Economic Challenges

With its economy so driven by revenues from oil exports, Saudi Arabia's economic challenges could become a long-term drain on its oil industry profits. Such challenges include a high unemployment rate and a population boom that increases the need for government spending. Saudi Arabia also has artificially low electric power prices because of government-mandated rates and consumer subsidies. These low prices have encouraged an increase in demand that has placed a strain on electric utilities. Electric power demand has been growing by 7 percent each year, according to the EIA. Moreover, because of Saudi Arabia's growing population, its per capita oil export revenues are about 80 percent below the levels Saudi Arabia once achieved during the 1970s and early 1980s.28 Although Saudi Arabia's staterun oil company, Aramco, has confidently projected that Saudi Arabia's oil production can easily be increased, oil industry analysts, including representatives of the Association for the Study of Peak Oil, analysts from major financial institutions, and former executives of Aramco itself, have claimed that Saudi oil production was, as of 2005, approaching its peak.29

One of Saudi Arabia's key energy-related issues is that it is located in the politically unstable Middle East, a major concern to Saudi oil customers such as the United States. A related issue, one that directly impacts Saudi Arabia's economy, is that Saudi Arabia has needed to increase its security spending because of a number of terrorist attacks in the country since 2003. Of special concern is the threat posed to Saudi oil facilities and the 3,000 Western oil workers in the country. Saudi Arabia reportedly has ramped up security spending by 50 percent since 2004. Saudi Arabia's oil fields, refineries, estimated 10,000 miles of oil pipelines, and other oil facilities fall under the protection of the Saudi National Guard, regular Saudi military forces, and Interior Ministry officers.

COUNTERSTRATEGIES Diversifying the Economy

Another issue for Saudi Arabia is the prevalence of monopolies, especially in the oil industry. Large state corporations, such as the oil firm Saudi Aramco and the Saudi Basic Industries Corporation, dominate the economy. In an effort to diversify the economy, Saudi Arabia has attempted to attract foreign direct investment to help encourage privatization. The Saudi cabinet approved a reduction in taxes on foreign direct investment in June 2004.

Maximizing Oil Production

Another of Saudi Arabia's responses to its energy-related issues is to maximize its oil production. In 2005 Khalid al-Falih, a Saudi Aramco senior vice president, stated that Saudi Arabia would increase oil production to more than 12 million barrels per day by 2009, up to a total of 15 million barrels per day by 2020. The details of this $18-billion plan were released in 2006. The country has also sought to increase the number of its operating drill rigs to more than double 2004 levels. However, according to another Aramco senior vice president, existing Saudi oil fields sustain from a 5 to a 10 percent decline in available reserves each year.

Maintaining Its Lead in Global Oil Production

Saudi Arabia has also attempted to secure its footing as the world's leading oil producer by stepping up production when foreign oil markets demand it. After the U.S. invasion of Iraq in March 2003, which placed Iraqi oil production on hold, Ali bin Ibrahim al-Naimi, Saudi Arabia's minister of petroleum and mineral resources since 1995, asserted Saudi Arabia's commitment to stepping up its own oil production to fill the void in Middle Eastern oil exports. In 2006 he declared that Saudi Arabia would increase its production while keeping oil prices competitive. That same year, however, he also announced the termination of negotiations with foreign oil companies on a plan that would have opened Saudi Arabia's upstream hydrocarbons sector to foreign investment for the first time since the 1970s. Negotiations reportedly fell apart over the extent of gas reserves to be included in the plan and the rate of return that Saudi Arabia would offer to participating companies.

Saudi Arabia has attempted to stay on top of the world oil market in other ways, too. In 1990 Sheik Ahmed Zaki Yamani, former petroleum and mineral resources minister of Saudi Arabia, founded the Centre for Global Energy Studies, an independent organization that analyzes energy-related developments, especially within the oil and natural gas market. In November 2005 Abdullah bin Abd al-Aziz al-Sa'ud, king of Saudi Arabia since August 2005, called on leading consumer countries to cut taxes on petroleum products to help control oil prices during a time of increasing pressure for OPEC to increase production to meet global oil demand. The king has also promoted privatization of his country's assets.

Nuclear Power

As Iran has, Saudi Arabia has run into problems in the Western world over its potential to manufacture nuclear weapons. In 2003 Saudi leadership had claimed that worsening relations with the United States were driving it to consider developing nuclear weapons.30 A former Saudi Arabian ambassador to the United Nations, Muhammad Khilewi, defected to the United States in 1994 and revealed documents that hinted of an arrangement between Saudi Arabia and Pakistan by which Saudi Arabia would partially fund Pakistan's development of nuclear weapons in exchange for the Saudis' ability to use such weapons should nuclear aggression be directed at them. However, Saudi Arabia has denied that any nuclear weapons program is being pursued on its soil. Yet in 2005 Saudi Arabia also signed the International Atomic Energy Agency (IAEA) Small Quantities Protocol, which allows countries with a low risk of nuclear weapons proliferation to opt out of extensive inspections for nuclear weapons if they make a disclosure about their nuclear activities. By signing this protocol, Saudi Arabia has raised suspicion in the global community that it is in the process of developing nuclear weapons and is trying to prevent detection of its nuclear activities.

Nevertheless, Saudi Arabia's economic foothold as a supplier of U.S. energy seems likely to be maintained as long as oil remains a dominant energy source, for the U.S.-Saudi Arabia energy relationship has been well established ever since Franklin D. Roosevelt, president of the United States from 1932 to 1945, fostered U.S. ties with the oil-producing country of Saudi Arabia, personally visiting its founder, Abd al-Aziz ibn Saud, in 1945. As long as the United States continues to need to fill a gap in its ability to meet its domestic oil demand, Saudi Arabia will continue to be one of the top candidates for the job.

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