Saudi Arabia's natural resources

Since the 1970s, Saudi Arabia’s primary, if not sole, contribution to the global network of natural resources has often been summarized in one word: oil.

The Country

Saudi Arabia occupies most of the vast Arabian Peninsula, with coastlines on the Red Sea and the Persian Gulf. Its borders are with Kuwait, Iraq, Jordan, Yemen, Oman, the United Arab Emirates, and Qatar. The Arabian Sea coast belongs to its neighbors Oman and Yemen. With the exception of scattered oases, most of Saudi Arabia is desert. The major mountain range, running parallel to the Red Sea, is named the Hejaz, or “barrier.”

Although international organizations such as the Organization of Petroleum Exporting Countries (OPEC) and the Organization of Arab Petroleum Exporting Countries (OAPEC) tend to integrate distribution of the oil resources of member countries, Saudi Arabia carries an overwhelming influence in the world market, affecting supplies in a way that can raise or lower prices around the globe.

Oil and Petroleum

Although estimates vary and are updated yearly as exploration efforts and methods are redefined, about one-fifth of the world’s crude oil reserves are in Saudi Arabia. The most important zones of production are located in the Saudi Eastern Province, with its capital in Dammam.

Historically, the growing importance of petroleum for Saudi Arabia’s economy in the twentieth century, combined with the international nature of demand for oil exports from a largely undeveloped Arab kingdom, posed a major problem: Who would undertake exploration for, and carry out production of, the country’s only major resource? During the first years of Saudi oil operations (starting in 1933, a period when the petroleum industry was completely dominated by European and American companies) a series of concession arrangements were made, initially with Standard Oil of California, then with its subsidiary, California-Arabian Standard Oil, and the Texas Oil Company (TEXACO), to drill for oil. By the time World War II had brought a temporary suspension of operations, serious oil deposits had been discovered and more companies attached themselves to the consortium that came to be known as the Arabian American Oil Company (ARAMCO). ARAMCO’s involvement in the country’s oil operations went through several changes, beginning when, in 1973, Saudi Arabia rewrote the concession, stipulating 25 percent participation by the Saudi government, followed by an increase of governmental participation to 60 percent in 1974 (in the wake of the oil supply crisis following the 1973 Arab-Israeli War).

In 1970, when oil sold for about three dollars per barrel, the gross domestic product (GDP) of the Saudi Arabian economy was more or less divided equally between oil-related revenues and non-oil production. In a little more than a decade, following the major price increases caused by the oil crises of the 1970s, the country’s GDP had quadrupled to just short of sixteen billion dollars, with oil-sector figures only slightly outweighing non-oil production. Government earmarking of oil revenues for the development of productive domestic undertakings was a clear priority. This involved investment in electricity, water facilities, manufacturing and agricultural expansion, and particularly in a petrochemical subsector. Fluctuation in the oil price market, however, exercised an uneven pattern in these vital statistics. By the late 1980s, the total value of the Saudi economy, though still high, began to show an imbalance, with oil-based figures outweighing non-oil production almost two to one. Such patterns reflected the varying pulse of the Saudi Arabian economy and its dependence on oil from decade to decade into the twenty-first century.

For years there has been a general assumption that international demand, and therefore the global market price, for oil is essentially inelastic (not subject to significant and rapid rises or declines). This assumption is based largely on the obvious fact that the economies of both the developed and emerging countries of the world are inextricably tied to the use of petroleum and petroleum-related products at almost all levels. This truism, however, is subject to serious qualifications, not the least of which depends on global political climates that can alter relations between oil-producing countries and multimember organizations like OPEC and OAPEC and oil-importing countries. Prime examples of this phenomenon have occurred intermittently since the first major oil crisis, brought about by the 1973 Arab-Israeli War, when oil prices soared as a result of scarcity imposed by producers like Saudi Arabia. A second major factor that has frequently affected the price of Saudi oil on the international market (and will do so in different ways as developed countries try to reduce their dependence on oil) has to do with decreased demand. A global recession, such as occurred in 2008, can lead to overproduction in relation to demand, pushing prices down. Because this happened in different ways and in different periods in the last quarter of the twentieth century, Saudi Arabian success in using its petroleum productive potential experienced various ups and downs.

Saudi Arabia acquired full control over ARAMCO’s operations in 1980, and the company (with an increasingly shared staff between Americans, other foreigners, and local Saudis) was renamed the Saudi Arabian Oil Company (Saudi Aramco) in 1988. A number of activities undertaken by ARAMCO before 1988 helped modernize petroleum production and distribution processes in Saudi Arabia. First, construction of the Ra’s at Tannūrah refinery on the Persian Gulf shore immediately after World War II represented the first step toward horizontal integration of oil-field operations and refining processes that would make Saudi petroleum production increasingly valuable. Expansion projects at Ra’s at Tannūrah continued in stages until the installation became the largest refinery complex in the world. By the mid-1960s, it supplied, in addition to refined and crude oil, major quantities of propane and butane gas to the international market. Fleets of tanker shipments from Ra’s at Tannūrah thus joined the Trans-Arabian Pipeline, which had opened in 1950 linking the Saudi Eastern Province oil fields and the Mediterranean coast in Lebanon. In the 1980s another pipeline, linking the same oil fields with the port of Yanbuՙ al Baḥr on the Red Sea, also became a major conduit, carrying Saudi Arabian oil to distant demand markets. By the late 1980s, the East-West Pipeline terminating at Yanbuՙ al Baḥr was capable of moving more than three million barrels of oil daily.

An important consideration for any country whose economy is mainly based on the export of a single commodity involves creating a balance between export revenues and domestic expenditures. There is a need to provide for domestic consumption demand, whether for basic necessities or for an entire gamut of consumer commodities.

Looking at Saudi Arabia’s obvious dependence on oil revenues, one can see that providing for domestic economic priorities involves another form of balance: determining how to allocate expenditures of government-controlled oil revenues between purchasing imports (which has a negative effect on balance-of-trade figures) and encouraging the development of domestic import-substitution industries, on one hand, and investing major sums for research and development (for transportation, communications, and modern industry infrastructure), on the other.

In the second sphere, several government agencies, such as the Saudi Basic Industries Corporation (SABIC), have been created to oversee investment of petrodollars to increase levels of economic sustainability and offset excessive reliance on oil export revenues. As the twentieth century came to a close, SABIC’s activities had brought about the establishment of a number of companies, mainly involving the development of petrochemicals. The logic of founding potentially complementary development projects in geographically concentrated areas, and tying these to other infrastructural networks to facilitate commercialization and exportation procedures, led, for example, to the emergence of two “new” cities—Jubail, on the Persian Gulf, and Yanbuՙ al Baḥr, on the Red Sea—boasting high levels of productivity, specifically in the area of petrochemicals. Furthermore, the impact of the Saudi Industrial Development Fund (SIDF), whose goal is to support establishment of start-up industries in areas not directly connected to oil, especially in the zone surrounding the capital city of Riyadh, contiunes to grow.

Although many new ventures have focused on the production of import substitution items, efforts have been made to establish high-technology firms that can be internationally competitive.

Another major effort to increase not only oil production but also locally trained managerial personnel was marked when, in 1963, the College of Petroleum and Minerals was founded. This institution (known since 1986 as the King Fahd University of Petroleum and Minerals, or KFUPM) grew to more than ten thousand students by the end of the twentieth century. Its programs include instruction in engineering and sciences relating not only to oil and petrochemicals but also to a number of other potentially exploitable mineral deposits. KFUPM’s program is overseen by an international advisory board. Attention is given to international involvement in a variety of technical scientific and managerial symposia, many related to environmental questions. An example was the June 2009 international seminar dealing with “Upgrading Oil Refineries to Produce Clean Fuels.”

Petrochemicals

After half a century or more of a near monopoly of the petrochemical industry by the United States and Europe, Saudi Arabia has invested heavily in its own petrochemical sector. Many key petrochemical products have already received primary attention. The most elementary product goes under the label ethylene, which itself can be broken down into different petrochemicals for use in different commercial markets. Ethanol, an engine fuel and fuel additive, is an ethylene by-product. Another petrochemical of key commercial importance is propylene, itself the basis of commonly known derivatives such as acrylonitrile (used to produce Orlon fabric as well as ABS synthetic pipes).

An example of Saudi joint ventures aimed at diversification in the petrochemical sector is its 2006 agreement with the Japanese firm Sumitomo Chemical for the construction of a state-of-the-art integrated refining/petrochemical project, Petro Rabigh, at the Red Sea port of Rabigh. The scheme involved an even sharing of initial costs, with provisions to open a portion of ownership to international bidders for publicly owned shares once the project neared productive status. In fact, Petro Rabigh Phase II is to involve additional construction with participation by the U.S. firm Dow Chemical. Other international firms have signed on for contracts to develop technologically specialized subsectors of the Saudi petrochemical complex.

Such projects exemplify a modern form of international capital investment sharing that can be contrasted with earlier patterns of concessionary monopolies in one sector only. These might have been necessary for initial development of Saudi Arabia’s oil, but they are no longer relevant to twenty-first century conditions.

Other Resources

Because Saudi Arabia sells its oil to consumers all over the world, payments by importers are made in hard currency, mainly in US dollars. Depending on the volume of Saudi Arabia’s global sales of oil, Saudi treasury holdings in dollars can vary significantly. In periods of high sales, however, such holdings (termed “petrodollars”) represent a major source for investment, not only in Saudi Arabia but also in many other countries. Petrodollar resources have been used to support major development projects, especially in other countries of the Middle East. Moreover, petrodollar investments in Western financial institutions represent an important part of the economic structures of both Europe and the United States.

Finally, Saudi Arabia possesses a resource of global significance that represents both material and nonmaterial importance for the country. The Islamic holy cities of Mecca and Medina attract millions of pilgrims yearly, bringing major income from local services, such as hotels and transportation, during an entire lunar month. Beyond the pilgrimage, the attraction of Muslim scholars from all over the world to studies in Mecca represents an important moral resource that gives Saudi Arabia a global role at all times.

Bibliography

Heradstveit, Daniel, and Helge Hveem, eds. Oil in the Gulf: Obstacles to Democracy and Development. Burlington, Vt.: Ashgate, 2004.

Pampanini, Andrea H. Cities from the Arabian Desert: The Building of Jubail and Yanbu in Saudi Arabia. 2d ed. New York: Turnabout Associates, 2005.

"Saudi Arabia." The World Factbook, Central Intelligence Agency, 21 Dec. 2024, www.cia.gov/the-world-factbook/countries/saudi-arabia/#economy. Accessed 6 Jan. 2025.

Simmons, Matthew. Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. New York: John Wiley and Sons, 2005.

Vitalis, Robert. America’s Kingdom: Mythmaking on the Saudi Oil Frontier. Stanford, Calif.: Stanford University Press, 2007.