Oil boost to aid Saudi economy

25 January 2011

Increasing oil production while prices are at current levels will drive the kingdom’s economy

When Saudi Arabia’s oil minister, Ali al-Naimi, announced that the Organisation of Petroleum Exporting Countries (Opec) was likely to increase production this year, oil markets reacted quickly, falling to an eight-week low.

It is no coincidence oil had been trading close to $100 a barrel before his announcement. Al-Naimi and the Saudi government were employing the same tactics they had used before. In November 2008, King Abdullah’s statement that $75 a barrel was a fair price for oil laid the groundwork for a turnaround in the then declining oil price, which had dropped from a peak of around $147 a barrel to under $40 a barrel.

Al-Naimi has deliberately cooled the market. Saudi Arabia is eager to ensure that the price stability of 2010 continues. That is good not just for the world economy, but also for Saudi Arabia.

As demand for oil recovers, production has to increase to stop prices rising too high and threatening the strength of the recovery.

For Saudi Arabia, increasing oil production while prices remain above $70 a barrel will be a significant boost for its economy. It is no wonder that Saudi Arabian Monetary Agency governor Mohammed al-Jasser surprised some economists by predicting that the economy would grow by 4.5 per cent, above most current growth estimates for this year. He is no doubt factoring in the boost from additional oil production.

The Saudi economy stagnated in 2009. Last year it recovered and this year will be a better one still. But it is not enough. The Saudi economy needs to grow about 6.5 per cent a year for a sustained period to provide the jobs necessary to avert a looming unemployment problem because of its young population.

Riyadh has already shown that it has learnt the lessons of the past and handled the recent oil price crash with aplomb. It may have balanced international oil demands with the management of its domestic economy, but the hardest job is ahead of it.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications