television distribution services, via cable, satellite, and terrestrial transmission systems. Under King Faisal ibn Abd al Aziz Al Saud (1964-75), there was a massive increase in government spending on education to an annual level of about 10 percent of the budget.

Saudi planners also saw the need for a subsidy program to supplement direct government outlays. The major reason was income distribution. Although direct grants to average citizens would have been most efficient, the logistics involved would have been difficult. Conversely, waiting for the oil expenditures to reach this economic and social objective might have created additional social tensions. Therefore, the government adopted a widespread subsidy program for utilities, fuels, agriculture, social services (both private and public), the industrial sector, and several other areas. Beyond income distribution, the rationale of the subsidy program was the need to promote nonoil development through cheap loans, technical assistance, industrial and agricultural incentives, and preferential buying of domestic products by the government. The subsidy program was also designed to improve education and health services.

The massive development effort entailed many risks. The size of the effort and the technology involved required the participation of a huge number of foreign workers for a long period, with the potential of disrupting the society. The pace of modernization was also economically disruptive. Some observers questioned whether Saudi refineries and petrochemical plants would be efficiently managed and prove competitive within a reasonable time. By the early 1980s, the country encountered economic and social tensions--such as the inflation of the mid- 1970s, the takeover of the Grand Mosque in Mecca in November 1979, and disturbances in the Eastern Province in 1979-80--that dissipated only late in the 1980s.

Another risk of the massive development effort was the loss of control over expenditures or inadequate justification of investments. The sudden easing of financial constraints in the mid-1970s permitted consideration of projects too lavish or too large earlier. The forced development of the capital at Riyadh was a sentimental and political decision that required large expenditures to bring such necessities as water, electricity, communications, and housing inland to a capital far from the economic centers of the country. The huge airports at Riyadh and Jiddah (built at a reported cost of US$3.2 billion and more than US$5 billion, respectively) were architectural monuments, but whether they were a wise use of the patrimony of future generations was unclear.

The rapid rise of public purchases and contracts after 1974 caused foreign businessmen to flock to the kingdom. Because Saudi agents were usually essential, foreign businessmen frequently paid them large fees, to be recovered in the contract they were seeking. The Saudi business sector viewed these practices from a perspective different from that of some outside observers: agent fees and influence peddling were called corruption by visiting journalists but were judged less harshly domestically, although there was some unease. Some Saudis criticized agent fees frequently granted to the wealthy, especially people related to the royal family. The perceived costs, combined with growing criticism at home, eventually prompted the government to restrict the use of agents and fees on some defense contracts and to take other measures to control costs.

Looking back at this huge effort in the early 1990s after several years of stagnant public investment, the picture was mixed. On the one hand, the infrastructure had stood the test of time and provided the citizenry with world-class facilities. On the other hand, maintaining these investments, some of which lacked a direct financial payback, despite their more general economic uses, has been costly. More problematic may be the public perception that authorities, having fostered such dependency on government largess, found it extremely difficult to reduce services.

Several other infrastructure problems became apparent. First, the vast majority of expenditures were concentrated in a few cities, predisposing these metropolitan areas to more rapid economic growth. Second, infrastructural support systems were programmed at an early stage of the country's development, rendering some obsolete in the early 1990s. Third, some of the facilities seemed to have been built as an end in themselves, leading to unnecessary waste and continuing maintenance costs.

The most entrenched problem from the period of rapid development of the mid-1970s to the early 1980s stemmed from the government's willingness to subsidize production, consumption, and investment. The objectives for subsidies were threefold: encouraging nonoil economic activity, meeting social goals, and distributing income. The subsidy program may have created greater problems than were earlier anticipated. Saudi planners never thought that oil revenues would constrain expenditures to the extent that they did in the late 1980s and early 1990s. Efficiency requires that subsidies be applied directly at the source. Most Saudi production subsidies have been indirect subsidies, which have reduced the cost to consumers of electricity and other industrial inputs, leading to unnecessary waste. The industrial sector has thereby become a relatively inefficient producer and has made little effort to wean itself from government assistance.

Nowhere was this problem more prevalent than in the agricultural sector where national security was the original objective in raising output. Saudi Arabia became self-sufficient in several major food grains but the cost to the budget and the ecology could not be justified. First, international experience has shown that food embargoes have generally failed unless accompanied by a major military campaign. Second, savings on food purchased from overseas could easily have been invested in inventory to safeguard against an external threat. Third, no social benefit emanated from such a program. Agricultural employment continued to decline, and large conglomerates, rather than peasant farmers, profited from most subsidies. Fourth, subsidies could have been related to more appropriate production methods that promoted water conservation.

Economic Policy after the 1986 Oil-Price Crash

The general thrust of Saudi economic policy underwent a fundamental change after the oil price crash of 1986. The serious depletion of foreign assets, combined with the extensive decline in oil revenues, necessitated a revised economic policy. The depreciation of the United States dollar on international financial markets also hurt Saudi purchasing power abroad. The kingdom's external terms of trade deteriorated rapidly because oil exports were largely denominated in United States dollars, and the bulk of Saudi imports came from countries whose currencies were appreciating relative to the United States dollar.

Reappraisal of the development program became necessary. The most urgent task was shoring up government finances, yet domestic constraints allowed only a few options, especially in terms of raising nonoil revenues. Imposing an income tax, for example, was out of the question partly because of its political dangers in a country where it was an unknown procedure likely to raise questions of income distribution and taxation without representation. Also an income tax appeared impractical because the bureaucratic difficulties involved in collection would be more expensive than the intake would justify. King Fahd's shortlived idea of taxing foreign workers' income was retracted after a public outcry. The government froze some current account spending and cut capital spending, partly by delaying projects and also by canceling some programs. The was informed that subsidies of private sector vast capital expenditures had ended for the present, and, whereas certain major projects would be completed, the governments' emphasis would shift to improving the efficiency and maintenance of its public assets. In addition, major defense contracts would include a provision whereby foreign equipment and service contractors would be required to allocate 35 percent of the cost of their projects or services for industrial investments in Saudi Arabia.

Economic Policy in the 1990s

The government's attempts to deal with the chronic budget deficits, largely through expenditure retrenchment, depletion of foreign assets, and the sale of development bonds, generally helped stabilize its financial situation by the late 1980s. It became clear by 1989 that the economy had weathered some of the other problems, such as the spate of bankruptcies of private companies, the growth of bad banking debts, and the massive outflow of private capital to overseas financial centers that followed the oil-price crash of 1986. During 1989 and 1990, economic planners had renewed optimism. New plans were made to put the oil and nonoil sectors of the economy on a surer footing. The perceived recovery in international oil consumption and prices provided regional policymakers the opportunity to resume spending to promote economic growth. As a result, two major initiatives became the basis of Saudi economic policy.

First, Saudi Arabia unveiled plans to raise crude oil production capacity to between 10.5 million and 11 million bpd by 1995. With the restructuring of the General Petroleum and Mineral Organization (Petromin), the creation of Samarec, which was given control over most of the kingdom's oil refineries, and the announcement of major plan to upgrade domestic and export refineries, a comprehensive picture emerged of the government's effort to promote oil investments. Another indication of Riyadh's intentions came in 1989 when Saudi Aramco purchased 50 percent of Star Enterprises in the United States, a joint venture with Texaco that signaled Saudi Arabia's pursuit of geographically diversified downstream projects.

Second, the government was not eager to continue its expansionist fiscal policies. Despite moderately higher oil prices, military outlays, oil capacity expansion plans, and current expenditures accounted for the bulk of total spending and did not permit a fiscal boost. However, because the nonoil private sector remained largely dependent on government spending, the sharp cutbacks in capital outlays hindered economic diversification. In light of this failure, the government adopted two policies to reorient and revive the private sector.

Financial sector reform was the government's main option. Since 1988 SAMA had made great strides in bolstering commercial bank balance sheets through mergers, debt write-offs, and injection of funds to prevent failures. Subsequently, banking regulations and supervision were tightened and compliance with international capital adequacy requirements enforced. The authorities also encouraged banks to take a more active role in financing private sector investments. The idea of opening a Riyadh stock exchange received renewed interest: the government sanctioned the establishment of the exchange in early 1990 and hinted it could be an appropriate venue for selling government assets.

Protectionism as a policy also gained some popularity during this period. Partly motivated by the impasse in Gulf Cooperation Council (GCC) negotiations with the European Economic Community (EEC), but mainly to protect domestic private investment, Saudi Arabia began enforcing some restrictive tariff and nontariff barriers that had been instituted in the mid-1980s. Under the guise of conforming to GCC-wide levels, Saudi Arabia raised its tariff rates to 20 percent on most items with certain industrial items gaining protection at higher rates. The government also began enforcing nontariff regulations such as preference for nationally produced commodities and the continued application of preference for local contractors, as well as quality standards that favored local production. In addition, the kingdom assiduously protected domestic banks from foreign competition by barring the sale of any foreign financial products and services.

The Iraqi invasion of Kuwait halted the miniboom that these policies had fostered. In the immediate wake of the invasion, the government faced two tasks. First, it had to deal with the massive outflow of assets from the domestic banking sector by liquidating the commercial banks (which lost more than 12 percent of their deposits within the first month of the crisis), encouraging a repatriation of private assets, and restoring the confidence of foreign creditors, who had canceled lines of credit as a precautionary measure. The monetary authorities reversed most of the hemorrhage caused by the loss of confidence in the Saudi riyal. Second, the government was obliged to raise oil output to levels unseen since the early 1980s. Saudi Aramco had to respond to a serious crisis without an adequate assessment of its overall production capacity. It quickly became apparent that Saudi Arabia had sufficient capacity to replace the bulk of the 4.5 million to 5 million bpd of Iraqi and Kuwaiti oil embargoed by the UN. Output rose rapidly to 8.5 million bpd, which restored some calm to the international oil market; however, by the end of 1990, oil prices were nearly double those in June 1990.

Supporting the United States-led multinational forces, however, placed an enormous burden on the government's budget. The deficits for 1990 and 1991 reached record levels, so the fiscal authorities were forced again to engage in further external asset drawdowns, increased volumes of development bond sales, and a novel feature: external borrowing from commercial banks and export credit agencies. Saudi Arabia was a prominent member of the World Bank but because of the nation's high per capita income, it was not entitled to borrow from that organization. Most of the major projects envisaged before August 1990 were preserved, however. But external borrowing had gained credence as the means to fund not only budgetary shortfalls but also the capital programs of major public enterprises. Notably, Saudi Aramco did not scale back its crude-oil capacity expansion plan. Rather, it appeared that new ways of financing were being sought from foreign commercial banks, multinational companies, and the domestic private sector. Sabic also moved to raise capital overseas, while Saudi Consolidated Electric Company (Sceco), the electricity conglomerate, requested foreign suppliers to help finance its expansion program.

The fiscal crisis did not cause economic problems for the private sector because the government's reduction of its budgeted expenditures was slight. Moreover, domestic government spending in support of the war effort surged, and many Saudi companies benefited from war-related contracts. Also, as a result of Operation Desert Shield and Operation Desert Storm, the more than 600,000 troops of the multinational forces increased domestic spending on consumer goods. This spending offset the effects of the fall in the number of foreign workers after the government expelled more than 1 million Yemenis, Palestinians, Sudanese, and Iraqis because their countries had not condemned the Iraqi regime. The miniboom, which was interrupted by the Iraqi invasion, was revived by this increase in government spending, and then received further stimulus by three other factors. First, the protection of the kingdom by United States forces and the perception that this would continue enhanced private sector confidence in the government. The private sector again repatriated capital, and the stock market boomed, with share issues rising to unprecedented levels. Second, changing regional politics encouraged many firms, which had set up manufacturing and processing plants for the domestic market, to seek sales in Iran, Turkey, and Central Asia. Third, the government cut domestic fees and utility charges almost in half. This increased subsidy was targeted to lower- and middle-income Saudis but had the net effect of raising domestic disposable income. As a result, it was seen by some people as a serious attempt by the monarchy to head off growing domestic demands for political participation.

Saudi Arabia

Saudi Arabia - Five-Year Plans

The kingdom first established a planning agency in 1958 in response to suggestions of International Monetary Fund (IMF) advisers. Planning was limited in the 1960s partly because of Saudi financial constraints. The government concentrated its limited funds on developing human resources, the transportation system, and other infrastructure aspects. In 1965 planning was formalized in the Central Planning Organization, and in the 1975 government reorganization it became the Ministry of Planning. The Ministry of Finance and National Economy controlled funding, however, and appeared to exert considerable influence over plan implementation.

The First Development Plan, 1970-75, was drafted in the late 1960s and became effective on September 2, 1970, at the start of the fiscal year (FY). Drafted during a period of fiscal constraint, gross domestic product (GDP) was to increase by 9.8 percent per year (in constant prices) and show the greatest increase in the nonoil sectors. Planned budget allocations for the five years were US$9.2 billion, 45 percent of which was to be spent on capital projects. Planned expenditures were concentrated on defense, education, transportation, and utilities. The unanticipated great expansion of crude oil production, accompanied by large increases in revenues per barrel, contributed to an exceptionally high rate of economic growth, far beyond the planners' expectations. Nonoil real GDP increased by 11.6 percent per year. As oil revenues grew, budget allocations increased, totaling about US$27 billion for the five years; actual budget expenditures amounted to US$21 billion.

The Second Development Plan, 1975-80, became effective on July 9, 1975, at the start of the fiscal year. The plan contained numerous social goals similar to those of the first plan, but it also set forth goals that reflected decreased fiscal constraints. Social goals included the introduction of free medical service, free education and vocational training, interest-free loans and subsidies for the purchase of homes, subsidized prices for essential commodities, interest-free credit for people with limited incomes, and extended social security benefits and support for the needy. The plan also outlined several economic goals and programs. GDP was to grow at an average rate of 10 percent a year. The nonoil sector's real planned rate of increase was 13.3 percent per year; the oil sector's projected rate of growth was 9.7 percent, although actual growth would depend on world markets.

The government's planned expenditures totaled almost US$142 billion, plus additional private investment. As the size of oil revenues became clearer during the plan's preparation, the final investment figure was more than double the initial sum. The planners acknowledged that spending of this magnitude would create various problems, and they anticipated shortfalls in actual spending. The largest share of planned government expenditure, 23 percent, was allocated for continuing development of ports, roads, and other infrastructure. Expansion of industry, agriculture, and utilities received 19 percent of expenditures, and defense and human resource development--essentially education--each received 16 percent.

The planners were correct in anticipating problems. An increasing flood of imports after 1972 proved too great for the transportation system to handle. Ports, where ships waited for four to five months to unload, were bottlenecks, but storage and distribution from the ports were also inadequate. Government spending contributed to the problems. By 1976 the clogged ports, an acute housing shortage, skyrocketing construction costs, and a growing manpower shortage caused prices to accelerate at what some observers estimated at about 50 percent a year, although the official cost-of-living index did not reflect these rates.

By 1977 second plan projects and ad hoc measures, such as the government's spending less than planned, had relieved many problem areas. Construction of additional ports, which contributed to almost a fivefold increase in the number of ship berths and paved roads, which increased by 63 percent to more than 22,000 kilometers as well as other substantial additions to the transportation and communications system occurred during the second plan period. More than 200,000 housing units were built over the five years.

Actual government expenditures during the second plan reached US$200 billion, about 40 percent above the planned figure and almost ten times the level of the first plan. As the transportation bottlenecks were removed, annual budget expenditures increased. Expenditures for salaries and other operating costs increased more rapidly than expected, whereas capital investments rose more slowly than budgeted. Over the course of the plan, between 20 percent and 33 percent of national income was devoted to investment. The private sector accounted for 27 percent of fixed capital formation; government ministries and agencies outside of the oil and gas sector invested 61 percent, and the public oil sector accounted for 12 percent. The bulk of fixed capital formation was in construction.

Despite the massive increase in government expenditures, overall real GDP growth at 9.2 percent average per annum was below the planned 10 percent rate. This lower growth resulted from a slower-than-anticipated growth in petroleum production, a function of international market conditions and political factors. Nonoil GDP grew at an average annual rate of 14.8 percent per year compared with a planned rate of 13.3 percent. The producing components grew at 16.6 percent per year on average (the plan rate was 13 percent), with most components outpacing their targets. The following components all exceeded their targets: agriculture, manufacturing, utilities, and services (including trade, transport, and finance). Construction paralleled the planned growth rate, and mining other than oil and public sector projects did not meet targets.

The Third Development Plan, 1980-85, took effect May 15, 1980. The third plan featured a modest rise in government expenditures reflecting stabilization of oil revenues and a desire to avoid inflation and disruptions to society from an unduly rapid pace of development. The planners expected construction activity to decline, but unfinished projects were to be completed and industry developed. Lower construction levels were expected to require only a small increase in the number of foreign workers. However, requirements for highly skilled workers and technicians, Saudi and foreign, to operate and maintain plants and equipment were expected to require shifts in the composition of the work force.

Total planned government civilian development expenditures during the third plan amounted to US$213 billion, plus an additional US$25 billion for administrative and subsidy costs. Third plan expenditures were categorized differently, making comparisons with the second plan difficult. Civilian development expenditures planned for 1980-85 were US$79 billion for the economy, primarily industry (37 percent of the total in the third plan; 25 percent in the second plan), US$76 billion for infrastructure (36 percent in the third plan; 50 percent in the second plan), US$39 billion for human resource development (19 percent in the third plan; 16 percent in the second plan), and US$18 billion for social development (close to 9 percent in both plans).

The third plan coincided with the sharp downturn in Saudi oil production. The oil sector's output fell on average 14.2 percent per annum. As a result, during the five years of the plan the average annual real GDP growth rate declined 1.5 percent compared with a planned annual increase of 1.3 percent. The principal factors behind the continued positive rates of growth in the nonoil sector (6.4 percent on average per annum) were the relatively few cutbacks in government expenditures and the continuation of major infrastructure and industrial projects despite declining oil revenues. The nonoil manufacturing sector and utilities expanded at 12.4 percent and 18.6 percent, respectively, but at annual growth rates well below their targets. The construction sector contracted but only at half the rate planned. The agricultural sector grew rapidly, surging to 8.1 percent per annum. The service sector maintained its momentum during the third plan, with trade and government services leading the way. The transportation and finance subsectors, however, fell well below their targets.

The Fourth Development Plan, 1985-90, budgeted total government outlays at SR1 trillion or almost US$267 billion, of which about US$150 billion was budgeted for civilian development spending. Most cuts were to come from reduced expenditures on infrastructure and a shift to developing economic and human resources. Concern for preserving the government's new investments was reflected in increased budgeted spending on operations and maintenance. The plan also emphasized stimulating private sector investment and increasing economic integration with members of the GCC.

During the period of the fourth plan, oil revenues plummeted following the oil-price crash of 1986. Overall real rates of GDP growth averaged a positive 1.4 percent per annum, far below the 4 percent programmed. The revival in crude oil output from the low levels of 1986, however, boosted oil sector growth rates to 3.6 percent per annum. The sharp decline in external income caused lower rates of output expansion in the producing sectors. Construction and other mining sector growth rates fell by 8.5 and 1.9 percent, respectively. Other manufacturing continued to grow modestly at 1.1 percent per annum, but well below the 15.5 percent target. Trade, transport, and finance reflected the financial setbacks in the government's program with annual average production declines. Two surprises helped to offset the depressed growth rates: agriculture, which had shown steadily higher rates of output growth in the second and third plan, rose by 13.4 percent per annum on average during the fourth plan, nearly double its planned rate, and the utilities sector's ability to surpass its planned target of 5 percent per annum.

Constrained resources shaped the Fifth Development Plan, 1990-95, with committed funds for the civilian program falling by nearly 30 percent to approximately US$105.4 billion for the period. The bulk of the cuts were in government investment in economic enterprises, transportation, and communications. Human resources development, health and social services, and municipality and housing all maintained their fourth-plan levels. Overall, the fifth plan called for consolidating the gains in infrastructure and social services of the previous twenty years and emphasized further economic diversification. The principal means for achieving this goal was expanding the productive base of the economy by encouraging private sector investment in agriculture and light manufacturing. The private sector was allowed to purchase shares in the larger industrial complexes and utilities. For example, Sabic may be further privatized as well as some downstream refining assets. In addition, there was greater emphasis on financial sector reform and development through the establishment of joint stock companies and a stock market to trade shares and other financial instruments. Another objective of the plan was greater government efficiency in social and economic services.

Fifth-plan targets envisaged a 3.2 percent per annum growth rate. Oil sector output was expected to increase 2.2 percent per annum, while nonoil sector growth-rate targets were 3.6 percent. Agriculture, other manufacturing, utilities, and finance were to pace the economy while other sectors would show only modest growth rates of 2 percent to 4 percent per annum.

Saudi Arabia

Saudi Arabia - Changing Structure of the Economy

Measuring the changing structure of the economy was difficult because of the lack of consistent data on the GDP structure. After the 1986 price crash and the shift from the use of the hijra calendar as the basis for government fiscal year accounting, national accounts data were revised and were generally not comparable to pre-1984 data. Moreover, the base year used was extremely important: if the base year were 1980, when oil prices were at peak levels, the nonoil sector in 1986 accounted for 50 percent of real GDP; if the 1970 base year were used, nonoil GDP was closer to 75 percent of total output.

Since 1984 the relative share of nonoil GDP has fallen from 75.8 percent of overall real GDP (in 1970 prices) to 67.4 percent in 1990 (the latest year for which data were available in 1992). This fall in nonoil GDP share resulted from the steady growth in crude oil production, increases in gas output, and higher refinery throughput, which rose prior to the sharp increase in oil output in late 1990. In the nonoil sector, the agricultural sector has grown most during this period. Accounting for 7.5 percent of nonoil output in 1984, this sector had risen to more than 14.7 percent in 1990. The utilities sector has also gained, growing from 2.5 percent of nonoil production in 1984 to 4.6 percent in 1990. In contrast, manufacturing has remained relatively stable, rising from 8.1 percent of nonoil GDP in 1984 to 9.0 percent in 1990. In contrast, construction fell from 14.3 percent of nonoil GDP in 1984 to 9.2 percent in 1990. Services, comprising trade, transport, and social services, fell from more than 66.8 percent to 62.4 percent in the same period.

Saudi Arabia

Saudi Arabia - LABOR

The Saudi labor force has undergone tremendous change in the latter half of the twentieth century as a consequence of the demise of traditional means of livelihood linked to pastoral nomadism as a way of life for most of the people and the rise of a modern economy. A large number of Saudis moved from these occupations older into government service. Many foreign workers were also brought into the kingdom by the private sector. With the domestic labor force growing at an average of 5 percent annually between 1975 and 1985, despite an annual population growth among the highest in the world at 3.5 percent, foreign labor was still necessary. Estimates varied, but a reliable Western source indicated that total employment grew from more than 1.7 million in 1975 to 2.2 million in 1980. The domestic work force numbered 1 million people (58 percent of total employment) in 1975. By 1980 employment of foreigners had risen from 723,000 in 1975 to more than 1 million (or 46 percent of total employment).

Ministry of Planning estimates, providing a breakdown of the sectoral distribution of employment, showed a slightly different picture. According to these figures, the total work force was 2.9 million in FY 1979, of which 1.3 million workers were in producing sectors and 1.6 million were in the services sectors. Labor was concentrated in four main sectors: in FY 1979 agriculture accounted for 15.8 percent of the total work force, construction 20.4 percent, trade 10.6 percent, and community and social services, including government service, 34.1 percent. By FY 1989 the total labor force had risen to close to 5.8 million, with 2.1 million in production sectors and 3.7 million in service sectors. Agriculture's share had fallen to 9.9 percent, construction was down to 16.4 percent, whereas trade's share of the labor force rose to 15.6 percent and community and social services were up to 42.4 percent. These figures indicated the extent to which the government had a direct hand in the livelihood of the average Saudi.

Saudi Arabia

Saudi Arabia - OIL INDUSTRY

Saudi Arabia is the world's most important oil producer. Given its relatively high production levels, accounting for nearly 13 percent of world output and 35 percent of total OPEC output in 1991, and, more significantly, its small domestic needs, the kingdom's dominance of international crude oil markets is unchallenged. Although reluctant to play the role, Saudi Arabia has become the "swing producer," balancing international oil demand and supply. Therefore, within limits, Saudi oil production policies can have a profound impact on international prices. Since the early 1970s, the kingdom has occasionally used this dominance to influence oil prices, usually to further its objectives of sustaining long-term oil consumption and ensuring economic stability in the industrialized world.

The oil sector is the key domestic production sector; oil revenues constituted 73 percent of total budgetary revenues in 1991. Precise statistics for expenditures on sector development were not available but some estimates placed the annual figure at US$5 billion to US$7 billion, or less than 10 percent of total budgetary expenditures. Export oil revenues accruing to Saudi Aramco, a large portion of which is allocated to the budget, accounted for 90 percent of total exports in 1991. Only in the number of jobs was the oil sector relatively unimportant to the economy; the capital-intensive nature of the oil industry required few workers--less than 2 percent of the labor force in the early 1990s.

Brief History

Abd al Aziz ibn Abd ar Rahman Al Saud, the first king of Saudi Arabia, had not gained control of the western part of the country when he granted the first oil concession in 1923. A British investment group, the Eastern and General Syndicate, was the recipient. The syndicate gambled on the possibility that it could sell the concession, but British petroleum companies showed no interest. The concession lapsed and was declared void in 1928.

Discovery of oil in several places around the Persian Gulf suggested that the peninsula contained petroleum deposits. Several major oil companies, however, were blocked from obtaining concessions there by what was known as the Red Line Agreement, which prohibited companies with part ownership of a company operating in Iraq from acting independently in a proscribed area that covered much of the Middle East. Standard Oil Company of California (Socal), which was not affected by the Red Line Agreement, gained a concession and found oil in Bahrain in 1932. Socal then sought a concession in Saudi Arabia that became effective in July 1933. Socal assigned its concession to its wholly owned operating subsidiary, California Arabian Standard Oil Company (CASOC). In 1936 Socal sold a part interest in CASOC to Texaco to gain marketing facilities for the crude discovered in its worldwide holdings. The name of the operating company in Saudi Arabia was changed to Arabian American Oil Company (Aramco) in January 1944. Two partners, Standard Oil Company of New Jersey (later renamed Exxon) and Socony-Vacuum (now Mobil Oil Company), were added in 1946 to gain investment capital and marketing outlets for the large reserves being discovered in Saudi Arabia. These four companies were the sole owners of Aramco until the early 1970s.

The original concession called for an annual rental fee of 5,000 British pounds (�) in gold or its equivalent until oil was discovered; a loan of �50,000 in gold to the Saudi government; a royalty payment of four shillings gold per net ton of crude production after the discovery of oil; and the free supply to the government of specific quantities of products from the refinery Aramco was to build after oil was discovered. (In 1933 the British pound was worth about US$4.87; there were twenty shillings to the British pound.) The company received exclusive rights to explore for, produce, and export oil, free of all Saudi taxes and duties, from most of the eastern part of Saudi Arabia for sixty years. The terms granted by the government were liberal, reflecting the king's need for funds, his low estimate of future oil production, and his weak bargaining position.

The original concession agreement was modified many times. The first modification was made in 1939 after the discovery of oil in 1938. This change added to Aramco's concession area and extended the period to 1999 in return for payments substantially higher than those specified in the first agreement and for larger quantities of free gasoline and kerosene to be supplied by Aramco to the Saudi government. In 1950 a fifty-fifty profit-sharing agreement was signed, whereby a tax (called an income tax, but actually a tax on each barrel of oil produced) was levied by the government. This tax considerably increased government revenues. Further revisions increased the government's share--slowly until the 1970s and rapidly thereafter. At the beginning of 1982, Aramco's concession area amounted to about 220,000 square kilometers (189,000 onshore and 31,000 offshore), having relinquished more than 80 percent of the original area of almost 1.3 million square kilometers.

Once the existence of oil in quantity was ascertained, the advantages of a pipeline to the Mediterranean Sea seemed obvious, saving about 3,200 kilometers of sea travel and the transit fees of the Suez Canal. The Trans-Arabian Pipeline Company (Tapline), a wholly owned Aramco subsidiary, was formed in 1945, and the pipeline was completed in 1950. Many innovations were required to keep costs down and to make operations competitive with tankers. Tapline linked the Lebanese port of As Zahrani, close to Sidon to Al Qaysumah in Saudi Arabia (a distance of more than 1,200 kilometers), where it connected with a pipeline collecting oil from Aramco fields. Initial capacity was 320,000 bpd, but capacity was expanded, eventually handling 480,000 bpd in the mid-1970s. Tax problems with Saudi authorities and transit fees due Jordan, Iraq, and Lebanon plagued Tapline for many years. The line was damaged and out of operation several times in the 1970s. And while operating costs of Tapline increased, supertankers were reducing seaborne expenses. By 1975 Tapline was no longer used to export Saudi crude via Sidon. In 1982 the line was again damaged. In late 1983, Tapline filed formal notice to cease operations in Syria and Lebanon, although small amounts of crude would reportedly continue, albeit temporarily, to supply a refinery in Jordan.

From the very start, Aramco had to concern itself with more than just oil. Its company presidents were virtually United States ambassadors in Saudi Arabia and played a significant role in shaping United States-Saudi relations in the early days of the oil company. Moreover, the undeveloped infrastructure and facilities demanded that Aramco construct virtually everything it needed. A port to bring in equipment had to be built; water had to be found and delivered to work areas; and housing, hospitals, and offices had to be constructed to launch development. Few Saudis were familiar with machinery, local construction firms hardly existed, and the unavailability of most materials locally necessitated long supply lines.

Aramco adopted the long-range policy of training Saudis to take over as many tasks as possible, although major management positions (culled from the ranks of the parent companies) were not intended to be relinquished, until Aramco could not resist government pressure to do so in the 1970s and 1980s. A wide variety of training programs, including sixty annual scholarships to foreign universities, and social service programs were established by Aramco. Saudis, for example, were trained as doctors, supply experts, machinists, ship pilots, truck drivers, oil drillers, and cooks. Many of these Saudis later fanned out into the local economy to establish businesses and entered the growing bureaucracy in Jiddah and Riyadh. Others remained with Aramco and advanced in responsibility. Aramco was also one of the first foreign companies in Saudi Arabia to employ labor from a variety of countries other than the United States. By 1980 about 22,000 of the 38,000 Aramco employees (excluding some 20,000 workers employed by Aramco contractors), were Saudis. More than 45 percent of management and supervisory positions were occupied by Saudis. In 1982 Ali Naimi, who had started with Aramco at age eleven and had risen through the ranks, became first executive vice president in charge of operations; two years later, Naimi became the first Saudi president of Aramco. The United States presence declined over the years. By 1980 there were only 3,400 United States citizens with Aramco. The remaining work force consisted of nationals from about forty-four countries. In 1989 the total number of company employees was 43,248. Of these, 31,712 were Saudis whereas the United States work force had shrunk to 2,482, and other foreign workers were slightly more than 9,000.

To divest itself of supply and service sidelines, Aramco had always subcontracted work to local entrepreneurs and at times provided technical, financial, and material assistance. At the request of King Abd al Aziz, Aramco teams helped find water and develop agricultural projects. The Saudi government paid the company to build a modern port at Ad Dammam and to supervise the construction of a railroad linking the port to Riyadh.

In the 1970s, Aramco's activities expanded greatly. Part of the expansion was associated with the facilities needed for the more than threefold increase of crude oil production during the period. Well drilling, pipeline installation, and construction of gas-oil separation plants, storage tanks, and tanker-loading terminals accelerated tremendously. As the world's largest oil company, Aramco frequently had to design and build installations larger than those used elsewhere. During the 1970s, Aramco was also entrusted with developing a gas-gathering system (currently referred to as the master gas system), which reportedly cost between US$10 billion and US$15 billion for the first phase alone and was completed in 1982. The company was also charged with producing the Eastern Province's electricity supply through managing the regional electric power company.

In 1968 Minister of Petroleum and Mineral Resources Ahmad Zaki Yamani first publicly broached the idea of Saudi participation in Aramco. In December 1972, long negotiations were completed for the Saudi government to buy 25 percent ownership of Aramco, effective in 1973. Negotiations during 1973 resulted in Saudi participation increasing to 60 percent, effective the beginning of 1974. In 1976 arrangements for total ownership of Aramco were reached, and in 1980 payments to the four Aramco parent companies were completed. By 1988 Aramco was converted to a totally Saudi-owned company called Saudi Arabian Oil Company (Saudi Aramco). By the 1990s, Saudi Aramco had responsibility for all domestic exploration and development--its mandate was expanded to include all Saudi Arabia--engaging in downstream joint ventures overseas, purchasing on-land storage facilities closer to key consuming markets for its crude oil, and expanding its tanker subsidiary, Vela Marine International.

The General Petroleum and Mineral Organization (Petromin) was established in 1962 as a public corporation wholly owned by the Saudi government to develop industries based on petroleum, natural gas, and minerals by itself or in conjunction with other investors, foreign or domestic. Although its activities predominantly centered on the country's hydrocarbon resources, Petromin also explored for and developed other mineral resources.

Petromin's original charter suggested that it would eventually become the country's national oil company. After the mid-1960s, only Petromin received concessions for exploration and development. Petromin, however, assigned its rights, but not its concessions, to companies formed with foreign oil companies. A joint venture was formed with an Italian state company to explore part of the Rub al Khali, or Empty Quarter, but activity ceased in 1973 after the company failed to discover oil. In 1967 Petromin joined a number of foreign oil companies in an equally unsuccessful exploration of areas of the Red Sea claimed by the kingdom.

In the 1960s, Petromin became responsible for domestic distribution of petroleum products, partly by purchasing Aramco's local marketing facilities. It became part owner with private Saudi investors in domestic refineries in Jiddah and Riyadh. It also began marketing crude oil abroad and became involved in tanker transport. By 1975 some of Petromin's activities were curtailed as part of a ministerial reorganization. Among the reasons for limiting its scope were its unsuccessful attempts at further oil exploration, the incompetence of its operations, and the diffusion of its activities. A clearer distinction between its activities and those of Aramco also occasioned the restriction. Some businesses in which Petromin held part ownership, such as a fertilizer plant and a steel mill, as well as responsibility for the many large petrochemical plants that were in the study stage, were transferred to the new Ministry of Industry and Electricity.

Although its responsibilities shrank somewhat after 1975, Petromin's activities increased. It supervised the construction and became responsible for operation of the crude oil pipeline from the Eastern Province oil fields to the new industrial city of Yanbu on the Red Sea coast. In joint-venture partnerships with foreign oil companies, it rapidly expanded refining facilities for domestic use and export. Petromin had responsibility for the supply, storage, and distribution of domestic petroleum products, for which the demand was growing rapidly. Petromin marketed some crude oil and petroleum products abroad and exported natural gas liquids. It also continued exploration and drilling activities well into the 1980s.

By the late 1980s, however, the government decided to create a company to take over Petromin's activities. The Saudi Arabian Marketing and Refining Company (Samarec) was created in 1988 to produce and market refined products in the kingdom and abroad. It assumed control of the joint ventures with foreign oil companies. Moreover, the government ordered Samarec to implement the major upgrading of domestic refineries, believed to cost well over US$5 billion during the first half of the 1990s.

Among the pivotal concessions Saudi Arabia awarded were those made to two small independent oil companies to explore for oil in the Divided Zone. In 1949 the Getty Oil Company (formerly Pacific Western Oil Corporation) was granted the right to explore in the Saudi share of the Divided Zone. Aramco had relinquished this area in 1948 partly because the ruler of Kuwait had won very favorable terms for a concession in his share of the Divided Zone, and Aramco did not want to match it.

Production from this concession (since the 1970s partly owned by Saudi Arabia) averaged 60,000 bpd during the 1980s. During the Persian Gulf War, production came to a halt because Getty's facilities were heavily damaged by the Iraqi occupying forces. The oil fields were mined while wells and gathering centers were seriously damaged or destroyed, as were the refinery and ten of fourteen crude oil storage tanks.

The second pivotal concession was granted in December 1957 by Saudi Arabia to the Arabian Oil Company (AOC), owned by Japanese business interests, giving exploration rights to the Divided Zone offshore area for two years, subject to extension. If oil were discovered in commercial quantities, an exploitation lease was to be granted for forty years. Subsequently, Saudi Arabia and Kuwait each became 10 percent owners of AOC. By the mid-1970s, Saudi Arabia had increased its stake to 60 percent, and in the early 1990s still controlled the company.

During the 1980s, average production was 125,000 bpd. After Iraqi attacks on storage facilities and the removal of personnel during Operation Desert Storm, output was shut down; production returned to peak levels by early 1992.

<> Oil Industry in the 1990s

Saudi Arabia

Saudi Arabia - Oil Industry in the 1990s

Structure and Organization

After two decades of organizational change, the reshaping of the oil industry in Saudi Arabia reared completion by the late 1980s. During the 1970s and early 1980s, the industry was transformed from one controlled by foreign oil companies (the Aramco parent companies) to one owned and operated by the government. Decisions made directly by the ruling family increasingly became a feature of the industry in the late 1970s. Saudi Arabia's participation in the Arab oil embargo in 1973 and foreign policy goals were featives of this transition. In 1992 the government had title to all mineral resources in the country (except in the former Divided Zone, where both Kuwait and Saudi Arabia had interests in the national resources of the whole zone). Through the Supreme Oil Council, headed by the king, and the Ministry of Petroleum and Mineral Resources the government initiated, funded, and implemented all investment decisions. It also controlled daily operations related to production and pricing.

On a functional level, the industry also underwent significant transformation. By the late 1980s, the major companies established by or taken over from foreign owners by the government were required to produce a particular product. For the most part, only one company controlled a certain industrial subsector, although there was some overlap. In the upstream part of the oil industry, all exploration, development, and production decisions within Saudi Arabia were controlled by Saudi Aramco. It managed the oil fields, pipelines, crude oil export facilities, and the master gas system throughout the country. Through its subsidiary Vela Marine International, Saudi Aramco controlled Saudi Arabia's tanker fleet. Because downstream investments overseas were an integral part of Saudi Arabia's crude oil marketing strategy, these have come under the control of Saudi Aramco. These downstream investments were joint-venture operations with foreign oil refiners. Saudi Aramco also operated the kingdom's largest oil refinery. In 1992 the refinery's output largely conformed to Samarec's specifications. Saudi Aramco was managed by a board of directors headed by the minister of petroleum and mineral resources and a senior management staff headed by a president, with the Supreme Oil Council having oversight. Most operational decisions were made by the professional staff except oil output decisions, instructions for which came from the king through the minister.

The downstream subsector of the oil industry was dominated by Samarec. Operated as a wholly government-owned refining and marketing company, Samarec took over Petromin's operation in 1988. Petromin still existed on paper, legally holding title with three foreign oil companies to the export refinery joint ventures at Al Jubayl on the gulf, and Yanbu, and Rabigh on the Red Sea. In addition to managing these refineries, Samarec operated three wholly owned domestic refineries at Riyadh, Jiddah, and Yanbu. Samarec controlled the distribution of refined products within Saudi Arabia and managed the bulk plants, loading terminals, tanker fleet, and product pipelines. All export sales of refined products were also managed by the downstream company. During the Persian Gulf War, to augment domestic supplies of jet fuel and other products, Samarec bid for products in the Singapore market. The Petromin board of directors, headed by the minister of petroleum and mineral resources, set Samarec policy but operations were managed by a senior staff.

After the reorganization of Petromin, the government transferred the production and distribution of lubricating oils to two joint ventures with Mobil. Two new companies were established: Petromin Lubricating Oil Company (Petrolube) and Petromin Lubricating Oil Refining Company (Luberef). Luberef operated the kingdom's single base oil refinery (base oil is a byproduct of the refining process), while Petrolube ran three small lubricating oil blending plants. Three other smaller private sector plants also operated lubricating oil blending facilities.

Crude Oil Production and Pricing Policy

The kingdom's oil policy was based on three factors: maintaining moderate international oil prices to ensure the long- term use of crude oil as a major energy source; developing sufficient excess capacity to stabilize oil markets in the short run and maintain the importance of the kingdom and its permanence to the West as a crucial source of oil in the long term; obtaining minimum oil revenues to further the development of the economy and prevent fundamental changes in the domestic political system.

Short-term oil policy in the early 1990s has been shaped by two major sequences of events. The first was Saudi Arabia's refusal to play the role of "swing producer" in the mid-1980s, its subsequent bid to maintain its market share, and abandonment of the fixed oil price system after the 1986 price crash. The second was Iraq's invasion of Kuwait, the kingdom's replacement of most of the oil lost from these two OPEC members, and its ascendance as unchallenged leader within OPEC after August 1990. Both periods have shaped an oil policy that called for OPEC decisions to promote moderate and stable oil prices but not compromise the kingdom's demand for its market share. Before the Persian Gulf War, Saudi Arabia demanded about 25 percent of the OPEC production ceiling; after the Iraqi invasion of Kuwait the share rose to 35 percent.

Saudi Arabia's behavior in the oil market since 1986 demonstrated its attempts to ensure both goals. In the early 1980s, oil prices rose rapidly because of the breakdown of the old vertically integrated system of multinational oil companies, following nationalizations by producer governments during the 1970s. Other causes of the price rises were the disruption of Iranian exports during and after the Iranian Revolution in 1979, and the destruction of the Iranian and Iraqi oil sectors during the Iran-Iraq War of 1980-88, which exacerbated an already low level of spare production capacity. High oil prices in the early 1980s stimulated the rapid growth of non-OPEC oil supplies in the Third World, in Siberia, the North Sea, and Alaska.

As a result, oil prices began to drop in late 1982, forcing OPEC to institute a voluntary output reduction system by assigning individual quotas. The new system failed to stem the price slide, however. By 1985 spot oil prices had fallen to about US$25 per barrel from an average of US$32 per barrel in the early 1980s.

Saudi Arabia's adherence to an official price system, which most OPEC members were abandoning, rendered the kingdom the swing producer. As a result, Saudi Arabia was forced to curtail output to ever lower levels. Other members "cheated" on their quotas by offering competitive prices, effectively pushing the entire burden of adjustment onto Saudi Arabia. In 1979-80, Saudi Arabia had peaked at a production of more than 10 million bpd; by 1986, that amount had reached a low point of 3 million bpd.

In early 1986, Saudi Arabia discontinued selling its oil at official prices and switched to a market-based pricing system called netback pricing--that guaranteed purchasers a certain refining margin. In doing so, Saudi Arabia recaptured a significant market share from the rest of OPEC. The sharp rise in crude oil supplies precipitated the crash of spot prices from an average of US$28 per barrel in 1985 to US$14 per barrel in 1986. The Saudis had used their "oil weapon"--significant excess capacity combined with adequate foreign financial reserves cushioning the blow of lower oil revenues--to establish some discipline in OPEC.

It did not take long before OPEC agreed to a new set of quotas tied to a price target of US$18 per barrel. By late 1986 and early 1987, prices rose to US$15 or US$16 per barrel for the OPEC basket (from well below US$10 per barrel in early 1986). To avoid a swing producer role, the Saudis imposed an important condition on other OPEC members: a guaranteed quota of approximately 25 percent of the total output ceiling, correlated to a US$18 per barrel price objective.

The latter became the center of controversy within the organization for much of the period before the Iraqi invasion of Kuwait. A revival in oil demand growth rates in the industrialized world between 1988 and 1990, partly aided by several years of low oil prices and double-digit annual consumption growth in the newly industrializing countries of East Asia, gave OPEC the chance to induce price increases above US$18 per barrel. Some members called for expanding OPEC's overall output ceiling by a smaller factor than the growth in anticipated demand, which would in effect push oil prices up, possibly back to their early 1980s level.

Whereas Saudi Arabia has always endeavored to maintain moderate oil prices, regional political and economic concerns have also motivated the kingdom not to depress prices too far, the 1986 Saudi-induced price crash notwithstanding. In 1988 and 1989, King Fahd publicly guaranteed that Saudi Arabia would work to achieve oil price stability at US$18 per barrel. There was one overwhelming reason for this policy: with the Iran-Iraq War cease-fire in 1988, the kingdom wanted to maintain oil prices at levels that would force Saddam Husayn to be concerned with rebuilding Iraq rather than threatening his neighbors. This objective was formally registered in the 1989 Nonaggression Pact that Riyadh signed with Baghdad.

The biggest battles in OPEC prior to 1990, however, were between Saudi Arabia and two of its gulf neighbors: Kuwait and the United Arab Emirates (UAE). Both refused to restrict production to their quota levels, and by early 1990 their serious overproduction contributed to mounting international crude oil inventories. By the second quarter of 1990, the oil traders in New York were pushing oil prices down.

Saddam Husayn's envoy, Saadun Hamadi, toured the gulf in June 1990 and halted the slide in prices as Iraq unveiled its own "oil weapon": the threat to invade Kuwait. Buttressing this threat by mobilizing 30,000 troops on the Kuwaiti border, Baghdad dictated an agreement at the OPEC ministerial meeting the following month. Although respecting Saudi Arabia's 25 percent market share, and allowing the UAE to raise its quota to 1.5 million barrels per day, OPEC set an overall ceiling of almost 22.5 million bpd and a compromise price of US$21 per barrel.

Saudi Arabia played a largely passive role at the July 1990 OPEC meeting in Geneva and conceded to Iraq's bid for dominance. Kuwait was clearly cowed: even before the meeting it reduced its oil output and appointed a new oil minister, Rashid Salim al Amiri, an unknown chemistry professor, to replace Ali Khalifa, the architect of Kuwait's downstream projects and its aggressive oil policies.

When Iraq invaded the invasion of Kuwait, it provoked massive intervention by the United States into the gulf and ultimately lost its power within OPEC. Behind direct United States protection, the kingdom's oil production rose to 8.5 million bpd or 35 percent of OPEC's total output.

Operation Desert Storm allowed Riyadh to regain its status within OPEC. At each successive OPEC meeting until the gathering of ministers in February 1992, Saudi Arabia dictated the final agreements with virtually no opposition. The eleven active members were producing at capacity while prices remained relatively high. Between March and July 1991, both Iran and Saudi Arabia expertly sequenced the unloading of large stocks of oil in "floating storage," which had been built up as insurance during Operation Desert Shield, and prevented an anticipated crash in oil prices during the spring and summer months of 1991. Part of the harmony within OPEC resulted from the opportunity Iran saw in being more cooperative with Saudi Arabia. For the West to see Iran as a "responsible" member of OPEC could help attract investment for its oil and other industrial sectors.

Observers of OPEC, however, awaited the revival of the old dove-hawk battles. The February 12, 1992 OPEC meeting was held to discuss reinstatement of the July 1990 agreement, temporarily suspended after August 2, 1990. The hawks wanted to preserve the quota system and the reference price, which had been neglected in order to replace lost Iraqi and Kuwaiti output, pushing oil prices to about US$21 per barrel for the OPEC basket. The expected return of Kuwait and Iraq to the oil market required a return to the preinvasion rules if prices were not to fall sharply.

Saudi Arabia's aim at the February 1992 OPEC meeting was to eradicate the last vestiges of the 1990 agreement and its quota shares, especially the kingdom's share of about 25 percent. At the February 1992 meeting, OPEC members refused to blink at Saudi pressure. Iran particularly was willing to risk the improved relations it had forged with Saudi Arabia and absorb the oil price cut.

Saudi Arabia's income requirement in the wake of the Gulf War would, Tehran suspected, keep the Saudis from forcing other OPEC members into accepting its objectives as it did in 1986. Technically, the final agreement reached was essentially what the Saudis wanted in the short run: a total production ceiling of almost 23 million bpd and a temporary quota of 35 percent of the ceiling and the maintenance of price stability. They did not achieve their long-term objective: unanimous OPEC recognition of a 35 percent market share of all future OPEC output ceilings.

Longer-term Saudi policy imperatives for the 1990s were shaped by structural factors within OPEC and within the international oil market. Highest on the priority list was the decision to push domestic oil capacity to more than 105 million bpd sustainable capacity with a further 1.5 million to 2 million bpd surge capacity in times of emergency. Three factors prompted these expansion plans. Growth in world demand for oil over the preceding several years, combined with the Persian Gulf War, had pushed the kingdom and other OPEC countries to their production capacities. Expecting that demand would continue to grow and that most other exporters were constrained by diminishing oil reserves or financing problems, a rapid rise in capacity could capture any increase in demand that might occur. Second, in light of the post-1986 intra-OPEC market-share competition, oil capacity expansions have had a direct impact on the ability of individual members to jockey for quota increases. Third, the ability to raise output at will, in the event of an unforeseen price decline, helped stabilize total oil revenues, which constituted the bulk of domestic budgetary income.

Saudi Arabia's interest in moving downstream was also a priority of its oil policy. The drive to obtain overseas refining and storage facilities was designed to further two objectives related to security of supply. First, the kingdom wanted to obtain captive buyers of its crude, assuring stable prices and terms. Saudi Arabia would thus be more receptive to market conditions in consuming countries and avoid being closed out of certain countries. Gaining further profits from refining the crude was an associated reason for the move downstream overseas. Second, the kingdom sought to provide consuming countries with "reciprocal security measures," under which it would undertake to guarantee supply--through capacity additions or stocking arrangements abroad--in return for consumer countries' decisions to avoid taxes and import restrictions on oil. Few consuming countries, however, have responded favorably to such arrangements.

Crude Oil Reserves and Production Capacity

Saudi Arabia has been described as the world "mother lode" of oil and gas reserves. Estimates for 1990 placed total oil reserves of the kingdom at 261 billion barrels. Saudi Aramco controlled all the reserves within the country's borders with the exception of reserves in the Divided Zone, which were controlled by Getty Oil Company and the Arabian Oil Company. Total oil reserves have risen steadily since oil was discovered in 1938. During the 1970s and 1980s, estimates of total oil reserves grew by nearly 91 percent from 137 billion barrels in 1972. The comprehensive reassessment of existing reserves boosted Saudi Arabia's share of world reserves to 25.8 percent. At 1992 production levels, these oil reserves would allow oil production for almost eight-four years.

Until the mid-1980s, all the oil that had been discovered had been found in the Eastern Province. Aramco had found forty-seven oil fields, including some during the 1970s in the Rub al Khali. The world's largest oil field, Al Ghawar, located in the Al Ahsa region of the Eastern Province, is 250 kilometers long and 35 kilometers wide at its greatest extent. The field is so vast that names have been given to separate subsections such as Ain Dar, Shadqam, Al Hawiyah, Al Uthmaniyah, and Harad. Discovered in 1948, the field began output in 1951. By 1990 Al Ghawar had 219 flowing wells. Saudi Arabia also possessed the world's largest offshore field, As Saffaniyah, located in the gulf near Kuwait and the Divided Zone. As Saffaniyah was discovered in 1951, began output in 1957, and by 1990 had 223 flowing wells. Of the four fields discovered before Al Ghawar--Ad Dammam, Abu Hadriyah, Abqaiq (also seen as Buqayq), and Al Qatif--only Abqaiq and Al Qatif were still producing in 1990. Abqaiq had forty-seven flowing wells. The major producing fields discovered after Al Ghawar, mainly in the 1960s and early 1970s, are offshore and include Manifah, Abu Safah, Al Barri, Az Zuluf, Al Marjan, and Al Khafji in the Divided Zone. Saudi Arabia had a total of 789 flowing wells during 1990, up from 555 producing wells in 1983.

The quality of crude oil flowing from these wells is based on density (measured by gravity standards established by the American Petroleum Institute--API) and the amount of sulfur and wax it contains. Light crude oil is generally more desirable and commands a higher price because it yields more high-value products such as gasoline and jet fuel. Several Saudi fields, including those in the Divided Zone, contain heavier grades by international standards. Al Ghawar field produces crude ranging from API gravity 33 degrees to 40 degrees, which is considered light crude oil in the kingdom but is generally heavier than most international light crude oils. As Saffaniyah produces heavy crude oil with API gravity ranging from 27 degrees to 32 degrees.

The historical production pattern until the early 1980s contained greater proportions of light and very light crude oils. By the mid-1980s, government policy sought to adjust output between heavy and light crude oils to reflect actual users of each, so that the kingdom would not exhaust its supply of light crude oils. Estimates for 1991 showed that this balance was not achieved, however; Extra Light (from Al Barri field) and Arab Light (crudes from Abqaiq, Al Ghawar, Abu Hadriyah, Al Qatif, and others) recorded production levels close to 70 percent of total output of 8.2 million bpd, whereas Arab Medium (from Az Zuluf, Al Marjan, Al Kharsaniyah, and other fields) and Arab Heavy (from As Saffaniyah, Manifah, and other fields) production levels approached 11 percent and 19 percent, respectively. In the early 1990s, the consensus was that after capacity was expanded, the split between light and heavy grades would shift to 10 percent more heavy crude oils, despite recent discoveries of very light grades south of Riyadh. During the 1980s, technological developments in refining narrowed the differentials between light and heavy crudes. Therefore, the traditional price disadvantage that the Saudis faced was steadily being erased because of the more sophisticated refineries being brought on line.

Saudi crude oils also contain high sulfur levels. Crude from Al Ghawar has sulfur content ranging from about 1.9 percent to close to 2.2 percent by weight, which is generally considered high. As Saffaniyah crude's sulfur content is even higher at above 2.9 percent by weight. Sulfur compounds are undesirable, often contaminating crude oils and corroding processing facilities.

Crude Oil Production and Exports

During the 1980s, crude oil production fell from a peak of 9.9 million bpd in 1980, as Saudi Arabia boosted output to offset shortfalls in supply resulting from the beginning of the IranIraq War, to 3.3 million bpd in 1985. Thereafter, and until the Iraqi invasion of Kuwait, a combination of moves by the kingdom and developments in international oil markets allowed for a steady increase in supply. Production rose to 4.9 million bpd in 1986 and reached in excess of 5.8 million bpd on the eve of the Iraqi invasion. To replace most of the 4.5 million bpd of embargoed Kuwaiti and Iraqi oil, Saudi Arabia raised output to 8.5 million bpd within three months. After the Persian Gulf War, market conditions and maintenance projects required modest declines in output to below 8 million bpd, but the kingdom's output in 1991 and 1992 averaged 8.4 million bpd. Divided Zone output, which was included in this figure, fell to zero immediately after the Persian Gulf War as a result of the war damage, but the Arabian Oil Company facilities resumed pumping at levels close to 350,000 bpd within a few months. Half of this output was attributed to Saudi Arabia. Getty Oil facilities in the Divided Zone did not resume pumping oil after the Persian Gulf War.

The bulk of Saudi Arabia's crude oil production was exported. In 1980, for example, crude oil exports totaled about 9.2 million bpd or 93 percent of production. By 1985, with lower production, exports fell to below 2.2 million bpd. Over the latter half of the 1980s, exports have risen steadily to average 3.3 million bpd in 1989, 4.8 million bpd in 1990, and 6.8 million bpd in 1991 and 1992. Direction of exports has also varied during the 1980s. In the early 1980s, the United States and, to a lesser extent, Canada accounted for 15 percent of Saudi exports; by 1985 they accounted for only 6 percent. Lower oil prices and more aggressive pricing structures enabled Saudi Arabia to place greater quantities of oil in North America by the early 1990s when this market constituted almost one-third of Saudi crude oil sales overseas. By contrast, Western Europe's importance to Saudi Arabia as an importer of crude fell during the 1980s from 41 percent in 1981 to about 18 percent by 1990. Saudi Arabia has maintained its market presence in Asia, although the high levels of dependence of the mid-1980s have been reduced. Asia received 37 percent of Saudi crude oil exports in 1981, expanded its share to 68 percent by mid-decade, but with the kingdom's attempts to capture a greater share of the United States market, Asia imported a somewhat reduced 47 percent of Saudi crude oil exports by the early 1990s.

Petroleum Refining Capacity, Production, Consumption, and Exports

Total refining capacity in the kingdom grew from fewer than 700,000 bpd in 1980 to roughly 1.9 million bpd in 1990. The significant capacity expansions during the 1980s were associated with the construction of three refineries: the Petromin/Mobil plant at Yanbu, which added 250,000 bpd; the 250,000 bpd Petromin/Shell plant at Al Jubayl; and the 325,000 bpd refinery at Rabigh. An 80,000-bpd increase to Saudi Arabia's largest refinery at Eas Tanura (530,000-bpd capacity after the increase), completed by 1987, also contributed to the overall increase. Damage to Saudi Arabia's refineries during the Persian Gulf War reduced capacity at Saudi Aramco's Ras Tanura refinery and at the AOC and Getty refineries in the Divided Zone. Total refining capacity during 1991 averaged 1.6 million bpd, but repairs during 1992 helped restore overall refinery capacity to 1.8 million bpd.

Domestic refined output grew steadily with the capacity expansions during the 1980s and early 1990s. Total production of refined petroleum averaged 1.2 million bpd in 1985, growing to more than 1.7 million bpd by 1990, representing an average capacity use of 84 percent in 1985 and 93 percent in 1990. The bulk of refined product output was naphtha and diesel oil; however, output of gasoline and lighter product grades grew more rapidly during the 1980s. This trend indicated both the construction of more sophisticated refineries and the upgrade of existing plants. Nonetheless, Saudi Arabia's refining capacity was of fairly low quality.

Domestic consumption of refined products grew rapidly in the first half of the 1980s. With economic retrenchment, however, consumption growth slowed markedly in the latter half of the 1980s. From 460,000 bpd in 1980, domestic consumption rose to 630,000 bpd by 1985 and stagnated at that level until military consumption during the Persian Gulf War boosted domestic demand to 840,000 bpd during 1991. A fall in consumption to 700,000 bpd was anticipated in 1992. Saudi Arabia became a major exporter of refined products after 1985. From a modest level of exports of 290,000 bpd in 1985, refined product sales reached 734,000 bpd in 1990 before falling to 610,000 bpd as a result of output retained domestically to fuel the foreign forces in the kingdom. A large proportion of exports have been directed to Asian markets, of which Japan alone accounted for one-third of Samarec's overseas sales.

Saudi Arabia

Saudi Arabia - NON-OIL INDUSTRIAL SECTOR

During the 1980s, the government established, virtually from scratch, a modern industrial sector. The industrialization process had two goals: first, the use of the kingdom's enormous gas production as industrial inputs to produce chemicals and petrochemicals for export and, second, the construction of energy-intensive industries, some for import-substitution purposes and others to meet infrastructural needs. The government also established state-of-the-art industrial cities and facilities to support its industrial program, including those at Al Jubayl and Yanbu.

By the early 1990s, the vast majority of these plants had been completed, and few major expansions were planned. Infrastructure requirements had largely stabilized and were adequate to meet the needs of the population and industry for much of the 1990s. Therefore, the government concentrated on maintenance and on improving productivity and efficiency. Moreover, with the onset of serious budgetary constraints, the government's role in advancing the domestic industrialization process grew more indirect. The government was forcing a number of state-owned industrial institutions to seek financing for their new capacity-expansion programs from nontraditional sources such as domestic and foreign commercial banks, stock markets, and private investors. In an ongoing attempt to encourage more private sector investment in manufacturing, particularly in light industries, local business received incentives in the form of production and consumption subsidies.

Utilities

Most of Saudi Arabia's electric power-generating capacity was built during the 1970s and 1980s. Nonetheless, after the establishment of the first municipal power plant in 1950, the development of the industry occurred largely in the private sector. By 1980 about ninety-five private companies supplied electric service, leading to a totally decentralized system. Voltages and cycles differed between towns and even within towns, preventing consumers from standardizing equipment and appliances. Consumers suffered from chronic power failures, voltage fluctuations, and poor repair service. Hospitals and large plants often had their own generators. Planners estimated that only 54 percent of the potential demand for electricity had been met in 1978.

In the early 1970s, the government embarked on a twofold plan to organize the sector and to stimulate further investment. The system relied on private sector participation with strong government oversight and planning. Early attempts to standardize the system called for all new generators to be 60 hertz with distribution voltages of 127 and 220 volts. In 1976 the first of a series of regional companies, Saudi Consolidated Electric Company (Sceco), was formed for the eastern region (Sceco-East). Ownership of the regional companies, which amalgamated their facilities under Sceco, remained locally held. The government had some equity participation, but the regional companies retained administrative autonomy. The government requested Aramco to manage Sceco-East because of its large share of generating facilities and its management expertise. Regional companies for the central and southern parts of the country were formed in 1979; Sceco-West was established in 1981. The goal was to link the generators in a region and to improve planning and service. Eventually the regional companies would be tied together to form a nationwide grid. The government-owned General Electricity Corporation, which served rural areas, participated in the regional companies in areas where it was active.

In addition, the government provided the private sector direct financial assistance for building and operating generating plants and distribution facilities under the Electric Utility Lending Program, administered by the Saudi Industrial Development Fund (SIDF). The government provided consumption subsidies by paying producers to sell their power below cost. The government also gave the producer an implicit fuel subsidy on gas. Direct subsidies to the sector peaked at SR2.75 billion in fiscal year 1984-85 but fell in 1989 to SR210 million. Following a 1992 government decree, subsidies were expected to rise again because electricity charges to users were halved.

After the early 1960s, generating capacity expanded rapidly. By 1979 generating capacity amounted to 4,214 megawatts. By 1990 this capacity had quadrupled to 16,549 megawatts. Between 1975 and 1979, consumption of electricity increased 37 percent yearly while the number of consumers rose 16 percent yearly. During the 1980s, the consumption growth rate slowed to 23.8 percent annually, with the number of consumers rising annually by 17 percent. From 872,054 subscribers in 1980--representing 4 million people--subscribers reached 2.4 million in 1990. Industry usage averaged 28.3 percent of electricity consumed, although in the Eastern Province, given the location of country's major industrial complexes, industry demand accounted for more than 60 percent of electric consumption. Industrial users in the other regions consumed less than 5 percent of total electricity generated.

Water consumption also rose rapidly during the 1970s and 1980s, both by traditional sectors and by newly established urban and industrial users. In the early 1980s, a national water plan was formulated when particularly serious problems were encountered. Lack of sewage treatment was contaminating groundwater from wells in the Eastern Province, and overpumping from wells in the central region near Riyadh drastically lowered the water table. However, few substantive changes in water supply have been instituted, leading to a continued depletion of water resources. Saudi Arabia's water was supplied from three different sources: surface water (about 10 percent), underground aquifers (more than 80 percent), and desalination plants (5 percent). The nonrenewable sources continued to provide the bulk of water to users and were being depleted at an alarming rate. Efforts to supplement the available water supply have concentrated on building desalination plants. In 1980 fourteen plants were in operation with a combined capacity of 65 million cubic meters per year. Eight more plants were constructed during the decade taking total capacity to more than 600 million cubic meters per year. By the end of the 1980s, output from these plants was approximately 500 million cubic meters per year.

Between 1980 and 1985, water consumption more than tripled from 190 million cubic meters to 574 million cubic meters. The consumption increase continued in the latter half of the decade with water usage rising to 900 million cubic meters in 1990. Agriculture was the prime water user, accounting for 85 percent; its rate of consumption quadrupled from 1980 to 1985. Although data are lacking for the late 1980s and early 1990s, it appeared that usage continued to grow but at a slightly slower rate. The government's policy of providing water free to the sector, combined with new water-intensive methods of farming have been the main factors for this growth of water consumption.

The idea of importing water into Saudi Arabia was first presented in the early 1970s when Denmark's Royal Greenland Company was commissioned to perform a study on the feasibility of towing icebergs. The conclusion reached was that no technical problems were insurmountable, but that the cost was prohibitive. In the late 1980s, the Turkish government proposed a plan whereby two pipelines from Turkey would bring water (at a cost of about US$1 per cubic meter compared with US$5 to US$6 per cubic meter for producing desalinated water) to both the Eastern Province and the Hijaz. Security concerns have prevented the Saudis from moving further on these plans, however.

Mining and Quarrying

By the early 1980s, promising deposits of metallic minerals had been found, largely in the western part of the country, but commercial mining was limited. Several international companies and other organizations, including the United States Geological Survey, were surveying and exploring for minerals. Commercial exploitation was being evaluated at some promising sites. The government owned all subsoil resources and permitted joint ventures with Petromin for exploration and mining activities. In fact, the government provided substantial assistance and incentives to foreign firms to develop mining.

The first mining project was the Mahd adh Dhahab gold mine about 280 kilometers northeast of Jiddah. The gold mine started commercial production in 1988 with a total capacity of 400 tons of gravel a day with a ratio of 26 grams of gold and 90 grams of silver per ton. Petromin reached an agreement with a Swedish company to exploit the gold deposits at Shukhaybirat, northeast of Medina. The mine began operations in 1991, planning to produce 1,500 kilograms of gold annually together with silver. Furthermore, gold deposits were found at Hajar (north of Medina), Bir at Tawilah (southeast of Al Taif), and Al Amar (southeast of Riyadh). Also in the early 1980s, iron ore deposits in Wadi Sawawin near the Gulf of Aqaba were under study to determine their economic potential. Ore containing copper, lead, zinc, silver, and gold was located in the Al Masani area about 200 kilometers northeast of Jiddah and showed promise. A pilot project began in the early 1980s to determine the feasibility of processing metal-rich mud from the bottom of the Red Sea. Lead, zinc, copper, silver, platinum, and cadmium appeared potentially exploitable. The country also has adequate nonmetallic minerals, such as clay, limestone, glass sand, and stone for the construction industry. These materials were exploited by private firms. Large gypsum deposits had been located near Yanbu and phosphorite had been found in several locations.

Manufacturing

The government has played an instrumental role in developing the manufacturing sector by directly establishing industrial plants, mainly in the basic industries sector, such as petrochemical, steel, and other large manufacturing enterprises. Also, it has developed manufacturing through direct loans, mainly by the SIDF and through industrial subsidies, offset programs, set-asides, preferential buying programs, and tariffs. In the 1980s, the bulk of private manufacturing investment was directed to plants that manufactured goods for the construction industry. With the decline of construction in the mid-1980s, there has been a shift to other light manufacturing including food processing, furniture making, and other consumer goods. This trend accelerated in the early 1990s.

Partly because of private sector reluctance to invest in manufacturing and partly because of growing oil revenues, the government was involved early in the 1960s in some basic industries. In the late 1960s, Petromin established a steel- rolling mill in Jiddah using imported billets, a urea fertilizer plant in Ad Dammam with 49 percent private Saudi capital, and a sulfuric acid plant in the same location. In the early 1970s, as oil revenues grew, a coordinated plan emerged to collect and distribute gas that was flared to two yet-unbuilt industrial sites where it could be used in basic industries. The two sites selected were Al Jubayl and Yanbu.

In 1975 the Royal Commission for Al Jubayl and Yanbu was created. The commission was given authority to plan, construct, manage, and operate the infrastructure needed to support the basic industries the government intended to build and to satisfy the community needs of the work force employed in these industries. The commission was also to promote investment in secondary and supporting industries, to develop effective city government, and to train Saudis to take over as many jobs as possible. The commission received an independent budget to facilitate its work.

By 1990 there were sixteen primary industries, forty-six secondary enterprises, and approximately 100 support and light industrial units at Al Jubayl. Yanbu had attracted five primary industrial plants, twenty-five secondary plants, and seventy-five support and light units in 1990. Al Jubayl benefited from the massive petrochemical projects of the Saudi Basic Industries Corporation (Sabic), but both saw substantial growth during the 1980s. Nonetheless, both locations suffered from overcapacity; for example, initial population projections called for 58,000 residents by 1985 in Al Jubayl, but by 1987 total residents barely reached 40,000. Revised forecasts estimated that there was substantial room for growth during the 1990s, and that no major capacity expansion would be necessary until the year 2000.

With the establishment of Sabic in 1976, the government undertook a major effort to create a domestic petrochemical industry that was designed to augment oil export earnings and to use abundantly available domestic resources, particularly associated gas supplies. The investments have been guided by a two-phase strategy. The first phase (1976-87) included a number of large capital-intensive and export-oriented petrochemical projects that have been completed. Its aim was to produce bulk products such as ethylene, polyethylene, melamine, methanol, and downstream products including derivatives of ethylene. Moreover, during this period, Sabic undertook the construction of plants to produce fertilizers (urea, sulfuric acid, and melamine), metals (steel rods and bars), supporting industrial products (nitrogen), and intermediate petrochemical products (vinyl chloride monomer, polyvinyl chloride, and MTBE). Sabic also acquired shares in two Saudi aluminum companies and expanded overseas by investing in a Bahraini petrochemical complex.

During the first phase, financing by joint-venture partners and funding from the government's Public Investment Fund (PIF) provided the bulk of support for these projects. Domestic and regional private sector participation was also allowed after 30 percent of the equity capital of Sabic (approximately SR3 billion) was sold to residents of Saudi Arabia and other GCC countries. In 1987 Sabic split each share into ten shares to mobilize investments from smaller investors.

In 1992 Sabic owned, either outright or with a minimum 50 percent stake, fifteen major industrial enterprises. Total output capacity was 13 million tons of various petrochemicals per year, up from 11.9 million tons per year in 1990 and 9.5 million tons per year in 1989. Although total sales have continued to rise, weaker international prices depressed profits during the late 1980s and early 1990s. During 1991 Sabic registered net profits of US$613 million. About 95 percent of Sabic's sales were exported; total exports approached US$4 billion per annum. Its success in rapidly increasing exports and capturing an international market share have made Sabic's petrochemical exports subject to nondiscriminatory restraint in both Europe and Japan, its main export markets. Both the EC and Japan have applied quantitative restrictions to Saudi exports. Moreover, urea exports from Saudi Arabia were subject to antidumping duties in the EEC, which no longer permitted preferential treatment under its General System of Preferences.

Future development plans, part of Sabic's second phase, were designed to maintain Saudi Arabia's 1992 international market share and raise domestic petrochemical capacity by 40 percent. By 1993 Sabic hoped to increase total petrochemical capacity to 20 million tons per year. Projects underway included the Eastern Petrochemical Company (Sharq), an equal-share joint venture with Japan's Mitsubishi Gas Company, which was planning a major increase in its capacity to produce ethylene glycol. The expansion program aimed to raise production to 660,000 tons per year from the 1991 level of 450,000 tons per year. Sharq also intended to increase its polyethylene production from 140,000 tons per year to 270,000 tons per year. Ibn Zahr, the Saudi- European Petrochemical Company, a joint venture in which Sabic had a 70 percent share and Finland's Neste, Italy's Eco Fuel, and the Arabian Petroleum Investment Corporation (Apicorp--owned by the Organization of Arab Petroleum Exporting Countries) each had 10 percent, intended to raise the output of MTBE from 550,000 tons per year. The company's polypropylene plant was to be expanded as well. The National Methanol Company (Ibn Sina) planned to double methanol production from the 640,000 tons annually in 1991 to 1.2 million tons. This plant was also expected to increase capacity of MTBE to 500,000 tons per year and possibly to 700,000 tons per year. The National Plastics Company (Ibn Hayyan), a joint venture with the South Korean Lucky Group (15 percent), planned to expand output of polyvinyl chloride from 200,000 tons to 300,000 tons per year. The National Industrial Gases Company was engaged in 1991 in doubling nitrogen production capacity from 219,000 tons per year to 438,000 tons per year, whereas oxygen production capacity was to increase from 438,000 tons per year to 876,000 tons per year. The Saudi Arabian Fertilizer Company completed a 500,000-tons-per-year anhydrous ammonia plant and a 600,000-tons-per-year granulated urea plant in 1992, and was expected to undertake further expansion throughout the 1990s. Because the available gas-based feedstock (ethane and methane) would be insufficient to meet requirements of the second phase, Sabic has invested in two flexible feedstock crackers with a total combined capacity of about 1 million tons. The crackers help reduce dependence on ethane and methane and allow the use of naphtha, liquefied petroleum gas, or propane as feedstock.

In Sabic's second-phase financing plans, retained profits and limited borrowing from the PIF, SIDF, and domestic commercial banks were expected to provide partial funding. Nonetheless, Sabic hoped to raise almost 30 percent of the planned US$3.5 billion to US$4 billion on the international market through syndicated borrowing. For example, Sharq's expansion plans called for approximately US$600 million in foreign borrowing, and Ibn Zahr was expected to raise US$500 million from foreign capital markets.

The private sector's role in industrialization has been largely restricted to light and medium-sized manufacturing units. However, some larger merchant families had established larger- scale chemical, secondary-stage petrochemical, and car or truck assembly plants. By 1981 Saudi Arabia had approximately 1,200 industrial plants of all sizes. At the end of the 1980s, this figure had doubled to about 2,000 units and had risen to 2,100 by 1991. Most private manufacturing concerns in the 1980s produced construction materials including cement, insulation materials, pipes, bricks, and wood products. Judging from data available from the Ministry of Industry and Electricity, there has been a marked shift from this sort of production to downstream chemicals, food processing, and metals, machinery, and equipment manufacturing. The annual number of new licenses issued to companies in the chemical, rubber, and plastics sector rose from seven per year in 1987 to fifteen in 1990. Although this number constituted at most 20 percent of all licenses granted, the size of the firms was growing, judging from their authorized capital, which grew from 42 percent of total new investment planned to 90 percent. Trailing well behind this sector was the food-processing sector, which saw a rise in number of licenses between 1987 and 1990, but the volume of authorized capital declined, indicating smaller individual companies and more widespread participation. Metals and machinery manufacturing followed a pattern similar to chemical companies, with both the number of units and authorized capital growing during the four-year period.

The patterns of Saudi private manufacturing investment have conformed to government investments. Incentives offered to private businesses included interest-free loans from SIDF of up to 50 percent of the cost an industrial project, repayable within fifteen years. Exemptions from tariff duties on imported equipment, raw materials, spare parts, and other industrial inputs; land leases at significantly reduced prices; discriminatory buying practices by government agencies; and significant import protection were some of the other incentives provided.

Saudi Arabia

Saudi Arabia - AGRICULTURE

During the 1970s and 1980s, the government undertook a massive restructuring of the agricultural sector. The stated objectives were food security through self-sufficiency and improvement of rural incomes. Although successful in raising domestic output of several important crops and foodstuffs through the introduction of modern agricultural techniques, the agricultural development program has not entirely met these objectives. In regard to self- sufficiency, the kingdom produced a sufficient surplus to export limited quantities of food. However, if the entire production process were considered, the import of fertilizers, equipment, and labor have made the kingdom even more dependent on foreign inputs to bring food to the average Saudi household.

Two patterns of income distribution emerged: traditional agricultural regions did not benefit from the development program, and the government's financial support led to the establishment of large-scale agricultural production units. Some of these were managed and operated by foreign entities and owned by wealthy individuals and large businesses. From an environmental viewpoint, the program had a less than satisfactory impact. Not only has it caused a serious drain on the kingdom's water resources, drawing mainly from nonrenewable aquifers, but it has also required the use of massive amounts of chemical fertilizers to boost yields. In 1992 Saudi agricultural strategy was only sustainable as long as the government maintained a high level of direct and indirect subsidies, a drain on its budget and external accounts.

Traditional Agriculture and Pastoral Nomadism

In the past, the bulk of agricultural production was concentrated in a few limited areas. The produce was largely retained by these communities although some surplus was sold to the cities. Nomads played a crucial role in this regard, shipping foods and other goods between the widely dispersed agricultural areas. Livestock rearing was shared between the sedentary communities and nomads, who also used it to supplement their precarious livelihoods.

Lack of water has always been the major constraint on agriculture and the determining factor on where cultivation occurred. The kingdom has no lakes or rivers. Rainfall is slight and irregular over most of the country. Only in the southwest, in the mountains of Asir, close to the Yemen border and accounting for 3 percent of the land area, was rainfall sufficient to support regular crops. This region plus the southern Tihamah coastal plains sustained subsistence farming. Cropping in the rest of the country was scattered and dependent on irrigation. Along the western coast and in the western highlands, groundwater from wells and springs provided adequate water for selfsupporting farms and, to some extent, for commercial production. Moving east, in the central and northern parts of the interior, Najd and An Nafud, some groundwater allowed limited farming. The Eastern Province supported the most extensive plantation economy. The major oasis centered around Al Qatif, which enjoyed high water tables, natural springs, and relatively good soils.

Historically, the limited arable land and the near absence of grassland forced those raising livestock into a nomadic pattern to take advantage of what forage was available. Only in summer, the year's driest time, did the nomad keep his animals around an oasis or well for water and forage. The beduin developed special skills knowing where rain had fallen and forage was available to feed their animals and where they could find water en route to various forage areas.

Traditionally, beduin were not self-sufficient but needed some food and materials from agricultural settlements. The near constant movement required to feed their animals limited other activities, such as weaving. The settled farmers and traders needed the nomads to tend this camels. Nomads would graze and breed animals belonging to sedentary farmers in return for portions of the farmers' produce. Beduin groups contracted to provide protection to the agricultural and market areas they frequented in return for such provisions as dates, cloth, and equipment. Beduin further supplemented their income by taxing caravans for passage and protection through their territory.

Beduin themselves needed protection. Operating in small independent groups of a few households, they were vulnerable to raids by other nomads and therefore formed larger groups, such as tribes. The tribe was responsible for avenging attacks on any of its members. Tribes established territories that they defended vigorously. Within the tribal area, wells and springs were found and developed. Generally, the developers of a water source, such as a well, retained rights to it unless they abandoned it. This system created problems for nomads because many years might elapse between visits to a well they had dug. If people from another tribe just used the well, the first tribe could frequently establish that the well was in territory where they had primary rights; but if another tribe improved the well, primary rights became difficult to establish. By the early twentieth century, control over land, water rights, and intertribal and intratribal relationships were highly developed and complex.

Modern Agriculture

Pastoral nomadism declined as a result of several political and economic forces. Sedenterization was a means of imposing political control over various tribal groupings in the Arabian Peninsula. New legal structures such as the 1968 Public Lands Distribution Ordinance created novel land relations and spurred the dissolution of the beduin way of life. The establishment of an activist modern state provided incentives for large numbers of Saudi citizens to enter the regular, wage-based, or urban commercial employment. Moreover, modern technology and new transport networks undermined the primitive services that the beduin offered the rest of the economy.

Until the 1970s, sedentary agriculture saw few changes and declined in the face of foreign imports, urban drift, and lack of investment. The use of modern inputs remained relatively limited. Introduction of mechanical pumping in certain areas led to a modest level of commercial production, usually in locations close to urban centers. Nevertheless, regional distribution of agricultural activity remained relatively unchanged, as did the average holding size and patterns of cultivation.

During the late 1970s and early 1980s, the government undertook a multifaceted program to modernize and commercialize agriculture. Indirect support involved substantial expenditures on infrastructure, which included electricity supply, irrigation, drainage, secondary road systems, and other transportation facilities for distributing and marketing produce. Land distribution was also an integral part of the program. The 1968 Public Lands Distribution Ordinance allocated 5 to 100 hectares of fallow land to individuals at no cost, up to 400 hectares to companies and organizations, and a limit of 4,000 hectares for special projects. The beneficiaries were required to develop a minimum of 25 percent of the land within a set period of time (usually two to five years); thereafter, full ownership was transferred. In FY 1989, the total area distributed stood at more than 1.5 million hectares. Of this total area 7,273 special agricultural projects accounted for just under 860,000 hectares, or 56.5 percent; 67,686 individuals received just under 400,000 hectares or 26.3 percent; 17 agricultural companies received slightly over 260,000 hectares, or 17.2 percent. Judging from these statistics, the average fallow land plot given to individuals was 5.9 hectares, 118 hectares to projects, and 15,375 hectares to companies, the latter being well over the limit of 400 hectares specified in the original plans.

The government also mobilized substantial financial resources to support the raising of crops and livestock during the 1970s and 1980s. The main institutions involved were the Ministry of Agriculture and Water, the Saudi Arabian Agricultural Bank (SAAB) and the Grain Silos and Flour Mills Organization (GSFMO). SAAB provided interest-free loans to farmers; during FY 1989, for example, 26.6 percent of loans were for well drilling and casing, 23 percent for agricultural projects, and the balance for the purchase of farm machinery, pumps, and irrigation equipment. SAAB also provided subsidies for buying other capital inputs.

GSFMO implemented the official procurement program, purchasing locally produced wheat and barley at guaranteed prices for domestic sales and exports. The procurement price was steadily reduced during the 1980s because of massive overproduction and for budgetary reasons, but it was substantially higher than international prices. By the late 1980s, the procurement price for wheat, for example, was three times the international price. Although quantity restrictions were implemented to limit procurement, pressures from a growing farm lobby led to ceiling-price waivers. Moreover, the government encountered considerable fraud with imports being passed off as domestic production. To control this situation, the government has granted import monopolies for some agricultural products to the GSFMO, while procurement and import subsidies on certain crops have been shifted to encourage a more diversified production program. Finally, agricultural and water authorities provided massive subsidies in the form of low-cost desalinated water, and electric companies were required to supply power at reduced charges.

The program prompted a huge response from the private sector, with average annual growth rates well above those programmed. These growth rates were underpinned by a rapid increase in land brought under cultivation and agricultural production. Private investments went mainly into expanding the area planted for wheat. Between 1983 and 1990, the average annual increase of new land brought under wheat cultivation rose by 14 percent. A 35 percent increase in yields per ton during this period further boosted wheat output; total production rose from 1.4 million tons per year in FY 1983 to 3.5 million tons in FY 1989. Other food grains also benefited from private investment. For example, output growth rates for sorghum and barley accelerated even faster than wheat during the 1980s, although the overall amount produced was much smaller. During the 1980s, farmers also experimented with new varieties of vegetables and fruits but with only modest success. More traditional crops, like onions and dates, did not fare as well and their output declined or remained flat.

In the 1970s, increasing incomes in urban areas stimulated the demand for meat and dairy products, but by the early 1980s government programs were only partially successful in increasing domestic production. Beduin continued to raise a large number of sheep and goats. Payments for increased flocks, however, had not resulted in a proportionate increase of animals for slaughter. Some commercial feedlots for sheep and cattle had been established as well as a few modern ranches, but by the early 1980s much of the meat consumed was imported. Although the meat supply was still largely imported in the early 1990s, domestic production of meat had grown by 33 percent between 1984 and 1990, from 101,000 tons to 134,000 tons. This increase, however, masked the dominant role of traditional farms in supplying meat. Although new projects accounted for some of the rapid growth during the 1980s, a sharp decline of roughly 74 percent in beef stock production by specialized projects during 1989 resulted in only a 15 percent fall in meat output. This reversal also highlighted the problems in introducing modern commercial livestock-rearing techniques to the kingdom.

Commercial poultry farms, however, greatly benefited from government incentives and grew rapidly during the 1980s. Chickens were usually raised in controlled climatic conditions. Despite the doubling of output, as a result of the rapid rise in chicken consumption, which had become a major staple of the Saudi diet, domestic production constituted less than half of total demand. Egg production also increased rapidly during the 1980s. The numbers of broiler chickens increased from 143 million in 1984 to 270 million in 1990, while production of eggs increased from 1,852 million in 1984 to 2,059 million in 1990.

Fishing, however, was an underdeveloped aspect of the Saudi economy despite the abundance of fish and shellfish in coastal waters. The major reasons for the small size of this sector were the limited demand for fish and the comparative lack of fish marketing and processing facilities. Iraqi actions in releasing oil into the Persian Gulf during the Persian Gulf War caused appreciable damage to fish and wildlife in the gulf. Data concerning postwar catches were not available in late 1992, but in 1989 the Food and Agriculture Organization of the United Nations estimated Saudi Arabia's total catch at more than 53,000 tons.

Saudi Arabia

Saudi Arabia - MONEY AND BANKING

Until the mid-twentieth century, Arabia had no formal money and banking system. To the degree that money was used, Saudis primarily used coins having a metallic content equal to their value (full-bodied coins) for storing value and limited exchange transactions in urban areas. For centuries foreign coins had served the local inhabitants' monetary needs. Development of banking was inhibited by the Quranic injunction against interest. A few banking functions existed, such as money changers (largely for pilgrims visiting Mecca), who had informal connections with international currency markets. A foreign bank was established in Jiddah in 1926, but its importance was minor. Foreign and domestic banks were formed as oil revenues began to increase. Their business consisted mostly of making short-term loans to finance imports, commercial trading, and businesses catering to pilgrims.

The government issued a silver riyal in 1927 to standardize the monetary units then in circulation. By 1950 the sharp increase in government expenditures, foreign oil company spending, and regulation of newly created private banking institutions necessitated more formal controls and policies. With United States technical assistance, in 1952 the Saudi Arabian Monetary Agency (SAMA) was created, designed to serve as the central bank within the confines of Islamic law.

The financial system has developed several layers intended to serve a number of multifaceted economic, exchange, and regulatory roles. At the apex was SAMA, which set the country's overall monetary policy. SAMA's functions also included stabilization of the value of the currency in an environment of openness with respect to exchange transactions and capital flows. The central bank used a number of monetary policy instruments for this purpose, including setting interest rates for commercial banks, which have been kept close to comparable dollar rates, the management of foreign assets, and the introduction of short- and medium-term government paper for budgetary and balance of payments purposes and to smooth fluctuations in domestic liquidity. SAMA also regulated commercial banks, exchange dealers, and money changers and has acted as the depository for all government funds; it paid out funds for purposes approved by the minister of finance and national economy.

SAMA's charter stipulated that it would conform to Islamic law. It could not be a profit-making institution and could neither pay nor receive interest. There were additional prohibitions, including one against extending credit to the government. This latter prohibition was dropped in 1955, when the government needed funds and SAMA financed about one-half of the government's debt that accrued in the late 1950s. From 1962 to 1983, the budget surplus did not require such action and all the government's debt was repaid. In 1988 SAMA was once again required to bolster government reserves, which had been sharply reduced to finance fiscal deficits, through the sale of Government Development Bonds. These bonds had varying short- and long-term maturities, with yields competitive with international interest rates. As a result of persistent government deficits, the stock of these bonds had grown to well over SR100 billion in 1991. Most of these bonds were placed with autonomous government institutions; however, close to 25 percent were purchased by domestic commercial banks.

In 1966 a major banking control law clarified and strengthened SAMA's role in regulating the banking system. Applications for bank licenses were submitted to SAMA, which submitted each application and its recommendations to the Ministry of Finance and National Economy. The Council of Ministers set conditions for granting licenses to foreign banks, however. The law also established requirements concerning reserves against deposits. Several restrictions continued to inhibit SAMA's implementation of monetary policy. It could neither extend credit to banks nor use a discount rate because these measures were forms of interest. SAMA had little flexibility in setting reserve and liquidity requirements for commercial banks. Its primary tool for expanding the credit base consisted in placing deposits in commercial banks. (OT)

By the 1980s, new regulations were introduced, based on a system of service charges instead of interest to circumvent Islamic restrictions. As of the early 1990s, banks were subject to reserve requirements. A statutory reserve requirement obliged each commercial bank to maintain a minimum of noninterest-bearing deposits with SAMA. Marginal reserve requirements applied to deposits exceeding a factor of the bank's paid-in capital and reserves. Moreover, banks had to hold additional liquid assets-- such as currency, deposits with SAMA beyond the reserve accounts, and Government Development Bonds--equal to part of their deposit liabilities. SAMA used two other instruments to manage commercial bank liquidity. The Bankers' Security Deposit Account (BSDA) was a short-term instrument with low yield, rediscountable with SAMA and transferable to other banks. In November 1991, SAMA issued the first treasury bills, which were short-term, usable for both liquidity management and government deficit financing, and designed gradually to replace the BSDAs.

Twelve private commercial banks operated in the kingdom, providing full-service banking to individuals, and to private and public enterprises. Eight of the banks were totally Saudi-owned. Four were joint ventures with foreign banks. In 1975 the government adopted a program of Saudi participation in ownership of foreign banks operating in the kingdom. In December 1982, the last of the foreign banks merged with a Saudi bank. The commercial banks operated more than 1,000 branches throughout the country and a widespread network of automated teller machines. The range of bank activities grew markedly during the 1970s and 1980s. Beyond providing credit and deposit facilities, they engaged in securities trading, investment banking, foreign exchange services, government finance, and development of a secondary government bond-treasury bill market.

For years money exchangers remained an anomaly in the Saudi banking system. They had operated for centuries in Arabia, particularly for pilgrims to Mecca. Most were family businesses, some of which had grown very large since World War II, conducting most kinds of banking activities in many areas of the country. Although licensed, the money-exchange houses remained largely unregulated. Most money exchangers operated under sound business practices; however, a series of fraudulent and speculative practices in the 1980s prompted SAMA to establish regulations for money-exchange houses. One of the larger such operations was converted to a commercial bank in 1987.

Because commercial banks favored short-term lending to established firms and individuals, the government created special credit institutions to channel funds to other sectors and groups in the economy. The Saudi Arabian Agricultural Bank was formed in 1963 to provide development financing and subsidies to the agricultural sector. The Saudi Credit Bank was formed in 1971 to provide interest-free loans to low-income Saudis who could not obtain credit from commercial banks. The Public Investment Fund was created in 1973 to help finance large public ventures. The Saudi Industrial Development Fund was established in 1974 to provide interest-free, medium- and long-term financing of up to 50 percent of the cost of a private sector project. The Real Estate Development Fund, also founded in 1974, was designed to encourage private sector residential and commercial building, partly through interest-free loans to low- and medium-income Saudis for up to 70 percent of the cost of a home.

The government budget provided almost all the funds for these specialized credit institutions and continued to increase their capital requirements until the mid-1980s, when budgetary problems necessitated cutbacks. For the most part, these funds were self- financing during the latter half of the 1980s. A significant departure from such self-financing was the government's substantial subvention to the Real Estate Development Fund in 1991 to allow a one-year moratorium on payments, which was a gift by King Fahd to his citizens.

The Saudi financial system also consisted of three autonomous government institutions, included because of their significant role in providing financing for budgetary shortfalls, deposits with SAMA, and foreign currency holdings. These included the Pension Fund, the General Organization of Social Insurance, and the Saudi Fund for Development.

For much of the 1980s, the stock exchange, created in 1983, was largely viewed by domestic investors as a vehicle for long- term investments. Since the Persian Gulf War, this situation changed markedly because the exchange has attracted investors seeking shorter-term investments. Share prices and trading volumes have grown sharply and by early 1992 had reached unprecedented levels, sparking fears of overvaluation. The official stock market index, which had remained relatively dormant in the late 1980s, and had dropped from 108.7 at the end of 1989 to 98.0 in late 1990, roughly doubled to 187.7 by the close of 1991. The value of shares traded grew from SR135 million at the end of 1990 to SR1.8 billion by the first quarter of 1992. The number of shares traded doubled from 15 million for the whole of 1989, to 29.2 million in 1991.

Three factors propelled this level of stock market activity. First, following the Persian Gulf War, confidence in the Saudi economy spurred by high oil prices and greater confidence in the regional geopolitical situation prompted domestic investors to repatriate foreign funds. Second, low international interest rates, combined with similar returns of domestic savings rates, increased the attractiveness of the stock exchange. Third, the number of companies trading on the exchange increased markedly as they attempted to boost domestic investment following several years of depressed economic conditions. Moreover, the tight government budget prompted some public enterprises to obtain capital on the domestic financial markets rather than from the state.

The Saudi stock exchange was not open to foreign investment and only shares of Saudi companies could be traded. The exception to the former rule was the right of citizens of GCC member states to purchase Sabic shares from 1984. In 1991 the Arab National Bank, partially funded by Jordanian capital, received permission to launch a stock fund, of which foreigners might purchase a portion. Despite growth in the stock market, the percentage of shares traded as a percentage of total market value of shares outstanding has been estimated as no more than 5 percent, very low by international standards. This lack of market depth resulted from the high proportion of shares owned by institutions rather than individuals and the concentration of ownership in a few hands.

Saudi Arabia