Expensive Oil: The Saudi side of the story

During the past couple of years, oil has constantly been in the news. Just about 99% of the coverage has centered on price trends, OPEC and the impact of expensive oil on the economies of rich nations. There’s a glaring gap here: what about the impact on the economies of producing nations?

Obviously, these come in all shapes and degrees of dependency on oil. Some, like Mexico, have large, diversified economies where oil plays a minor part. Others, such as Saudi Arabia, the world’s largest producer, basically live off the black stuff (in 2003 oil production represented nearly 40% of its GDP) and thus make for interesting subjects of inquiry.

Needless to say, the Saudi kingdom did very well last year. According to the IMF, it’s dollar-based GDP grew 16% last year. Given that inflation was non-existent and the exchange rate held steady, this increase pretty much reflects how much their purchasing power rose in 2004.

(As an aside, this stat also shows why one must not exclusively rely on real variables. The IMF estimates that in real terms Saudi GDP rose 5%, but this figure clearly does not reflect the true rise in that nation’s income).

The most interesting question is how all that money was spent. According to the data, the stereotype of huge petro-dollar funded shopping sprees in Harrod’s is rather dated.

Total demand, made up of consumption and investment, rose 7.7% in dollar terms last year in Saudi Arabia. Obviously, it’d be much better if that money was spent on infrastructure and such, but one couldn’t blame the Saudis if they splurged a bit (the available information doesn’t break down total demand). Nonetheless, national saving rose 66%, which shows that the government/royal court has learned something about the value squirreling away some money for low oil price days.

All in all, as a nation, Saudi Arabia spent only 80% of its available income last year (English to wonk translation: the current account surplus stood at 19.8%), up from 86% in 2003.

One can only hope that all that extra income will temp aspiring jihadis to pursue worldly affairs rather than martyrdom.