With the world's largest oil reserves and as the world's largest petroleum exporter, Petroleum is the main source of Saudi exports and income for the country. According to estimates, the Petroleum sector accounts for roughly 45% of GDP, and 90% of export earnings. The Saudi economy is dependent on petroleum prices. Therefore in accordance to basic logic, higher petroleum price would mean higher income for the Saudi economy. Therefore the Saudi government should strive for a climate where petroleum prices keep rising at all times.

However in reality the maximum point of return for Saudi economy is where petroleum prices are at such high levels where they don't start to affect the global economy in a negative manner. Because if the price of petroleum is too high, that will translate into higher petroleum costs for the global petroleum consumer, and high petroleum cost will mean less money available for investment and growth for the global economy. Therefore as demand for Saudi petroleum is driven by the general health of the global economy, the healthier the global economy, the more demand there will be Saudi for petroleum. Furthermore Saudi Arabia also has investments abroad as well as other non petroleum related exports, whose economic viability and income potential also depends on the health of the global economy.

Therefore according to estimates in order to balance its government budget on average Saudi Arabia needs to produce and export eight million barrels of oil per day at an average price of US$22 per barrel. As a result the Saudi government in accordance to the agreement of other OPEC members increases/decreases its petroleum production in order increase or to reduce the price of peteroleum. Efforts to increase or decrease the price of petroleum by the Saudi government depends on the income requirements of the Saudi economy which run concurrently to Saudi efforts aimed at keeping the global economy at level where it can afford to continue the purchase of Saudi petroleum for the foreseeable future.

Other sources of income for the Saudi economy are:

• The Private Sector
• Income from visiting Haj Tourists
• Services

The Saudi economy is made up of a large contingent of foreign workers, especially in such sectors as health, construction and energy.

Plans and Targets

Being dependent on petroleum means being dependent on the global price for petroleum. This exposes a petroleum based economy such as that of Saudi Arabia's to the highs and lows of oil prices on the international market and this is simply too risky for the stability of an economy.

As a result the Saudi government has embarked on a program to diversify its economy away from petroleum. This is based on the principle that the more diversified the Saudi economy is, the less it will depend on petroleum exports and fluctuations in oil prices. Currently Saudi Arabia is in its fifth year of its five-year plan (2000-2005), which has set the annual target of 4% for the growth of its non oil sector.

The Saudi government aims to achieve this target by:

• Investing its income from petroleum exports into the local non oil industry
• Encouraging international investment through promotion campaigns devising business friendly laws and regulations such as protection of investment, property and tax breaks
• Privatisation of government owned industries Continued improvement of the country's physical and social infrastructure as means of attracting investment and improving political stability

So far the results show that the government's efforts to increase non oil exports have paid off. It is expected that Saudi Arabia 's non oil exports were up by as much as 35% (est) for the year 2004.

However the government's efforts to privatise state owned industries have not been as successful. This is due to the opposition posed by the conservative elements in the royal family and the government's awareness of rising unemployment in the country which would worsen if the government sells off state owned industries.

The Saudi workforce currently comprises heavily of foreign workers. However due to rising unemployment rates in Saudi Arabia , and the country's recent economic problems (prior to the boom in oil prices), the Saudi government set out a plan where foreign workers would be gradually replaced by Saudi workers. This process is termed as " Saudization" and aims to achieve the following targets:

• Reduce unemployment rates in Saudi Arabia
• Increase the skills and experience of the local workforce through their increased involvement in the local economy
• Reduce the flow of foreign worker's remittances sent abroad

This process has been relatively successful so far. However in some areas the Saudi government has lost more foreign workers than intended due to recent attacks against foreigners (especially Westerners) in the country.

By: Meir Javedanfar- www.meepas.com

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